Financing for Development Development Finance Impact Project – Digital Artifact

What is the problem or issue that you are trying to solve?

The island state of Mauritius – for the purposes of this exercise, I have assumed that Mauritius is an IDA-only country – does not produce enough electricity to satisfy its needs, which results in frequent blackouts. Investments are needed to boost electricity production. At the same time, it is acknowledged that Mauritius “sorely needs to diversify energy sources to avoid excessive dependence on coal. According to the present outlook, the country will be dependent on coal to produce electricity for the next 50 years.” (Source: Blackouts bye-bye: Mauritius’ CT Power project to start in 2016, in Africa Money, web article). The other source of power is imported heavy oil and obviously, it too is not particularly environmentally friendly.

At the same time, the country must remain mindful of finding outputs for its sugar production since this industry is a large contributor to the country’s overall economy. Indeed, sugarcane is grown on about 90% of the cultivated land area and accounts for 15% of exports (source: https://www.cia.gov/library/publications/the-world-factbook/geos/mp.html). Yet, under WTO rules, preferential subsidies to sugar exports to Europe were phased out starting in or around 2007. The government and local industry had no choice but to reorganize this sector by finding other ways to capitalize on this important resource. The adaptation strategy called for optimizing sugar production (resulting in the closure of some of the country’s sugar factories) and pushing for the use of bagasse for energy generation (source: Integrated Safeguards Data Sheet Concept Stage available at http://documents.worldbank.org/curated/en/519071468051286827/Mauritius-Compagnie-Savannah-Thermique-Bagasse-Fuelled-Cogeneration-Project).

One solution that addresses both the energy and the economic issues is to use sugar cane or by-products from its exploitation to generate or co-generate electricity. In fact, “bagasse”, the fibrous matter that remains after sugarcane stalks are crushed to extract their juice, can be used to generate electricity. Dry bagasse is burnt to produce steam, which is in turn used to rotate turbines to produce power. In addition, bagasse can be used as a biofuel (source: Wikipedia, under the rubric “bagasse”). At the same time, one must be mindful of the fact that during off-crop periods, when no bagasse is available, overall electricity production is reduced. Therefore, an alternative source of energy must always be available lest the country is to continue to experience power black-outs or accept lower output from its sugar factories. However, the government and industry have agreed that the output of the remaining sugar factories will need to be increased significantly if the industry is to remain on track with its export targets.

What are the reasons that the government, official aid provider or private sector would want to participate?

As in many cases, the reasons are two-fold: Maintaining or increasing the country’s economic output, whilst at the same time protecting the environment though the reduction of carbon emissions. An additional reason is to reduce the island’s dependency on imported oil, which is not only a pollutant, but an expensive one at that, which is an objective actively pursued by the Minister of Energy since at least 2012 (see http://www.lemauricien.com/article/%C3%A9nergie-r%C3%A9duire-notre-d%C3%A9pendance-au-%E2%80%9Cfossil-fuel%E2%80%9D-d%C3%A9clar%C3%A9-rashid-beebeejaun). Both reasons are worthwhile for any, even mildly, benevolent and responsible government and private sector actors paying attention to the Sustainable Development Goals. Because of the limit on available bagasse, there is an opportunity to both introduce an alternate, clean source of power, such as a wind farm, and at the same time increase the output of the remaining sugar refineries.

What are the main obstacles currently standing in the way of unlocking financial opportunities? How would your solution overcome them?

The main obstacles are as follows:

1) The local commercial banks do not have the ability to finance such a large project alone.

Solution: Blended finance with the backing of the African Development Bank (both of which have previously financed projects in Mauritius) or the World Bank. The latter could look to its Risk Mitigation Facility to de-risk the deal, for example by offering breach of contract coverage in relation to the off-taking agreement mentioned below if the Mauritius government is not in a position to provide a sovereign guarantee to the investor or if the investor will not take it (see (http://documents.worldbank.org/curated/en/251611468198009717/pdf/106374-BR-Box396267B-OUO-9-IDA-SecM2016-0120.pdf). Furthermore, as part of the project is to transform one more coal-based generation station into a bagasse-coal co-generation station, there will be a resulting displacement of fossil fuels. For the right investor, the resulting substantial greenhouse gas emission reductions could be monetized through an Emissions Reduction Purchase Agreement (ERPA), with the WB’s carbon finance unit assisting in finding a buyer for the carbon credits.

2) A private investor will want to maximize its investment in the new sugar factory by securing a steady flow of revenues for a period of time. As such, the prospect of having downtime because of the limited availability of bagasse at certain times of the year could be a deal-breaker.

Solution: A private-public partnership to build a wind farm that will both provide electricity to the new sugar plant and will connect to the national grid so that excess electricity production benefits at least part of the population. The private party would build and operate the wind farm with a guaranteed feed-in tariff, as well as an off-take agreement, de-risked as set out above, for a minimum period of seven years so as to guarantee a minimum return on investment.

The Duty of Care Owed by International NGOs: Is it Real?

The question of what sort of duty NGO’s owe their workers who are operating in risky parts of the world is a hot topic of the law of international organizations. Interestingly, to the author’s knowledge there has been but one case that has come before a court of law to canvass this issue. The case in question, which is the subject of this article, allows us to put some empirical legitimacy to what may otherwise remain theoretical conjuncture. This is especially true for Canadian-based NGOs since the concept of any employer’s duty of care towards its employees is not strongly embedded in our law, except that the law in Canada is now well settled that employers may be liable for harm caused when employees have been drinking at the workplace or in connection with work. As such, it is a concept that is much more prevalent in British and Australian jurisprudence. Other legal systems not based on English common law may not even comprise a concept of duty of care, although aggrieved parties in these jurisdictions could certainly utilize alternate legal theories to frame their cases.

In Steven Patrick Dennis vs. Stiftelsen Flyktninghjlpen, a Canadian national posted in the Dadaab refugee camp established by UNHRC on the Somali-Kenya border took legal action against his employer, the Norwegian Refugee Council (the “NRC”), before the Oslo District Court. Mr. Dennis prevailed and received compensation for his economic and non-economic losses as a consequence of the psychological and physical injuries resulting from an incident that we describe below.

The facts of the case

At the time of the incident, Steven Dennis was employed by the NRC in Dadaab as an Area Programme Support Manager. The security situation in Dadaab had highly deteriorated during 2011 and 2012 (with a UN risk level of 4 out of 5, with 5 mandating an evacuation) with a high risk of kidnapping.

In order to raise global awareness for the plight of the refugees in Dadaab, it was decided that the Secretary-General of the NRC was to visit the camp on 29 June 2012, and more particularly, the IFO II sector, considered to be riskier than the camp’s other sectors. After leaving the said sector, the unarmed convoy of three NRC vehicles of which Dennis was a part of was attacked by six men firing several shots. Dennis was kidnapped along with three other NRC staff and one of the three drivers was killed. Four days later, a rescue operation was successfully carried out and the victims put on leave.

The plaintiff’s legal claim

The plaintiff opted to bring his claim in Norway, seat of NRC’s headquarters, putting forward three possible bases of liability for holding NRC responsible for the damages sustained by him during the Secretary General’s visit, namely, employer’s liability under Norway’s Compensation Act, non-statutory principles of compensation law, and responsibility of an employer’s “managing bodies” for gross negligence. In all three cases, Norwegian law mandates that the same three basic requirements for compensation be established by the plaintiff: 1) an injury, 2) a basis of liability, and 3) a causal relationship between the two.

1) Injury – The existence of an injury was undisputed by the defendant. In addition to the gunshot injury to his thigh, Dennis suffered from chronic PTSD and mild clinical depression.

2) Basis of liability – Norway’s Compensation Act imposes upon employers a strict liability for injuries that are intentionally caused by an employee or through an employee’s negligence in the course of the employee’s work. What happened to the plaintiff obviously not being the result of intentional actions, the Court went on to examine if one or more of NRC’s employees had acted negligently in connection with the SG’s visit. The Court thus enquired whether the NRC’s employees could have acted differently to avert the risk of kidnapping. In performing its assessment, the Court looked at the degree and nature of the risk, whether the risk of injury was visible or foreseeable and whether effective and practicable alternative courses of action existed. Importantly, the Court found no basis for a lower “due care standard” for employers in the aid industry than for other employers.
The Court questioned whether the use of armed escorts in connection with aid work was an “industry standard” but concluded that this was not so. However, in the case at bar, the decision not to use an armed escort was “at odds with the prevailing conditions and advice from the local security advisor in Dadaab”. It was also contrary to established and mandatory practice in Dadaab at the time and contrary to the advice of NRC’s own security advisors. In the end, the Court found that several effective and practicable courses of action could have reduced and averted the risk of kidnapping and that, therefore, there existed a legal basis for liability.

The portion of the plaintiff’s claim relating to compensation for pain and suffering posed an additional challenge. This is because in order for such a claim to succeed under Norwegian law, the wrongdoer must have acted intentionally or with gross negligence and it must be possible to make the link between the tort and the employer’s “managing bodies”. According to the authorities relied upon by the Court, the concept of management encompasses more than the company’s top management and it may include lower levels with the highest independent decision-making authority in a particular area. Thus, it is an individual’s function as a manager that is of interest, not only his position in the organizational structure. The Court found that the country director, the regional director and the head of field operations had made the decisions regarding the security plan and security measures in connection with the visit in Dadaab. All three persons having independent decision-making authority, their actions and omissions were those of “managing bodies”. Moreover, such actions and omissions went beyond simple negligence as they represented a clear deviation from responsible conduct.

3) Causal relationship – As to the required factual and legal causal relationship between the basis of liability and the plaintiff’s injuries, the NRC acknowledged that there was a breach in the security of the information and that this most probably resulted in the kidnappers becoming aware of the Secretary General’s visit. The Court also determined the presence of several negligent acts and omissions – the decision not to use an armed escort, to visit the particular camp that they visited and for a time that extended beyond the recommended duration and the absence of security staff – which, on the balance of probabilities were conditions necessary for the kidnapping to happen.

Having found the NRC to be liable on a statutory basis, the Court did not see fit to pursue the question of non-statutory liability.

In conclusion, while one must keep in mind that each jurisdiction will deal with the issue of an NGO’s so-called duty of care in accordance with its own laws, and that results may therefore vary, Mr. Dennis’ successful claim may prove to be a catalyst for others to bring forward their cases in the future.

An emerging duty of care for International NGO employees

Canadian’s $680,000 for three nights in hell: Kidnapped aid worker wins landmark suit against NGO

TORONTO – A Canadian kidnapped and shot in a Kenyan refugee camp more than three years ago has won a landmark lawsuit against the aid agency that employed him at the time. Richmond Hill, Ont.’s Steve Dennis was one of four employees of the Norwegian Refugee Council (NRC) abducted in a violent shootout near the Somali… Continue reading

Multinational Corporations Beware: What happens in Vegas may not stay in Vegas!

We all know the phrase “What happens in Vegas, stays in Vegas”. There is comfort in knowing that what happens far away from home does not haunt us at home. Now, imagine that there is a chance that you could be held liable for your relative’s wrongdoings in a foreign country even though that relative does not live in Canada and has no connection to Canada. The Supreme Court of Canada’s recent decision in Chevron Corp v Yaiguaje[i] considered this situation in a business context.

Background of the Case

The case has its roots in a lawsuit brought by indigenous Ecuadorian villagers from an oil-rich region in Ecuador against Texaco over twenty years ago. The villagers claimed that Texaco’s operation in the region caused considerable environmental damage and sought compensation. Initially, the plaintiffs filed a lawsuit against Texaco in the US but the lawsuit was dismissed on the basis of forum non conveniens. Then, the plaintiffs filed a lawsuit in Ecuador. The Ecuadorian appellate court upheld the trial court’s award of US$17.2 billion in damages. Ecuador’s highest court upheld the appellate court’s judgment although it reduced the damages to US$9.51 billion. During the course of the proceedings, Texaco merged with Chevron. Chevron has no assets in Ecuador.

The plaintiffs sought recognition and enforcement of the Ecuadorian judgment and commenced an action against the defendants, Chevron and Chevron Canada, in Ontario. Chevron had no connection to Canada and was based in California while Chevron Canada was Chevron’s Canadian subsidiary and not a party to the Ecuadorian judgment. The plaintiffs served the defendants at its head office in California and at its place of business in Ontario[ii], respectively. The motion judge ruled in favour of the plaintiff on the jurisdictional issue but stayed the proceedings, citing as reasons that: (1) Chevron has no assets in Ontario; (2) Chevron does not carry on a business in Ontario; and (3) there is no basis for claiming that Chevron Canada’s assets can be used to satisfy Chevron’s debt from the Ecuadorian judgment. The Court of Appeal held that the stay was inappropriate and again ruled in favour of the plaintiffs with regards to Ontario court’s jurisdiction to recognize and enforce a foreign judgment in Ontario. The defendants then appealed to the Supreme Court of Canada.

The Supreme Court of Canada’s Ruling

There were two main issues that were raised before the SCC[iii]:

In an action to recognize and enforce a foreign judgment in Ontario, must there be a real and substantial connection between the defendant or the dispute and Ontario for jurisdiction to be established?
Do the Ontario courts have jurisdiction over Chevron Canada, a third party to the judgment for which recognition and enforcement is sought?
With respect to the first issue, the Court ruled that it is not necessary to establish a real and substantial connection in an action to recognize and enforce a foreign judgment in Ontario. The Court held that the prerequisite to recognize and enforce a foreign judgment is that “the foreign court had a real and substantial connection with the litigants or with the subject matter of the dispute, or that the traditional bases of jurisdiction were satisfied”[iv]. As such, the Court stated that requiring the connection to be established again in Canada would be inconsistent with the principle of comity.

On the second issue, the Court held that Chevron Canada, by carrying on a business in Ontario coupled with being properly served at its place of business, satisfies the presence-based jurisdiction. It made a reference to the motion judge’s factual finding of Chevron Canada running a bricks and mortar office in Ontario. However, the Court was clear in stating that “a finding of jurisdiction does nothing more than afford the plaintiffs the opportunity to seek recognition and enforcement of the Ecuadorian judgment”[v].

Ultimately, the Court dismissed the appeal by Chevron and Chevron Canada. However, it did leave an important question unanswered.

The Question Left Unanswered

Although the Court found that an Ontario court has jurisdiction to recognize and enforce a foreign judgment, it did not go so far as to decide whether the assets of a Canadian subsidiary can be used to satisfy the obligations of its parent corporation. The question thus remains as to whether the actual enforcement of the foreign judgment will be allowed. The Court stated that the finding of the existence of jurisdiction does not mean that it will be exercised. The Court also stated that defences are available to the defendants in trying to dispose of the allegations. For example, Chevron could bring forth an argument that the Ontario courts should not exercise their jurisdiction based on forum non conveniens.

Implications of the Case

The case is in line with the current trend whereby Canadian courts are becoming more inclined to hear cases concerning jurisdiction. In a 2013 case, Choc v Hudbay Minerals Inc[vi], an Ontario court expressed the willingness to hear cases involving actions of a foreign subsidiary of a Canadian corporation that happened in a foreign country. The Chevron case showed the Supreme Court of Canada’s generous interpretation of jurisdiction and its willingness to recognize foreign judgments. As a result, Canada may be in the process of becoming a friendlier place for those seeking to recognize and enforce foreign judgments. It also showed that Canadian subsidiaries (even very indirect ones that are wholly-owned) could potentially be exposed to the liability incurred by their parent corporation, making Canadian companies more vulnerable than they used to be. Ultimately, the question is now whether the corporate veil will prevent a Canadian subsidiary from being held liable for the actions of its parent.

[i] Chevron Corp v Yaiguaje, 2015 SCC 42.

[ii] Chevron Canada had its head office in Alberta and also had an office in British Columbia.

[iii] Ibid at para 23.

[iv] Ibid at para 27.

[v] Ibid at para 94.

[vi] Choc v Hudbay Minerals Inc, 2013 ONSC 1414.

Arbitrate this: the Applicability of Arbitration Exclusion in the Recast Brussels Regulation

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In our previous article, “Lawsuits in the European Union: disarming the “Italian torpedo” with the Recast Brussels Regulation, we discussed the impact the changes to the Brussels Regulation has on choice-of-court clauses.

In this article, we will discuss the impact of the new rules on arbitration clauses. Often, such clauses will specify the jurisdiction in which the arbitration will be carried out.

The Brussels Regulation

The Brussels Regulation[i] explicitly provided in Article 1.2(d) that the Regulation does not apply to arbitration. The arbitration exclusion made sense given that all EU states are parties to the 1958 New York Convention[ii] which deals with arbitration. However, the Regulation did not make any reference to the Convention. The limited clarity on the scope of the exclusion was the source of many issues, including the possibility of a torpedo action to disrupt the arbitration process and the impossibility of obtaining an anti-injunction suit to stop such an action.

The famous Allianz v West Tankers[iii] case is a good illustration of the shortcomings of the Brussels Regulation in respect to its arbitration exclusion. This is what happened:

Erg Petroli SpA chartered a vessel owned by West Tankers. In Italy, the vessel collided with a jetty which was owned by Erg. The contract between the Erg and West Tankers contained an arbitration clause specifying London as the jurisdiction for arbitration. The insurers, Allianz and Generali, paid Erg compensation up to the limit stipulated in the insurance policies. Erg commenced arbitration proceedings against West Tankers in London as per the arbitration clause to claim the amount not covered by the insurance. Allianz and Generali brought proceedings against West Tankers in Italy to claim the amount they had paid to Erg.

West Tankers then brought proceedings in the United Kingdom seeking a declaration that the arbitration agreement be honoured and to enjoin Allianz and Generali from proceeding further in Italy. The English court granted the anti-suit injunction against Allianz and Generali. However, the issue was referred to the European Court of Justice and it was held there that the granting of an anti-suit injunction runs contrary to the Brussels Regulation.

The Recast Brussels Regulation

The Recast Brussels Regulation[iv] retains Article 1.2(d) which states that the Regulation does not apply to arbitration. It also added Article 73.2 which provides that “This Regulation shall not affect the application of the 1958 New York Convention”.

In addition, Recital 12 was added. In summary, it states that:

  • The Recast Regulation should not prevent Member State courts from referring parties to arbitration, from staying or dismissing the proceedings, or from examining whether the arbitration agreement is null and void.
  • A ruling giving by a Member State court as to whether or not the arbitration agreement is null and void should not be subjected to the rules of recognition and enforcement laid down in the Recast Regulation, regardless of whether the court decided this as a principal issue or as an incidental question.
  • Once the Member State court determines that an arbitration agreement is null and void, this should not stop that court’s judgment on the substance of the matter from being recognised or enforced in accordance with the Recast Regulation.
  • The New York Convention takes precedence over the Recast Regulation.
  • The Recast Regulation should not apply to actions or ancillary proceedings such as the establishment of an arbitral tribunal and the powers of arbitrators.

We were hoping that the recent Gazprom[v] decision would have shed more light on the applicability (or lack thereof) of the Recast Brussels Regulation to arbitration clauses and provide more clarification on Recital 12.  Unfortunately, while the Advocate General’s opinion addressed Recital 12, the Court made no mention of it. However, the Court did emphasize that arbitration falls outside the scope of the Brussels Regulation.

The Recast Regulation has definitely brought in new improvements to different areas such as enforceability of choice-of-court clauses (as we discussed in our last article) and to applicability of arbitration exclusion. Although there are still some remaining uncertainties, the Recast Regulation is a step forward in the right direction for the development of European Union Law.

Martin Aquilina is a seasoned International Business Lawyer at HazloLaw – Business Lawyers, based in the heart of Canada’s national capital, Ottawa, Ontario. Contact: maquilina@hazlolaw.com , +1) 613-747-2459 ext.308. visitwww.hazlolaw.com/team/martin-aquilina


[i] Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

[ii] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).

[iii] Allianz SpA and Generali Assicurazioni Generali SpA v West Tankers Inc, Case C‑185/07, [2009] ECR. I-663.

[iv] Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.

[v] ‘Gazprom’ OAO, Case C-536/13, [2015] WLR (D) 212.

Lawsuits in the European Union: disarming the “Italian torpedo” with the Recast Brussels Regulation

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A defensive action commonly known as “Italian torpedo”[1] is no stranger to the field of commercial litigation in Europe. The parties have taken advantage of the slow speed of judicial proceedings in Italy (and other countries such as Belgium) to torpedo the action that might be brought against them. Essentially, the vessels from which the crews (potential defendants) fired their torpedoes were the Brussels Regulation and its predecessor, the Brussels Convention. The potential defendants abused the lis pendens rule found in Article 27(1) of the Brussels Regulation which stated:

Where proceedings involving the same cause of action and between the same parties are brought in the courts of different Member States, any court other than the court first seised shall of its own motion stay its proceedings until such time as the jurisdiction of the court first seised is established.

The lis pendens rule was supplemented by Article 28(1):

Where related actions are pending in the courts of different Member States, any court other than the court first seised may stay its proceedings.

To continue with the maritime analogy, the flagship that enabled the vessels and its crews to fire the torpedo was Article 5(1) and (3) of the Brussels Regulation, which stated:

A person domiciled in a Member State may, in another Member State, be sued:

1. (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question;

(b) for the purpose of this provision and unless otherwise agreed, the place of performance of the obligation in question shall be:

in the case of the sale of goods, the place in a Member State where, under the contract, the goods were delivered or should have been delivered,

in the case of the provision of services, the place in a Member State where, under the contract, the services were provided or should have been provided,

(c) if subparagraph (b) does not apply then subparagraph (a) applies;

3. in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur.

Although torpedo actions are often initiated in the context of patent infringements, they can be launched in other contexts as well.

How a torpedo action essentially works

Let’s say there are two companies: ABC Corporation (“ABC”) based in Italy and DEF Corporation (“DEF”) based in Germany. ABC infringes a patent held by DEF. ABC, fearing that DEF will bring a claim against it for patent infringement, seeks a declaration of non-infringement from an Italian court. However, before even the merits of such action can be decided, Italian courts must first decide whether they have jurisdiction over the case. Under Article 27(1) of the Brussels Regulation, DEF was prevented from bringing an infringement claim against ABC in a German court (where procedures move much faster) until the Italian court determined whether it had jurisdiction, a process that could take years. ABC had effectively “torpedoed” DEF’s ability to bring forward a patent infringement claim against it.

Two leading cases from the EU

Even exclusive jurisdiction clauses could not fully protect parties from torpedo actions. In the 2003 case of Gasser v MISAT, the courts dealt with a contract containing an agreement that in case of disputes, Austrian courts would have jurisdiction. Despite such a choice-of-court agreement, MISAT filed an action in Italy seeking a declaration that its contract with Gasser had been terminated. Gasser then brought a claim against MISAT in Austria for the outstanding payments. The European Court of Justice held that since the Austrian court was the second seised, it had to wait until the Italian court decided whether it had jurisdiction, notwithstanding the parties’ agreement to the contrary.

The 2005 ruling in Turner v Grovit provides another example of the strength of the lis pendens rule. Mr. Turner was an employee of an English company and Mr. Grovit was its director. Mr. Turner brought a claim against the company in London, alleging that the company asked him to engage in illegal activities while he was working in Spain. A Spanish company part of the same corporate group commenced an action against Mr. Turner in Spain alleging misconduct. Mr. Turner then asked the English court to issue an anti-suit injunction, alleging that the Spanish company was interfering with his claim in London. The court granted the injunction. However, the European Court of Justice held that the English court’s injunction was an interference with the jurisdiction of a foreign court inconsistent with the Brussels Convention.

The Italian courts’ response

The Italian courts, recognizing the potential abuse of the lis pendens rule, have long tried to deal with the issue of torpedo actions. The Italian Supreme Court in BL Macchine Automatiche SpA v Windmoeller und Hoelscher KG, ruled that the country’s courts should not assume jurisdiction in a torpedo action based on a claim of non-infringement because such a claim necessarily meant that the harmful event required to trigger the lis pendens rule had not occurred. The decision could have been the first step in disarming the torpedo and it very well sums up the reluctance of Italian courts to recognize jurisdiction in such matters. However, ten years after its judgment in Windmoeller, the Italian Supreme Court rendered a somewhat contradictory judgment. In The General Hospital Corporation and Palomar Medical Technologies Inc v Asclepion Laser Technologies GmbH, the Court ruled that it had jurisdiction over an action seeking a declaration of non-infringement with respect to the non-Italian part as well as the Italian part of the patent.

Disarming torpedoes in the context of exclusive jurisdiction clauses

The Recast Brussels Regulation makes significant amendments to various provisions of the Brussels Regulation in order to rectify some of its shortcomings. Amongst these is the ineffectiveness of exclusive jurisdiction clauses in disarming torpedo actions, as illustrated by the Gasser v MISAT case.

The Recast Brussels Regulation bolsters the effectiveness of choice-of-court clauses in two ways. Firstly, the lis pendens rule is now explicitly “without prejudice” to agreements conferring exclusive jurisdiction to a court of a given Member State. Secondly, whereas the previous Regulation only recognized choice-of-court clauses in agreements where at least one party was domiciled in a Member State, they are now recognized even if none of the parties are from the EU.

Conclusion

There is no doubt that the Recast Brussels Regulation brings many improvements with regards to exclusive jurisdiction clauses and countering torpedo actions. Unlike the Windmoeller case where the Italian Supreme Court tried to counter torpedo actions at the national level, the Recast Brussels Regulation tries to disarm the torpedo at the supranational (EU) level. While the new Regulation strengthens the enforceability and effectiveness of choice-of-court clauses, time will tell whether the torpedo has been completely disarmed.

[1] The term “Italian torpedo” was coined by Mario Franzosi. For more detailed discussion, see Franzosi, “Worldwide Patent Litigation and the Italian Torpedo”, [1997] 19 European Intellectual Property Review 382.


Martin Aquilina is a seasoned International Business Lawyer at HazloLaw – Business Lawyers, based in the heart of Canada’s national capital, Ottawa, Ontario. Contact: maquilina@hazlolaw.com , +1) 613-747-2459 ext.308. visit www.hazlolaw.com/team/martin-aquilina

Letters of credit: Another one does NOT bite the dust.

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The strength of the letter of credit as a payment mechanism lies in the fact that its beneficiary, the seller of goods, is entitled to be paid as long as it provides to the bank the documents specified by the letter of credit. The bank has an absolute obligation to pay, irrespective of any contractual disputes between the buyer and the seller. Issues as to whether the goods actually meet the agreed upon specifications or any other claim of non-performance cannot be used by the purchaser to avoid paying the seller. It is thus said that the letter of credit is a separate contract, autonomous from the contract on which it is based, e.g. the contract of sale. One of the very few exceptions to this principle of autonomy is a fraud committed by the beneficiary of the letter of credit.

English law is often used between the parties to an international sale of goods, particularly where one or both parties are domiciled in a member country of the Commonwealth. The jurisprudence of English courts is therefore of some importance to those involved in international commerce. The recent case discussed in this blog entry confirms that the fraud exception is to be interpreted narrowly under English law.

In the case of Alternative Power Solutions vs. Central Electricity Board et al., [2014] UKPC 31, the Judicial Committee of the Privy Council (the “JCPC”) clarified the legal principles that are to be applied where the fraud exception is invoked in order to prevent the seller from drawing on the letter of credit. The JCPC’s judgement confirms that the fraud exception will only be available in very exceptional circumstances.

In 2010, Alternative Power Solutions (“APS”) won a tender process launched by the Central Electricity Board of Mauritius (“CEB”) for the supply of 660,000 compact fluorescent light bulbs. The ensuing contract provided that CEB had the right to inspect the merchandise prior to shipment. Disputes between the parties were to be arbitrated. An irrevocable letter of credit was issued by the Standard Bank and notified to CEB. Importantly, there was no requirement for any certificate of inspection or similar document to be presented to the bank in order for the letter of credit to be paid.

Differences of opinion arose between the parties in respect of the identity of the manufacturer of the light bulbs, the modalities of the inspection and the port of shipment. CEB applied for an injunction to restrain Standard Bank from paying under the letter of credit. At the hearing, APS’ representative indicated that it had no objection to an inspection being carried out in accordance with the terms of the contract and that no shipment would take place unless the inspection was carried out to the satisfaction of the buyer. Standard Bank indicated that it would not make payment until shipment was effected. The purchaser therefore withdrew its application; however the bulbs were shipped without the inspection having taken place. It was far from clear that the representative of the seller who made the representation before the court was aware of this at the time he made the representation.

CEB sought to draw an inference from APS’ conduct that it had no intention to provide the light bulbs it had agreed to provide and was acting fraudulently in order to defraud it of the purchase price. For a second time, CEB filed for, and this time obtained an interim (provisional) injunction prohibiting Standard Bank from making any payment under the letter of credit. A few months later, the court made the interim injunction interlocutory, confirming that APS had no right to draw on the letter of credit. The Court of Appeal of Mauritius confirmed the lower court’s decision.

The JCPC reversed the Court of Appeal’s judgement, quashing the injunction. The JCPC agreed with the lower courts’ judges that an injunction should only be granted to restrain a bank from paying under a letter of credit where the fraud exception applies and the bank is aware of the fraud. However, the test to determine whether the exception applies was incorrect. The test applied by the judge at first instance was whether CEB had raised “a serious prima facie arguable case that there might be an attempt to defraud” by APS. He held that the issue of fraud must ultimately be decided by the court or, in this case, the arbitrator.

The JCPC, after canvassing a number of previous court cases, determined that the tests to decide on the availability of the fraud exception at trial and at the injunction stage are not quite the same. At the interlocutory stage of the proceedings, i.e. before the injunction becomes final, the correct test, according to the JCPC, is whether it is “seriously arguable that on the material available [to the court], the only realistic inference is that the beneficiary of the letter of credit could not have honestly believed in the validity of its demands [for payment]”. An interlocutory injunction can only be granted if this test is met. The JCPC then clarified that “the expression “seriously arguable” is intended to be a significantly more stringent case then “good arguable case”, let alone “serious issue to be tried.”

Here, it was not suggested before the lower courts that any of the documents presented to Standard Bank were forgeries or that any of them contained, to the knowledge of APS, any material express misrepresentation. Given that conclusions regarding CEB’S allegation of fraud depended upon a thorough analysis of the true contractual position between the seller and buyer, such conclusions could not form a proper basis for the grant of an injunction against Standard Bank. Also, that the latter was aware of a contractual dispute between the seller and buyer and indeed, even made party to the court proceedings, had no bearing on its obligation to honour the terms of the letter of credit.

While this case is a fine specimen of semiological hair splitting by the English judiciary, it offers a lesson to be learned. Namely, if as a purchaser of goods paid through a letter of credit you have specific requirements that you consider to be a pre-condition to payment and these can be objectively documented on paper, then include them in the documents that must be presented to the bank to trigger payment. Do not count on the courts to take your word that the seller is not adhering to the terms of the deal.


Martin Aquilina is a seasoned International Business Lawyer at HazloLaw – Business Lawyers, based in the heart of Canada’s national capital, Ottawa, Ontario. Contact: maquilina@hazlolaw.com , +1) 613-747-2459 ext.308. Visit: www.hazlolaw.com/team/martin-aquilina

Canadian international securities case, the sequel

Earlier this year (see blog post of March 15, 2014), we commented on the Canadian case of Kaynes vs. BP PLC, 2013 ONSC 5802, in which a judge of the Superior Court of Ontario ruled that the Province of Ontario had jurisdiction in a securities class action related to trades of a foreign security of a foreign issuer on a foreign exchange. The decision was appealed to Ontario’s highest appellate court, which confirmed that Ontario had jurisdiction sempliciter. [1] The Court of Appeal however recently overturned the judgement a quo on the basis of forum non conveniens.

The facts

Briefly, Kaynes, a resident of the Province of Ontario, is requesting the court’s permission to bring a class action for secondary market misrepresentation under s. 138.3(1) of the Ontario’s Securities Act (the “Act”) on the basis that BP made various misrepresentations in its investor documents before and after the notorious Deepwater Horizon oil spill in the Gulf of Mexico in April 2010. Kaynes seeks to represent all Canadian purchasers of shares of BP in a class action, regardless of where they purchased their shares. In parallel, a proposed class action is also pending certification in the United States, based on the same allegations.

Kaynes purchased American Depository Shares (ADS) in the U.S., which traded on the Toronto Stock Exchange (the “TSX”) until August 2008, at which time BP voluntarily de-listed them. In conjunction with its delisting, BP undertook with the Ontario Securities Commission (the “OSC”) to continue sending to its Canadian securityholders all disclosure material that it was required to send to its U.S. investors (its ADSs were still listed on the NYSE).

Although BP has several indirect Canadian subsidiaries that conduct exploration and development of energy properties in Canada, BP itself is a company incorporated in the U.K. headquartered in London. It has no property, no offices and no employees in Canada.

BP concedes that Ontario has jurisdiction to entertain the claims of those members of the proposed class who purchased their shares on the TSX, but contends that there is no “real and substantial connection” – the applicable test under Ontario’s rules of private international law as well as under the Act – between Ontario and the claims of Canadian residents who, like the plaintiff, purchased their shares on foreign exchanges.

BP’s appeal

On appeal, BP argued that the motion judge erred when she determined that she had jurisdiction based on a statutory tort having been committed in Ontario. Section 138.3(1) of the Act provides for a cause of action where an issuer “releases a document that contains a misrepresentation”. BP argued that since it never has had a presence in Ontario, the document allegedly containing a misrepresentation could only have been issued outside of Ontario, thus locating the commission of the tort outside the jurisdiction.

The Court of Appeal upheld the motion judge’s finding of jurisdiction sempliciter, ruling that when BP released the documents containing the alleged misrepresentations, it knew by virtue of the undertaking it had given to the OSC that even if the initial point of release was outside Ontario, the document was certain to find its way to Ontario and to its Ontario shareholders. The Court rejected the “place of acting” test, which it described as being “rigid and unduly mechanical”, for determining the place of commission of a tort for purposes of determining jurisdiction. In so doing, it referred to Moran v. Pyle National (Canada) Ltd.[2], a product liability tort case that involved a defective light bulb manufactured in Ontario causing injury in Saskatchewan, a jurisdiction where the defendant did not sell or manufacture its products or otherwise carry on business. In holding that the tort was committed in Saskatchewan, Dickson J. wrote:

“[W]here a foreign defendant carelessly manufactures a product in a foreign jurisdiction which enters into the normal channels of trade and he knows or ought to know both that as a result of his carelessness a consumer may well be injured and it is reasonably foreseeable that the product would be used or consumed where the plaintiff used or consumed it, then the forum in which the plaintiff suffered damage is entitled to exercise judicial jurisdiction over that foreign defendant….By tendering his products in the market place directly or through normal distributive channels, a manufacturer ought to assume the burden of defending those products wherever they cause harm as long as the forum into which the manufacturer is taken is one that he reasonably ought to have had in his contemplation when he so tendered his goods.”

Given BP’s undertaking to the OSC, it could not possibly argue that the place of effect of its misrepresentation, i.e. Ontario, was beyond its contemplation.

The Court of Appeal also made a provision-specific determination, indicating that for purposes of s. 138(1), a document’s point of release is to be understood as the place where the document was either released or presented.

BP’s forum non conveniens argument

It is well-established under Ontario law that if a plaintiff succeeds in demonstrating that an Ontario court has jurisdiction, the court retains the discretion to decline to exercise it under the doctrine of forum non conveniens. Quoting the Supreme Court of Canada’s decision in Van Breda[3], to succeed in a plea of forum non conveniens, “[t]he defendant must identify another forum that has an appropriate connection under the conflicts rules and that should be allowed to dispose of the action” and “must demonstrate why the proposed alternative forum should be preferred and considered to be more appropriate.”

According to the Court of Appeal, the motion judge erred in law by failing to take into account the principle of comity[4] in assessing the effect of Ontario’s jurisdiction over claims arising from foreign traded securities. In particular, in the US: a) there is a well-established regime governing class actions for secondary market misrepresentation, b) there is a pending class action […] based upon very similar allegations, covering substantially the same period, and embracing the claims of all BP shareholders, including the plaintiff, who purchased their shares on a US exchange; c) the law relating to jurisdiction over such claims is based on the principle that securities litigation should take place in the forum where the securities transaction took place (this is also the case with the U.K.); d) by statute, actions for secondary market misrepresentation under US securities law may only be brought by those who purchased their shares on a US exchange; e) the Securities and Exchange Act of 1934 stipulates that “the US district courts have “exclusive jurisdiction of violations of this title or the rules and regulations thereunder” including claims for secondary market misrepresentation”; f) US law precludes US courts from entertaining private actions involving securities transactions outside the US; and g) perhaps most importantly, the plaintiff’s claim rests to a significant degree on foreign law, as the impugned document in fact consisted in the material required to be sent or provided to US resident security holders “under applicable US federal securities laws or exchange requirements”.

To further convince the Court that Ontario was not the most appropriate forum, BP submitted that 83,945 ADSs were traded on the TSX, compared with 9 billion on the NYSE and 8.7 billion on the LSE. The Court agreed “that permitting the plaintiff to use BP’s negligible relative trading on the TSX […] as a toehold for bringing foreign exchange purchasers under the jurisdiction of an Ontario court would be both opportunistic and a classic example of the “tail wagging the dog””.[5]

In our previous blog, we pondered as to “what logic would allow a court to cast aside the substantive application of the very law that gave it jurisdiction in the first place”. We now have an answer: forum non conveniens. As a result of the Ontario Court of Appeal’s decision, class action plaintiffs will now likely think twice before using Ontario courts as a forum for secondary market misrepresentation claims against foreign issuers for trades of securities acquired on foreign exchanges.


Martin Aquilina is a seasoned International Business Lawyer at HazloLaw – Business Lawyers, based in the heart of Canada’s national capital, Ottawa, Ontario. Contact: maquilina@hazlolaw.com , +1) 613-747-2459 ext.308. Visit: www.hazlolaw.com/team/martin-aquilina

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[1] Kaynes v. BP, PLC, 2014 ONCA 580.

[2] Moran v. Pyle National (Canada) Ltd., [1975] 1 S.C.R. 393.

[3] Club Resorts Ltd. v. Van Breda, 2012 SCC 17.

[4] Comity can be defined as: “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” (the Court of Appeal, quoting Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077 at p. 1096 S.C.R., in which La Forest J. adopted the definition of comity set out in the 1895 American case of Hilton v. Guyot, 159 U.S. 113).

[5] For our foreign readers who may not be familiar with this idiomatic impression, it refers to a minor or secondary part of something controlling the whole.

Lawsuit Against Canadian Government by “Potential Immigrants”

There has been quite a bit of controversy with respect to a number of recent changes to Canada’s immigration policy. An interesting and most likely unanticipated consequence of these changes has taken the form of a lawsuit by affluent foreigners, mostly from China, against the Federal Government after the cancellation of the Immigrant Investor Program (IIP).

The IIP offered “would-be” immigrants permanent residency to those with a net worth exceeding $1.6 million as long as they invested $800,000 into the Canadian government. Seems like a good trade? Well, it did to the 66,000 applicants whose applications were backlogged prior to the Program’s cancellation. 1,500 of them are now asking to either have their applications processed or they will seek compensation in the amount of $5 million per applicant – resulting in over $18 billion in claims.

Without disputing the benefits of immigration for Canada, a lawsuit like this one has, at first blush, little merit. From a private law perspective, the obvious argument is that the former availability of the IPP can hardly be considered an “offer” that, if accepted by a foreign applicant, forms a contract between the applicant and the Canadian government. From a public law perspective, Canadian courts have been traditionally loathe to find the existence of a duty of care between a government and a private party that could form the basis of a claim in tort. Finally, and perhaps most importantly, the conferral of citizenship, which is what permanent residency usually leads to, is an act of sovereign power.

The acceptance of the plaintiffs’ claim by the Canadian judiciary would be tantamount to the imposition upon the other branches of government of a legal obligation not to change immigration policies where such change would be detrimental to a potential immigrant. This would be not only be taking the government’s duty to provide procedural fairness too far, it also ignores the sovereign nature of citizenship attribution under public international law.

For further details on this matter, please refer to the link below:

http://www.huffingtonpost.ca/2014/06/06/immigrant-investor-program-lawsuit-canada_n_5455932.html?utm_hp_ref=email_share


Martin Aquilina is a seasoned International Business Lawyer at HazloLaw – Business Lawyers, based in the heart of Canada’s national capital, Ottawa, Ontario. Contact: maquilina@hazlolaw.com , +1) 613-747-2459 ext.308. visitwww.hazlolaw.com/team/martin-aquilina

New European Rule on Certain Technology Transfer Agreements

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On May 1, 2014, Regulation 316/2014 of the European Commission dealing with anti-competitive technology transfer agreements came into effect. The Regulation replaces a previous Regulation put in place by the Commission ten years ago (Reg. 772/2004).  Technology transfer agreements that satisfied on April 30, 2014 the conditions for exemption set out in the previous Regulation are grandfathered until April 30, 2015.  Thereafter, they must meet the criteria in the new Regulation.

To a Canadian reader, the granular prescriptions of the Regulation may appear excessive. However, one must realize that in the European Union, the free movement of goods and services between Member States has quasi-constitutional value, being enshrined as it were in one of the two treaties governing the EU, namely the Treaty on the Functioning of the European Union (the “Treaty”).  Against such a backdrop, it is less surprising that certain commercial behaviours, such as the entering into of contracts that prevent, restrict or distort competition, are expressly prohibited by the Treaty.

The purpose of the Regulation is to safe-harbour technology transfer agreements that restrict competition by exempting them from the applicable article of the Treaty. In doing so, the Regulation seeks to reconcile the objective of protecting competition with that of allowing business entities to bargain for legitimate commercial and legal advantages through their intellectual property contracts.

The Regulation covers two types of technology transfer agreements.  The first are agreements whereby one entity licenses virtually any form of intellectual property, other than trade-marks, to another entity that will use the intellectual property to produce a good or service.  The second are agreements whereby one entity sells intellectual property to another entity that will use it to produce a good or service but with the vendor retaining part of the risk associated with the exploitation of the technology.  Certain other forms of IP transfers are excluded from the scope of the Regulation, including supply and distribution agreements, research and development agreements and specialisation agreements, which are each governed by distinct EC Regulations.

There are different rules in the Regulation depending on whether the contracting parties are competitors or not.  For example, if the parties are competitors, restrictions on competition can be safe-harboured as long as the combined market share of the parties does not exceed 20%.  That percentage increases to 30% if the parties are not competitors.  In either case, care must be taken to ensure that the agreement does not contain one of the so-called “hardcore restrictions” (restrictions caractérisées) described in the Regulation, for example a restriction prohibiting the licensee from selling product into an exclusive territory (other than a territory reserved for the licensor), or an “excluded restriction” (restrictions exclues), such as an obligation imposed on the licensee to grant to the licensor an exclusive license in respect of the licensee’s own improvements to the licensed technology (this is known as a “grant back clause”).  The difference between the two types of restrictions is that for hardcore restrictions, the entire agreement is denied the benefit of the safe harbour. In the case of excluded restrictions, only the restriction is denied such benefit.

Finally, it is to be noted that the Regulation provides the Commission or the competition authority of the Member State with the ability to withdraw the benefit of the Regulation in specific cases.

Martin Aquilina is an international business and institutional lawyer. For more information on the above, please contact him at +1 613-747-2459 x 308 or at maquilina@hazlolaw.com.