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Trade News

Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.


The Rules of the Game: International and Trade Litigation and Arbitration involving Chinese and Canadian Parties

Wednesday, February 22, 2012 > 11:30:18

Blakes – Roy Millen and Andrew Crabtree)

Canada’s economic relationships with the People’s Republic of China continue to grow each year, creating attractive partnership opportunities for Canadian and Chinese companies. Despite the obvious benefits of such growth, Canadian and Chinese companies should be aware of the sleeping dragon that can surface in the event of a contract or trade dispute, based on differences in how some parties approach the process of dispute resolution. These differences can add cost and complexity, as well as uncertainty, to an already complicated process. This bulletin highlights some of these differences and offers suggestions to mitigate the risks that can arise in the course of resolving a dispute involving Canadian and Chinese companies.

Given the legal, commercial and cultural diversities between Canada and China, it is not surprising that there could be differences in how some parties in each country approach dispute resolution. These differences often relate to the significance of the terms of a contract or trade legislation, rules of procedure and court (or tribunal) orders. Being aware of these potential differences can reduce the likelihood of unwelcome surprises in the event that a dispute arises regarding a proposed or completed transaction. This is particularly important given the additional (and typically unbudgeted) operational and financial resources that may be required in order to resolve the dispute.

Canadian Dispute Resolution Processes: Designed to Deliver Compliance and Certainty

In Canada, the framework and structure of commercial and trade dispute resolution is carefully prescribed by legislation and rules of procedure, such as each province's Rules of Court, each arbitration centre's Rules of Procedure, and, in the case of trade disputes, the Special Import Measures Act, the Customs Act and related Canadian legislation. These various sets of rules prescribe numerous mandatory steps and timelines for the resolution of disputes in each forum. Canadian courts have expressly stated that parties’ contractual and legislative obligations should be given effect barring very good reasons otherwise, in aid of providing market certainty. As such, Canadian courts and tribunals seek to ensure the litigation process closely follows the rules of procedure in order to resolve disputes in a manner that is intended to be both just and efficient.

Similarly, the Canada Border Services Agency (CBSA) and the Canadian International Trade Tribunal (CITT) have consistently demonstrated an intention to investigate allegations of trade law violations in order to ensure strict compliance with trade legislation. Both agencies are governed by legislation that sets tight timelines and filing requirements, and which offers limited flexibility. Imports from China have often been the target of such investigations. A recent example is the January 12, 2012 CITT preliminary injury determination regarding stainless steel sinks imported from China. The CITT concluded that there is evidence that discloses a reasonable indication that dumping and subsidizing of the imports have caused or are threatening to cause injury to the domestic industry. As a result, a full inquiry will proceed, and duties may be assessed on the subject imports.

Failure to abide by the terms of a contract, trade legislation, or the rules of procedure invites an adverse ruling by a court, arbitrator, the CBSA or the CITT. Further failure to abide by such an order will result in additional consequences and penalties, including increased legal costs. Companies operating in Canada should be aware that Canadian courts will expect strict compliance on these matters and will penalize contraventions of such rules, particularly once an order has been issued setting out clear expectations and deliverables.

Trading Lenses: Different Views on Dispute Resolution Processes

Some trade and commercial cases demonstrate that certain companies operating in Canada do not always view the dispute resolution process in the same manner as that prescribed by Canadian legislation. In particular, some companies may not see contracts, legislation, rules of procedure and even court orders as binding rules to govern the parties’ conduct and relationship. Instead, such rules may be considered useful but not definitive “guideposts” as to how the parties may or ought to act within a particular relationship. Examples of such conduct include:

•a party refusing to abide by a court order in respect of disposing of certain property, resulting in a further court hearing to apply for contempt of court. This occurred in litigation in the British Columbia Supreme Court involving corporate transactions in China (Luu v. Wang);
•a party disregarding an express contractual requirement to pay the other party a certain amount of money, despite its earlier acceptance of such terms (Luu v. Wang);
•a party continuing to operate under an unreasonable and distorted interpretation of a contract even after an arbitral ruling to the contrary; and
•parties exporting goods to Canada while in receipt of subsidies from up to 86 government programs, in potential contravention of Canadian trade legislation.

It is important to note that these examples are not unique to trade or contractual disputes with companies from any particular country. Further, there are always two sides to a story that are not always apparent from court and tribunal rulings. Nevertheless, companies doing business in Canada need to be aware of the potential for disputes over not just their and their counterparts' substantive legal obligations under contract and legislation, but also their respective procedural obligations in the resolution of disputes. Parties assume at their peril that everyone knows and agrees to the rules of the game.

The litigation history of the Luu v. Wang case, referenced above, demonstrates the potential procedural and substantive issues that may arise, and the financial and logistical consequences that necessarily follow, when a party does not abide by the rules.

Risk Mitigation for Dispute Resolution Processes

The litigation process is already marked by inherent risks and uncertainties. The possibility that contractual terms, trade legislation, rules of procedure or court orders will be disregarded creates further uncertainties and economic costs for all parties, particularly a party that expects compliance with such rules. If a challenge arises and litigation results, both parties should be aware of the differences outlined above in order to properly prepare for the litigation process and the rules-based expectations of commercial relationships in Canada, as well as the associated costs if such rules are disregarded.

To a certain degree, parties can mitigate the risks of these problems through proper planning both before and after a contract is completed. For example, the following considerations may be relevant:

•Including detailed and powerful enforcement mechanisms in the contract if contractual compliance is essential;
•Including contractual provisions relating to the payment of legal fees regarding contract compliance and/or enforcement; and
•Including Canadian legal counsel in settlement negotiations to protect substantive and procedural rights and also to ensure that procedural deadlines are not missed during such negotiations.

No one can predict if or when a deal may go sour. What can be done is to recognize and prepare for the possibility, such that if it does occur, there are increased prospects of an efficient outcome.

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