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In Kirloskar Technologies (P) Ltd. vs. Best Theratronics Ltd., 2022 ONCA 331 the Ontario Court of Appeal held that the perceived risk of criminal prosecution under Canada’s bribery of foreign public officials legislation does not excuse a debtor from paying his debt under an agency agreement , when the outstanding criminal charges are not relevant to the current civil case. The question of whether a debtor could be released from a contractual obligation when the alleged corrupt conduct of its agent was more clearly demonstrated and/or more directly related to his activities on behalf of the debtor was not decided by this case. .

Background

In 2000, Best Theratronics Ltd. (“BTL”), a manufacturer of medical equipment, has entered into an agency agreement with Kirlostar Technologies (P) Ltd. (“KTPL”) to sell BTL’s medical equipment in India and Nepal in exchange for a commission. The parties had a long-standing business relationship and BTL had paid KTPL’s commissions for the sale of medical equipment without difficulty.

However, at test, BTL argued that it should be released from the obligation to pay its debt to KTPL. Specifically, BTL raised three defenses as to why it was not obligated to pay KTPL’s current outstanding invoices:

  1. Part of the claim was statute-barred under the Limitation Act 2002;

  2. BTL was entitled to deduct the amount it owed KTPL from the amount owed for various breaches of contract alleged by KTPL; and

  3. BTL could be sued under federal law Corruption of Foreign Public Officials Act (there “LCAPE“) by making any payment to KTPL as KTPL was facing charges related to alleged bribery of public officials in India.

BTL, however, did not contest the existence of the debt or the amount owed to KTPL.

The first instance decision

The trial judge rejected BTL’s three defenses for resisting payment of the debt.

In particular, with regard to the potential violation of the
CFPOA, the trial judge admitted into evidence, on consent, an Indian indictment which purported to detail the alleged bribery charges of officials against KTPL and BTL relating to the sale of medical equipment in 2006 (the “indictment”).

The trial judge concluded that the implications of the indictment were “far from clear”. BTL did not produce an expert to help the Court understand the significance of the indictment, and the parties also agreed that the charges relating to KTPL were both unproven and unrelated to the debt. in question.

Accordingly, the trial judge concluded that the perceived risk of prosecution under the LCAPE did not excuse BTL from paying the outstanding debt.

The decision of the Court of Appeal

On appeal, BTL argued that the trial judge erred in her assessment of BTL’s third defense regarding the potential violation of the LCAPE by, among other things, ordering a Canadian company to pay an agent in a foreign jurisdiction where there are “red flags” of potentially corrupt practices on the part of the agent (such as the charge sheet).

BTL further argued that the Court of Appeal should recognize a principle, as a matter of public policy, that contract payments need not be paid to agents who are under a “cloud of suspicion Corrupt Practices” (the “Proposed Principle”) .

Ultimately, the Court of Appeal concluded that there was no evidence to support BTL’s arguments. The trial judge’s findings on the indictment were key to the Court of Appeal’s decision.

The Court of Appeal also noted that in Uber Technologies Inc. v. Heller, 2020 SCC 16, the Supreme Court of Canada had “emphasized that public policy considerations should be relied upon” sparingly “and cautioned against expanding public interest grounds to override contractual provisions” .

Key points to remember

  • Although the Court of Appeal did not recognize the proposed principle due to the factual circumstances involved, the decision underscores the courts’ general reluctance to interfere with the contractual obligations agreed to by the parties.

  • However, the ruling leaves open the question of whether courts will interfere with parties’ contractual obligations where the suspicion of corrupt activity is based on stronger evidence and/or is more directly related to the contractual obligation at issue.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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