In Kirloskar Technologies (P) Ltd. v. Best Theratronics Ltd., 2022 ONCA 331 the Ontario Court of Appeal affirmed that the perceived risk of criminal prosecution under Canadian corruption of foreign public officials legislation does not absolve a debtor from paying its debt under an agency agreement, where the outstanding criminal charges are irrelevant to the civil case at hand. Whether a debtor might be absolved of a contractual obligation where its agent's alleged corrupt conduct was more clearly demonstrated and/or more directly related to its activities on behalf of the debtor was not decided by this case.

Background

In 2000, Best Theratronics Ltd. ("BTL"), a manufacturer of medical equipment, 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 commercial relationship, and BTL had paid KTPL's commissions for the sale of medical equipment without issue.

However, at trial, BTL argued that it should be relieved of the obligation to pay its debt to KTPL. Specifically, BTL raised three defences as to why it wasn't liable to pay KTPL's current outstanding invoices:

  1. A portion of the claim was statute barred as per the Limitations Act, 2002;
  2. BTL was entitled to set-off the amount it owed KTPL against the amount owing for various alleged breaches of contract by KTPL; and
  3. BTL would risk prosecution under the federal Corruption of Foreign Public Officials Act (the "CFPOA") by making any payment to KTPL since KTPL was facing charges relating to allegations of bribery of public officials in India.

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

The Trial Decision

The trial judge rejected BTL's three defences for resisting payment of the debt.

In particular, with respect to the potential violation of the CFPOA, the trial judge admitted into evidence, on consent, a charge sheet from India that purported to detail alleged bribery charges of government officials against both KTPL and BTL relating to the sale of medical equipment that occurred in 2006 (the "Charge Sheet").

The trial judge found that the implications of the Charge Sheet were "far from clear". BTL didn't produce an expert to assist the Court with understanding the significance of the Charge Sheet, and the parties also agreed that the charges relating to KTPL were both unproven and irrelevant to the debt at issue.

Accordingly, the trial judge held that the perceived risk of prosecution under the CFPOA did not absolve BTL from paying the outstanding debt.

The Court of Appeal Decision

On appeal, BTL argued that the trial judge erred in her assessment of BTL's third defence regarding the potential violation of the CFPOA by, among other reasons, ordering a Canadian business 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 do not need to be paid to agents who are under a "cloud of suspicion for corrupt practices" (the "Proposed Principle").

Ultimately, the Court of Appeal held that there was no evidence to ground the submissions made by BTL. Critical to the Court of Appeal's decision were the trial judge's findings related to the Charge Sheet.

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 on 'sparingly' and cautioned against expanding the heads of public policy for setting aside contractual provisions".

Key Take-Aways

  • While the Court of Appeal did not recognize the Proposed Principle due to the factual circumstances at issue, the decision underscores the general unwillingness of the courts to impede contractual obligations agreed to by parties.
  • However, the decision leaves open the question of whether courts will interfere with the contractual obligations of parties where the suspicion of corrupt activity is grounded in stronger evidence and/or is more directly related to the contractual obligation at issue.

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