Denial of Mareva injunction due to Bank’s “dirty hands” upheld

Advancing unfounded allegations of fraud and overstating its case may preclude a party from attaining equitable relief. A panel of the Ontario Divisional Court upheld Justice Stinson's dismissal of a motion to continue an interim Mareva injunction brought by the Royal Bank of Canada.^[1]  Stinson J. determined that all of the constituent elements for granting the injunction had been met, but he nevertheless exercised the Court's equitable discretion in denying RBC the relief sought, as a result of RBC's unfounded pleadings of fraud. (see "Bank's "dirty hands" deprive it of Mareva injunction even though test met". http://www.thelitigator.ca/2010/12/banks-dirty-hands-deprive-it-of-mareva-injunction/ )

Starting in 2005, RBC had loaned the defendant Royal Edge $4 million, secured by a general security agreement and personal guarantees.  The loan went into default, and RBC appointed a receiver.  RBC commenced the action, and sought an interim and interlocutory Mareva injunction.  According to Stinson J., RBC's pleadings "were gorged with allegations of fraud".  The Defendants vigorously defended against the fraud allegations.  On the motion, the Defendants denied any fraud and denied any basis for a Mareva injunction.  Alternatively, they argued that the Court should refuse any injunction because the bank had made unsupported allegations of fraud.  Stinson J. agreed.

The Divisional Court agreed with Stinson J. that RBC's conduct disentitled it to the continuation of the interim Mareva injunction.  Firstly, RBC relied on the unsubstantiated allegations to obtain a preliminary interim injunction and continued to rely on this allegation in their motion materials until they delivered an amended factum late in the motion process, which did not refer to fraud.  RBC, however, did not abandon those allegations in oral argument, in response to the Defendants' vigorous defence against those allegations. Speaking metaphorically, Perrell J. indicated that RBC's tactical decisions have consequences: "if a litigant drops the gauntlet and insults another's integrity, then the litigant must complete the duel or genuinely withdraw the insult and apologize." RBC did not. RBC had overstated its case and made unsupportable allegations of fraud. The court exercised its discretion to deny the motion.

On appeal RBC argued, among other things, that the Defendants had to have pleaded the doctrine of clean hands to rely on it. Perrell J. held that the discretionary factors associated with such equitable relief are always in play, and need not be specifically pleaded.

RBC also argued that the motions judge erred in the exercise of his discretion. Perrell J. disagreed, in that RBC's "tactical decision was an iniquity done to the Defendants", and, as such, Stinson J. made no error in his reliance on the unclean hands doctrine.

RBC further argued that once the constituent elements of the test for the granting of a Mareva injunction had been met, the court had no discretion to deny the injunction on equitable grounds. No authority was offered in support of the position. That proposition, Perrell J. held, "is just wrong".

An injunction, unlike the common law remedy of damages, is an equitable remedy and by its very nature discretionary; it can therefore be refused, on equitable grounds, including application of the clean hands doctrine, by the court. In denying the injunction on these grounds, Stinson J. made no error.

Affleck Greene McMurtry LLP acted as counsel to the defendants/respondents in this case.