Canada: No Shortcuts For Service! Convention Supersedes The Rules For Service Of Claims Abroad

In Khan Resources Inc. v. Atomredmetzoloto JSC the Ontario Court of Appeal confirmed that the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (the “Convention”) supersedes Ontario’s out of province service rules. In light of this decision, Ontario litigants seeking to sue a foreign entity must exhaust all steps to serve the claim in accordance with the Convention before asking Ontario’s courts to validate service and, even then, it is uncertain whether any exceptions to the Convention’s procedure will be permitted.

Background

Khan Resources Inc. and its subsidiaries (“KRI”) are involved in uranium exploration and development in Mongolia. Khan entered into a joint venture to develop a property in Mongolia with Atomredmetzoloto JSC and its subsidiary (“ARMZ”), companies controlled by the Russian State Atomic Energy Corporation.

In 2010, KRI issued a claim in Ontario alleging that, among other things, ARMZ had tried to deprive KRI of its interest in the property (the “Claim”).

KRI attempted to serve the Claim in Russia in accordance with Rule 17.05(3)(a) which incorporates the Convention and required service to be effected through the Russian Ministry of Justice. The Ministry refused service, citing Article 13 of the Convention which permits a state to deny service “if it deems that compliance would infringe its sovereignty or security.” The Ministry did not provide any other reasons for the refusal.

KRI’s Russian counsel advised that an appeal of the Ministry’s decision would be costly, time-consuming and that the result might be politically driven. KRI also decided not to pursue the diplomatic remedies set out in Article 14 of the Convention. Instead, KRI brought a motion in Ontario seeking an order to substitute or dispense with service, or validate service, under Rules 16.04 and Rule 16.08.

The Master’s Motion

Master Graham granted KRI’s motion and validated service of the Claim under Rule 16.08. The Master held that Rule 17.05(3) did not oust the discretion of Ontario courts to validate service. Without attorning to the jurisdiction of Ontario, ARMZ appealed to set aside the Master’s order.

The Superior Court Appeal

In setting aside the Master’s Order, Justice O’Marra held that when the Convention applies, it is the only channel for service available to the litigants. Justice O’Marra held that the Convention has been incorporated into Ontario’s domestic law through the enactment of Rule 17.05(3), the Convention’s procedure governed service of the Claim and the Convention’s procedure superseded domestic procedure.

Justice O’Marra concluded that in cases where the Convention applies there is no discretion for the court to substitute, dispense with or validate service pursuant to Rules 16.04 or 16.08.

The Court of Appeal

KRI appealed Justice O’Marra’s decision. The issue before the Court of Appeal was whether the Convention is a complete code for service of a claim abroad.

KRI argued that while Rule 17.05(3) is the prima facie procedure to approve service, it does not deprive the court of its discretion under the other Rules. Since the Convention’s objective is to ensure a foreign defendant has notice of a legal proceeding, KRI argued that if the court was satisfied the defendant had notice of the proceeding then it was justified in validating service.

The Court of Appeal rejected KRI’s arguments and dismissed the appeal, holding that the Convention’s procedure is exclusive.

First, in addition to providing notice of a legal proceeding, the Convention is intended to improve the notice system by establishing a uniform procedure in all contracting states. Second, Rule 17.05(3) uses mandatory language and the Court held that it intended to provide a complete code for service in contracting states. Third, interpreting Rule 17.05(3) as a complete code for service is consistent with the principle that domestic law should be read, wherever possible, to comply with Canada’s international obligations.

Interestingly, despite its firm holding, the Court of Appeal questioned whether, if KRI had exhausted all possible avenues for service in Russia, a court could order service to be validated or dispensed with. However, the Court declined to answer this question, concluding that possible exceptions to the service procedure established by the Convention were beyond the scope of the appeal and, in any event, the facts of the case did not justify an exception.

Analysis and Recommendations

Of some concern is that the Khan decision appears to accept that it is possible for a foreign central authority to “reject” service without extensive reasons and defeat a claim before it gets off the ground. As suggested by Khan, this may be a particular concern where the defendant is the state itself and the claim may not suit its political objectives. This creates an interesting conundrum: by respecting the very instrument intended to improve dispute resolution by establishing a uniform method of serving claims, a plaintiff is exposed to the risk that the Convention will be misused in the defendant’s jurisdiction.

Perhaps in recognition of this dilemma, the Court of Appeal has left open the possibility that Ontario courts may exercise discretion to validate or dispense with service, but only when all avenues under the Convention have been exhausted. Presumably, such steps would include appealing the decision of the central authority in the defendant’s jurisdiction and pursuing other avenues of relief under the Convention, regardless of the expense or legal risk.

In addition, the Court of Appeal suggests that there may be circumstances when considerations of access to justice would justify an exception to the Convention. While in Khan the Court did not accept that the cost of following the Convention procedure would justify an exception, it did not rule out the possibility in appropriate circumstances. Given the Court’s comments, and the recent amendments to the Rules to emphasize proportionality in litigation, an exception may be recognized if the cost of pursuing the “Convention route” is grossly disproportionate to the value of the claim. However, the Convention itself does not contemplate such an exception and if the Convention is exclusive and paramount, it is unclear on what basis the Court would ground such an exception.

In short, parties preparing to engage in international litigation should be aware that, as a general rule, the Convention procedure for service must be fully complied with. A plaintiff must exhaust all avenues available to it under the Convention before turning to Ontario’s courts to validate service. While there may be exceptional cases that justify a departure from this general rule, such exceptions have yet to be determined and the decision in Khan confirms that courts expect parties to comply with the Convention’s procedure.

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