Canada: Ontario Courts Cannot Validate Foreign Service Of Claims Where The Hague Convention Applies

The Ontario Court of Appeal recently confirmed that foreign states can hinder a plaintiff from serving a foreign defendant if that defendant resides in a country that is a member of the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters and the foreign state refuses to effect service. The Convention requires contracting states to designate a central authority to serve foreign proceedings and permits states to refuse to serve proceedings if they infringe on sovereignty or security. As an Ontario court will not grant final judgment against a defendant unless that defendant has been served, a foreign state can prevent the plaintiff from seeking the assistance of Ontario courts and require that plaintiff to start its action in the foreign court. 

In Khan Resources Inc. v. Atomredmetzoloto JSC, 2013 ONCA 189, the Ontario Court of Appeal held that an Ontario court cannot dispense with or validate foreign service when a contracting state refuses to facilitate service under the Convention. This decision, which underscores the risks involved when litigating international business disputes, confirms that rule 17.05(3) of the Rules of Civil Procedure – which incorporates the Convention into Ontario law – is a complete code for service on foreign defendants in contracting states. In short, plaintiffs must comply with the Convention

Factual Background 

Khan Resources Inc. (Khan) engaged in a joint venture to develop a uranium mining property in Mongolia with Atomredmetzoloto JSC (ARMZ). Khan is an Ontario corporation and ARMZ is a Russian corporation in which the Russian State Atomic Energy Corporation has a controlling interest. In August 2010, Khan commenced an action in Ontario against ARMZ seeking damages in the amount of $300 million. Khan alleges that the Russian government, acting through ARMZ, sought to deprive Khan of its interest in the uranium mining property in Mongolia. 

Russia Refuses to Serve Defendants 

As both Canada and Russia are contracting states, the Convention governed service of Khan's statement of claim on ARMZ in Russia. In December 2010, the Russian Ministry of Justice informed Khan that pursuant to article 13 of the Convention, it was refusing to serve Khan's statement of claim on the basis that effecting service would infringe its sovereignty or security.  

Asking Ontario Courts to Validate Service Regardless of the Convention 

After the Russian Ministry declined to serve ARMZ, Khan had the option of pursuing remedies under section 14 of the Convention, which provides that difficulties arising in connection with service abroad should be settled through diplomatic channels. Instead, Khan brought a motion in the Ontario Superior Court for an order substituting or dispensing with service under rule 16.04 or validating service under rule 16.08 of the Rules

In October 2011, Khan's motion was granted by a Master of the Superior Court, who held that Ontario courts retained the jurisdiction to substitute, dispense with or validate service regardless of the Convention. ARMZ appealed the Master's decision to a judge of the Superior Court. In March 2012, the Superior Court allowed the appeal and set aside the Master's order, concluding that the Convention applied to the exclusion of domestic law. 

Khan appealed the Superior Court's decision to the Ontario Court of Appeal, arguing that rule 17.05(3) (which incorporates the Convention into Ontario law) is only a prima facie means of service in a contracting state and that an Ontario court has the jurisdiction to validate foreign service regardless of the Convention. The Court of Appeal dismissed the appeal, outlining five reasons why rule 17.05(3), and through it the Convention, is a complete code for service on parties who reside in contracting states. 

Reasons Why Plaintiffs Must Comply with the Convention

The Court of Appeal explained why plaintiffs must comply with the Convention and rule 17.05(3) as follows: 

  1. The Convention's objectives: One of the Convention's main objectives is to improve the system of giving a defendant notice of a legal proceeding by establishing a uniform procedure for service in all contracting states. If Ontario courts were to circumvent the Convention and validate foreign service under rules 16.04 and 16.08, this would undermine one of the Convention's main purposes.
  2. The language found in the Rules: Rule 17.05(3)(a) contains the mandatory language that service in a contracting state shall be through the central authority. This mandatory language stands in contrast to rule 17.05(2), which is the rule regarding service in non-contracting states and which contains permissive language. Additionally, rule 17.05(2) incorporates the rule 16 provisions for dispensing with or validating service; rule 17.05(3) does not.
  3. Interpretation of the Rules in light of Canada's treaty obligations: Domestic law should be read so that it complies with Canada's international treaty obligations. The exception to this rule is where the government has expressly legislated contrary to treaty obligations. Ontario has not expressly legislated exceptions to Canada's Convention obligations; rule 17.05(3) fully enacts the Convention
  4. The Convention's exclusive character: The Practical Handbook on the Operation of the Hague Service Convention indicates that the Convention is of exclusive character and that if foreign service is required, the Convention provides an exhaustive list of ways to serve abroad. This notion has been affirmed by the Alberta Court of Appeal in Metcalfe v. Yamaha Motor Powered Products Co., 2012 ABCA 240, in which it was held that the Alberta Rules of Court "should not be interpreted so as to circumvent the methods of service provided in the Hague Convention." 
  5. Ontario jurisprudence: There is previous Ontario jurisprudence to the effect that plaintiffs cannot circumvent the Convention. If the Convention applies, plaintiffs must comply with it.

Exhausting All Possible Remedies Under the Convention

The Court of Appeal mentions that its analysis may have been different had Khan pursued all possible remedies under the Convention and was still unable to effect service. For example, in Zhang v. Jiang (2006), 82 OR (3d) 306, a Master for the Superior Court dispensed with service under rule 16.04 after finding that all reasonable steps to serve the defendants had been exhausted and that the interests of justice favoured an exception to service under the Convention.  

However, the Court of Appeal notes that, even if Khan had exhausted all means of serving ARMZ, Zhang would likely not have applied, especially as Khan had provided no compelling evidence to show that the interests of justice favoured dispensing with or validating service.

Implications 

This decision highlights the risks involved when litigating international business disputes, especially when one of the involved parties is affiliated with a foreign government. While contracting states can refuse to facilitate service in only limited and specific circumstances, it is a risk that should be considered when choosing where to start cross-border litigation. On a more fundamental pre-contractual level, the decision mandates consideration of attornment clauses with agreed Canadian agents for service or arbitration clauses with agreed methods of non-Convention service of initiating documents – either of which could potentially avoid the outcome in Khan for a Canadian plaintiff asserting contractual rights against a foreign defendant.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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