A very recent ruling of the Ontario Court of Appeal, Khan Resources Inc. v. Atomredmetzoloto JSC, 2013 ONCA 189, is significant for two reasons: first, it provides appellate authority addressing the interaction between domestic civil procedure rules and international conventions; and, secondly, it highlights a potential pitfall facing Canadian companies doing business with foreign entities (and particularly state-controlled foreign entities).

In order to develop a uranium mine in Mongolia, a Canadian mining company and two of its affiliates had entered into a joint venture with two Russian companies, both of which were controlled by the Russian State Atomic Energy Corporation. A dispute arose between the parties. The Canadian entity (and its affiliates) commenced an action in Ontario, and attempted to serve the two Russian companies in Russia with notice of the commencement of the proceeding.

Unfortunately for the plaintiffs, both Canada and Russia are signatories to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters (“the Hague Convention). Pursuant to Rule 17.05(3) of the Ontario Rules of Civil Procedure – which domesticated the Hague Convention in this province — plaintiffs are unable to serve defendants in Russia directly, but are instead required to effect service through the Russian government.

The Russian Ministry of Justice refused to permit service on the two subsidiaries of the state-controlled Atomic Energy Corporation, citing concerns with sovereignty and national security.

The Canadian plaintiffs faced a quandary. They could have attempted to challenge this decision of the Russian government through the Russian courts. Alternatively, they could have attempted to facilitate a diplomatic resolution (as is proposed in the Convention itself). Instead, they sought the assistance of the Canadian justice system, asking the Ontario courts to make use of the Rules of Civil Procedure to, effectively, circumvent the obstruction created by the Hague Convention. More specifically, the plaintiffs asked the Ontario court (i) to authorize a substituted form of service on the Russian parties, (ii) to dispense with the need for such service, or (iii) to validate the service that had already been effected in Russia.

Both the motion judge and the Court of Appeal rejected these requests, leaving the Canadian plaintiffs with no obvious (domestic) recourse in continuing their claim against the Russian defendants.

The Court of Appeal concluded that the Hague Convention serves two purposes: (i) it provides a mechanism for giving notice of legal proceedings to a party in a foreign jurisdiction, and (ii) it provides a uniform procedure for giving such notice. In line with these two goals, the Convention represents a complete code, which cannot be undermined or circumvented through reliance on domestic law (including the Rules of Civil Procedure).

The Ontario court noted that a recent ruling of the Alberta Court of Appeal, Metcalfe v. Yamaha Motor Powered Products Co., 2012 ABCA 240, had reached a similar conclusion with regard to the inefficacy of the Alberta Rules of Court in validating service on a foreign party, when such service had not been effected in compliance with the Hague Convention.

The Court of Appeal left open an interesting question — namely, had the Ontario plaintiffs first exhausted all possible further remedies available to them under the Convention in seeking to serve the Russian defendants, could an Ontario court then use the Ontario Rules of Civil Service to validate service or dispense with service? The existing law in Ontario on this question is sparse, inconsistent and factually driven (see the discussion in Gray v. SNC-Lavalin Group Inc., 2012 ONSC 3735), and a final answer must await a future proceeding.