FACTUM OF THE APPELLANTS - KHAN … File No. C55360 COURT OF APPEAL FOR ONTARIO B E T W E E N : KHAN...

Court File No. C55360

COURT OF APPEAL FOR ONTARIO

B E T W E E N :

KHAN RESOURCES INC., KHAN RESOURCES LLC, CAUC HOLDING COMPANY LIMITED, CENTRAL ASIAN URANIUM COMPANY LLC,

KHAN RESOURCES B.V. and KHAN RESOURCES BERMUDA LTD.

Plaintiffs (Appellants)

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ATOMREDMETZOLOTO JSC and JSC PRIARGUNSKY INDUSTRIAL MINING AND CHEMICAL UNION

Defendants (Respondents)

FACTUM OF THE APPELLANTS

DAVIES WARD PHILLIPS & VINEBERG LLP 44th Floor, 1 First Canadian Place Toronto, ON M5X 1B1 James Doris (LSUC #33236P) [email protected] Derek Ricci (LSUC #52366N) [email protected] Tel: 416.863.0900 Fax: 416.863.0871 Lawyers for the Plaintiffs (Appellants)

TO: NORTON ROSE CANADA LLP Barristers & Solicitors TD Waterhouse Tower The Toronto-Dominion Centre Suite 2300, P.O. Box 128 79 Wellington Street West Toronto, ON M5K 1H1 Robert Frank (LSUC #35456F) [email protected] Erik Penz (LSUC #43145H) [email protected] Tel: 416.360.8511 Fax: 416.360.8277 Lawyers for the Defendants (Respondents)

TABLE OF CONTENTS

PART I ~ THE APPELLANT AND THE DECISIONS BELOW ....................................... 1

PART II ~ OVERVIEW .................................................................................................... 2

PART III ~ THE FACTS .................................................................................................. 4

A. The Parties ........................................................................................................... 4

B. The Substantive Dispute Between the Parties ..................................................... 5

C. Khan's Full Compliance with the Hague Convention ............................................ 7

D. Russia's Refusal to Serve the Statement of Claim ............................................. 10

E. Khan Had No Means to Effect Timely Service in Russia .................................... 11

F. The Decisions Below .......................................................................................... 12

PART IV ~ ISSUES AND THE LAW ............................................................................. 15

A. Objective and Scope of the Hague Convention .................................................. 16

B. The Hague Convention is Not Mandatory in Ontario .......................................... 21

C. Service was Properly Validated by Master Graham ........................................... 26

PART V ~ ORDER REQUESTED ................................................................................. 29

Court File No. C55360


B E T W E E N :

KHAN RESOURCES INC., KHAN RESOURCES LLC, CAUC HOLDING COMPANY LIMITED, CENTRAL ASIAN URANIUM COMPANY LLC,

KHAN RESOURCES B.V. and KHAN RESOURCES BERMUDA LTD.

Plaintiffs (Appellants)

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ATOMREDMETZOLOTO JSC and JSC PRIARGUNSKY INDUSTRIAL MINING AND CHEMICAL UNION

Defendants (Respondents)


PART I ~ THE APPELLANT AND THE DECISIONS BELOW

1. The Appellant, Khan Resources Inc. ("Khan"), is an Ontario company

involved in uranium exploration and development. Its head office is in Toronto and its

shares are listed on the TSX. The other Appellants are direct or indirect subsidiaries of

Khan.1

2. Khan appeals from the Order of Justice O'Marra dated March 9, 2012,

which allowed the Respondents' appeal and reversed the Order of Master Graham

dated October 28, 2011 validating service of the Statement of Claim in this action upon

the Respondents.

1 For simplicity, in this Factum, "Khan" refers to all of the Appellants.

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PART II ~ OVERVIEW

3. This appeal asks whether the Hague Convention,2 the fundamental

objective of which is to ensure that parties have actual notice of legal proceedings

commenced against them in sufficient time to enable them to defend, ousts all

discretion of the Ontario courts to validate or dispense with service in circumstances

where the party clearly has actual and timely notice of the legal proceeding.

4. Justice O'Marra, reversing a decision of Master Graham, held that the

Hague Convention is a mandatory complete code, and that the Ontario courts have no

discretion at all to validate or dispense with service, even in the extraordinary

circumstances of this case. In doing so, Khan submits that His Honour erred in law.

5. With this appeal, Khan seeks nothing more than the right to proceed with

its claim on the merits against the Respondents, Russian commercial enterprises that

participate actively in Ontario's capital markets. This is not a case of Khan seeking to

avoid the requirements of the Hague Convention. Khan did everything it was required

to do to effect service under the Hague Convention. It retained experienced Russian

counsel to assist with compliance with the Hague Convention, translated the Statement

of Claim into Russian and duly filed all of the required documentation. The Russian

Government, which controls the Respondents, refused Khan's validly transmitted

request to serve the Respondents in Russia in accordance with the Hague Convention.

2 Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters signed at The Hague on November, 15 1965 (the "Hague Convention"); Appellants' Book of Authorities, Tab 1.

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6. The Respondents have opposed Khan's efforts to serve the Statement of

Claim, even though they have unquestionably received actual and timely notice of this

proceeding. The Respondents have even actively participated in this proceeding

through Ontario counsel, by bringing a motion and an appeal, conducting a cross-

examination, and by serving many volumes of materials. In doing so, the Respondents

have used the Hague Convention as a shield to immunize themselves from litigation in

Ontario and seek to bar Khan from proceeding on the merits. Regrettably, the

Respondents have partially achieved their objective, having now substantially delayed a

claim commenced in August 2010, notwithstanding their active participation in it.

7. Khan submits that Justice O'Marra erred in law by concluding that Rule

17.05(3) of the Rules of Civil Procedure is a complete code for service on the

Respondents in this case. This is because while Rule 17.05(3) provides that the prima

facie means of service on the Respondents is through the Hague Convention, it does

not completely oust the court's statutory jurisdiction under Rule 16.04 and Rule 16.08 to

dispense with service altogether, or to substitute or validate an alternative means of

service. Rule 17.05(3) also does not oust Rule 1.04, which requires the Rules to be

construed liberally to secure the just, most expeditious and least expensive

determination of every civil proceeding on its merits.

8. In this regard, Rule 17.05(3) (which addresses service under the Hague

Convention) is no different than Rule 16.01(1) (which addresses service in Ontario).

While Rule 16.01(1) states that service of an originating process "shall" be effected by

way of personal service or alternative to personal service, our courts always maintain

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the jurisdiction under Rule 16.04 and Rule 16.08 to dispense with service altogether, or

to substitute or validate an alternative means of service.

9. In the circumstances, Khan asks that Master Graham's discretionary

decision to validate service of the Statement of Claim upon the Respondents be

restored so that the parties can finally move past the first step in this litigation. Such an

outcome would not only fulfill the objective of the Rules to secure the just, most

expeditious and least expensive determination of every civil proceeding on its merits, it

would also fulfill the objective of the Hague Convention, which as described in its

preamble is "to ensure that judicial and extrajudicial documents to be served abroad

shall be brought to the notice of the addressee in sufficient time". If, however, Justice

O’Marra’s decision is allowed to stand, the objectives of both the Rules and the Hague

Convention will be frustrated, rather than fulfilled.

PART III ~ THE FACTS

A. The Parties

10. As set out above, Khan is an Ontario company engaged in the exploration

and development of uranium. Khan's projects are located in the Dornod district of

northeastern Mongolia, a district that contains significant known uranium deposits.

Affidavit of Grant Edey sworn April 11, 2011 (the "Edey Affidavit"), paras. 3-5; Appeal Book, Tab 9, p. 84.

11. The Defendants (Respondents) are Russian commercial enterprises

controlled by the Russian government. Specifically, the Russian State Atomic Energy

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Corporation has a 80.345% controlling interest in the Defendant, Atomredmetzoloto

JSC ("ARMZ"). The other Defendant (Respondent) is a subsidiary of ARMZ.3

Edey Affidavit, paras. 6-7; Appeal Book, Tab 9, p. 85.

12. Although ARMZ is based in Russia, it participates in Ontario's capital

markets. ARMZ owns over 50% of Uranium One Inc., a TSX-listed company with its

head office in Toronto. Two representatives of ARMZ hold seats on the board of

directors of Uranium One, including ARMZ's Director General, Vadim Zhivov.

Edey Affidavit, paras. 26-30; Appeal Book, Tab 9, pp. 91-92.

13. In addition, in November 2009, ARMZ launched a hostile take-over bid for

Khan pursuant to Ontario securities laws. In connection with this hostile take-over bid,

ARMZ prepared and filed a circular and other documentation with Canadian securities

regulatory authorities. Khan successfully defended ARMZ's hostile take-over bid.

Edey Affidavit, para. 27; Appeal Book, Tab 9, p. 91.

B. The Substantive Dispute Between the Parties

14. Several years ago, Khan embarked on a joint venture with ARMZ to

explore and develop a uranium mining property in Mongolia known as the Dornod

Property. Khan (though a subsidiary) had a 58% interest in the joint venture and ARMZ

(through a subsidiary) had a 21% interest. The remaining 21% interest was held by a

Mongolian state-owned company.

3 For simplicity, in this Factum, "ARMZ" refers to all of the Respondents.

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Edey Affidavit, paras. 8, 11-12; Appeal Book, Tab 9, pp. 85-86.

15. Khan has invested several years and over $21 million to explore and

develop the Dornod Property. Khan's investments in the Dornod Property have

included exploration and drilling work, establishing a power line, building a settling pond,

building a permanent campsite, completing an internationally-recognized social and

environmental impact assessment, and completing pre-feasibility and feasibility studies.

In addition, in 2009, Khan announced a substantial development plan for the Dornod

Property, which contemplates a total investment of over US$300 million to bring the

project into production.

Edey Affidavit, paras. 13 and 14; Appeal Book, Tab 9, p. 87.

16. In contrast, Khan maintains that ARMZ has contributed virtually nothing to

the exploration and development of the Dornod Property.

Statement of Claim, para. 21; Appeal Book, Tab 8, p. 59.

17. ARMZ now seeks to exclude Khan from the Dornod Property and take the

full benefit of Khan's substantial investments in the Dornod Property. As described in

the Statement of Claim, ARMZ seeks to do so by, among other things, embarking on a

new joint venture to develop the Dornod Property with the Mongolian government, to the

exclusion of Khan and without any regard for Khan's rights and interests. To the same

end, in November 2009, ARMZ launched an ultimately unsuccessful hostile take-over

bid for Khan, as described above, which was highly prejudicial to Khan and jeopardized

its ability to re-register mining licences associated with the Dornod Property.

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18. In August 2010, Khan commenced an action in Ontario against ARMZ

seeking damages of $300 million for, among other things, breach of fiduciary duty and

unlawful interference with economic relations resulting from ARMZ's ongoing efforts to

completely exclude Khan from the Dornod Property and misappropriate the full benefit

of Khan's substantial investments therein.


Statement of Claim; Appeal Book, Tab 8, p. 54.

C. Khan's Full Compliance with the Hague Convention

19. There is no dispute that Canada and the Russian Federation are both

signatories to the Hague Convention, which deals with service abroad of judicial and

extrajudicial documents such as statements of claim. The Hague Convention is the

product of the Hague Conference On Private International Law, an organization with a

permanent bureau in The Hague.

20. As explained more fully below, the fundamental objective of the Hague

Convention is to ensure that judicial and extrajudicial documents to be served abroad

are brought to the actual notice of addressees in sufficient time for them to organize a

defence. In this regard, the preamble to the Hague Convention states:

"The States signatory to the present Convention,

Desiring to create appropriate means to ensure that judicial and extrajudicial documents to be served abroad shall be brought to the notice of the addressee in sufficient time,

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Desiring to improve the organisation of mutual judicial assistance for that purpose by simplifying and expediting the procedure,

Have resolved to conclude a Convention to this effect and have agreed upon the following provisions: …" (Emphasis added)

Hague Convention, preamble; Appellants' Book of Authorities, Tab 1.

21. The facts of this case are quite different from other Ontario and Canadian

cases involving service under the Hague Convention in that Khan has complied fully

with all of the requirements of the Convention. Indeed, Master Graham found in the

Motion Decision that Khan "did everything right" in terms of compliance with the Hague

Convention. This is not a case of Khan trying to circumvent or disregard the prima facie

requirements of the Rules or the Hague Convention.

Motion Decision, para. 41; Appeal Book, Tab 6, p. 45.

22. Khan's efforts to comply with the Hague Convention included:

(a) retaining leading Russian counsel from Baker & McKenzie CIS in Moscow

to assist with service of the Statement of Claim;

(b) drafting a bilingual (English and Russian) Request for Service;

(c) translating the Statement of Claim into Russian;

(d) preparing and issuing a formal Request for Service;

(e) duly filing the Request for Service with the Ministry of Justice of the

Russian Federation, in its capacity as Russia's central authority; and

(f) engaging in follow-up correspondence with the Russian central authority

regarding the status of the Request for Service.

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Affidavit of Vladimir Khvaley sworn April 5, 2011 (the "Khvaley Affidavit"), paras. 2, 4-13; Appeal Book, Tab 10, pp. 95-98.

23. In addition to complying fully with the requirements of the Hague

Convention, Khan also accomplished the fundamental objective of the Hague

Convention of ensuring that parties receive actual notice of proceedings commenced

against them in sufficient time. ARMZ unquestionably received actual and timely notice

of the Statement of Claim:

(a) On August 20, 2010, Khan issued a press release in Ontario announcing

that it had filed the Statement of Claim to recover $300 million in damages

arising from ARMZ's improper conduct in relation to the Dornod Property.


Khan Press Release dated August 20, 2010, Exhibit "C" to Edey Affidavit; Appeal Book, Tab 11, pp. 101-102.

(b) Following the commencement of the action, representatives of Khan

communicated directly with senior representatives of ARMZ to discuss

whether there was any basis to resolve the litigation. Based on these

discussions, Khan has no doubt that ARMZ is fully aware of the claim.

Edey Affidavit, para. 34; Appeal Book, Tab 9, pp. 92-93.

(c) ARMZ retained litigation counsel from the Toronto office of Norton Rose

Canada LLP (then Macleod Dixon) to assist with this action. By letter

dated December 17, 2010, ARMZ's counsel notified Khan's counsel that

they had been retained and specifically requested that Khan provide

notice of any motions in respect of the action, which Khan has done.


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Letter from Macleod Dixon LLP dated December 17, 2010, Exhibit "D" to Edey Affidavit; Appeal Book, Tab 12, p. 103.

(d) ARMZ has actively participated in this action, including by (i) bringing a

motion to cross-examine Khan's affiants, (ii) serving and filing several

volumes of materials in connection with both its motion to cross-examine

Khan's affiants and its response to Khan's motion before Master Graham

to validate, dispense with or substitute service, (iii) commencing and

conducting an appeal of Master Graham's Order validating service of the

Statement of Claim, and (iv) appearing in Ontario courts (through their

Ontario counsel) in connection with this action on at least four occasions.

D. Russia's Refusal to Serve the Statement of Claim

24. Although Khan complied with all of the requirements for service under the

Hague Convention and ensured that ARMZ had actual and timely notice of the

Statement of Claim, the Russian government refused outright to serve the Statement of

Claim, stating that "the indicated queries were returned without service to the address of

the initiator…on the basis of art. 13 of the [Hague] Convention…". No additional

explanation or reasons were provided.

Khvaley Affidavit, para. 14; Appeal Book, Tab 10, p. 98.

Letter from the Russian Ministry of Justice dated December 29, 2010, Exhibit "E" to Khvaley Affidavit; Appeal Book, Tab 13, pp. 104-105.

25. Article 13 of the Hague Convention states that, provided a Request for

Service otherwise complies with all of the requirements of the Hague Convention, a

state party "may refuse to comply therewith only if it deems that compliance would

infringe its sovereignty or security".


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Hague Convention, Article 13; Appellants' Book of Authorities, Tab 1.

26. As correctly noted by Master Graham in the Motion Decision, there is no

suggestion in the correspondence from the Russian central authority that Khan's

request for service did not comply with the Hague Convention.



E. Khan Had No Means to Effect Timely Service in Russia

27. Following the Russian government's refusal to serve the Statement of

Claim, Khan was advised by its Russian counsel that any appeal of the Russian

government's final decision may take up to a year or longer, cost approximately

US$100,000 and would likely be unsuccessful.

Khvaley Affidavit, paras. 19-26; Appeal Book, Tab 10, pp. 99-100.

Transcript of the cross-examination of Vladimir Khvaley dated July 12, 2011 ("Khvaley Transcript"), pp. 45-46, qq. 150-151; Appeal Book, Tab 18, pp. 120-121.


28. Significantly, Khan was also advised by its Russian counsel that there was

a real risk that any appeal would be subject to political interference.

Khvaley Affidavit, paras. 23-26; Appeal Book, Tab 10, p. 100.


29. For these reasons, Khan did not pursue seemingly hopeless and

expensive appeals of the Russian government's final decision to refuse to serve.


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30. On the prior motion and appeal, ARMZ attacked the admissibility of the

evidence of Khan's Russian counsel concerning his advice to Khan about the cost,

political interference and low chance of success associated with any appeal in Russia of

the Russian government's final decision. These attacks are entirely misplaced. Khan

relies on the advice of its Russian counsel for the fact that the advice was given at the

relevant time. This fact is unchallenged. Whether the advice is (or was at the relevant

time) correct as a matter of Russian law is not relevant. What matters is that Khan

received advice from senior counsel in Russia and reasonably relied on the advice in

deciding not to pursue appeals in Russia.

Edey Affidavit, paras. 24-26; Appeal Book, Tab 9, p. 90-91.

Chart of Answers to Undertakings; Appeal Book, Tab 14, pp. 106-107.

Email from Baker & McKenzie dated February 1, 2011; Appeal Book, Tab 15, pp. 108-111.

Email from Baker & McKenzie dated February 6, 2011; Appeal Book, Tab 16, p. 112-113.

Letter from Baker & McKenzie dated March 3, 2011; Appeal Book, Tab 17, p. 114-117.

31. In any event, ARMZ has not adduced any evidence to either contradict or

undermine the advice given to Khan by its Russian counsel at the relevant time. This is

so even though ARMZ had Russian lawyers freely available to them, two of whom

attended Mr. Khvaley's cross-examination on their behalf.

F. The Decisions Below

32. Given the advice Khan received from its Russian counsel, Khan believed

that nothing further could be done to effect service of the Statement of Claim on ARMZ,

other than to seek relief from the Ontario courts. Accordingly, Khan brought a motion

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under Rule 16.04 and Rule 16.08 of the Rules for an order either dispensing with

service on ARMZ altogether, or substituting or validating an alternative form of service.


33. In September 2011, Khan's service motion was heard by Master Graham.

ARMZ participated as a full party on the motion. ARMZ's Toronto lawyers accepted

service of Khan's motion materials, served and filed a Responding Motion Record,

Factum and Book of Authorities (all of which identify the Toronto office of Norton Rose

Canada LLP as lawyers of record for ARMZ), and made oral submissions.

34. Khan's motion was successful. Master Graham exercised his discretion

under Rule 16.08 and validated service of the Statement of Claim upon ARMZ.

Order dated October 28, 2011; Appeal Book, Tab 5, pp. 35-37.

Motion Decision; Appeal Book, Tab 6, pp. 38-47.

35. In the Motion Decision, Master Graham accepted the conclusions of

Master Glustein in Zhang v. Jiang (discussed in greater detail below) and found that the

Hague Convention does not somehow oust the statutory jurisdiction of Ontario courts to

validate, substitute or dispense with service in appropriate circumstances. As stated by

Master Graham:

"Ontario rule 17.05(3)(a) and by extension the Hague Convention establish the prima facie means of service of a statement of claim issued in Ontario upon a foreign defendant. The Convention, although providing the mechanism for service of a foreign defendant under the Ontario Rules of Civil Procedure, does not oust the jurisdiction of the Ontario courts to order substituted service where service as described in the Convention

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could not practicably be effected or to validate service where the defendants have otherwise received notice of the proceeding. A plaintiff's inability to serve an Ontario defendant by way of personal service in accordance with the mandatory language of rule 16.01(1) does not preclude an order for substituted service or validating service and an inability to serve a foreign defendant under rule 17.05(3)(a) is no different.

Where service has been unsuccessfully attempted in accordance with the Convention, the Ontario court may consider whether the attempt at service has been sufficient to warrant an order for substituted service or dispensing with service, or, where it appears that the defendant has actually received notice of the statement of claim, an order validating service. In this regard, I accept Master Glustein's conclusions in Zhang v. Jiang, supra." (Emphasis added)

Motion Decision, paras. 43 and 44; Appeal Book, Tab 6, p. 45.

36. Master Graham correctly noted that an order validating service under Rule

16.08 may be made "where the court is satisfied that the document came to the notice

of the person to be served". In exercising his discretion to order that service was

validated, Master Graham stated:

"The defendants have clearly been aware of the action since no later than December 17, 2010 when their counsel first communicated with plaintiffs' counsel. The statement of claim can reasonably be assumed to have come to their notice either through the press release, the plaintiffs' corporate filings or the attempt to serve the statement of claim through the Russian central authority. Regardless of how the defendants received notice of the action, the point is that they now know about it, which is the fundamental purpose of service under both rule 16 and the Hague Convention. The fact that the defendants know about the statement of claim means that there would be no need for the plaintiffs to proceed through the "diplomatic channels" referred to in article 14 of the Convention." (Emphasis added)

Motion Decision, paras. 49 and 50; Appeal Book, Tab 6, p. 46.

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37. ARMZ appealed Master Graham's decision. On March 9, 2012, Justice

O'Marra allowed the appeal and dismissed Khan's service motion.

Order dated March 9, 2012; Appeal Book, Tab 2, pp. 11-13.

Appeal Decision; Appeal Book, Tab 3, pp. 14-32.

38. In the Appeal Decision, Justice O'Marra concluded that Master Graham

erred in law by validating service pursuant to Rule 16.08. Justice O'Marra held that

when a defendant is from a contracting state, Ontario courts have no jurisdiction at all

under Rule 16.04 or Rule 16.08 to either dispense with service altogether, or to

substitute or validate alternative means of service.

Appeal Decision, para. 79; Appeal Book, Tab 3, p. 29.

39. Justice O'Marra went on to hold, in obiter, that Khan's service motion

should have been dismissed in any event because Khan did not pursue an appeal (or

appeals) in Russia of the Russian government's final decision to refuse to serve the

Statement of Claim.

Appeal Decision, paras. 80-85; Appeal Book, Tab 3, pp. 29-30.

PART IV ~ ISSUES AND THE LAW

40. This appeal asks whether the Hague Convention completely ousts the

jurisdiction of the Ontario courts to either dispense with service altogether, or to

substitute or validate alternative means of service in appropriate circumstances. Khan

submits that Justice O'Marra erred in law in concluding that it does.

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41. The main issue on this appeal requires this court to also address the

following three questions:

(a) What is the objective and scope of the Hague Convention?

(b) Do the Rules provide that service pursuant to the Hague Convention is

mandatory in every case involving defendants from contracting states?

(c) If the answer to (b) above is no, did Justice O'Marra err in law in reversing

Master Graham's discretionary decision to validate service of the

Statement of Claim pursuant to Rule 16.08?

A. Objective and Scope of the Hague Convention

42. The Hague Convention provides different channels of transmission to be

used when a "judicial or extrajudicial document" in a "civil or commercial matter" is to be

transmitted abroad from one contracting state to another contracting state for service in

the latter. There is no dispute that Canada and the Russian Federation are both

contracting states under the Hague Convention.



Hague Conference – Permanent Bureau, Practical Handbook on the Operation of the Hague Service Convention, 3d ed. (Montreal: Wilson & Lafleur Ltée, 2006) at xxv and paras. 1-2 ["Handbook"]; Appellants' Book of Authorities, Tab 4.

43. The objective of service under the Hague Convention is no different than

the objective of domestic service: to bring notice of a legal proceeding to the attention of

defendants, thus giving them the ability to mount a defence. In this regard, the

preamble to the Hague Convention states that its objective is "to ensure that judicial and

extrajudicial documents to be served abroad shall be brought to the notice of the

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addressee in sufficient time". In the Handbook, the Permanent Bureau of the Hague

Convention describes the basic objectives of the Convention as follows:

"a To establish a system which, to the extent possible, brings actual notice of the document to be served to the recipient in sufficient time to enable him to defend himself.

b To simplify the method of transmission of these documents from the requesting State to the requested State.

c To facilitate proof that service has been effected abroad, by means of certificates contained in a uniform model."

Handbook, supra at para. 6; Appellants' Book of Authorities, Tab 4.

Gary D. Watson and Lynne Jeffrey, Holmested and Watson: Ontario Civil Procedure, loose-leaf, vol. 2 (Toronto: Thomson Reuters, 1984) at 16-17 to 16-18; Appellants' Book of Authorities, Tab 7.

44. The Hague Convention's scope is limited by Article 1. It applies only

"where there is occasion to transmit a judicial or extrajudicial document for service

abroad". It does not apply merely because a defendant is from a contracting state.


45. It is well-established that the Hague Convention is not mandatory in

character, nor is it intended to modify the substantive rules of service applicable in

contracting states. Rather, the law of the forum (in this case, the law of Ontario)

dictates if and when the Hague Convention applies in a particular case. If the law of the

forum states that compliance with the Hague Convention is mandatory, then the Hague

Convention applies exclusively, meaning that the only channels of service permitted are

those set out in the Convention itself.

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Volkswagenwerk Aktiengesellschaft v. Schlunk, 486 U.S. 694 at pp. 4, 6 and 9 (U.S. Supreme Court) ["Schlunk"]; Appellants' Book of Authorities, Tab 8.

Handbook, supra at paras. 24-45; Appellants' Book of Authorities, Tab 4.

Hague Conference – Permanent Bureau, Conclusions and Recommendations Adopted by the Special Commission on the Practical Operation of the Hague Apostille, Evidence and Service Conventions (November 2003) at paras. 73-74 ["2003 Conclusions and Recommendations"]; Appellants' Book of Authorities, Tab 5.

Hague Conference – Permanent Bureau, Conclusions and Recommendations of the Special Commission on the Practical Operation of the Hague Apostille, Service, Taking of Evidence and Access to Justice Conventions (February 2009) at para. 12 ["2009 Conclusions and Recommendations"]; Appellants' Book of Authorities, Tab 6.

46. For example, in Schlunk, a seminal decision of the Supreme Court of the

United States, the defendant VWAG, a German company, brought a motion to quash

service on the basis that it was not served in accordance with the Hague Convention.

Rather than serve VWAG through the Hague Convention, the plaintiff in Schlunk

effected substituted service on VWoA, a subsidiary and local agent of VWAG, as

permitted by Illinois and U.S. law. Although the Hague Convention prima facie applied

in Schlunk (because both the U.S. and Germany are contracting states), the Supreme

Court held that the plaintiff's substituted service on the local agent was proper and valid.

Accordingly, the Hague Convention had "no further implications". Justice O'Connor, for

the court, held as follows:

"Where service on a domestic agent is valid and complete under both state law and the Due Process Clause, our inquiry ends and the Convention has no further implications. [. . .] The only transmittal to which the Convention applies is a transmittal abroad that is required as a necessary part of service. And, contrary to VWAG's assertion, the Due Process Clause does not require an official transmittal of documents abroad every time there is service on a foreign national. Applying this analysis, we conclude that this case does not present an occasion to transmit a judicial

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document for service abroad within the meaning of Article 1 [of the Hague Convention]. Therefore the Hague Service Convention does not apply, and service was proper." (Emphasis added)

Schlunk, supra at p. 9; Appellants' Book of Authorities, Tab 8.

47. Just as the law of Illinois dictated whether the Hague Convention applied

in Schlunk, the law of Ontario must dictate whether the Hague Convention applies and

whether it applies in a way that ousts the discretion of the Ontario court to validate,

substitute or dispense with service. If the law of Ontario provides that service in

accordance with the Hague Convention is not mandatory, and instead permits

substituted service (or for service to be validated, dispensed with or otherwise carried-

out in a manner not expressly provided for in the Hague Convention), then the Hague

Convention "has no further implications".

48. Similarly, in Baldiga, a recent decision of the United States Bankruptcy

Court for the District of Massachusetts (Central Division), the defendants (a Russian

company and a Russian bank) sought to dismiss proceedings commenced against them

on the basis that they were not properly served under the Hague Convention. Much like

in this case, the plaintiff in Baldiga could not effect service under the Hague Convention

due to the Russian Federation's refusal to serve the claim. Nevertheless, the court held

that service had been validly effected because the defendant received actual notice of

the claim through various alternative means. The court stressed that actual notice was

more important than strict formalism:

"It is obvious but worth noting that both defendants are aware of the pending adversary proceedings as they have retained local counsel to appear in the adversary proceedings to

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represent their interests. The defendants' argument that they were not properly served is based purely on a technicality arising from the Russian Federation Central Authority's refusal to serve summonses issued by courts in the United States. This refusal, however, cannot be used by the defendants as a shield to deflect otherwise legitimate service of process." (Emphasis added)

Baldiga v. Joint Stock Co., 2011 Bankr. LEXIS 729 at pp. 2 and 5 (D. Mass.); Appellants' Book of Authorities, Tab 9.

49. Like the Russian defendants in Baldiga, ARMZ should not be permitted to

defeat the fundamental objective of the Hague Convention by using the Russian

Federation's refusal to serve the Statement of Claim "as a shield to deflect otherwise

legitimate service of process".

50. Because the Hague Convention is plainly not mandatory (and because the

law of the forum may authorize a substituted or alternative form of service not provided

for in the Convention, such as in Schlunk and Baldiga), the Hague Convention includes

provisions specifically addressing whether plaintiffs can obtain judgment against

defendants who were not served in accordance with the Convention. For example,

Article 15(2) authorizes each contracting state to declare that a judge may give

judgment in a proceeding in certain circumstances even if service has not been effected

in accordance with the Hague Convention. Both Canada and the Russian Federation

have made the requisite declarations pursuant to Article 15(2).

Canada's Declarations under the Hague Convention; Appellants' Book of Authorities, Tab 2.

Russian Federation's Declarations under the Hague Convention; Appellants' Book of Authorities, Tab 3.

2003 Conclusions and Recommendations, supra at para. 74; Appellants' Book of Authorities, Tab 5.

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2009 Conclusions and Recommendations, supra at para. 35; Appellants' Book of Authorities, Tab 6.

51. If the Hague Convention was mandatory and contracting states (including

Ontario) had no jurisdiction to dispense with, substitute or validate alternative means of

service in appropriate circumstances, there would be no need for a provision such as

Article 15(2) dealing with judgments against defendants not served in accordance with

the Hague Convention. This is because no such judgment could ever be obtained.

52. For these reasons, Khan submits that Justice O'Marra erred in law by

interpreting the Hague Convention as a mandatory treaty that must apply in all cases

involving defendants from contracting states. It is plainly not mandatory, unless the law

of Ontario makes it mandatory. Justice O'Marra also erred in law by interpreting the

Hague Convention in a manner that defeats its fundamental objective of providing

actual and timely notice to defendants. In making these errors, Justice O'Marra allowed

ARMZ to use the Hague Convention as a shield to immunize themselves from litigation

in Ontario that ARMZ is fully aware of. This should not be permitted.

B. The Hague Convention is Not Mandatory in Ontario

53. Having incorrectly concluded that the Hague Convention is mandatory in

nature, Khan submits that Justice O'Marra then erred in law by concluding that the

Rules make compliance with the Hague Convention mandatory in all cases involving

defendants from contracting states, including in cases such as this where the

fundamental objectives of both the Hague Convention and service generally have so

clearly been accomplished.

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(i) Rule 17.05(3) is Not a Complete Code

54. Rule 17.05 deals with service outside of Ontario. It is the only provision in

the Rules that addresses service under the Hague Convention. Rule 17.05(3) sets out

the prima facie means of effecting service in a contracting state:

"17.05(3) An originating process or other document to be served outside Ontario in a contracting state shall be served,

(a) through the central authority in the contracting state; or

(b) in a manner that is permitted by Article 10 of the Convention and that would be permitted by these rules if the document were being served in Ontario."

55. It is not disputed that because the Russian Federation is an "objecting

state", Rule 17.05(3)(b) does not apply in this case.

56. While Rule 17.05(3) provides the prima facie means of service in a

contracting state, it does not oust the statutory jurisdiction of the Ontario courts under

Rule 16.08 and Rule 16.04 to dispense with service, or to substitute or validate service

in appropriate circumstances. Rule 17.05(3) also does not oust Rule 1.04, which

requires the Rules to be construed liberally to secure the just, most expeditious and

least expensive determination of every civil proceeding on its merits.

57. The use of the word "shall" in Rule 17.05(3) does not make compliance

with the Hague Convention mandatory. The use of "shall" in Rule 17.05(3) is no

different (and not intended to be any different) from the use of "shall" in Rule 16.01(1),

which governs service of an originating process in Ontario:

"16.01(1) An originating process shall be served personally as provided in rule 16.02 or by an alternative to

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personal service as provided in rule 16.03." (Emphasis added)

58. Although Rule 16.01(1) states that service of an originating process in

Ontario "shall" be effected by way of personal service or by an alternative to personal

service, the courts unquestionably have a discretion under Rule 16.04 and Rule 16.08

to validate, substitute or dispense with service.

59. As Master Graham correctly concluded in the Motion Decision, Rule

17.05(3) dealing with service in contracting states is "no different". While service in a

contracting state should prima facie be conducted in accordance with the Hague

Convention (just as service in Ontario should prima facie be conducted by personal

service or alternative to personal service), compliance with the Hague Convention is not

mandatory because the courts have a discretion under Rule 16.04 and Rule 16.08 to

validate, substitute or dispense with service.


60. There is nothing in either Rule 16.08 (concerning validating service) or

Rule 16.04 (concerning substituting and dispensing with service) stating that they do not

apply in circumstances where the Hague Convention also prima facie applies. Rule

16.08 states simply that the court has a discretion to validate service whenever "a

document has been served in a manner other than one authorized by these rules or an

order…". Similarly, Rule 16.04 gives Ontario courts the discretion to substitute or

dispense with service of any originating process when "it appears to the court that it is

impractical for any reason to effect prompt service…".

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61. Moreover, there is nothing in Rule 17.05(3) which displaces the mandatory

obligation in Rule 1.04 to construe the Rules liberally to secure the just, most

expeditious and least expensive determination of every civil proceeding on its merits.

As Master Birnbaum correctly noted in Barry Fenton Family Trust v. Fenton (which

involved a motion to validate service), Rule 1.04 requires the court to apply common

sense in the application of the Rules and strive to make things simple, not complex.

Barry Fenton Family Trust v. Fenton, [2008] O.J. No. 2697 at paras. 1, 6 and 9 (S.C.J. (Master)); Appellants' Book of Authorities, Tab 10.

62. In this case, ARMZ seeks to do the opposite. It seeks to put form over

substance. It seeks to use an international treaty created to ensure actual and timely

notice of legal proceedings as a shield to immunize themselves from litigation in

Ontario, even though they unquestionably have actual and timely notice of the litigation.

Khan submits that Justice O'Marra erred in law in permitting ARMZ to do so.

(ii) The Rules are Consistent with Canada's Obligations under the Hague Convention

63. Khan accepts that the legislature is presumed to legislate in a manner

which conforms with Canada's international law obligations, and that courts should

strive to interpret domestic law consistently with the obligations set out in the applicable

convention. However, Canada's (and Ontario's) international law obligations do not,

and cannot, override Canada's (and Ontario's) domestic law.

Bouzari v. Iran (Islamic Republic), [2004] O.J. No. 2800 at paras. 60-67 (C.A.); Appellants' Book of Authorities, Tab 11.

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64. Although the Hague Convention is not mandatory in Ontario because of

the potential application of Rule 16.04 and Rule 16.08, and the mandatory application of

Rule 1.04, it does not follow that the Rules are in any way inconsistent with the

requirements of the Hague Convention. This is because, as explained above, the

Hague Convention is plainly not mandatory. Contracting states get to decide if the

Hague Convention will apply in a mandatory fashion in all cases, or whether resort may

be had to alternative means of service.

65. Not only are the Rules in no way inconsistent with the Hague Convention,

Khan submits that the Rules ensure that the fundamental objective of the Hague

Convention will always be achieved in cases involving service abroad. This is because

our courts will not, and should not, exercise their discretion under Rule 16.04 and Rule

16.08 unless defendants have actual and timely notice of the proceeding brought

against them.

66. Moreover, our courts will not, and should not, exercise their discretion

under Rule 16.04 and Rule 16.08 in all cases, just as they do not exercise this

discretion in all cases involving service in Ontario under Rule 16.01(1). Plaintiffs must

first show that they complied with the Hague Convention, but that for reasons beyond

their control, service could not be effected.

67. Having incorrectly interpreted the Hague Convention as a mandatory

complete code for service in contracting states, Justice O'Marra erred in law by using

the international treaty to re-write Ontario law. His Honour did so by reading out Rule

1.04, Rule 16.04 and Rule 16.08 from the Rules. This is clearly impermissible. An

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international treaty cannot override unambiguous domestic law, even if the domestic law

is inconsistent with the treaty.

Bouzari, supra at paras. 64-67; Appellants' Book of Authorities, Tab 11.

C. Service was Properly Validated by Master Graham

68. Even where service is made in a manner that is contrary to the Rules (as

ARMZ and Justice O'Marra maintain occurred in this case), Rule 16.08 expressly

confers upon the court a discretion to validate an alternative means of service:

"16.08 Where a document has been served in a manner other than one authorized by these rules or an order, the court may make an order validating the service where the court is satisfied that,

(a) the document came to the notice of the person to be served; or

(b) the document was served in such a manner that it would have come to the notice of the person to be served, except for the person's own attempts to evade service."

69. There is no question in this case that ARMZ received full and timely notice

of the Statement of Claim. As Master Graham correctly concluded in the Motion

Decision, ARMZ has clearly been aware of the action since no later than December 17,

2010, when its Ontario counsel first communicated with Khan's counsel. Accordingly,

service was properly validated and there was no basis for Justice O'Marra to interfere

with Master Graham's discretionary decision.

Zeitoun v. Economical Insurance Group, [2008] O.J. No. 1771 at paras. 40-41 (Div. Ct.), aff'd [2009] O.J. No. 2003 (C.A.); Appellants' Book of Authorities, Tab 12 and Tab 13.

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70. Further, and in the alternative, Khan submits that it also meets the tests

for both dispensing with service and ordering substituted service. It is impracticable for

Khan to effect prompt service under the Hague Convention given the Russian

government's final decision to refuse to effect service. It is in the interests of justice to

either dispense with or order substituted service given ARMZ's undeniable knowledge of

the Statement of Claim and the consequences to Khan if no order is made. Simply,

Khan will be permanently barred from pursuing its serious and substantial claims

against ARMZ in Ontario.

Laframboise v. Woodward, [2002] O.J. No. 1590 at paras. 6-8 (S.C.J.); Appellants' Book of Authorities, Tab 14.

Zhang v. Jiang, [2006] O.J. No. 2909 at para. 17 (S.C.J. (Master)) ["Zhang"]; Appellants' Book of Authorities, Tab 15.

71. In Zhang v. Jiang, the only case to Khan's knowledge that squarely

addresses the issue on this appeal, Master Glustein agreed that Rule 17.05(3) was not

a complete code that ousted the discretion of the Ontario courts under Rules 16.08 and

16.04 to validate, substitute or dispense with service. Master Glustein dispensed

entirely with service pursuant to Rule 16.04 in circumstances where, as in this case, a

contracting state (the People's Republic of China) used Article 13 of the Hague

Convention to refuse service on the grounds of sovereignty and security. Master

Glustein held that it was in the interests of justice to dispense with service due to the

impossibility of service under the Hague Convention.

Zhang, supra at paras. 16-25; Appellants' Book of Authorities, Tab 15.

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72. There is an even stronger basis for the court to exercise its discretion in

this case. This is because unlike in Zhang where the defendants had neither been

located, nor provided with a copy or notice of the claim, ARMZ clearly has full

knowledge of the Statement of Claim. Thus, in this case, the fundamental objective of

the Hague Convention to ensure that parties receive actual and timely notice of

proceedings commenced against them in foreign jurisdictions has been fully achieved.

73. Contrary to Justice O'Marra's observations, this is not a case where Khan

seeks to circumvent or avoid the requirements of the Hague Convention. As set out

above, Khan complied fully with the requirements of the Hague Convention and as

Master Graham noted, "did everything right". Given the advice Khan received from its

Russian counsel, there is simply nothing more Khan can do to effect service under the

Hague Convention.

74. For these critical reasons, this case is unlike the Campeau and Dofasco

decisions referred to by Justice O'Marra in the Appeal Decision. Both of those cases

involved plaintiffs that did not comply with the requirements of the Hague Convention.

75. In Dofasco, the plaintiff did not even attempt to comply with the Hague

Convention and, instead, sought immediate relief from the court under Rule 16.04 to

avoid the cost and delay associated with compliance with the Convention. In that case,

Justice Campbell correctly held that the court would not exercise its discretion under

Rule 16.04 because the plaintiff could still comply with the Hague Convention.

However, Justice Campbell clearly signaled that the court had the discretion to

substitute service in the circumstances:

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"…there does not appear to be grounds that would suggest the very procedure contemplated by the Convention is impracticable [so] as to invoke the discretion required under Rule 16.04 for substituted service. This is particularly the case when service by the central authority of Japan continues…"

Dofasco Inc. v. Ucar Carbon Canada Inc., [1998] O.J. No. 3745 at para. 15 (S.C.J.); Appellants' Book of Authorities, Tab 16.

76. Similarly, in Campeau, the plaintiff failed to translate the statement of

claim into German as required by the Hague Convention. Translation is an important

requirement of the Hague Convention because it assists with providing defendants

"actual" knowledge of the proceeding against them. While the court refused to exercise

its discretion under Rule 16.04 in the face of the plaintiff's non-compliance with the

Hague Convention, the court did not suggest that it was without jurisdiction to exercise

this discretion.

Campeau v. Campeau, [2004] O.J. No. 4788 at paras. 59-60 (S.C.J.); Appellants' Book of Authorities, Tab 17.

77. In contrast to the facts in both Dofasco and Campeau, Khan complied

with all of the provisions of the Hague Convention and there is nothing more it can do to

effect service through the central authority of the Russian Federation.

PART V ~ ORDER REQUESTED

78. Khan respectfully requests that the Order of Justice O'Marra dated March

9, 2012 be set aside and judgment be granted as follows:

(a) an order restoring the Order of Master Graham dated October 28, 2011,

allowing Khan's motion to validate service of the Statement of Claim;

KHAN RESOURCES INC. et al. Plaintiffs (Appellants) and

ATOMREDMETZOLOTO JSC ET AL.Defendants (Respondents)

Court of Appeal File No. C55360


Proceeding commenced at Toronto


DAVIES WARD PHILLIPS & VINEBERG LLP 44th Floor, 1 First Canadian Place Toronto, ON M5X 1B1

James Doris (LSUC #33236P) Derek Ricci (LSUC #52366N)

Tel: 416.863.0900 Fax: 416.863.0871

Lawyers for the Plaintiffs (Appellants)

FACTUM OF THE APPELLANTS - KHAN … File No. C55360 COURT OF APPEAL FOR ONTARIO B E T W E E N : KHAN...

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