OCA Confirms: No substituted Service of Claims to Hague Convention Countries

The Ontario Court of Appeal ruled this month that where a statement of claim is to be served in  a country  to which the Hague Convention on the Service Abroad of Judicial and Extra-judicial Documents in Civil or Commercial Matters (“the Convention”)  applies,  the court has no power to order substituted service even if personal service would be impractical, and has no power to validate or dispense with service, even if the defendant has actual notice of the claim.   Plaintiffs are limited to the means of service set out in the Convention.    

In Khan Resources Inc. et alv. Atomredmetzoloto JSC et al   2013ONCA 189, a Canadian mining company sued its Russian joint venture partners, alleging the latter sought to deprive them of their interest and substantial investment in a certain mine in Mongolia.    The Russian government owns 80% of the shares of the Russian defendants.    Pursuant to the Convention, the plaintiff requested the Russian Central Authority to serve the claim.  The Central Authority refused,  giving no explanation other to simply cite article 13 of the Convention, which says that a state may refuse service “if it deems that [service] would infringe its sovereignty or security”.        

Under Russian law an appeal lies from that decision.   However, there were indications that the result may be driven by political considerations.  Also, the appeal could take a year and cost $100,000.    Article 14 of the Convention provides that  difficulties that arise “in connection with the transmission of documents for service shall be settled through diplomatic channels”.  The plaintiffs chose neither option; they opted instead to bring a motion before the Ontario Superior Court of Justice for substituted service or an order validating service, on notice. After all, lawyers for the Russian defendants had  a copy of the claim.  The Master granted an order validating service.  On appeal  to a judge, Mr. Justice O’Marra,  the decision was reversed, on the grounds that there is no power to validate service or allow substituted service.    The Ontario Court of Appeal dismissed the appeal.    

The Court of Appeal ruled that the Convention provides the only means by which service into a contracting state under the Convention (a “Convention country”) may be effected; the Convention ousts the domestic law provisions for substituted service or validation of service, even if the defendant has actual notice of the claim.  There are several reasons. One is that one of the two stated purposes for the Convention is to establish a uniform procedure in all contracting states; to open the door to the use of domestic powers   to validate service or allow substituted service would undermine that purpose.   Also, the origins and wording of the rule that implements the Convention into Ontario law (R. 17.05 (3) indicate that for service to Convention countries, use of the means provided in the Convention is mandatory.  The Practical Handbook on the Operation of the Hague Service Convention, published by the Hague Conference on Private International Law, confirms that the Hague provisions are intended to the only means to effect service in Convention countries.   A 2012 ruling of the Alberta Court of Appeal  – Metcalfe v Yamaha Motor Powered Products2012 ABCA 240, 536 A.R. 67 --  and a 1988 ruling from an American court say the same.  

The Ontario Court of Appeal discussed but did not rule on the question of whether the plaintiffs would be permitted to move to validate or dispense with service if they had pursued all possible remedies under the Convention and were still  unable to effect service, as in Zhang v.  Jiang (2006), 82 O.R. 306 (S.C. Master), a case in which violation of basic human rights, torture and crimes against humanity were alleged.   The Court of Appeal hinted that there could be an “access to justice” exception to the otherwise prevailing rule that the Convention is exclusive.  

Comment  

The facts of Khan Resources would indicate the plaintiffs there also lacked access to justice.  Given the Russian government’s 80% interest in the defendants, the prospects for an impartial ruling or a successful outcome for diplomatic efforts seem very remote. 

Also, arguably the Convention need not apply. Article 1 of the Convention provides it applies “where there is occasion to transmit a judicial … document for service abroad”.  There would be no need to transmit anything abroad if service on the Russians’ Canadian lawyers could be validated.   

B.C. Shortens Limitation Periods

          Litigants with claims that may be subject to the law of British Columbia should take note that for many claims the limitation period there  will be significantly shortened when Bill 34, the  new Limitation Act, comes into effect in B.C. on June 1, 2013.  The existing law – Limitation Act, R.S.B.C. 1996, c. 266 -- states that the limitation period is six years, unless an exception applies, and there are several exceptions.  Under  Bill 34, the general limitation period will be just two years, again subject to some exceptions.  Exceptions under Bill 34 include matters subject to a limitation period set by an international convention or treaty that has been adopted by legislation, certain actions for the redemption or realization of collateral, and the enforcement of child or spousal support payable subject to a judgment.    

          As before, an action on an extra-provincial judgment for the payment of money or the return of personal property must be commenced before  the time for enforcement has expired in the jurisdiction where that judgment was made, or within ten years after the judgment became enforceable in the jurisdiction where the judgment was made.

Foreign Law

          Bill 34 expressly acknowledges that if the substantive law of another jurisdiction is the applicable law, the limitation period under that law will apply, except in certain cases pertaining to sexual and other assaults.   The existing law, to be repealed by Bill 34, allows the court discretion to apply either B.C. law or the applicable foreign law if the limitation law of that foreign law is considered procedural for private international law purposes, as necessary to achieve the most just result.

Acknowledgment of Liability

          As before, and as in other provinces, Bill 34 extends the limitation period if the defendant acknowledges liability, in a signed written document, or in the case of claims for liquidated damages the debtor has made a partial payment.

Transitional Provisions

          The new law will apply to claims discovered after the law goes into effect, even if the act or omission complained of occurred before the new law went into effect.

ABA Endorses Mareva-like Pre-judgment Asset-Freezing Legislative Proposal

          Mareva injunctions – i.e. pre-judgment asset freezing orders – are a most valuable remedy in cross border litigation but are sadly mainly unavailable and unenforceable in the U.S.  That may soon change.  Last month,  the American Bar Association House of Delegates approved last month the Uniform Law Commission’s Asset-Freezing OrdersAct (the “Act”), legislation that would enable American courts to issue orders similar to Mareva injunctions in specific circumstances, and to enforce such orders from foreign courts. 

The Existing U.S. Law Regarding Pre-judgment Attachment Orders and Recognition of Foreign Orders

             

         At present, federal courts in the U.S. lack jurisdiction to issue in-personam freezing orders prior to judgment, even in circumstances where the defendant is likely to, or has already begun, to dissipate assets so as to defeat a judgment  -- see the U.S. Supreme Court decision in Grupo Mexicano de Dessarolo v. Alliance Bond Fund Inc.  527 U.S. 308 (1999).  Before judgment, federal courts have power only to issue in rem orders prohibiting the transfers of specific assets.   The facts in Grupo show the need for an in-personam remedy:  the defendant’s assets were all outside the U.S., so an in-rem remedy was of no use.  An in-personam remedy  is needed also in cases where the assets cannot be identified.  The trial court in Grupo had found there would be irreparable harm if the order was not granted.  Some state courts have interpreted Grupo to mean they too lack jurisdiction.    By and large, U.S. courts do not enforce foreign injunctions or other foreign non-monetary judgments.

The Act’s Provisions for Issuance of Asset-Freezing Orders

             

          The requirements in the Act for such orders are similar to those under Canadian and British law, and include: 

a.)     a substantial likelihood that the moving party will prevail on the merits of the action;

b.)     a substantial likelihood that the defendant ‘s assets will be dissipated and the judgment will be defeated, if the order is not granted; and

c.)    a balancing of convenience.

The Act specifies this additional requirement: that the order not be adverse to the public interest.  Unlike in Ontario, there is no need to show fraud. 

The Act’s Provisions for Recognition of Foreign Asset-Freezing Orders

             

           The Act requires courts to recognize asset-freezing orders from courts outside the U.S., subject to some exceptions.  Courts may not recognize such orders if the issuing court lacked jurisdiction (grounds for personal jurisdiction are codified in the Act), or if they are issued under a judicial system that does not provide impartial tribunals or due process of law. Courts need not recognize such orders in a variety of certain circumstances, including some that are similar to the defences in Canadian law to enforcement of a foreign judgment, e.g. the order was obtained by fraud, or is contrary to public policy, or conflicts with another order, or the proceeding in the issuing court was contrary to a forum selection agreement or arbitration agreement.     These provisions are similar to those found in the older, Uniform Foreign-Country Money Judgments Recognition Act.  The burden is on the party resisting recognition to show there are grounds for non-recognition.   The act does not apply to actions against an individual for a consumer debt or in family/domestic relations cases.  An order that is recognized is entitled to “full faith and credit” in the same manner as a judgment.

The Uniform Asset-Freezing Orders Act has been introduced in two Legislatures so far, those of Colorado and North Dakota.

Comment

            If the Uniform Asset-Freezing Orders Act is enacted in many states,  Canadian-issued Mareva injunctions will be more readily available and substantially more useful than before, in cases involving American assets.  Canadian courts are often reluctant to even issue an order that cannot be enforced; the Act eliminates this concern.     

            Canadian legislatures would do well to consider enacting the Act, so as to codify the law, and to make clear that fraud is not a prerequisite for a Mareva injunction.  As well, the Act provides protection for non-parties, such as banks, that may be affected by the order. They may need protection insofar as they may have competing obligations, to their client or others, under foreign law, and an injunction may require speedy action. 

Suing in the U.S.? Beware their Borrowing Statutes’ Impact on Limitation Periods

             Some Canadian plaintiffs may believe they can avail themselves of sometimes quite long American limitation periods by suing in the U.S.  For example, the New York limitation period for contract claims and fraud claims is six years, and for personal injury or product liability it is three years.  In Massachusetts the period for breach of a contract, if written and under seal, is twenty years, otherwise six years.   Tolling statutes can extend those limitation periods.[i]    However, plaintiffs must beware “borrowing statutes” that require the court to “borrow” and apply the limitation period for the jurisdiction where the cause of action arose, if it is shorter than the limitation period under the law of the forum.   These statutes, designed to discourage forum shopping, are found in the laws of several U.S. states including New York, California, Pennsylvania,  Massachusetts, Virginia, Maine, and others.   When deciding where to sue, it is important to ask  local counsel  about such statutes.

           

            A recent decision of the Supreme Court of the State of New York is illustrative.  In Norex v. Blavatniket al,  a company based in Alberta, brought an action in Federal Court in 2002 under the Racketeering Influenced and Corrupt Organizations Act (“RICO”) in connection with alleged misappropriation of its interest in a Russian mining venture.  After that action was dismissed (for reasons other than the merits) Norex brought a new action in the state court, relying on the New York tolling statute.  Norex’s claim would be statute-barred under Alberta’s two year limitation period unless a tolling provision was available.  However, there is no tolling provision in Alberta law, and the New York tolling provision does not apply because the statute does not expressly provide that it has extraterritorial effect. 

Norex argued that the limitation period is substantive law, not procedural, and Alberta law is not the applicable substantive law for the New York proceeding, insofar as the tort did not occur in Alberta.  However, the court ruled that New York’s “borrowing statute”  -- Civil Procedure Law and Rules (“CPLR s. 202”)  -- makes no distinction between substantive and procedural laws.   

The cause of action was found to have accrued in Alberta, even though the tort was not committed there, because under New York law, the cause of action for economic loss accrues where the losses are felt, which is the principal place of business of the company. 

CPLR s. 202 reads:

An action based on a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favour of a resident of the state the time limited by the laws of the state shall apply.

In the result, because more than two years had passed since the cause of action had accrued, Norex’s action was statute barred, by operation of the Alberta limitation period.  

Ironically, had Norex sued in Alberta, Norex might have gained the benefit of the  New York limitation period.  Because in Canada statutes of limitation are substantive law, not procedural,  an Alberta court would not apply the Alberta statute if a foreign law was the applicable law (lex causae) under choice of law principles.  Had Norex shown that New York law was the applicable law,  Norex would face a six year limitation period instead of  a two year one.

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[i] E.g. where the defendant is not physically present in the jurisdiction, or an action has been dismissed other than on its merits.