Khan Resources v. Atomredmetzoloto: No Immunity for State-Owned Companies?

Logo-АРМЗ-МоскваSubmitting to the jurisdiction of state courts instead of opting for arbitration may lead to unexpected difficulties when serving a statement of claim.  A lesson drawn from the recent Canadian case [2012 ONSC 1522] discussed below should give another reason why arbitration may be preferred to litigation in state courts.

In 1995 Khan[i] embarked on a joint venture with ARMZ[ii] to develop the Dornod uranium mining property in Mongolia. Khan had a 58% share in the joint venture and ARMZ had a 21% share. The remaining 21% share belonged to the State of Mongolia.

By December 2010, the Government of Mongolia had entered into an intergovernmental agreement with the Russian government to jointly develop the uranium deposits in the Dornod region. Khan found itself excluded from the new joint venture.  At the same time the Mongolian Nuclear Energy Agency invalidated Khan’s mining and exploration licences.

As a result, Khan Resources B.V. (the Netherlands) started an ad hoc UNCITRAL arbitration under the ECT against Mongolia for illegal expropriation, which is still pending.

At the same time, Khan commenced an action in Ontario seeking damages from AMRZ for breach of fiduciary duties as partner in the joint venture, in the amount of USD 300 million.

Khan retained the law firm Baker & McKenzie in Moscow to assist in serving the statement of claim on AMRZ in Russia.  Khan filed the request for service in compliance with the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, 1965. The Service Convention requires that a request for service be filed with the central authority, which is the Ministry of Justice of the Russian Federation.

The Ministry informed Khan that it declined to serve the statement of claim on AMRZ, without further explanation. The State may indeed refuse the service if doing so would infringe its sovereignty or security.

Khan was advised by the head of the arbitration and litigation practice of Baker & McKenzie in Moscow that it was entitled to challenge both the refusal of the Ministry of Justice to serve the statement of claim and its failure to give reasons for its refusal.  The means of doing so would have been to file an application with the Arbitrazh court of Moscow.

The law firm advised that the steps required to challenge the Ministry’s actions should take no longer than three months in the court of first instance and any appeal proceedings from that court’s decision should not take more than two months.  The law firm estimated their legal fees at USD 50,000 for representation at the court of first instance, USD 30,000 for a first appeal and USD 20,000 for a second appeal.

Instead of pursuing legal action in Russia, Khan brought a motion in the Ontario Court of Justice to dispense with service or to validate service.

The Ontario Court of Justice allowed Khan’s motion to validate service.

The Court of Justice reasoned that the Service Convention should not “immunise” state-owned corporations from litigation initiated by foreign companies.

AMRZ appealed.  The Superior Court of Justice allowed appeal for the following reasons.

There were at least two options for Khan to consider after the Ministry declined to serve AMRZ.  First, Khan could have filed an application with the Arbitrazh court of Moscow appealing the Ministry’s decision, or, second, Khan could have made a complaint to a superior authority in Russia about the actions of the state authorities.

However, Khan, relying on the advice of the Moscow-based law firm concerning political interference, alleged that appealing the Ministry’s decision before a Russian court or complaining to a superior authority in Russia would have been unduly costly and likely to have been unsuccessful.

The Superior Court of Justice said that Khan cannot circumvent the Service Convention simply because compliance would be costly or tedious.

Khan appealed to the Court of Appeal for Ontario.  At the time of the publication of this article, the appeal is still pending.

Ekaterina Butler  
LALIVE, Geneva

[i] Khan Resources Inc., Khan Resources LLC, CAUC Holding Company Limited, Central Asian Uranium Company LLC, Khan Resources B.V. and Khan Resources Bermuda Ltd.

[ii] Atomredmetzoloto JSC a subsidiary of the Russian State Atomic Energy Corporation and JSC Priargunsky Industrial Mining and Chemical Union companies “PIMCU”

About the Author:

Ekaterina Butler is attorney with a Swiss law firm LALIVE. Her main areas of practice are international arbitration, international taxation and estate planning. Ekaterina holds a degree in law and economics from the University of London, SOAS, and a degree in linguistics from the University of St. Petersburg, Russia. See full profile.

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