CITATION: Stans Energy Corp. v. Kyrgyz Republic, 2015 ONSC 3236

DIVISIONAL COURT FILE NO.: 511/14

Commercial List Court File No.: CV-14-10731-00CL

DATE: 20150610

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

H. Sachs, Lederer and A.J. Goodman JJ.

BETWEEN:

STANS ENERGY CORP.

Respondent in Appeal/ Responding Party

– and –

KYRGYZ REPUBLIC, KYRGZALTYN JSC AND CENTERRA GOLD INC.

Appellant/Moving Party

Lincoln Caylor & Ranjan K. Agarwal, for the Respondent in Appeal/Responding Party

Matthew Latella & Matt Saunders, for the Appellant/Moving Party, Kyrgyzaltyn JSC

HEARD at Toronto: May 15, 2015

H. Sachs J.:

Introduction

[1] This is an appeal from the order of Newbould J. extending a Mareva injunction against the Kyrgyz Republic (the “Republic”) and the Appellant, Kyrgyzaltyn JSC (the “Appellant”). In June 2014, an arbitration panel in Moscow ordered the Republic to pay the Respondent, Stans Energy Corp. (the “Respondent”), US$118 million in compensation for breach of its investor rights (the “Award”).

[2] The Respondent applied to the Ontario Superior Court of Justice to enforce the Award, pursuant to the International Commercial Arbitration Act, R.S.O. 1990, c. 19 (the “ICAA”). In October of 2014, the Respondent moved ex parte before Penny J. seeking a Mareva injunction freezing the Appellant’s shares in a Toronto-based company, Centerra Gold Inc. (“Centerra”), pending the outcome of the ICAA application.

[3] Two weeks after Penny J. granted the injunction, the Respondent applied to extend it indefinitely. The Appellant opposed the extension. It argued that the Respondent had failed to make full and frank disclosure of all of the facts that were material to the matters before Justice Penny. Newbould J. extended the Mareva order indefinitely. That order is the subject of this appeal.

[4] Before this Court, the Appellant brought a motion for fresh evidence. The Respondent agreed that the proffered evidence was admissible as such, while arguing that we should not take it into account in making our decision. That evidence revealed that a court in Moscow had set aside the Award between the time when Newbould J. made his order and this Court heard the appeal.

[5] On the basis of this new evidence, the appeal must be allowed and the Mareva injunction set aside. Even if that were not the case, I agree with the Appellant that the Respondent failed to meet its obligation of full and frank disclosure (which includes the obligation to disclose all material facts) when it applied ex parte before Penny J. In this regard, I confirm that a material fact for the purpose of the relevant disclosure obligation is “any fact that would have been weighed or considered by the motions judge in deciding the issues, regardless of whether its disclosure would have changed the outcome” (Forestwood Co-operative Homes Inc. v. Pritz, [2002] O.J. No. 550 (Div. Ct.), at para. 26).

Allegations Giving Rise to the Award

[6] The Kyrgyz Republic is a Central Asian country. Formerly part of the Soviet Union, it has been independent since 1991. The Appellant, Kyrgzaltyn JSC, is a company based in the Republic that manages a number of gold mining operations. It is incorporated under the laws of the Republic, which is the sole shareholder of the company. The Appellant is the registered owner of 77,401,766 common shares of Centerra (approximately one-third of the issued and outstanding common shares). Centerra is a Canadian, publicly-traded mining company with extensive operations in Asia. It owns a gold mine that is located in the Republic. Its head office is located in Toronto and its shares are traded over the Toronto Stock Exchange.

[7] Like Centerra, the Respondent is also a Toronto-based, publicly-traded company. It develops resource properties in the former USSR. Through its subsidiaries, the Respondent owns a mining licence for a mine in the Republic. In June of 2012, that licence was cancelled at the direction of a committee of the Republic’s Parliament.

[8] The Award arose out of a proceeding brought by the Respondent against the Republic, seeking a remedy for the cancellation of its mining licence.

History of the Proceedings in Russia

[9] The Award was made by the Arbitration Court of the Moscow Chamber of Commerce and Industry (the “MCCI”). The Respondent chose to commence the arbitration before the MCCI, instead of a more widely recognized arbitral tribunal. From the beginning, the Appellant contested the MCCI’s jurisdiction to conduct the arbitration. The MCCI rejected these arguments and proceeded to issue the Award despite the Appellant’s refusal to participate in its proceedings.

[10] In asserting that the MCCI had jurisdiction, the Respondent relied on two key legal instruments: (1) the Republic’s domestic law – specifically, Chapter 18 of the law of the Kyrgyz Republic No. 66 (the “2003 Republic Law”); and (2) Article 11 of the Moscow Convention on the Protection of the Rights of the Investor (the “Moscow Convention”).

[11] In the event that a party to the Moscow Convention contests an arbitration tribunal’s jurisdiction, the Economic Court of the Commonwealth of Independent States (the “CIS Court”) has the sole authority to resolve the dispute. However, it does not have the power to set aside an award. That can only be done by the Russian courts, as the supervisory courts in the seat of the arbitration.

[12] The Republic filed an application with the CIS Court seeking an authoritative determination on the scope of Article 11 of the Moscow Convention. As just noted, that provision directly bears on the question of whether the MCCI had jurisdiction to arbitrate the dispute. On September 23, 2014, the CIS Court issued a short-form decision to the effect that the Respondent could not use Article 11 of the Moscow Convention to clothe the MCCI with jurisdiction in this matter. More detailed reasons were issued on October 6, 2014.

[13] The Republic also applied to the Moscow State Court to set aside the Award, based on the same jurisdictional argument. That application was dismissed on July 1, 2014. The Republic appealed this dismissal to the Federal Arbitration Court of the Moscow District (the “Federal Arbitration Court”).

[14] By the time the matter was heard by the Federal Arbitration Court, the CIS Court had issued its decision regarding the MCCI’s lack of jurisdiction to render the Award. On September 26, 2014, the Federal Arbitration Court found that the Moscow State Court’s decision was “premature” because the CIS Court had not yet rendered its decision. Therefore, the Federal Arbitration Court ordered the Moscow State Court to reconsider de novo its decision on jurisdiction, in light of the CIS Court’s findings.

[15] On the hearing de novo, the Republic argued that neither Article 11 of the Moscow Convention, nor Article 18 of the 2003 Republic Law, gave the MCCI jurisdiction over the arbitration. The hearing took place on April 28 and 29, 2015. At the conclusion of the hearing, the presiding justice set aside the Award. On May 15, 2015, just before the hearing of this appeal, the parties obtained the short-form decision of the Moscow State Court setting aside the Award.

[16] Thus, by the time of the ex parte hearing before Penny J. on October 10, 2014, both the CIS Court and the Federal Arbitration Court had rendered their decisions. The status was the same when the parties appeared before Justice Newbould ten days later.

The Application for an Ex Parte Mareva Injunction in Ontario

[17] In his endorsement granting the ex parte Mareva injunction, Penny J. correctly noted that the onus is on the moving party to establish that it has a strong prima facie case and that the moving party has an obligation “to provide full and fair disclosure of known material facts, including those which may tend to support the opposing argument.” (Endorsement of Penny J., Oct. 10, 2014, p. 2).

[18] Penny J. found that the Respondent had a strong prima facie case because an international arbitration award is enforceable under the ICAA.

[19] Article 35(1) of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”), which is the Schedule to the ICAA, provides that “[a]n arbitral award, irrespective of the country in which it was made, shall be recognized as binding and, upon application in writing to the competent court, shall be enforced subject to the provisions of this article and of article 36”.

[20] Article 36(1) of the Model Law sets out various grounds for an Ontario court to refuse to apply Article 35, two of which are as follows:

(iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the country where the arbitration took place, or

(v) the award has not yet become binding on the parties or had been set aside or suspended by a court of the country in which, or under the law of which, that award was made;

[21] As of the date of the application before Penny J., the Award had not yet been set aside, although proceedings leading to that result were underway. Importantly, however, the CIS Court – the body with the lawful authority to determine this issue – had already declared that the MCCI did not have the jurisdiction to make the Award. Based on this decision, a Russian appellate court had ordered the Moscow State Court to reconsider its dismissal of the Applicant’s application to quash the Award. Given the provisions of Articles 35 and 36 of the Model Law, these facts were clearly material to the threshold question before Penny J.: whether the Respondent had a strong prima facie case for Ontario courts to recognize and enforce the Award.

[22] When it applied ex parte before Penny J., the Respondent filed an affidavit with a number of exhibits attached. It also filed a factum. Part 4 of its factum is headed, “The Kyrgyz Republic Challenged Jurisdiction and Delayed the Proceedings”. Under this part, the Respondent detailed the Appellant’s unsuccessful efforts to persuade the MCCI that it lacked jurisdiction and to stay the proceedings pending an interpretation of Chapter 11 of the Moscow Convention. The Respondent also described the Appellant’s thwarted application to the Moscow State Court to set aside the Award.

[23] Nowhere in this section, which should have described all of the Appellant’s efforts to challenge the MCCI’s jurisdiction, does the Respondent mention the Appellant’s successes in the CSI Court and the Federal Court of Arbitration of Moscow.

[24] Later on in their Factum, under a section entitled “THE AWARD”, the Respondent characterizes the CIS Court decision as follows:

On September 23, 2014, the CIS Economic Court delivered an advisory opinion with respect to Article 11 of the Moscow Convention. The advisory opinion holds that Article 11 of the Moscow Convention establishes the types of institutions that may arbitrate investor-state disputes, subject to the existence of a separate arbitration agreement between the state and the investor. There is no such arbitration agreement between the Kyrgyz Republic and Stans. This decision does not have the effect of setting aside or suspending the Award. (at para. 37; emphasis added)

[25] This paragraph essentially says that the CIS Court delivered an advisory opinion as to the types of tribunals that could arbitrate investor-state disputes in the absence of an explicit arbitration agreement between the parties. What it does not state is that the CIS Court determined that the MCCI was not one of the investor-state tribunals that could arbitrate the dispute in question in the absence of such an agreement. Further, the Respondent did not make it clear that the CIS Court’s decision was by its terms “final and not subject to appeal” and that, under the laws of the country where the arbitration took place, the CIS Court’s interpretation of the Moscow Convention is authoritative.

[26] The materials which the Respondent filed before Penny J. did include the short-form decision of the CIS Court, but only in Russian. The English translation of the decision was not provided, even though it was available.

[27] In paragraph 38 of its Factum, the Respondent described the decision of the Federal Arbitration Court as follows:

On September 26, 2014, the Federal Arbitration Court of the Moscow District ordered reconsideration by the Moscow State Court of its decision on jurisdiction (without setting aside or suspending the Award).

[28] The Respondent included a copy of the original decision of the Federal Arbitration Court in its material, together with an English translation. But the factum did not explain why the Federal Arbitration Court made the order it did – i.e., because the Moscow State Court did not consider the decision of the CIS Court which called into question the MCCI’s jurisdiction to make the Award. It also failed to explain that if the Moscow State Court found that the MCCI lacked jurisdiction, that Court had the authority to set aside the Award.

[29] On the basis of what he was told, Penny J. found as follows:

There appears to have been full disclosure of the Republic’s position. Among other things, it has been disclosed that the Republic disputes the arbitrator’s award/jurisdiction; that it has challenged the Award in various courts such that the Award might conceivably be set aside….

The Proceedings to Extend/ Set Aside the Mareva Injunction

[30] The Appellant argued before Newbould J. that the Mareva injunction granted by Penny J. should not be extended “mainly on the grounds of material non-disclosure by Stans.” (Reasons of Newbould J., at para. 1).

[31] Newbould J. characterized the position of the Appellant on the motion before him as follows (at para. 28):

What Mr. Latella is essentially arguing is that had Penny J. had the two pages of the [CIS Court] decision rather than the paragraph in Mr. Aryev’s affidavit, it would have influenced him in his decision to grant the ex parte order.

[32] Newbould J. found that the material before Penny J. “clearly disclosed the position of the Republic that there was no jurisdiction in the MCCI Arbitration Court to make any Award” (para. 30). He added the following, at para. 32:

What Mr. Latella is contending is that there should have been fuller explanation made on behalf of the Republic at the ex parte hearing as to the Russian or Kyrgyz law so that Penny J. could have better understood those laws and the strength of the Republic’s case on lack of jurisdiction. However, I think this goes too far. An Ontario court cannot get into Russian and Kyrgyz law and decide whether one side has the better case over another on those laws. Mr. Latella contends that the Republic has the better case. Mr. Agarwal says that there are many reasons why Sands [sic] may win out. It would not be possible for an Ontario court to say that by looking at the decision of the CIS Economic Court and the Moscow Courts decisions that the outcome in the Moscow courts can be safely presumed. On my reading of all the decisions I cannot say with any confidence at all. What is known is that the Award has not been set aside in spite of several attempts by the Republic to achieve that end.

[33] Newbould J. agreed with Penny J. that the Respondent had a strong prima facie case that the Award should be recognized in Ontario and that the Republic had an equitable interest in the Centerra shares held in the name of the Appellant in Ontario. He found no reason to question Justice Penny’s finding of a serious risk of dissipation or removal of the assets from the jurisdiction. Therefore, he extended the injunction until further order of the Court.

The Position of the Parties on the Appeal

[34] As already noted, by the time this appeal was heard, the Moscow State Court had set aside the Award. Consequently, the Appellant argues that the Mareva injunction must also be set aside. However, the Appellant also submits that this court should address the issue of whether the Respondent met its disclosure obligations when it applied for a Mareva injunction before Penny J. This is important to any costs determination and to a potential proceeding on the undertaking as to damages that the Respondent gave when it sought the injunction in question.

[35] The Respondent agrees that the fresh evidence is appropriately admissible as such, but argues that it should have no bearing whatsoever on our decision. It says that our task is to assess whether Newbould J. applied the correct legal test and whether he committed a palpable and overriding error in applying that test. The issue of whether the injunction should now be set aside because of the fresh evidence is properly addressed by a judge sitting in the Commercial List in Toronto.

Analysis

[36] There is no issue that this Court has the jurisdiction on appeal to set aside the impugned order. Given that the Award that formed the basis for granting the Mareva injunction has now been set aside, the injunction must also be set aside (See Article 36(1)(v) of the Model Law reproduced in paragraph 20 above). I can see no reason to refer that issue to another judge of the Commercial List for a decision. To do so would waste judicial resources and run contrary to the use that an appellate court is entitled to make of properly admitted fresh evidence (which all parties agree the evidence in question is).

[37] An ex parte Mareva injunction is one of the most extraordinary remedies in the civil justice system. As Sharpe J. (as he then was) pointed out in United States of America v. Friedland, [1996] O.J. No. 4399 (Gen. Div.), at paras. 26-28:

It is a well established principle of our law that a party who seeks the extraordinary relief of an ex parte injunction must make full and frank disclosure of the case. The rationale for this rule is obvious. The Judge hearing an ex parte motion and the absent party are literally at the mercy of the party seeking injunctive relief. The ordinary checks and balances of the adversary system are not operative. The opposite party is deprived of the opportunity to challenge the factual and legal contentions advanced by the moving party in support of the injunction. The situation is rife with the danger that an injustice will be done to the absent party. As a British Columbia judge noted recently:

There is no situation more fraught with potential injustice and

abuse of the Court’s powers than an application for an ex parte injunction.

For that reason, the law imposes an exceptional duty on the party who seeks ex parte relief. That party is not entitled to present only its side of the case in the best possible light, as it would if the other side were present. Rather, it is incumbent on the moving party to make a balanced presentation of the facts and law. The moving party must state its own case fairly and must inform the Court of any points of fact or law known to it which favour the other side. The duty of full and frank disclosure is required to mitigate the obvious risk of injustice inherent in any situation where a Judge is asked to grant an order without hearing from the other side.

If the party seeking ex parte relief fails to abide by the duty to make full and frank disclosure by omitting or misrepresenting material facts, the opposite party is entitled to have the injunction set aside. That is the price the Plaintiff must pay for failure to live up to the duty imposed by the law. Were it otherwise, the duty would be empty and the law would be powerless to protect the absent party. (citations omitted)

[38] The effect of a failure to disclose a material fact on the continuation of an ex parte interim injunction was set out by the Court of Appeal in Chitel v. Rothbart et al (1983), 1982 1956 (ON CA), 39 O.R.(2d) 513, at p. 7, as follows:

If there is less than this full and accurate disclosure in a material way or if there is a misleading of the court on material facts in the original application, the court will not exercise its discretion in favour of the plaintiff and continue the injunction.

[39] The question of what is a “material” fact was considered by the Divisional Court in Forestwood Co-Operative Homes Inc. v. Pritz, supra. At paragraph 26, the Court stated:

Counsel for the respondent submits that the information omitted would not have affected the result. In our view, any fact that would have been weighed or considered by the motions judge in deciding the issues, regardless of whether its disclosure would have changed the outcome, is material. (citations omitted).

[40] The Respondent submits that this was essentially the same test that Newbould J. applied, i.e., whether the missing information would have influenced Penny J. in his decision to grant the ex parte order. The problem with this submission is that Newbould J. only uses this language when he describes the Appellant’s counsel’s submission (at para. 26):

What Mr. Latella is essentially arguing is that had Penny J. had the two pages of the decision rather than the paragraph in Mr. Aryev’s affidavit, it would have influenced him in his decision to grant the ex parte order.

[41] Nowhere in his decision does Newbould J. adopt this articulation of the criteria for a “material” fact that should have been disclosed. Had he done so, this could have been problematic: there is no requirement to demonstrate that the fact in question would have influenced the result, but only that it would have been weighed and considered by the judge who granted the injunction.

[42] This is the essential fact that was not disclosed to Penny J.: the CIS Court had issued a final and binding decision under the Moscow Convention (the law governing investor-state arbitrations in the country where the arbitration took place) that the MCCI had no jurisdiction to grant the Award. This fact is obviously material to the issue of whether the Respondent had a strong prima facie case for recognition and enforcement of the Award in the courts of Ontario. Recall that under Article 36 (1)(iv) of the Model Law, a court may refuse to recognize and enforce an award if the “arbitral procedure…was not in accordance with the law of the country where the arbitration took place.”

[43] Newbould J. found (at para. 32) that “an Ontario court cannot get into Russian and Kyrgyz law and decide whether one side has the better case over another person under those laws.” To the extent that he is suggesting that an Ontario court cannot interpret the Moscow Convention to decide whether the MCCI did have jurisdiction, I would agree. However, to the extent that the court was being asked to consider a determination by a Russian tribunal with the authority to interpret the Moscow Convention as to whether the MCCI had jurisdiction, the Ontario court was required to weigh and consider that determination. That is because it bears directly on the first question that the court must decide – namely, does the Respondent have a strong prima facie case that the Award will be recognized and enforced in Ontario?

[44] It may be that, having considered the CIS Court’s decision, Penny J. would still have granted the injunction. However, that does not affect our conclusion that Penny J. was entitled to know (and the Respondent was obliged to tell him) the full extent of the CIS’s decision so that he could weigh and consider it before deciding whether to grant the Mareva injunction. The Respondent did not make full and frank disclosure when it portrayed the CIS Court’s ruling as merely advice about what type of institutions may arbitrate investor-state disputes.

Conclusion

[45] For these reasons, I would allow the appeal and set aside the Mareva injunction that was granted by Penny J. and continued by Newbould J. Failing agreement, the parties may make written submissions as to costs. The Appellant shall make its submissions within 15 days from the release of these reasons and the Respondent shall have 15 days thereafter to make its submissions.

H. SACHS J.

LEDERER J.

A.J. GOODMAN J.

Released: 20150610

CITATION: Stans Energy Corp. v. Kyrgyz Republic, 2015 ONSC 3236

DIVISIONAL COURT FILE NO.: 511/14

Commercial List Court File No.: CV-14-10731-00CL

DATE: 20150610

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

H. Sachs, Lederer and A. Goodman JJ.

BETWEEN:

STANS ENERGY CORP.

Respondent in Appeal/ Responding Party

– and –

KYRGYZ REPUBLIC, KYRGZALTYN JSC AND CENTERRA GOLD INC.

Appellant/Moving Party

REASONS FOR JUDGMENT

H. SACHS J.

Released: 20150610