SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Sistem Mühendislik İnşaat Sanayi Ve Ticaret Anonim Sirketi, Applicant

AND:

Kyrgyz Republic and Kyrgyzaltyn JSC, Respondents

BEFORE: D. M. Brown J.

COUNSEL: G. Pollack, for the Applicant

J. Casey and C. Doria, for the Respondent, Kyrgyzaltyn JSC

J. Judge and V. Voakes, for Centerra Gold Inc.

No one appearing for the Respondent, Kyrgyz Republic

HEARD: April 17, 2012

REASONS FOR DECISION

I. Overview of motions to set aside an Ontario order recognizing and enforcing an international arbitral award and to stay Ontario enforcement proceedings as forum non conveniens

[ 1 ] The applicant, Sistem Mühendislik İnşaat Sanayi Ve Ticaret Anonim Sirketi (“Sistem”), a Turkish company, invested in a hotel in the city of Bishkek, in the Kyrgyz Republic (the “Republic”), ultimately becoming sole owner and operator. Sistem was evicted from the hotel, literally at gun-point, in 2005 during a period of revolutionary politics in the Republic. Sistem then initiated proceedings before the International Centre for Settlement of Investment Disputes claiming compensation from the Republic for the loss of its investment. The Republic defended the claim before the international arbitration tribunal. Sistem succeeded on its claim, obtaining an award against the Republic of U.S. $8.5 million, together with interest and costs.

[ 2 ] The Republic did not pay the Award.

[ 3 ] Sistem then initiated proceedings to enforce the Award. Specifically, Sistem commenced this application against the Republic under the International Commercial Arbitration Act and the State Immunity Act seeking recognition and enforcement of the Award (the “Application”). Although made aware of the Application, the Republic did not respond. By order dated January 5, 2011, Echlin J. recognized and enforced the Award and ordered the Republic to pay Sistem an amount in Canadian currency sufficient to purchase US$9,147,470, which covered all elements of the Award (the “Judgment”).

[ 4 ] Sistem then pursued steps to enforce the Judgment using tools available to it under Rule 60 of the Rules of Civil Procedure . Those steps involved an Ontario-based, Canadian Business Corporations Act company, Centerra Gold Inc., wholly-owned subsidiaries of which operate the Kumtor Mine in the Republic. Centerra is a reporting issuer. Sistem sought (i) to seize shares in Centerra registered in the name of Kyrgyzaltyn JSC (“Kyrgyzaltyn”), a joint stock company incorporated under the laws of the Republic which is wholly-owned by the Republic, contending that the Republic was the beneficial owner of those shares (the “Disputed Shares”) and (ii) to garnish amounts it alleged Centerra owed the Republic.

[ 5 ] The Republic owns Kyrgyzaltyn which in turn owns 33% of the issued and outstanding shares of Centerra.

[ 6 ] Kyrgyzaltyn asserted that it owned the Disputed Shares in Centerra which Sistem was attempting to seize, and these proceedings resulted.

[ 7 ] Kyrgyzaltyn moved for two forms of relief before me. First, Kyrgyzaltyn moved under Rule 38.11 to set aside the Judgment of Echlin J. on the basis that it was a “party affected” by that recognition and enforcement Judgment and this Court lacked jurisdiction to recognize and enforce the Award against the Republic. Kyrgyzaltyn also moved for an order staying the proceedings regarding ownership of the Disputed Shares on the grounds of forum non conveniens .

II. Background facts

A. The international arbitration proceedings and award

[ 8 ] On September 30, 2005, Sistem initiated an arbitration claim against the Kyrgyz Republic before the International Centre for Settlement of Investment Disputes seeking compensation for the loss of its hotel investment. The nature of the claim was succinctly described by the Tribunal in its Decision on Jurisdiction dated September 13, 2007:

[T]he claim arises from a joint venture formed in 1992 by the Claimant, Sistem, and a Kyrgyz company, the Ak-Keme Joint-Stock Company…Sistem says that it fulfilled its obligations under the various agreements that underpinned the project, that it bought Ak-Keme’s share in the project in 1999 after Ak-Keme went into bankruptcy in 1998, and that it is entitled now to operate the hotel, but was dispossessed in March 2005 by Ak-Keme (now acting with a Malaysian partner). Sistem claims that the Kyrgyz Republic failed in its duty to protect Sistem’s investment. The Respondent says that Sistem was simply a contractor hired to build the hotel, that it did not fulfill its obligations, that the 1998 bankruptcy procedure and 1998 purchase by Sistem of Ak-Keme’s interest were legally invalid, and that Sistem unlawfully occupied the hotel until it was recovered by Ak-Keme and its Malaysian partner in March 2005. The Kyrgyz Republic does not accept Sistem’s claim.

In its claim Sistem sought orders requiring the Republic to compensate it for the value of the hotel and for lost profit.

[ 9 ] The Tribunal conducted a two-stage hearing. First, it heard argument on whether it enjoyed jurisdiction over the dispute. The Republic contended that the Tribunal lacked jurisdiction. Both parties appeared before the Tribunal and made submissions. By Decision dated September 13, 2007 the Tribunal held that it was competent to hear and decide the claims.

[ 10 ] The Tribunal then conducted a hearing on the merits. The Republic fully participated and was represented by counsel. In its Award dated September 9, 2009, the Tribunal found that Sistem’s ownership rights in the hotel were abrogated by an organ of the Krygyz State for which the Republic was responsible. The Tribunal ordered the Republic to pay Sistem compensation in the amount of U.S. $8.5 million, together with interest and some costs.

[ 11 ] As noted, the Republic has not paid the Award.

B. The Ontario enforcement proceedings

[ 12 ] After obtaining the recognition and enforcement Judgment from Echlin J., Sistem secured a Writ of Seizure and Sale on February 11, 2011, as a result of which the Sheriff of the City of Toronto served a Notice of Enforcement dated March 10, 2011 on Centerra which stated:

“All monies and interest and all shares and dividends and any equitable or other right, property, interest or equity of redemption in or in respect of shares and dividends, standing in the name of Kyrgyz Republic in the stock of Centerra (Kyrgyzaltyn currently holds 77,401 Centerra Shares) are hereby seized.”

[ 13 ] On April 1, 2011, Centerra informed the Sheriff that it did not possess or control any stock in the name of the Republic. The Sheriff indicated that it would not re-issue the Notice of Enforcement to provide for the seizure of the Disputed Shares in the name of Kyrgyzaltyn.

[ 14 ] Then, on April 12, 2011, the Registrar of this Court issued a Notice of Garnishment to Centerra in respect of a fine which the company might become liable to pay to the Republic. In its May 3, 2011 Garnishee’s Statement Centerra indicated that no such fine had been levied, that Centerra did not carry on business in the Republic, and any fine would be the responsibility of the two wholly-owned Centerra subsidiaries which operate the Kumtor Mine in the Republic, namely Kumtor Operating Company and Kumtor Gold Company CJSC. Both subsidiaries are incorporated under the laws of the Republic.

[ 15 ] That then prompted Sistem to move in May, 2011, against Centerra for an order declaring that the Republic beneficially owned all shares in Centerra “nominally held by Kyrgyzaltyn”. Sistem’s motion ultimately was heard last September. Although given notice of the hearing neither the Republic nor Kyrgyzaltyn appeared. Cumming J. made an order dated September 30, 2011 (the “Amending Order”) which added Kyrgyzaltyn as a party to the Application and amended the relief sought by Sistem to include a determination of the beneficial ownership of the Disputed Shares. [1] I will return later in these Reasons to consider the precise relief sought by Sistem in its Amended Application.

[ 16 ] At the same time, a new motion by Sistem seeking an order requiring Centerra to hold in trust an amount equal to the Award pending a determination about whether the Disputed Shares could be seized in satisfaction was adjourned. That motion has not been brought back on for hearing.

III. Request to set aside the recognition and enforcement Judgment

A. The positions of the parties

[ 17 ] Kyrgyzaltyn advanced several arguments in support of its request to set aside the Judgment:

(i) the recognition and enforcement Judgment was made ex parte in that Kyrgyzaltyn did not receive notice of the Application seeking the Judgment; [2]

(ii) since Sistem, in its Amended Application, claims “to seize Kyrgyzaltyn’s assets to satisfy the Judgment against the Republic, Kyrgyzaltyn now under Rule 38.11(1) is a person affected by the Original Application and Judgment”;

(iii) as a person affected Kyrgyzaltyn may move to set aside the Judgment; and,

(iv) this Court lacked jurisdiction to grant the Judgment because (i) the Republic was not served properly and (ii) no real and substantial connection exists between the litigation and Ontario.

[ 18 ] Sistem submitted that since Kyrgyzaltyn was not a party to the proceedings before the Tribunal, nor a party to the Award, nor a party to the Application seeking recognition and enforcement of the Award, it lacked standing to move to set aside the Judgment.

[ 19 ] Centerra filed extensive written submissions to the effect that Echlin J. lacked jurisdiction to make the Judgment and the court should grant Kyrgyzaltyn’s motion to set aside the Judgment.

B. Analysis

[ 20 ] In support of its argument that it possessed the standing to set aside the Judgment, Kyrgyzaltyn relied on Rule 38.11(1) of the Rules of Civil Procedure which states:

38.11(1) A party or other person who is affected by a judgment on an application made without notice or who fails to appear at the hearing of an application through accident, mistake or insufficient notice may move to set aside or vary the judgment, by a notice of motion that is served forthwith after the judgment comes to the person’s attention and names the first available hearing date that is at least three days after service of the notice of motion.

Kyrgyzaltyn contended that its “economic and proprietary rights are directly affected by the Judgment and by the subsequent Amending Order”.

[ 21 ] I should observe that in its Factum Kyrgyzaltyn advanced an argument that it was an “affected person” with standing to set aside the Judgment, whereas in its Amended Notice of Motion Kyrgyzaltyn suggested that by reason of its joinder as an added respondent under the Amending Order it had become a “party affected” by the Judgment and could move to set it aside. I will deal with both arguments advanced by Kyrgyzaltyn.

[ 22 ] Certain facts are not in dispute. First, Kyrgyzaltyn was not a party to the proceedings before the Tribunal. Second, Kyrgyzaltyn was not a party to the Award. Finally, Kyrgyzaltyn was not named as a party in the original Application which resulted in the making of the Judgment and, as a result, there is no dispute that the Judgment was made without notice to Kyrgyzaltyn.

[ 23 ] Of course, Kyrgyzaltyn was not named as a party respondent to the Application because it was not a party to the Award which the Application sought to recognize and enforce. In common parlance, the Award made Sistem a judgment creditor of the Republic, the judgment debtor, and Kyrgyzaltyn was a stranger to the substantive dispute between the judgment creditor and the judgment debtor.

[ 24 ] In Ivandaeva Total Image Salon Inc. v. Hlembizky [3] Borins J.A. reviewed at some length the jurisprudence concerning Rule 37.14(1), the “motions” equivalent to the “applications” Rule 38.11(1). He concluded that the jurisprudence revealed that successful motions brought under Rule 37.14(1) to set aside or vary an order suggested that the order must be one that directly affected the rights of the moving party in respect to the proprietary or economic interests of the party. It is worth reproducing the entirety of the case review conducted by Borins J.A. in order to gain a fuller understanding of when proprietary or economic interests of a person might be affected by an order. He wrote:

[26] Since the inception of the rule in 1881, access to it has been available to one “affected by” the order which it is sought to rescind, set aside or vary. From 1881 to the introduction of the Rules of Civil Procedure in 1985, the rule provided that it was available to a “party affected by an ex parte order”. However, in 1985 “person” replaced “party” in rule 37.14(1). In this regard, I note that in the complementary rule, rule 37.07(1), a notice of motion must be served “on any person or party who will be affected by the order sought” [emphasis added]. This raises the question of whether a party may bring a motion under rule 37.14(1), or whether it is available only to a “person”, or whether a person includes a party.

[27] Other than Stanley Canada Inc. v. 683481 Ontario Ltd. reflex , (1990), 1990 8098 (ON SC) , 74 D.L.R. (4th) 528 (Ont. Gen. Div.) , the cases that have considered the rule in its different forms do not discuss the meaning of “affected by”. However, a review of the cases in which a successful motion has been brought under rule 37.14(1) and rule 38.11(1), which applies to applications, or their predecessors, to set aside or vary an order suggest that the order must be one that directly affects the rights of the moving party in respect to the proprietary or economic interests of the party. In addition, there is another broad group of cases, usually arising from the sealing of a court file, in which the media has complained that its right to freedom of expression as guaranteed by s. 2 (b) of the Canadian Charter of Rights and Freedoms has been compromised and in which the principle of open and accessible court proceedings has been invoked. See, e.g. , Sierra Club of Canada v. Canada (Minister of Finance) 2002 SCC 41 () , (2002), 211 D.L.R. (4th) 193 (S.C.C.) .

[28] In Stanley , the issue was whether a union and its members had standing under rule 37.14(1)(a) as persons “affected by an order obtained on motion made without notice”, to move for an order setting aside an order obtained under rule 44.01(1) by the employer of the union members, Stanley, directing the sheriff to enter the defendant company’s premises and to recover a quantity of steel owned by Stanley. At the time of the order, the union was on a legal strike against Stelco Inc., which had manufactured the steel for Stanley, that was stored for Stanley by the corporate defendant.

[29] The union contended that it had standing because the economic impact on Stelco of its picketing had been, and would be, diminished as a result of the rule 44.01(1) order. The union’s picketing of the company precluded Stanley from removing its steel from the company’s warehouse. The union contended that this represented an economic advantage to it in its strike against Stelco Inc.

[30] McKeown J., at p. 537, held “that the substantial economic advantage to the union members in keeping the steel in the warehouse makes them persons ‘affected by an order’ under rule 37.14”. He also found at p. 539, that the “potential infringement” of its freedom of expression guaranteed by s. 2 (b) of the Canadian Charter of Rights and Freedoms “qualifies the union members as ‘affected by’ . . . the master’s order”.

[31] Stanley was applied in Weinstein v. Weinstein (Litigation Guardian of) 1997 12272 (ON SC) , (1997), 35 O.R. (3d) 229 (Gen. Div.) . In that case a wife had settled a trust and provided that on her death the trust assets were to go to her estate, the residue of which had been bequeathed to her grandchildren under her will. Subsequently, her husband applied without notice to the grandchildren for a judgment equalizing the net family assets of himself and his wife. The application was granted and a judgment was given transferring $2.5 million from the wife’s trust to the husband. The grandchildren moved under rule 38.11(1) to set aside the judgment on the ground that they were persons “affected by a judgment on an application made without notice”. In setting aside the judgment, Sheard J. held that the grandchildren were “manifestly” persons affected by the judgment and that they should have received notice of the application. Citing Stanley , he rejected the argument that an economic interest in the outcome of a proceeding does not confer standing under rule 38.11(1).

[32] The following cases which have considered whether a stranger to a proceeding was a person affected by an ex parte order, or an order made without notice to him or her, within the meaning of rule 37.14(1) or rule 38.11(1), all determine standing on the ground that the order sought to be set aside or varied affected the moving party’s propriety or economic interests:

(1) The administrator of an estate of a deceased person had standing to move to set aside an order appointing an administrator ad litem to represent the estate of the deceased in an action against him commenced before his death: McLean v. Allen (1898), 18 P.R. 255 (Ont. Sup. Ct.) .

(2) A person claiming to be entitled to moneys attached pursuant to a garnishee order obtained with notice to her, was a person affected by the order: Canada Lumber Co. Limited v. Whatmough (1923), 23 O.W.N. 584 (Ex.) .

(3) The defendant’s motor vehicle insurer was affected by an order renewing a writ of summons because it could be liable to indemnify the plaintiff for any damages recovered from the defendant: Palmateer v. Bach (1976), 1975 612 (ON SC) , 9 O.R. (2d) 693 (High Ct.) .

(4) A mortgagee’s interests as a secured creditor were affected by an order expediting the sale of condominium units and requiring it to discharge its mortgage: Unical Properties v. 784688 Ontario Ltd. , [1993] O.J. No. 2039 (Gen. Div.) .

(5) The Government of Canada was affected by an order in a garnishee proceeding that contemplated that it would exceed its statutory authority and pay out money in a manner other than as authorized by statute: Beattie v. Ladouceur 1995 7192 (ON SC) , (1995), 23 O.R. (3d) 225 .

[The remainder of the judgment continues exactly as provided in the source text, including paragraphs [25]–[75] and the footnotes.]

D. M. Brown J.

Date : July 25, 2012