Canada: The Choice Of Forum Clause Takes Precedence Over Legislative Rules Giving Jurisdiction To Québec Courts

The Supreme Court of Canada has recently rendered an important decision in the case of GreCon Dimter Inc. vs. J.R. Normand Inc. et al.,(July 22, 2005). This case confirms the privileged position which international commercial arbitration currently enjoys and will in all likelihood continue to benefit from in Québec and in Canada.

The Supreme Court held that the parties' decision to submit litigious issues arising from a contractual relationship to a foreign tribunal or to an arbitrator will be enforced despite certain provisions of the Civil Code of Quebec (the "CCQ") which provide for the joining, into a single trial and hearing, of the principal claim and an action in warranty. This case highlights both the importance of a choice of forum clause in a contract and the potential risks of contracting with a party bound by such a clause.

The facts are fairly simple.

GreCon Dimter Inc.("GreCon") is a German corporation which manufactures and sells specialized equipment used in processing plants and saw mills. Defendant J.R. Normand Inc. ("Normand") sells and services industrial wood working machinery. Co-Defendant Scierie Thomas-Louis Tremblay Inc. ("Tremblay") operates a saw mill in the Province of Québec. The case arises out of two contracts. One was entered into by Normand and Tremblay for the supply and delivery of equipment in Québec. The other contract is a contract of sale between GreCon and Normand. The latter contract contains a choice of forum and choice of law clause drafted as follows:

" It is agreed, by and between the seller and buyer, that all disputes and matters whatsoever arising under, in connection with, or instant to this contract... shall be litigated, if at all, in and before a Court located in Alfeld, Germany to the exclusion of the Courts of any other State or country...

This agreement is governed by and construed under the laws of Germany to the exclusion of all other laws of any other state or country (without regard to the principles of conflicts of law)."

Tremblay brought an action in damages against Normand based on a professional seller's liability for latent defects and other faults (the principal action). Normand filed an action in warranty against GreCon shortly thereafter. Normand sought to be indemnified in full by GreCon in the event of an award being made against it in the principal action.

Both the Superior Court of Quebec and the Quebec Court of Appeal dismissed GreCon's declinatory exception by which the jurisdiction of the Québec Courts was challenged on the basis of the choice of forum clause. The Court of Appeal dealt with an apparent conflict between two articles of the CCQ (3139 and 3148) by giving precedence to article 3139 which gives Québec Courts jurisdiction to join a principal action and action in warranty when there is a sufficient nexus or connexity between them.

Decision

A unanimous Supreme Court of Canada decided that, by virtue of article 3148, par. 2 CCQ, the jurisdiction of the Quebec Courts is ousted in a personal action of a patrimonial nature once it is established that the parties have chosen by a clear and precise agreement to submit their disputes to a foreign authority or to an arbitrator. According to the Supreme Court, article 3148 of the CCQ recognizes the primacy of the autonomy of the parties' choice. The Court held that "... although the legislature did confer jurisdiction on the Québec authority on the basis of the criteria of jurisdictional connection, such as domicile, fault, the damage or the injurious act, it was careful to give the parties the ability to choose to oust the authorities' jurisdiction when they wished to entrust current or future disputes between them that arise out of a specific legal relationship to a foreign authority or an arbitrator".

The Supreme Court of Canada regarded article 3148 of the CCQ as embracing the letter and spirit of international agreements sponsored by international organizations such as The Hague Conference on Private International Law and the UNCITRAL. The Court also noted that article 3148, par. 2 CCQ is based on articles 5 and 6 of the Convention on the Choice of Courts (November 25, 1965) whose purpose is to give effect to choice of forum clauses.

According to the Supreme Court of Canada, this legislative choice, which provides for the use of arbitration clauses, fosters foreseeability and certainty in international legal transactions.

In order to benefit from such treatment of the choice of forum clause, the party seeking to enforce it must demonstrate that the clause is mandatory and that it clearly and precisely confers exclusive jurisdiction to an arbitral institution or foreign court.

This case overturns the Québec Court of Appeal decision in Guns 'N Roses Missouri Storm Inc. v. Musical Productions Donald K. Donald Inc. [1994] R.J.Q. 1183 which allowed an action in warranty despite contract between the principal defendant and the third party (called in warranty) which contained an arbitration clause.

Also of great importance is the way in which the Supreme Court considers the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). This convention deals not only with the recognition and enforcement of arbitral awards but it also serves to provide legal protection for arbitration agreements. The principles of the New York Convention are incorporated into both the CCQ and the Québec Code of Civil Procedure. Article II (3) of the New York Convention gives primacy to the principle that arbitration agreements must be recognized and enforced. The Québec Code of Civil Procedure gives priority and greater weight to an arbitration clause over the jurisdiction of a Québec authority. Therefore, both national and international norms, confirm the position adopted by the Supreme Court of Canada that the enforcement of an arbitration agreement or choice of forum clause cannot be preempted by procedural rules relating to actions in warranty.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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