Canada: Fighting Forum: Where Forum Selection Clauses Fall Short

Last Updated: March 4 2015
Article by Ahmed A. Malik

Forum selection clauses are frequently used in commercial contracts, especially in cases where the parties to the contracts are based in different jurisdictions. These clauses allow the parties to choose which jurisdiction their disputes will be resolved in. However, a recent decision of the Saskatchewan Court of Queen's Bench cautions about the use of forum selection clauses and their enforceability. This decision emphasizes the importance of ensuring that a forum selection clause is drafted clearly and properly serves the intention of the party wishing to include the clause.

In Yara Belle Plaine Inc v Ingersoll-Rand Company, 2014 SKQB 254, the plaintiff company, Yara Belle Plaine Inc ("Yara") owned and operated a nitrogen fertilizer plant, in Belle Plaine, Saskatchewan. Beginning in 2004, Yara entered into a series of contracts with the defendant, Ingersoll-Rand Company ("Ingersoll"), based out of the United States, for the disassembly, repair and reassembly of two rotors (Rotor 'A' and 'B') used in a nitric acid expander.

The contracts were all primarily drafted by Ingersoll. The 2004 contract did not include a forum selection clause. The rotors operated without incident from 2004 to 2009. In 2009, the parties entered into two further agreements, both of which incorporated a forum selection clause. In 2012, the parties entered into a further agreement which also incorporated a forum selection clause. The clause in question was identical in the latter three agreements, selecting Alberta as the forum for disputes therein. The clause stated:

"The rights and obligations of the parties under the Agreement as well as any dispute between the parties, shall exclusively be governed by and dealt with through the laws and courts of the Province of Alberta, Canada."

In 2012, rotor A experienced a major failure which caused a fire and resulted in extensive damage to the property and operations of Yara. Yara commenced an action in Saskatchewan against Ingersoll for breach of duty to warn and breach of contract. Ingersoll made an application to the Saskatchewan Court of Queen's Bench for a stay of action, relying on the forum selection clause in the two 2009 agreements and the 2012 agreement. Ingersoll, instead, argued that the matter should proceed in Alberta, as contemplated by the forum selection clause.

On the question of the Court's jurisdiction with respect to forum selection clauses generally, the Court found that such a clause does not oust the jurisdiction of the Court. The Court reiterated the test for analyzing forum selection clauses, found in previous Saskatchewan decisions:

  1. Does the province have territorial competence over the matter?
  2. Has the defendant established that the forum selection clause is valid, clear and enforceable?
  3. If the forum selection clause is valid, has the plaintiff shown strong cause why the Court should not give effect to the clause?
  4. If the plaintiff has not shown strong cause, the Court should consider whether it is appropriate to transfer the proceeding to another territory.

The Court in Yara Belle Plaine found that it had jurisdiction over the action based on The Court Jurisdiction and Proceedings Transfer Act, S.S. 1997, c. C-41.1, which gives the Court territorial competence over any proceeding with a real and substantial connection between Saskatchewan and the facts of the proceeding. The Court found that a real and substantial connection existed in this case based on the fact that Yara was registered in Saskatchewan and carried on business here, and that the alleged failure of the rotor and resulting damage occurred in Saskatchewan.

As the validity of the clause was not in dispute, the Court then turned to the scope of the clause to determine whether it covered all of the issues in dispute under the action. The Court determined that the clause did not cover all of the disputes that arose from the contracts, because much of the subject matter of the duty to warn claim appeared to deal with the pre-2009 dealings of the parties. In addition, the Court cautioned that if disputes involve parties who are not covered by the agreement, such disputes may also fall outside the scope of forum selection clauses.

Furthermore, the Court found that the forum selection clause could not be interpreted to cover all disputes between the parties. The Court stated that if the parties had intended this, they would have included this in the forum selection clause. Instead, the Court interpreted the clause as intending to cover only disputes arising between the parties "under the Agreement". The Court stated (at paragraph 52) that it was "not clear that the clause in question was intended to govern every potential dispute between the parties. A plain and common sense reading of the clause supports an interpretation that the parties intended the words 'under this Agreement' to apply to the subsequent language of 'any dispute between the parties'".

In finding that the forum selection clause was not broad enough to cover all of the issues in dispute between the parties, the Court dismissed Ingersoll's application to stay the Saskatchewan action.

The decision of the Court of Queen's Bench in Yarra Belle Plaine serves as a caution for commercial parties that frequently engage in business transactions with parties outside their jurisdiction and do so on a consistent basis. When negotiating agreements with other parties, the party seeking to include a forum selection clause should ensure that (i) it is written clearly, and (ii) if it is intended to cover all disputes between the parties, even those outside of a particular contract, the clause should expressly state this. However, the Court's position in Yarra Belle Plaine raises the possibility that even in situations where a valid and enforceable forum selection clause exists, the Court may still be able to exercise its jurisdiction and override such a clause. Parties looking to include forum selection clauses should carefully draft such provisions and speak to legal counsel about the enforceability of such clauses.

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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