Canada: Court Of Appeal Blurs Boundaries In Forum Selection Case

Last Updated: February 23 2017
Article by Daphne Hooper

A recent decision from the Ontario Court of Appeal has international arbitrators scratching their heads as non-contracting parties to a dispute based largely in Ontario are sent to arbitration in Germany. The majority decision of Brown J.A. is notable for the fact that it runs contrary to long-standing principles of both conflict law and the law of arbitration.

The dispute in Novatrax International Inc. v. Hägele Landtechnik GmbH concerned the breach of an exclusive sales agreement to sell industrial reversible fans from Germany in the North American market. The agreement contained a hybrid forum selection and arbitration clause whereby the contracting parties agreed that German law is binding, and "to settle any disputes by binding arbitration" in Germany.

The plaintiff, an Ontario corporation, brought an action for breach of contract and tort in Ontario against three groups of parties: the German corporation with whom the plaintiff contracted; the individual principles of the German corporation; and an Ontario corporation created by the German corporate defendant to compete with the plaintiff in the North American market. The defendants successfully moved for a stay of the action in Ontario.

A majority of the Ontario Court of Appeal upheld the stay. Brown J.A. ruled that the motion judge made no error in finding that the forum selection clause was broad enough to capture the tort claims against the German corporation, and in applying the forum selection clause to stay the action against the non-contracting parties.

The majority decision is troubling for two reasons. Firstly, it muddles the Z.I. Pompey forum selection clause analysis with the forum non conveniens test in relation to the non-contracting parties. Where parties have agreed to resolve their disputes in a foreign jurisdiction, the party seeking to have the action heard in Ontario must show "strong cause" that the forum selection clause should not be enforced. In contrast, where there is no forum selection clause, the party seeking to resist the presumptive jurisdiction of the Ontario court must establish that another jurisdiction is clearly more appropriate. Whereas the presence of a forum selection clause "pervades" the analysis and is given full weight in the "strong cause" test, no single factor relevant to the forum non conveniens analysis is determinative.

Brown J.A. found that the individual principals of the German corporation and the Ontario corporate defendant were not parties to the exclusive sales agreement. However, instead of holding the non-contracting parties to the onus of proving that Germany was a clearly more appropriate forum, the onus shifted to the plaintiff to show "strong cause" why its claims against the non-contracting parties should not be arbitrated in Germany. In the absence of agreement forum selection clause, there was no basis on which to hold the plaintiff to the onus of proving there was "strong cause" for the claims to not be heard in Germany.

Moreover, the fact that the claims pleaded all arose from the same transactions and occurrences, and raise common questions of fact and law, is not an overriding consideration in the forum non conveniens analysis. Even where there is a risk of inconsistent judgments, the Supreme Court ruled in Teck Cominco Metals Ltd. v. Lloyd's Underwriters that parallel proceedings are a significant but not determinative consideration for courts exercising forum non conveniens discretion.

Secondly, and pursuant to the dissenting judgment of Feldman J.A., the majority decision undermines the law of arbitration by forcing non-parties to arbitrate claims. The decision is consistent with the law of arbitration as the consent of the parties was implied from how the plaintiff pleaded its claim: by tethering its claims against the non-contracting parties to the claim governed by a forum selection clause, the plaintiff was precluded from then arguing that the claims could be divided and heard in two different jurisdictions. Notably, Laskin J.A. left available the opportunity for the plaintiff in to re-draft its pleading to allow the claims to be heard in separate jurisdictions. Unlike in, the plaintiff in Novatrax did not plead that its claims must all be dealt with together. Feldman J.A. concluded that there was no basis on which to infer consent by the plaintiff to arbitrate its claims against the non-contracting parties in Germany, or to apply German law.

To resolve the apparent conflict that arises when some parties to an action are subject to an arbitration agreement and some are not, Feldman J.A. adopted the principled approach of the Alberta Court of Appeal in UCANU Manufacturing Corp. v. Calgary (City):

  1. Whether the issues in the arbitration are substantially the same as the issues in the action;
  2. Whether the defendant has satisfied the court that continuing the action would work an injustice on him or her; and
  3. Whether the defendant has satisfied the court that staying the action would not cause an injustice to the plaintiff.

Upon applying these three factors, Feldman J.A. concluded that the stay of the claims in the Ontario action against the non-contracting parties should be set aside.

This case has left a cloud of confusion for businesses involved with multi-party claims where only some relationships are subject to forum selection clauses. The decision is ripe for appeal, and it will be interesting to see if and how the Supreme Court will provide clarity on this issue.

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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Daphne Hooper
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