Litigation or Arbitration? Ontario Court of Appeal’s Differing Approaches to Enforcing Forum Selection and Arbitration Clauses

Forum selection clauses are a mainstay of international commercial agreements. Contracting parties often negotiate and insert a clause specifying either the chosen forum for adjudicating any disputes arising from the contractual relationship, or agreeing to arbitrate the dispute.
However, not all disputes are characterized as contractual in nature; sometimes one party alleges fraud or tortious conduct against the other party. Party autonomy, certainty, predictability and lower transaction costs are oft-cited public policy goals in the enforcement of ex ante forum selection or arbitration clauses.  In GreCon Dimter Inc. v. J.R. Normand Inc. et al., 2005 SCC 46, (2005) 255 D.L.R. (4th) 257, (2005) 336 N.R. 347, (2005) J.E. 2005-1369 (S.C.C.) [cited to D.L.R.], LeBel, J. at 269 notes:

“The recognition of the autonomy of the parties…is also related to the trend toward international harmonization of the rules of conflict of laws and of jurisdiction. That harmonization is being achieved by means, inter alia, of international agreements sponsored by international organizations such as the Hague Conference on Private International Law and the United Nations Commission on International Trade Law (“UNCITRAL”).

[where legislatures] recognize the primacy of the autonomy of the parties in situations involving conflicts of jurisdiction. Moreover, this legislative choice, by providing for the use of arbitration clauses and choice of forum clauses, fosters foreseeability and certainty in international legal transactions.” 

However, forum selection clauses are not interpreted and enforced within a jurisprudential vacuum as they are subject to the juridical process of characterization. As Prof. Janet Walker notes:

“[t]he distinction between substance and procedure, or right and remedy, is an important subject of characterization…The characterization of a particular rule, whether foreign or domestic, as substantive or procedural, cannot be done in the abstract because substance and procedure are not clear-cut or unalterable categories.” [ J.G. Castel and Janet Walker, Canadian Conflict of Laws, 6th Ed., Looseleaf-R elease 10, Dec. 2007 (Markham: LexisNexis Canada Inc. 2005, Vol. 1, Chap. 3 “Characterization and the Incidental Question” and Chapter 6 “Substance and Procedure”, §6.2, p. 6-2) 

The issues of the enforceability of a forum selection clause and characterization are front and centre in the recent Court of Appeal for Ontario decision in Matrix Integrated Solutions Limited v. Radiant Hospitality Systems Ltd, 2009 ONCA 593 (CanLII) [“Matrix v.Radiant“]
In Matrix v. Radiant, the plaintiff/appellant, Matrix Integrated Solutions Limited [“Matrix”] was an Ontario restaurant equipment seller and installer. The defendant/respondent, Radiant Hospitality Systems Ltd. [“Radiant”] was a Texas limited partnership that sold restaurant equipment in Canada and the United States. The parties executed a Non-Exclusive Reseller Agreement [the “Reseller Agreement”] under which the Ontario plaintiff was authorized to resell the Texas defendants in Ontario. The Reseller Agreement contained the following forum selection clause:

“This Agreement shall be governed by and construed in all respects in accordance with the laws of the State of Texas, U.S.A. In any civil action by either party relating to this Agreement, the prevailing party shall recover from and be reimbursed by the other party for all costs, reasonable attorneys’ fees and related expenses. [Matrix] hereby consents and submits to the exclusive jurisdiction and venue over any action, suit or other legal proceeding that may arise out of, or in connection with this Agreement , by any state or federal court located in Tarrant County in the State of Texas, U.S.A. Reseller shall bring any action, suit or other legal proceeding to enforce, directly or indirectly, this Agreement or any right based upon it only in Tarrant County in the State of Texas, U.S.A. The parties agree that the United Nations Convention for the International Sale of Goods shall not apply to this Agreement.”

Matrix commenced an action against Radiant and two of its former employees, Frank Naccarato and Gus Markou, alleging conspiracy and for knowingly assisting Matrix’s former employees in breaching their fiduciary duties to leave Matrix in order to form Radeon Technologies Ltd. At the same time, Radiant terminated the Reseller Agreement and entered an agreement with Radeon, all of which Matrix alleged was beyond the ambit of the forum selection clause as not“arising out of, or in connection with” their agreement. Radiant successfully brought a motion for as stay of action against it based on the forum selection clause. Matrix appealed. The Court of Appeal of Ontario allowed the appeal.

Writing for the unanimous Court of Appeal, Sharpe, J.A. (Laskin and LaForme, JJ.A. concurring), held that the motions judge had erred in characterizing Matrix’s claims as being contractual in nature and subject to the forum selection clause. Justice Sharpe points out that:

[10] The motion judge did not have the benefit of this court’s decision in Precious Metal Capital Corp. v. Smith 2008 ONCA 577 (CanLII), (2008), 92 O.R. (3d) 701 (“Precious Metal”). Precious Metal dealt with the application of forum selection clauses in a series of agreements to claims for breach of fiduciary duty similar to those advanced in the present case. Writing for the court, Doherty J.A. held that in order to determine whether the claims for breach of fiduciary duty fell within the reach of the forum selection clauses, an important first step was to characterize the nature of the claims as they were in the statement of claim. Doherty J.A., at paras 10-11, agreed with the conclusion of the motion judge that the claims “in pith and substance” centred on a fiduciary relationship and the allegation that two of the defendants “deliberately orchestrated events” to put the plaintiff at a disadvantage and to misappropriate to themselves a commercial opportunity. As the case was “not contractual in substance” but rather about “an allegedly abusive course of conduct by fiduciaries”, the forum selection clauses in those agreements did not apply (Ed: emphasis removed in the original).

Relying on Doherty, J.A.’s contextual approach in Precious Metals,, Sharpe, J.A.further observes that:

[11] Applying a similar analysis to this case, the claims for breach of fiduciary duty and conspiracy advanced in the amended statement of claim cannot fairly be described as “contractual in substance”. As in Precious Metal, they are “in pith and substance” centred on a fiduciary relationship and the allegation that Radiant conspired with and knowingly assisted Naccarato and Markou to breach their fiduciary obligations. The RA is merely part of the factual background that explains the existence and nature of the relationship that existed between Matrix and Radiant prior to the alleged wrongs that form the basis of this action. In my view, the claims for conspiracy and knowing assistance do not arise out of or in connection with the provisions of the RA. The elements of the causes of action asserted do not depend upon the RA, and the RA can be removed from the picture without undermining those claims.

[12] I respectfully disagree with the motion judge’s conclusion that Matrix relied upon the RA in advancing this claim. The motion judge focused on the ambiguous reference to a “breach of a duty of good faith” in paras. 37-38 of the amended statement of claim:

37. Each and all of the defendants have violated the duty of good faith owing to Matrix as a result of the circumstances set out above. 

38. In particular, Naccarato and Markou owed a duty of good faith in the performance of all obligations arising from their employment with Matrix.

The Court of Appeal distinguished a line of authority construing arbitration clauses which held that words such as “relating to”, “respecting”, “in connection with” or “concerning” are expansive terms, and reflect an intention of the parties to embrace claims beyond those that may be brought “under” the contract or that are founded “upon” the contract: (see eg. Mantini v. Smith Lyons LLP 2003 CanLII 20875 (ON C.A.), (2003), 64 O.R. (3d) 505, at para. 19 (C.A.); Woolcock v. Bushert 2004 CanLII 35081 (ON C.A.), (2004), 246 D.L.R. (4th) 139 (“Woolcock”), at para. 22 (Ont. C.A.).) Relying on the Court of Appeal’s earlier decisions in Dalimpex Ltd. v. Janicki, 2003 CanLII 34234 (ON C.A.), (2003), 64 O.R. (3d) 737 at paras. 41-43, and the Alberta Court of Appeal decision in Kaverit Steel and Crane Ltd. v. Kone Corp. 1992 CanLII 2827 (AB C.A.), (1992), 87 D.L.R. (4th) 129 (“Kaverit Steel”), at p. 135, leave to appeal to S.C.C. refused, [1992] 2 S.C.R. vii, Sharpe, J.A. confirmed that the proper test in deciding whether to apply a contractual provision which employs the words “disputes arising out of or in connection with” the parties’ contract is “if either claimant or defendant relies on the existence of a contractual obligation as a necessary element to create the claim, or to defeat it.”

In the learned Justice’s view, the claims for breach of fiduciary duties and conspiracy could not fairly be described as contractual in substance as Matrix’s claims were centred on a fiduciary relationship. The Reseller Agreement was merely part of the factual background, whereas the claims for conspiracy and knowingly assisting breach of fiduciary duties did not arise out of or in connection with provisions of that agreement. As such, Matrix’s claims were sustainable in lieu of any reference to the Reseller Agreement. Similarly, any putative defences arising from provisions in the agreement had no direct bearing on the claims of conspiracy or knowingly assisting breach of fiduciary duties.

The decision in Matrix v. Radiant  hints at a pro-arbitration bias by the Ontario Court of Appeal. In an earlier decision this year in Dancap Productions Inc., v. Key Brand Entertainment, Inc., 2009 ONCA 135 (Ont. C.A.) per Sharpe, Armstrong and Watt JJ.A., , Justice Sharpe reaffirmed the Canadian judiciary’s “deferential approach” to the principle of competence/competence for arbitral jurisdiction.

The issue on appeal was whether the motion judge erred in refusing to grant a stay on account of arbitration and forum selection clauses in one of the contracts entered into by the respondents “Dancap” and the appellants “Key Brand”. Dancap and Key Brand executed a preliminary Term Sheet outlining the general terms of a participation agreement related to Key Brand’s acquisition of theatrical assets, including two Toronto theatres. Dancap was to gain an equity position in Key Brand and membership on its board, which included the right to manage the theatres pursuant to separate management agreements yet to be concluded. The parties also entered into an Additional Rights Agreement (“ARA”) which, inter alia, set out the parties’ agreement to negotiate in good faith towards the conclusion of the management agreements. Following Key Brand’s acquisition of the assets, but prior to the finalization of the management agreements, Key Brand sold the Toronto theatres to the respondent Mirvish Enterprises Limited (“Mirvish”). Dancap immediately threatened proceedings. However, Key Brand won the “race to the courthouse”; a month before Dancap sued in Ontario, Key Branch had already commenced an action in the United States District Court in California for an order compelling Dancap to submit their dispute to arbitration.

The ARA contained an “entire agreement” clause providing that it “supersedes all prior agreements, negotiations and understandings concerning the subject matter hereof” and that it “shall supplement each of the Management Agreements and the Shareholders Agreement of even date”. The entire agreement clause further provided that “if there is a conflict between this Agreement and… the Management Agreements, this Agreement shall control and provide [Dancap] with the additional rights granted… under this Agreement.” [at ¶ 13]. The ARA and Shareholders Agreement both contained an arbitration clause requiring that “[a]ny dispute, controversy or claim arising out of or relating to” the agreement (except for equitable claims) be submitted to arbitration “in accordance with the JAMS International Arbitration Rules. The tribunal will consist of a sole arbitrator.” The ARA and Shareholders Agreement also contained a forum selection clause providing for the exclusive jurisdiction of the state or United States District courts in California. However, the Term Sheet was silent on both arbitration and forum selection.

Key Branch then moved for a stay of the Ontario action based upon art. 8(1) of the UNCITRAL Model Law on International Commercial Arbitration, adopted in Ontario by the International Commercial Arbitration Act, R.S.O. 1990, c. I-9. The motion judge dismissed Key Brand’s motion. Morawetz, J. ruled that Dancap’s claims arose solely under the Term Sheet and not under the ARA and that the arbitration and forum selection clauses did not apply.

The Court of Appeal allowed the appeal and stayed the Ontario action, pending the resolution of the arbitration on the “core issue of whether Key Brand has the right to terminate any management rights to the theatres that Dancap may have obtained under either the Term Sheet or the ARA upon the sale of the theatres.” [at ¶43] Writing for the unanimous Court, Sharpe, J.A., held that:

“[32] It is now well-established in Ontario that the court should refuse to grant a stay under art. 8(1) of the Model Law where it is “arguable” that the dispute falls within the terms of an arbitration agreement. [Dalimpex Ltd. v. Janicki (2003), 64 O.R. (3d) 737 ( C.A. ), at para. 21, Charron J.A. and Hinkson J.A. in Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 66 B.C.L.R. (2d) 113 (B.C.C.A.) internal quotation omitted] . . .

[33] As Charron J.A. explained in Dalimpex, at para. 22, “a deferential approach” allowing the arbitrator to decide whether the dispute is arbitrable, absent a clear case to the contrary, ‘is consistent both with the wording of the legislation and the intention of the parties to review their disputes to arbitration.’”

Justice Sharpe also relied upon the recent Supreme Court of Canada decision in Dell Computer Corp. v. Union des consommateurs, which endorsed the “competence-competence” principle, calling for deference to arbitrators to resolve challenges to their jurisdiction [at ¶34, citing Deschamps, J., [2007] 2 S.C.R. 801 (S.C.C.) at ¶84). The parties consented to the admission of fresh evidence relating to a recent order issued by the District Court in California, which required the parties to submit to arbitration. The Court of Appeal’s deferential approach was not limited to arbitrability. Sharpe, J.A. had no difficulty in extending judicial comity to the U.S. court, without any form of reciprocity requirement, stating:

[36] It may well be that in the United States , courts do not follow the deferential approach to arbitrability set out in Dalimpex and Dell. (I note, however, that in the statement of defence Dancap has filed in the arbitration, Dancap maintains that Key Brand’s claims are not arbitrable and reserves the right to argue the point before the arbitrator as well as before the Ninth Circuit Court of Appeals.)

[37] Whatever the law may be in the United States , I am persuaded that the motion judge erred in ruling on the scope of the arbitration clause rather than leaving the issue to the arbitrator. While the issue of whether the dispute between the parties is covered by the ARA is by no means free from doubt, for the reasons that follow, I conclude that it is at least arguable that the ARA arbitration clause governs the core issue raised in the action. That issue was properly identified by the District Court judge as being whether Key Brand has the right to terminate any management rights to the theatres that Dancap may have obtained under either the Term Sheet or the ARA upon the sale of the theatres to Mirvish.

Antonin I. Pribetic

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