Nova Scotia Court Throws a “Curve” on Consent-Based Jurisdiction

Curves International

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The recent Supreme Court of Nova Scotia decision in Curves International, Inc. v. Archibald, 2011 NSSC 217 (CanLII) is an odd jurisdictional motion involving a franchise agreement with a result that throws a curve on consent-based jurisdcition.

The plaintiff, Curves International Inc. [“Curves”], is a Texas corporation incorporated in 1995 with its head office in Waco, Texas, U.S.A., offering a franchise system comprised of nearly 10,000 women’s fitness centres in over five countries.  Curves has been operating in Canada since 1995 and has 563 franchised fitness centres in Canada, including 20 franchises in Nova Scotia, one of which it entered into for a 10 year term with the defendant, Archibald on June 26, 2001 for a Curves for women thirty minute fitness and weight loss system business in “the city limits of Truro in the Province of Nova Scotia, Canada”.  The agreement contained the following provision:

M.        Governing Law and Jurisdiction.  Franchisee agrees that the relationship, rights and obligations of the parties of this Franchise Agreement shall be governed by the internal laws of the state of Texas, except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1051 et seq.) and The Canadian  Trade-Marks Act, (R.S.C. c. T-10) and any provincial or federal legislation governing franchising which now exists or which may become law.  Franchisee agrees that any action arising out of or relating to the relationship, rights, or obligations of the parties herein shall be brought in the Province or in any State or U.S. Federal court of general jurisdiction where Franchisor’s principal business address is then located and Franchisee irrevocably submits to the jurisdiction of such courts and waives any objection it may have to either the jurisdiction or venue of such court.

Curves sued the defendants in Nova Scotia seeking various relief in contract, tort and also sought injunctive relief.  The defendant Archibald moved to dismiss the action relying on the exclusive jurisdiction clause specifying Curves’ principal place of business; namely, Texas. Nova Scotia has yet to enact any franchise legislation similar to Ontario’s Arthur Wishart Act (Franchise Disclosure) 2000, S.O. 2000, c.3 [the “Arthur Wishart Act”].

Applying the “strong cause” test established in TheEleftheria [1969] 2 All E.R. 641 (P.D.A. Division) and approved by the Supreme Court of Canada in  Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27 (CanLII), 2003 SCC 27, Justice Coughlan dismissed the motion and held that Curves had shown “strong cause” why its own asymmetrical franchise agreement containing a forum selection clause  specifying Texas should not be enforced:

[17]         In dealing with an application for a stay pursuant to a forum selection clause, the claim must otherwise be within the jurisdiction of the Nova Scotia court.

[18]         The law with respect to the territorial jurisdiction of Nova Scotia courts has been codified in the Court Jurisdiction and Proceedings Transfer Act, S.N.S. 2003 c. 2.

[19]         In this case, this Court has territorial competence, in that the defendants are resident in or incorporated under the laws of Nova Scotia, and the agreement between Curves and Ms. Archibald relates to contractual obligations to be performed in Nova Scotia, a business carried on in Nova Scotia – a Curves’ franchise in Truro, Nova Scotia; and a claim for an injunction ordering the defendants to refrain from doing something in Nova Scotia – operating a non Curves’ women’s fitness centre in Truro, Nova Scotia.  This proceeding has a real and substantial connection to Nova Scotia.

[20]         Having determined the claim is otherwise within the jurisdiction of the Nova Scotia court, the question arises whether Curves has shown there is a “strong cause” for not granting the stay, taking into account all the circumstances of the case.

Coughlan, J. then proceeds to consider the concurrent claims framed in contract and tort, as well as a claim for injunctive relief, the recognition and enforcement of which which the Supreme Court of Canada has liberalized in Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52 (CanLII), 2006 SCC 52. The motion judge concludes:

[20]         Having determined the claim is otherwise within the jurisdiction of the Nova Scotia court, the question arises whether Curves has shown there is a “strong cause” for not granting the stay, taking into account all the circumstances of the case.

[21]         All defendants are residents of Nova Scotia.  None of the defendants have a real and substantial connection to Texas.  The action relations to activities carried out in Truro, Nova Scotia.  Reviewing the affidavit of Johanne Neal, it appears many of the witnesses will be residents of Nova Scotia or other Canadian provinces.  Consequently, it will be less costly for a trial to take place in Nova Scotia than in Texas.

[29]         If Curves was successful in its action in Texas, it would have to enforce any Texas judgment in Nova Scotia.  The injunction it is seeking involves activity in Nova Scotia and any judgment for damages would have to be recovered from the defendants in Nova Scotia.

[30]         If the matter was tried in Texas, rather than Nova Scotia, it would be much more expensive for the defendants.

[31]         Considering the facts of this case, including the claim for equitable relief and the other factors present, I find Curves has shown there is strong cause why I should exercise my discretion and not dismiss or stay the action.

[32]         I dismiss the motion to dismiss the action for want of jurisdiction.

Frankly, applying the factors under the “strong cause” test perforce to a franchisor which drafted the franchise agreement ignores the inequality of bargaining power between a franchisor and a franchisee. Loss of juridical advantage or fairness considerations are counter-intuitive in situations where a franchisor plaintiff decides to sue in a jurisdiction other than the one it chose to resolve disputes arising under its own franchise agreement.

Moreover, the Nova Scotia court’s interpretation of the wording of the forum selection clause in the franchise agreement, to the effect that Texas law applies to claims “arising out of or relating to the relationship, rights, or obligations of the parties” to the agreement is more restrictive than the approach taken by the Supreme Court of Canada and Ontario and B.C. appeal courts: see  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.); Matrix Integrated Solutions Limited v. Radiant Hospitality Systems Ltd, 2009 ONCA 593 (CanLII); Rudder v. Microsoft Corp. [1999] 47 C.C.L.T. 2d 168 (Ont. SCJ); Sarabia v. Oceanic Mindoro, [1996] 26 B.C.L.R.3d 143 (B.C.C.A.)

By contrast, in Di Stefano v. Energy Automated Systems Inc., 2010 ONSC 493, 2010 CarswellOnt 550 (Ont. SCJ), the defendant, EASI,  seller and distributor of equipment designed to reduce electricity volume consumed in commercial facilities, offered trainees upon completion of a five-day training course at its Tennessee facilities, an opportunity to sign up for its distributorships.

The ten Plaintiffs, all Ontario residents, issued a Statement of Claim in 2008 alleging breaches of the Arthur Wishart Act claiming to have “purchased Energy Automation Systems Inc. [EASI] distributorships, between 2002 and 2003, from the corporate defendant”, ostensibly pursuant to separate but similar contracts with EASI. They all claimed for rescission of the contracts, a refund of the purchase monies, a return and purchase of any remaining inventory and equipment and, a total of $640,000 in general and special damages. The plaintiffs each alleged that the “distributorships” sold to them met the test for a “franchise” under the Arthur Wishart Act and that the defendants failed to make statutorily mandated disclosure and also made various misrepresentations.

The three defendants sought a stay of proceedings pursuant to s.106 of the Courts of Justice Act and/or Rule 17.06(1)(b) of the Ontario Rules of Civil Procedure on the ground that all contracts contained forum selection and governing law clauses specifying Tennessee as the exclusive jurisdiction over any disputes. They also argued for a stay pursuant to Rules 17.06(1)(b) and (2)(c) that Ontario was forum non conveniens and under Rule 21.01(3)(d) that the claim was an abuse of process in that the plaintiffs had previously been unsuccessful litigating essentially the same claims in a Tennessee court.

The eight contracts all contained forum selection and governing law clauses stating that “any claim…shall be brought in Sumner County, Tennessee” or “sole jurisdiction and venue for actions related to the subject matter hereof shall be the State of Tennessee”; and, “this agreement shall be construed and enforced in accordance with laws of the State of Tennessee” or “this agreement is governed by Tennessee law”.

The motion was granted and the plaintiffs’ action was stayed. Code, J. concluded that the agreement in question was not a “franchise agreement” based upon the three-part test found in s.1 of the Arthur Wishart Act which reads:

(i) “the franchisee is required by contract…to make a payment or continuing payments…to the franchisor…as a condition of acquiring the franchise or commencing operations”;

(ii) “the franchisor grants the franchisee the right to sell…goods or services that are substantially associated with the franchisor’s…trademark”;

(iii) “the franchisor…exercises significant control over, or offers significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training”.

The Arthur Wishart Act contains a statutory exception for “franchise agreements” which negates choice of forum and choice of law clauses by providing in ss.10 and 11 as follows:

Any provision in a franchise agreement purporting to restrict the application of the law of Ontario or to restrict jurisdiction or venue to a forum outside Ontario is void with respect to a claim otherwise enforceable under this Act in Ontario.

Any purported waiver or release by a franchisee of a right given under this Act or of an obligation or requirement imposed on a franchisor or franchisor’s associate by or under this Act is void.

At paragraph 23, Justice Code notes:

23 …s.10 of the Arthur Wishart Act only applies if the contract with EASI is “a franchise agreement”. This is the central issue in the Plaintiffs’ law suit. In deciding whether s.10 does or does not apply, on this preliminary Motion, the Court would effectively be deciding a central issue relating to the merits of the claim. The Plaintiffs submit that the Court must take the facts relating to the merits as pleaded, as if this was a Rule 21.01(1)(b) Motion. The Defendants submit that the merits may be considered on Rule 17 motions and that the test is whether the Plaintiff has a “good arguable case”.

With respect to the “strong cause” test, Justice Code reasoning focuses on the issue of applicable law and the parallel Tennessee litigation, outlined in the affidavit filed by EASI’s U.S. counsel, who deposed that:

• “No court, regulatory agency or state has ever found that EASI is a franchise [under U.S. Law]”;

• The relevant U.S. federal authorities (the Federal Trade Commission) have “never taken the position that EASI was a ‘franchise’ under federal law”;

• The Tennessee litigation between EASI and Hunsberger was commenced in 2003 by EASI, alleging various torts and breaches of contract. Hunsberger responded in 2004 with a Counter-claim alleging fraud, breach of contract and violation of the Tennessee Consumer Protection Act. The litigation continued for a number of years with Hunsberger never disputing the jurisdiction of the Tennessee courts. In 2007, EASI obtained judgment against Hunsberger for “breach of contract, interference with business relations and misappropriation of confidential and proprietory information”. EASI was awarded damages of $119,625, its costs and a permanent injunction prohibiting Hunsberger from making “defamatory comments” and using “misappropriated” information. The Tennessee judgment for damages and costs totalling $194,766.51 was made a judgment of the Ontario Superior Court of Justice on July 25, 2008;

• The Plaintiff Hunsberger “has already received restitution in the full amount of the dealership fee he paid to EASI” as a result of the agreement reached in 2008 with the Tennessee Attorney General;

• The ruling in the Briggs case, relied on by the Plaintiffs, was clarified in a subsequent ruling in which the Court stated: “In ruling on summary judgment, the Court did not make a factual finding that the relationship between EASI and Plaintiffs constitutes a franchise”. The earlier ruling simply allowed the Plaintiffs to have the issue of whether EASI was subject to the U.S. federal “Franchise Rule” put to the trier of fact. The judge so instructed the jury and the jury then found in favour of EASI.”

With respect to forum non conveniens, Code, J. cites Young v. Tyco International of Canada Ltd. et al (2008), 92 O.R. (3d) 161 at paras. 31-34 (C.A.), where Laskin J.A. (for the majority) stated:

“But, on some motions — and this is one of them — the efficiency and fairness considerations at the heart of the forum non conveniens test will be tied inextricably to the factual issues in dispute. On these motions, the motion judge will have no choice but to address the competing versions put forward by the parties. In doing so, the motion judge should accept the plaintiff’s version as long as it has a reasonable basis in the record. Accepting the plaintiff’s version where warranted should not inhibit the motion judge from assessing all the evidence in the record and finding facts regarding the forum non conveniens factors themselves. Where the evidence is disputed the party relying on a fact supporting the application of a factor in its favour will bear the evidential burden of establishing that fact: see Frymer v. Brettschneider (1994), 19 O.R. (3d) 60, [1994] O.J. No. 1411 (C.A.), at para.60.

However, the important point is that at this preliminary stage of the action, the motion judge’s assessment and weighing of the forum non conveniens factors should be based on the plaintiff’s claim if it has a reasonable basis in the record, not on the defendant’s defence to that claim. This approach makes sense to me because the ultimate question is whether an Ontario court should take jurisdiction over the plaintiff’s claim. (emphasis added) Also see: Incorporated Broadcasters Ltd. v. Canwest Global Communications Corp. (2003), 63 O.R. (3d) 431 (C.A.); Epoxy Solutions Inc. v. Polymer Science Corp., [2009] O.J. No. 3715 (S.C.J.); Banro Corp. v. Editions Ecosociete Inc., [2009] O.J. No. 733 (S.C.J.).”

Later on in the reasons, Justice Code eschews the applicable law altogether in his forum non conveniens analysis, stating:

“31 Three of the seven factors clearly favour Tennessee as the more appropriate forum, three factors are neutral and one factor is either neutral or it marginally favours Tennessee. None of the factors favour Ontario and the overwhelming weight of the factors in this discretionary balance favour Tennessee. It is therefore unnecessary to consider the second factor, concerning the applicable law of the contract, as it overlaps with the merits. The Court of Appeal, in Young v. Tyco, supra, recommended this approach where feasible.” [emphasis added]

However, in Z.I. Pompey Industrie v. ECU-Line N.V., [2003] 1 S.C.R. 450, 2003 SCC 27, 224 D.L.R. (4th) 577, at para. 19 Bastarache J.writing for the unanimous Court notes:

“The key difference between the forum non conveniens and “strong cause” tests is that “the presence of a forum selection clause […] is sufficiently important to warrant a different test, one where the starting point is that the parties should be held to their bargain”.

Code, J. recognizes the circularity in the conflict of laws analysis, when he writes,

22 Section 10 of the Arthur Wishart Act, relied on by the Plaintiffs, is a provision like s.46 of the Marine Liability Act. It has the effect of statutorily limiting the forum selection clause in Ontario “franchise” contracts. Accordingly, the Defendants have the burden of establishing on this Motion “that the clause applies” and that s.10 does not apply. In effect, there is a preliminary question of law that has to be decided before the traditional forum conveniens factors and the “strong cause” test can be considered. I am entitled to receive affidavit evidence in order to determine this preliminary question of law. However, the difficulty in this regard is that the preliminary question of law is closely tied up with the merits of the Plaintiffs’ claim. [emphasis added]

Some lingering questions:
(1) why is an English case originally about a bill of lading still the precedent for  consent-based jurisdiction in Ontario?
(2) Is the “strong cause” test appropriate for franchise disputes?
(3) how many tests with multiple factors are really necessary? 
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