The Perils of Drafting Ineffective Forum Selection Clauses

Today’s decision of the Court of Appeal for Ontario in 2249659 Ontario Ltd. v. Sparkasse Siegen, 2013 ONCA 354 addresses issues pertaining to jurisdiction simpliciter, the effect of forum selection clauses and forum non conveniens.

At first instance, the motion judge held that the Ontario Superior Court of Justice had no jurisdiction, or, alternatively, that Ontario was forum non conveniens.

The defendant/respondent, Thomas Magnete GmbH (“TMG”), a subsidiary of Thomas Holding Deutschland GmbH (“THD”) owned and controlled by the Thomas family from Germany, manufactures and sells solenoids used in the production of automotive transmission systems. The defendant/respondent, Sparkasse Siegen (“Sparkasse”), is TMG’s German banker. The plaintiff/appellant, Rohwedder Canada Inc. (“RCI”), an Ontario company which manufactures and sells automated assembly lines to automotive parts manufacturers, is formerly a wholly-owned subsidiary of Rohwedder A.G., a German company which declared bankruptcy in 2010. The plaintiff/appellant, 2249659 Ontario Ltd., is the parent company which acquired all of the shares of Rohwedder North America, a wholly-owned subsidiary of Rohwedder A.G, but had nothing to do with the underlying litigation.

The dispute arose from negotiations to manufacture solenoids for transmissions between TMG and one of Chrysler’s suppliers. TMG and RCI signed a Confidentiality Agreement covering all of the information “acquired either directly or indirectly in the course of the [assembly line] Project”. Paragraph 10 of the Agreement is a choice of forum clause which read:

Unless otherwise expressly prescribed by law, the sole place of jurisdiction for all disputes arising from this Agreement is Betzdorf, Germany. All disputes arising from or in connection with this Agreement shall be subject to the law of the Federal Republic of Germany.

TMG and RCI eventually entered into an agreement with respect to the purchase and installation of the assembly lines at the Cambridge plant, taking the form of a Purchase Order, which incorporated by reference TMG’s General Business Conditions. The English translation of the General Business Conditions provided to RCI at the time it signed the Agreement included the following two terms:

• If the parties have not agreed otherwise the laws of the Federal Republic of Germany shall exclusively apply.

• The court at the place where the plaintiff is domiciled is Herdorf [Germany].

The English translation of the General Business Conditions was more terse:

• The place of jurisdiction is Betzdorf [Germany].

TMG incorporated Thomas Magnete Canada Inc. (“TMC”) in Ontario, a wholly-controlled subsidiary of TMG. TMG then sought financing from Sparkasse, which agreed to make the loan on condition that TMG be the legal owner of the assembly lines as security for the loan. TMG then asked RCI to substitute its subsidiary TMC for TMG as the purchaser of the assembly lines for tax planning purposes. RCI, however, eventually agreed to allow the substitution of TMC as the purchaser after Sparkasse provided a letter entitled “Confirmation of Project Funding” guaranteeing the loan. A second Purchase Order on identical terms, substituting TMC as the purchaser, was signed by RCI in Markham in January 2008. Neither defendant/respondent was a party to the second Purchase Order.

RCI delivered the assembly lines to the Cambridge, Ontario plant, but the Chrysler suppler went bankrupt. TMC advised RCI that the project was “on hold”, acknowledging RCI was owed money. Thereafter, TMC was wound up resulting in a litigation in Ontario among TMC’s creditors, with RCI eventually succeeding in obtaining the proceeds of the sale of the assembly lines.

RCI then commenced litigation against TMG and Sparkasse with claims sounding in contract and tort (negligent misrepresentation). Rather than plead and rely upon the original Purchase Orders, RCI sued on the subsequent guarantee given to RCI for any amounts not paid by TMC in connection with the manufacture and installation of the assembly lines

Justice Doherty held that the motion judge made three errors on the threshold issue of jurisdiction simpliciter under Club Resorts Ltd. v. Van Breda,2012 SCC 17, [2012] 1 S.C.R. 572.

(1) Contrary to the motion judge’s approach, the existence of a forum selection clause in favour of Germany was not central to the question of jurisdiction simpliciter. Doherty J.A. notes,

[25] A forum selection clause applicable to the relevant litigation identifying a forum other than Ontario as the forum of choice cannot deprive Ontario of jurisdiction simpliciter. A forum selection clause is relevant to whether Ontario should exercise its jurisdiction and not whether Ontario has jurisdiction[1]: see Momentous.ca Corp. v. Canadian American Assn. of Professional Baseball Ltd., 2010 ONCA 722, 103 O.R. (3d) 467, at paras. 33-40, aff’d 2012 SCC 9, [2012] 1 S.C.R. 359. The motion judge should have considered the question of jurisdiction simpliciter before examining the forum selection clauses. Those clauses, even if applicable to this litigation, could not assist in determining jurisdiction simpliciter.

(2) A jurisdictional motion is neither the time nor place to consider the adequacy of the pleadings for the purpose of a trial. That is the function of a Rule 21.01(1)(b) motion: “Any further inquiry into the adequacy of the pleadings had no relevance on the motion challenging the jurisdiction of the Ontario court.” (at para. 28)

(3) The motion judge’s analysis of the contractual relationship incorrectly focussed on the Purchase Orders, rather than the agreement in the form of a guarantee alleged in the Statement of Claim. “In doing so, she failed to consider whether the agreement alleged in the Statement of Claim, as opposed to the Purchase Orders, was entered into in Ontario, thereby providing a presumptive connecting factor that prima facie entitled Ontario to assume jurisdiction simpliciter over the claim.” (at para. 29)

Justice Doherty then considers the three presumptive connecting factors relied upon by RCI:

• the respondents were carrying on business in Ontario;

• the tort of negligent misrepresentation was committed in Ontario; and

• the contracts relied on in the Statement of Claim were made and breached in Ontario.

The learned justice writes:

[31] There is a strong argument that all three factors exist, although any one factor will give rise to a presumption of jurisdiction under the Van Breda analysis. Perhaps the strongest of the three factors relied on by the appellants is its contention that the negligent misrepresentation occurred in Ontario. The tort of negligent misrepresentation occurs where the misinformation is received or acted upon: Cannon v. Funds for Canada Foundation, 2010 ONSC 4517, at para. 52. RCI received the alleged misrepresentations via the email sent to its place of business in Markham, Ontario. Based on this allegation, the tort of negligent misrepresentation occurred in Ontario.

[32] It is arguable that the allegation of a commission of tort in Ontario is enough to give Ontario jurisdiction simpliciter over both the tort claim and the closely related contract claim: see Cannon, at paras. 80-91. I need not decide that issue, as in my view the claim as pleaded also alleges a contract entered into and/ or broken in Ontario.

[33] The representations by the respondents relied on by the appellants as constituting the guarantee of TMC’s indebtedness were made in response to RCI’s offer to substitute TMC as the purchaser if the respondents agreed to provide the guarantees. RCI received notification of the respondents’ acceptance of that offer at its office in Markham. As a general rule, a contract is made where the offeror (RCI) receives notification of the offerees’ (the respondents) acceptance of the offer: Eastern Power Ltd. v. Azienda Communale Energia and Ambiente (1999), 178 D.L.R. (4th) 409 (Ont. C.A.), at paras. 21-22.

[34] On the facts as alleged, the contract RCI relies on in advancing its contract claim was made in Ontario. For the reasons explained in connection with the negligent misrepresentation pleadings, a jurisdiction motion is neither the time nor the place to consider arguments that the allegations in the Statement of Claim are insufficient to establish a contract between RCI on the one hand, and TMG and Sparkasse on the other. “

Justice Doherty then cites Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27, [2003] 1 S.C.R. 450, at para. 20; Expedition Helicopters Inc. v. Honeywell Inc., 2010 ONCA 351, 100 O.R. (3d) 241, concerning the “strong cause” test for forum selection clauses. After noting that the drafting language of either version of the forum selection clause left much to be desired, he concludes:

[45] The motion judge described this clause as providing “that the place of jurisdiction is Herdorf, Germany” (para. 6). I seriously doubt that the clause as worded in the version provided to RCI at the time it entered into the first Purchase Order has the clarity needed to create an effective forum selection clause. The alternate version put forward by the affiant for the respondents on the motion which declares that “the place of jurisdiction is Betzdorf” is clearer and could, in my view, be construed as a forum selection clause applicable to disputes arising out of the Purchase Order.

[47] The commercial interchange leading up to the Purchase Orders and the terms of the Purchase Orders are central features of the factual context in which the appellants’ claims are advanced. The claims are, however, distinct from obligations arising under the Purchase Orders. As counsel for the appellants persuasively argues, the appellants do not seek an interpretation or implementation of any provision of the Purchase Orders. Rather, they seek enforcement of the respondents’ guarantees. Assuming there is a forum selection clause in the Purchase Orders, it does not apply to these claims.

[48] I would add that neither respondent is a party to the second Purchase Order. I do not see how, on their theory of the case, either could enforce the terms of the second Purchase Order.”

Finally, on the discretionary forum non conveniens test, while appellate review is usually deferential, the Court of Appeal also found the motion judge’s analysis wanting:

[53] The motion judge’s erroneous determination that German law would govern the claims was part of her forum non conveniens analysis. That error amounts to an error in law, removing the requirement that this court defer to the motion judge’s decision and requiring this court to make its own assessment of whether Ontario is forum conveniens. In making that assessment, I bear in mind that the respondents have the burden of showing that Ontario is forum non conveniens. To meet that burden, the respondents must demonstrate that fairness to the parties and the efficient resolution of these claims makes Germany clearly a more appropriate forum for resolving these claims than is Ontario: Van Breda, paras. 103-111.

[56] Ultimately, the forum conveniens inquiry comes down to a characterization of the commercial activity giving rise to this litigation. By commercial activity, I include not only the alleged guarantees giving rise to the claims, but also the course of commercial activity that gave rise to the guarantees. That activity was German in the sense that the controlling corporations and the individuals making the decisions on behalf of the controlling corporations operated out of Germany and viewed Germany as the place to litigate disputes arising out of the confidentiality agreement and probably the Purchase Orders.

[57] In another sense, however, the underlying commercial activity is Canadian in that it represents the expansion of German business interests into the automobile parts manufacturing industry in Ontario. Presumably, the Thomas controlled companies saw significant potential business through active participation in that industry in Ontario. The end product of the commercial relationship – the assembly lines – were to be manufactured and installed in Ontario.

[58] At the risk of oversimplifying the situation, the commercial activities that give context to this litigation can be described as business decisions made by Germans in Germany about doing business in Ontario. I think both jurisdictions have meaningful connections to that commercial activity.

[59] The respondents, as the parties seeking a stay based on the argument that Ontario was forum non conveniens, had the onus of showing that a German court was in a better position to fairly and efficiently dispose of this claim than was an Ontario court. I think the respondents demonstrated that Germany was a forum conveniens, but I do not think the respondents demonstrated that Germany was “clearly more appropriate for disposing of the litigation” than was Ontario: see Van Breda, para. 109. The Ontario proceedings should not have been stayed on the basis of forum non conveniens.

Analysis

In my view, the “core of the action” is the contractual relationship relating to the Purchase Orders, without which no guarantee of payment would have arisen. It is arguable that the Confidentiality Agreement also formed part of the factual matrix and contractual nexus. In the end, the respondents should have drafted not only a better choice of forum and choice of law clause, but also an Entire Agreement clause to avoid having a collateral guarantee become the defining jurisdictional ground to assume jurisdiction over the respondents.

Justice Doherty adds an important footnote:

[1] The situation is quite different where the forum selection clause identifies Ontario as the forum of choice. In that situation, the clause arguably gives Ontario jurisdiction through the consent of the parties.

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