How to Draft Choice of Law and Forum Clauses Part Two: Location, Location, Location – Selecting the Right Forum
When drafting a contract, parties often overlook (and occasionally conflate) two clauses: choice of law and choice of forum. At the time of drafting, the parties may consider it obvious which law applies or which court has jurisdiction. The situation may be much less clear by the time a dispute arises. Both law and forum may substantively affect parties’ rights and remedies.
In the second half of this two-part series, we’ll explore some recently litigated contracts with poorly crafted or absent choice of forum clauses to reveal how courts interpret these contracts. We’re wrapping it up with an overview of how parties to a contract can decide who will adjudicate any disputes that arise.
Choice of Forum
Beyond choice of law, contracting parties need to specify which adjudicative body will settle disputes should one arise. This is known as the choice of forum clause. Parties can choose provincial/territorial courts or arbitral institutions to adjudicate disputes. This election indirectly affects the procedural rules that control the conduct of the resolution process. In this way, parties often ‘shop’ for their preferred combination of law and forum to obtain the best region’s laws, the most advantageous procedural rules, and the most convenient location. For example, electing a local forum may allow a party to more easily obtain counsel familiar with the forum.
Exclusive and Non-exclusive Clauses
In addition to the forum, parties can opt for (a) a mandatory/exclusive forum, whereby all disputes must be sent to this venue; or (b) a permissive/non-exclusive forum, whereby disputes may, but don’t have to be, heard at this listed venue. In the case of Savanta v Hilditch, 2022 ONSC 1384, the choice of forum clause was unclear about whether the forum was exclusive or non-exclusive. The clause stated, “[i]f any dispute arises with respect to this Agreement… the Dispute must be brought in any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts, and each Party irrevocably submits and agrees to attorn to the non-exclusive jurisdiction of such court.” Here, the use of “non-exclusive” created ambiguity.
If the clause was found to be exclusive, then disputes had to be heard by the state or federal court in the Commonwealth of Massachusetts. However, if the clause was found to be non-exclusive, then the court would consider this as one factor in favour of the forum of Massachusetts in its analysis as to the most appropriate jurisdiction. The ONSC concluded the choice of forum clause was non-exclusive because it was the commercially reasonable interpretation, and the language favoured this result. In the B.C. Supreme Court decision, Highline Mushrooms West Limited v 1895742 Alberta Ltd., 2021 BCSC 2464, the Court dealt with the same matter; it found that the clause, “each party shall submit to the jurisdiction, but not exclusive jurisdiction, of the Alberta courts and all appellate courts within its jurisdiction,” meant non-exclusive forum. Therefore, the takeaway is that parties must carefully choose their words when crafting the choice of forum clause to ensure disputes are resolved where intended.
Where Forum is Specified
Courts respect and enforce the choice of forum clauses unless there is strong cause not to. If a party files an action in a forum other than the elected forum, then they will have to make out the strong-cause test to persuade the court in favour of another forum (Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27). Otherwise, as long as the parties aren’t electing foreign forums to contract out of local legislation or forcing other parties to travel across the globe to arbitrate the matter, courts favour the certainty of the contract (Uber Technologies Inc. v. Heller, 2020 SCC 16).
If a party seeks to override the existing choice of forum clause, they bear a significant onus to persuade the court to exercise its discretion and decline jurisdiction (Wang v. Sun, 2014 BCSC 87 at para 52). The courts use the test for forum non conveniens set out in section 11 of the Court Jurisdiction and Proceedings Transfer Act, SBC 2003 c 28 (“CJPTA”). A court must consider the CJPTA factors, as well as those factors in JTC Management Services Ltd. v Bank of Nanjing Co., 2015 BCCA 200, to determine the more appropriate, fairer, and better-positioned forum to hear the proceeding. The CJPTA factors include:
(a) the comparative convenience and expense for the parties to the proceeding and their witnesses, in litigating in the court or any alternative forum;
(b) the law to be applied to issues in the proceeding;
(c) the desirability of avoiding multiplicity of legal proceedings;
(d) the desirability of avoiding conflicting decisions in different courts;
(e) the enforcement of an eventual judgment; and
(f) the fair and efficient working of the Canadian legal system as a whole (section 11(2)).
The Court in Dollinger v. Starke, 2020 BCSC 1574 recently dealt with this issue. The contract’s choice of law clause engaged the law of Ontario, and the Court found, in the absence of a choice of forum clause, that BC had jurisdiction. The defendant sought to stay the action on the basis that B.C. was a forum non conveniens and was not the most appropriate forum for resolution.
The Court explored the above CPJTA factors to make its determination. First, the Court looked at the laws of contracts of the different jurisdictions and found the laws of contracts for B.C. and Ontario were essentially the same. Next, the Court considered whether there were any concurrent proceedings on this matter outside of B.C. and found none. Lastly, because the plaintiff and defendant resided in B.C. at the time of the proceedings, the Court found the expenses and convenience factors weighed in favour of B.C. exercising jurisdiction. Likewise, in the 2021 decision in Bouchard v Facility Condition Assessment Portfolio Experts Ontario Ltd., the Court placed considerable weight on convenience and expenses, specifically where the trial was to proceed during the pandemic. These cases reinforce the notion that parties must be diligent when drafting contracts because the factors can lead to different forums at different times throughout the contract’s lifespan.
Where No Forum is Specified
Where parties fail to elect a forum, the starting point is that plaintiffs have a prima facie right to proceed in their chosen forum. The plaintiff must show a real and substantial connection between the circumstances giving rise to the claim and the jurisdiction where the claim is brought. The court will make two inquiries: (1) whether there is a recognized presumptive connecting factor and (2) if so, whether the party challenging the assumption of jurisdiction has successfully rebutted the presumption.
Beginning with the first inquiry, the court explores the following non-exhaustive, identified presumptive connecting factors:
- Where the parties reside;
- Where the defendant carries on business;
- Where the alleged wrongdoing occurred; and
- Where the agreement was made.
If a presumptive connecting factor is made out, the court explores whether the party challenging the assumption of jurisdiction has successfully rebutted the presumption. Here, the defendant acquires an obligation to prove that the plaintiff’s selected jurisdiction does not point to any real relationship between the subject matter of the litigation and the forum or that it points only to a weak relationship between them (Rooney v. Pure Extraction Ltd., 2021 ONSC 5770 at paragraph 22; Club Resorts Ltd. v. Van Breda, 2012 SCC 17 at paragraphs 81 and 95; and Haaretz.com v. Goldhar, 2018 SCC 28 at paragraphs 42-43).
The two inquiries are exemplified in the recent case of Rooney v. Pure Extraction Ltd., 2021 ONSC 5770 where no forum was specified. In exploring whether there was a presumptive connecting factor, the ONSC looked at where the contract was made. A contract is made where the offeror receives the notification of the offeree’s acceptance of the offer (Eastern Power Limited v. Azienda Communale Energia and Ambiente, 1999 CanLII 3785 (ONCA)) at paragraph 22. Since the defendant received notice of the plaintiff’s acceptance in Ontario, a contract connected with the dispute was made in Ontario. With a presumptive connecting factor made out, the Court turned to the second inquiry: whether the defendant rebutted the presumption of jurisdiction. The Court found that, although the defendant was incorporated in BC and began a new sales presence outside Ontario a month before the action commenced, the defendant had a continuous sales presence in Ontario for the past three years. For these reasons, the ONSC found the defendant failed to rebut the presumption and concluded the Ontario court had jurisdiction. The effect of the decision is that the plaintiff, not the defendant, could hear the case in their desired jurisdiction. However, if the parties had included a choice of law clause in their agreement, they could have elected a jurisdiction that satisfied both parties and avoided the costly litigation.
Conclusion: Choose the Right Court, or Court Disaster
As evidenced by the case law above, it is a serious hassle for parties to litigate poorly drafted choice of forum clauses. By misusing or including some words, such as “non-exclusive,” parties may accidentally reverse the meaning of their clause. In the absence of clauses, defendants are obligated to rebut presumptive connecting factors and convince the court to exercise discretion and decline forums. Forums can differ enormously, and this materially affects the possible resolutions. For example, in one jurisdiction, an employer can terminate an employee without cause but, in another jurisdiction, the employer cannot and thus would owe significant compensation. Unnecessary frustration can be avoided by thoughtfully drafting choice of forum clauses.
Contracting, like any art, takes time and experience to perfect. You can safeguard your interests by hiring a lawyer to help you draft a contract with choice of law and forum clauses. Remember, the stronger the contract is, the less likely it will be litigated. If you are considering drafting a contract, the experienced team at MT+Co. would be happy to support you in this endeavour. For more information contact Allison Sproule or Myles Brown of our Litigation Group with questions and comments.