Enforcing Forum Selection Clauses – How to avoid litigating where you litigate
November 14, 2016 Read Time: 3 minutes
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Many commercial contracts contain a “forum selection clause”. This sets out the court and country that will have jurisdiction over any litigation that may result from a contractual dispute. If a party commences a legal proceeding in a different forum than the one set out in the contract, the other party may attempt to stay the proceedings and enforce the forum selection clause.

The Supreme Court of Canada set out the proper test for a stay of proceedings in Z.I. Pompey Industrie v ECU-Line N.V. A party seeking to avoid the forum selection clause must demonstrate that there is “strong cause” to litigate in another forum. The Supreme Court found that parties should be held to their bargain, and the party seeking to set aside a forum selection clause bears the burden of demonstrating that it would not be reasonable or just in the circumstances to require that party to litigate in the agreed forum.

The Ontario courts have embraced this standard. Parties to a commercial contract who wish to set aside a forum selection clause must meet a high bar. The Ontario Court of Appeal in Expedition Helicopters Inc v Honeywell Inc., found that the law favours the enforcement of forum selection clauses. A departure from this presumption is only justified in “exceptional circumstances.” The Court of Appeal listed the following non-exhaustive factors that may justify overturning the choice of the parties:

  1. Fraud or improper inducement;
  2. The contract is otherwise unenforceable;
  3. The court of the selected forum declines jurisdiction or is otherwise unable to deal with the claim;
  4. The claim or circumstances arise outside of what was reasonably contemplated by the parties; or
  5. Public policy.

In CP Ships Ltd v. Icecorp Logistics Inc., the Ontario Superior Court of Justice stated that these factors “…underscore the degree of seriousness which must be found to justify the court in overriding the choice of the parties.” In this decision, the “strong cause” standard was again employed to determine if the forum selection clause in a share purchase agreement should be enforced. The share purchase agreement stated that the local courts of Hannover, Germany were the courts of competent jurisdiction. Justice Dunphy found that none of the five factors listed above were present, and that the dispute was precisely the type that the parties ought to have considered when they entered into the agreement. As a result, there was no “strong cause” or “extraordinary circumstances” to justify overruling the forum selected by the parties. The court found that “…the parties with their eyes wide-open selected German law and Hannover courts to govern disputes under the Guarantee of those very obligations. In signing that agreement, Icecorp knew and understood that any claims under the [agreement] would be heard in Germany”.

The courts are generally deferential to a party’s freedom to contract. Given the reticence of the courts to set aside a forum selection clause, parties to a commercial contract should seriously turn their minds to the jurisdiction that will govern contractual disputes when negotiating. Failure to do so may result in a party having to litigate or arbitrate in a foreign jurisdiction, where they may be unfamiliar with the practice and procedure. While the freedom to contract provides parties with numerous options and opportunities, a party should take care to ensure the forum selected is a logical one within the context of the commercial contract, in order to avoid litigating the selected forum prior to litigating the actual contractual dispute.

For more information about forum selection clauses, contact Nelligan O’Brien Payne’s Commercial Litigation Group.

[This article was originally published on November 14, 2016 in Ottawa Business Journal]

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2020 Nelligan O’Brien Payne LLP.

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