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Choice of Forum Clause Circumvented by Court of Appeal

The Court of Appeal hit the ground running in 2017, having already released 22 decisions as of January 16. This particular case involved an appeal of a failed motion for summary judgment brought by the plaintiff-appellants. At the motion hearing for summary judgment, Justice Edward M. Morgan of the Superior Court found that the Court had no jurisdiction over the dispute due to a “choice of forum clause” as agreed to by both parties, which required that all disputes were to be resolved in the Cayman Islands. The Court of Appeal overturned Justice Morgan’s ruling, granting summary judgment in favour of the plaintiffs, awarding them $1,052,706.31 USD plus interest and legal costs. 

Facts

In this case, the plaintiff-appellants gave to the defendants money to invest on behalf of the plaintiffs into a specific fund. Instead of investing the money as agreed upon, the defendants diverted it to third-party companies associated with the defendants. The plaintiffs’ lawyer sent a letter demanding repayment of the money on October 8, 2015, and when that didn’t work, the plaintiffs initiated a lawsuit on October 30, 2015. A motion for summary judgment was promptly set down.

At the hearing for summary judgment, the defendants argued that the Subscription Agreement—which contained the terms upon which the money in issue was paid to the defendants—contained a “choice of forum clause” dictating that any disagreement would be dealt with by the courts located in the Cayman Islands. Specifically, the choice of forum clause stated:

“…any action or proceeding arising, directly, indirectly, or otherwise, in connection with, out of, related to, or from, this Application Form for Subscription or the purchase of the Participating Shares, or any transaction covered hereby, shall be resolved, whether by arbitration or otherwise, exclusively within the Cayman Islands.”

The motion judge found that the clause did apply to the action, thereby rendering the Ontario courts without jurisdiction to hear the dispute and award remedies. The Court of Appeal, however, found that this action was in essence one for the misappropriation of funds and therefore did not arise out of the Subscription Agreement. As a result, the choice of forum clause did not apply and the Ontario courts did have jurisdiction to hear the case and award remedies.

Our Thoughts

This case serves as a reminder of the importance of properly characterizing the cause of action when initiating a lawsuit. In the plaintiffs’ statement of claim, they characterized their action against the defendants as one of breach of contract. By formulating the action as one for breach of contract, the defendants were granted more opportunity to draft creative arguments about contract interpretation and enforceability. This was not a fatal mistake for the defendants, however, due to the fact that Ontario courts have the power to look beyond the specific cause of action(s) pleaded. This is not to say that pleadings don’t matter, or that courts will “read-in” a cause of action when it is unsupported by the facts. Courts focus on the material facts contained in an initiating procedure and exercise discretion in determining whether any cause(s) of action apply, even if they were not specifically pleaded. This stems from the fact that Ontario Courts are disinclined to bar actions based on purely procedural grounds. Nevertheless, it is always best to draft initiating procedures strategically so as to ensure the cause of action as pleaded gives you the greatest chances of success by giving you the easiest and most straight-forward route to reaching your objective.

W&W Fiberglass Tank Co. Profit Sharing Plan v Bartholomew, 2017 ONCA 4.

The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.