CANADA: an interesting case law on distributorship contracts.

André BÉGIN | CANADA | 2012-11-15

André BÉGIN

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Abstract

This case concerns an action in warranty taken by a Quebec importer, sued by his buyer, against the German manufacturer. The Supreme Court of Canada unanimously overturned a decision of the Quebec Court of Appeal, which had maintained a decision of the Superior Court dismissing an application by the German manufacturer to enforce a choice of forum clause under which the parties had attributed jurisdiction to the German courts

The principles of this case, which have since been applied by the courts of the province of Quebec, are relevant to distribution contracts insofar as how an election of forum in a distribution contract could be interpreted if the manufacturer is called into warranty by his distributor who has been sued by the end purchaser due to a defect in the product. This decision is favourable to the foreign manufacturer where such a clause exists in a distribution contract with a Quebec distributor. However, care should be taken in drafting the clause to ensure it will be maintained, in that such clauses must be mandatory and clearly grant exclusive jurisdiction to the foreign tribunal.

Legal provisions

The Civil Code of Quebec (‘CCQ’) sets out when the Quebec courts have jurisdiction in cases where one or more parties to a lawsuit are in different jurisdictions (for example, where the defendant is domiciled or resides in Quebec(2), and where a fault or damage has taken place in Quebec(3) ).

If a Quebec court has jurisdiction in a principal demand, it also has jurisdiction on any incidental dispute (such as a distributor calling a manufacturer into warranty) or a cross-demand.(4)

Since its reform in 1992, the CCQ recognizes contractual clauses whereunder parties have chosen a foreign tribunal or arbitrator to hear any dispute that may arise between them. Hence, where a contract contains such a valid clause, the Quebec courts have no jurisdiction, unless the defendant submits to the jurisdiction of the Québec authority.(5) However, such clauses must imperatively and irrevocably oblige the parties to take an action exclusively before that tribunal designated in the clause.

Since the reform, the CCQ has also codified the forum non conveniens doctrine. Where a Quebec court does have jurisdiction, it may exceptionally decline jurisdiction if it considers a foreign tribunal to be in a better position to decide the case.(6) Similarly, where the court does not have jurisdiction, it may accept jurisdiction to hear a dispute provided there is a sufficient connection with Quebec and where it is impossible to institute proceedings outside of Quebec or same cannot reasonably be required.(7)

Background

The Defendant, J.R. Normand inc. (‘Normand’), in the business of selling and servicing industrial woodworking machinery, tools and supplies, entered into a contract for the supply and delivery of equipment with the Plaintiff, Scierie Thomas-Louis Tremblay inc. (‘Tremblay’), who operated a sawmill. Both these parties were Quebec corporations. Normand then entered into a contract with GreCon Dimter inc. (‘GreCon’), a German corporation in the business of manufacturing and selling specialized equipment for sawmills, to purchase the equipment which would be resold to Tremblay. The contract stated that German law would apply, and that any disputes would be submitted to the courts of Alfeld, Germany, to the exclusion of the courts of any other state or country. GreCon failed to deliver the equipment within the agreed delay. When Normand was sued by Tremblay for damages due to the non-delivery, GreCon was called into warranty by Normand. GreCon filed a motion to dismiss the action in warranty on the ground that the parties’ choice of forum denied the Quebec courts any competence.

Superior Court (8)

In the first instance, the Superior Court ruled that, in an incidental action in warranty, an election of a foreign tribunal could not deny the Quebec courts jurisdiction where the Quebec courts had jurisdiction on the principal demand. In addition, the Court was of the view that it was also in the interest of the parties that the incidental demand be heard by the same tribunal that would hear the principal action, notwithstanding the election of forum clause.(9)

Court of Appeal(10)

The Court of Appeal dismissed the appeal, in applying the forum conveniens principle in favour of the Quebec courts. Although the contract between Normand and GreCon was indeed governed by German law, the action in warranty was closely linked to the principal suit because the plaintiff Tremblay intended to demonstrate to the court the damages due to the late delivery and malfunctioning of the equipment. The evidence of damages would coincide in the two cases.(11) The Court of Appeal concluded that all parties would benefit from a combined hearing of the two suits. Furthermore, GreCon had not demonstrated that one and the same foreign tribunal would be preferable or that the German courts were clearly more appropriate than the Quebec courts.(12)

Supreme Court

The Supreme Court concluded that both courts erred in their respective reasoning.

The Court ruled that the autonomy of the parties prevailed over the provisions of Article 3139 CCQ. Although the legislator did expressly set certain limitations to the parties’ freedom to designate a foreign tribunal in certain defined cases (such as in consumer and employment contracts(13) ), this article does not fall among such exceptions. Nothing in Article 3139 suggests any intention that it be mandatory or that it limit the parties’ autonomy.(14)

Further, the codified forum non conveniens rules, whether in accepting or declining jurisdiction, are exceptional ones and are applied only on a suppletive basis. Their application plays a secondary role in the hierarchy of the jurisdiction rules.(15) The forum non conveniens principle can apply only where the jurisdiction of the court has been established, as a court cannot decline an authority it does not have. It cannot be applied when a valid choice of forum clause exists. Therefore the Court of Appeal erred in turning to this doctrine.(16) (Therefore, unlike a court’s declaration not to have jurisdiction under forum non conveniens, which can only be granted on the application of a party, a court may of its own motion declare itself not to have jurisdiction in the presence of a valid forum selection or arbitration clause.)

In light of the hierarchy of the parties’ autonomy and the non-application of the forum non conveniens doctrine, the Supreme Court concluded that the choice of forum clause in the contract between GreCon and Normand should have been enforced.

 

 

Andrè Begin , IDI agency and distribution expert for Canada.

 

 

Notes:

(1) published as [2005] 2 S.C.R. 401/ 2005 SCC 46

(2) Art. 3148(1) CCQ

(3) Art. 3148(3) CCQ

(4) Art. 3139 CCQ

(5) Art. 3148 CCQ, par. 2

(6) Art. 3135 CCQ

(7) Art. 3136 CCQ

(8) 21-02-2003, 200-05-016948-023( published as 2003 R.L. 260 )

(9) Superior Court decision, pars. 20, 34

(10) 12-01-2004, 200-09-004398-035 (published as [2004] R.J.Q. 88)

(11) Court of Appeal decision, pars. 48-49

(12) idem, pars. 53,54

(13) Art. 3149 CCQ

(14) Supreme Court decision, pars. 33 – 37

(15) idem, par. 48

(16) idem, par. 58

 

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