Court File and Parties

COURT FILE NO.: CV-17-567429-00 DATE: 20170719 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 2SOURCE MANUFACTURING INC., Plaintiff

AND:

UNITED TECHNOLOGIES CORPORATION, GOODRICH AEROSPACE CANADA LTD., GOODRICH CORPORATION, DINO SOAVE and VERIFY, INC., Defendants

COUNSEL: James Patterson, for the Plaintiff Kirsten Crain, for the Defendants

BEFORE: Monahan, J.

HEARD: June 27, 2017

Endorsement

[1] 2Source Manufacturing Inc. (“2Source”) is an Ontario corporation engaged in the business of manufacturing and supplying aircraft landing gear. It entered into a two-year agreement, effective January 1, 2015, for the supply of aircraft component parts (the “Supply Agreement”), with Goodrich Aerospace Canada Ltd. and Goodrich Corporation (collectively “UTAS”). The Supply Agreement expired in accordance with its terms on December 31, 2016.

[2] 2Source subsequently brought this action in January 2017 alleging that UTAS, United Technologies Corporation (“UTC”), (the parent company of UTAS), and Dino Soave (collectively, the “Defendants”), deliberately misled 2Source into believing that the Supply Agreement would be renewed when that was not their intention and, moreover, that this course of conduct was intended to retaliate against 2Source for certain actions 2Source had taken during the negotiation and performance of the Supply Agreement. 2Source also alleges that the Defendants’ actions were motivated, in part, by a desire to maintain an uninterrupted supply of landing gear parts under the Supply Agreement up until its expiry. 2Source alleges fraudulent misrepresentation, deceit, conspiracy and unlawful interference with economic relations, as well as breach of the Competition Act.

[3] The Defendants argue that a forum selection clause applicable to the Supply Agreement (the “FSC”) bars the 2Source action, in that the FSC requires that these claims be filed in a New York court. They move for summary judgment staying the action.

Facts

[4] In its claim, 2Source alleges that between March and August 2016, the Defendants deceived 2Source into believing that the Supply Agreement would be renewed when, in fact, they had decided to end their relationship with 2Source when the Agreement expired on December 31, 2016. 2Source claims that the Defendants’ actions were motivated by a negative reaction to 2Source’s insistence that the latter’s liability for consequential damages under the Supply Agreement be capped. 2Source also claims that the Defendants were upset with 2Source’s handling of a dispute about the quality assurance inspection process applicable to products supplied by 2Source under the Supply Agreement. They allege that they suffered harm in that they were induced to refrain from seeking alternative business opportunities upon the conclusion of the Supply Agreement.

[5] The Supply Agreement incorporated the September 2013 version of the United Technologies Corporation Standard Terms and Conditions (the “STCP”). The STCP included an Applicable Law and Forum section that provides as follows:

“ Applicable Law and Forum

27.1 The Order shall be interpreted in accordance with the plain English meaning of its terms and the construction thereof shall be governed by the laws in force in the State of New York, USA…without regard to conflicts of law principles…Buyer may, but is not obligated to, bring any action or claim relating to or arising out of the Order in the appropriate court, or arbitration forum, if arbitration is required by law or the Order, in the jurisdiction described above, and Supplier hereby irrevocably consents to personal jurisdiction and venue in any such court…If Supplier or any of its property is entitled to immunity from legal action on the grounds of sovereignty or otherwise, Supplier hereby waives and agrees not to plead such immunity in any legal action arising out of an Order or the Agreement.

27.2 Any action or claim by Supplier with respect hereto shall also be brought in the appropriate court in the jurisdiction described above, if Buyer so elects. Accordingly, Supplier shall give written notice to Buyer of any such intended action or claim, including the intended venue thereof, and shall not commence such action or claim outside of such jurisdiction if Buyer, within thirty (30) days from receipt thereof, makes its election as aforesaid…”

[6] The STCP also included definitions of “Order”, “Agreement” and “Buyer” as follows:

“2.14 “Order” means a paper or electronic document sent by Buyer to Supplier, or where provided for in an Agreement, an entry on a Buyer web site, to initiate the ordering of Goods or Services, such as a purchase order, a scheduling agreement, or other authorization or Order, and including change notices, supplements or modifications thereto. The phrase “in connection with the Order” includes performance of the Order, performance in anticipation of the Order, and preparation of a bid or proposal for the Order. Where the context permits, the term Order includes Agreement.

2.2 “Agreement” means the master terms agreement, long term agreement, subcontract, or other agreement that references these terms and conditions, and pursuant to which Orders are issued to Supplier.

2.3 “Buyer” means United Technologies Corporation (“UTC”) or the UTC Affiliate that issues an Order referencing these Terms and Conditions, and any successor or assignee of Buyer.”

[7] Goodrich Aerospace Canada Ltd. and Goodrich Corporation are “UTC Affiliates” within the meaning of the STCP.

[8] On August 23, 2016, UTAS advised 2Source by letter that it would not be renewing the Supply Agreement.

[9] On January 4, 2017, in response to a threat from 2Source to commence the current legal action, counsel for the Defendants advised 2Source that it was relying on the FSC and that it would not consent to litigation being filed in any forum other than New York State. Notwithstanding that notice, 2Source commenced this action on January 10, 2017.

[10] On January 31, 2017, counsel for the Defendants advised 2Source that the current motion for a stay based on the FSC would be brought.

Motion for Summary Judgment

[11] As the Supreme Court of Canada has explained in Hryniak v. Mauldin, 2014 SCC 7, there is no genuine issue for trial when the motions judge is able to reach a fair and just determination on the merits. This will be the case when the process: (i) allows the judge to make the necessary findings of fact; (ii) allows the judge to apply the law to the facts; and (iii) is a proportionate, more expeditious and less expensive means to achieve a just result.

[12] Here the motion for summary judgment engages the interpretation of the FSC in light of facts that are uncontested. As such it is an appropriate case for determination on a summary judgment motion.

Legal Principles Applicable to Forum Selection Clauses

[13] The leading authority on the interpretation and enforceability of forum selection clauses, at least in the commercial context, remains that of the Supreme Court of Canada in Z.I. Pompey Industries v. ECU-Line N.V., 2003 SCC 27 (“Pompey”). Justice Bastarache for a unanimous Court noted that forum selection clauses are common components of international commercial transactions and that such clauses “have been applied for ages” by the courts. They are “generally to be encouraged by the courts as they create certainty and security in transactions, derivatives of order and fairness, which are critical components of private international law.” Pompey at paragraph 20. The enforceability of such clauses reflects the desirability that “parties honour their contractual commitments and is consistent with the principles of order and fairness at the heart of private international law.” Pompey at paragraph 27. Moreover the certainty that flows from enforcing forum selection clauses reduces litigation risk, which generates savings that can be passed on to consumers. Douez v. Facebook Inc., 2017 SCC 33 at paragraph 160.

[14] This framework applies even if the contract is in standard form, since such agreements are typically entered into by sophisticated parties who could have attempted to negotiate such terms and should in normal circumstances be held to their bargain. Pompey at paragraphs 28-29; Facebook at paragraph 148 (per the Chief Justice and Coté J., dissenting, although not on this point.)

[15] Pompey directs a two stage analysis with respect to forum selection clauses. First, the court must determine whether the forum selection clause is enforceable and applies to the circumstances. Second, the court must assess whether there is a “strong cause” in favour of denying a stay, despite an enforceable forum selection clause. Pompey at paragraph 39; Expedition Helicopters Inc. v. Honeywell Inc., 2010 ONCA 351 and “Expedition Helicopters”.

[16] Although 2Source advanced arguments against the enforceability and/or applicability of the FSC under both stages of the Pompey test, in argument counsel candidly acknowledged that he was relying primarily on the first stage of Pompey. In particular, counsel for 2Source argues that the FSC is ambiguous and is not framed in sufficiently broad terms to bar the claims advanced by 2Source, which are based on the Defendants’ allegedly tortious conduct as well as breach of the Competition Act.

[17] 2Source relies particularly on the decision of the Court of Appeal in Matrix Integrated Solutions Ltd. v. Naccarato et al., 2009 ONCA 593 (“Matrix”), where the Court allowed claims for conspiracy and breach of fiduciary duty to proceed despite a forum selection clause which gave Texas courts exclusive jurisdiction over all disputes that “may arise out of, or in connection with this Agreement.” The Court of Appeal held that the agreement in that case was “merely part of the factual background” to the claim, which did not depend upon the agreement. Justice Sharpe held that the application of the forum selection clause turned on whether the claims advanced were “contractual in substance”: Matrix at paragraph 11.

“…[T]he claims for breach of fiduciary duty and conspiracy advanced in the amended statement of claim cannot fairly be described as “contractual in substance”….they are “in pith and substance” centered on a fiduciary relationship with the allegation that Radiant conspired with and knowingly assisted Naccarato and Markou to breach their fiduciary obligations. The RA [Reseller Agreement] is merely part of the factual background that explains the existence and nature of the relationship that existed between Matrix and Radiant prior to the alleged wrongs that form the basis of this action. In my view, the claims for conspiracy and knowing assistance do not arise out of or in connection with the provisions of the RA. The elements of the causes of action asserted do not depend upon the RA, and the RA can be removed from the picture without undermining those claims.”

[18] Similarly, 2Source alleges, the claims advanced in the present case are not “contractual in substance” as they result from the allegedly tortious conduct of the Defendants. As such they do not “relate to” the Supply Agreement and would exist even if the Supply Agreement had never been made. Accordingly, the FSC is no bar to the commencement of this proceeding in Ontario.

Pompey Stage One: Meaning and Scope of the FSC

[19] It is settled law that the interpretation of contractual provisions should be consistent with the expectations of the parties as well as commercial reality: Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37 (“Ledcor”) at paragraph 63. Courts should avoid interpretations that bring about unrealistic results or results that the parties would not have contemplated in the commercial atmosphere in which they negotiated the contract. Ledcor at paragraph 78.

[20] Applying these broad principles to the FSC, I begin with the observation that it is in two parts; section 27.1 applies to claims brought by the Buyer, while s.27.2 applies to claims brought by a Supplier. Although this proceeding is brought by 2Source as a supplier, and thus is governed by s.27.2, the proper meaning of s.27.2 can be discerned only by reading it in the context of 27.1.

[21] Section 27.1 is far from a model of clarity in drafting. Section 27.1 primarily refers to claims “relating to or arising out the Order”. An “Order” is defined in s.2.14 as a document “to initiate the ordering of Goods and Services” and the phrase “in connection with the Order” includes “performance of the Order, performance in anticipation of the Order, and preparation of a bid or proposal for the Order.”

[22] It is evident that the claims in this proceeding do not relate to or arise out of an “Order” in the narrow sense of a document “to initiate the ordering of Goods and Services”. However, as noted above, s.2.14 also provides that “where the context permits, the term Order includes Agreement.” This gives rise to the possibility that s.27.1 could be read as applying to claims “relating to or arising out of the Agreement.”

[23] Some support for this broader interpretation might be thought to arise from the fact that s.27.1 refers throughout to “the Order”. If s.27.1 was merely intended to apply to the interpretation of, or disputes relating to “an Order” one might have expected to see the use of the indefinite article “an” as opposed to the definite article “the” accompanying references to “Order”.

[24] Further, the final sentence of s.27.1, in dealing with claims of legal immunity by a Supplier, refers to legal actions arising out of “an Order or the Agreement.” The reference to claims arising out of “the Agreement” only makes sense if such claims otherwise fall within the scope of s.27.1. This can only be the case if the earlier references to “The Order” include claims arising out of “the Agreement.”

[25] Finally, commercial reality supports a reading of s.27.1 as encompassing all claims arising from the Agreement. It would make no sense for UTAS to specify that claims regarding “Orders”, a narrow category, must be in New York, while claims relating to the Agreement in general, a broader category, would fall outside the ambit of s.27.1. Moreover this interpretation would give rise to the necessity of distinguishing between claims relating to the “Order” as opposed to those relating to the “Agreement”. This would lead to uncertainty, promote litigation, and increase transactions costs, thereby defeating one of the main purposes of including the FSC in the first place.

[26] On balance, therefore, I interpret s.27.1 as including claims relating to or arising out the Agreement.

[27] That being said, s.27.1 applies only to claims brought by the Buyer. A claim by the Supplier, which is what has occurred here, is governed by s.27.2, which does not use the terms “Order” or “Agreement”. Instead, s.27.2 states that it applies to “any action or claim by Supplier with respect hereto”. The question is what meaning is to be given to the words “with respect hereto”?

[28] The commercially sensible interpretation of the FSC is that ss.27.1 and 27.2 should have the same ambit. There would be no commercial justification for the UTAS to leave itself more exposed to litigation in fora other than New York in respect of claims brought against it under s.27.2, as distinct from claims which it initiates under s.27.1.

[29] I have already noted that s.27.1 applies to claims relating to the Agreement. I therefore further conclude that the phrase “with respect hereto” in s.27.2 should be read as meaning “with respect to the Agreement.”

[30] Counsel for 2Source argued that the terms “with respect to” have been interpreted narrowly, contrasting this phrase with the wording of other forum selection clauses that have used language counsel characterizes as more expansive.

[31] In my view, the legal principles applicable to forum selection clauses, as articulated by the Supreme Court of Canada in Pompey, militate against a technical or formalistic approach to the interpretation of phrases such as “with respect to” or “arising out of” (as found in s.27.1 of the FSC). Courts should ensure that such clauses are read and applied so as to further the reasonable expectations of the parties, promote certainty, and reduce litigation and transaction costs.

[32] With this in mind, I would apply the approach set out by the Court of Appeal in Matrix, where the forum selection clause was held to apply to claims that were “in pith and substance contractual”. Such claims would include, at the very least, (i) claims relating to the formation, performance, or termination of the contract; (ii) claims relating to its interpretation or implementation; or (iii) where the existence of a contractual obligation is a necessary element to found or defeat a claim. Matrix paragraphs 10-18; Novatrax International Inc. v. Hägele Landtechnik GmbH, 2016 ONCA 771 (“Novatrax”) at paragraph 11.

[33] Moreover, it is well established that a party cannot escape the ambit of a forum selection clause by careful drafting. Even though a claim may be framed as one in tort or otherwise, it will nevertheless be subject to a valid forum selection clause in a contract where the subject matter of the claim is in pith and substance contractual. Novatrax at paragraph 15.

[34] In this case, although 2Source has framed its claim in tort or as involving a breach of a statutory provision, it is evident that the claim is in substance contractual. 2Source alleges that the wrongful acts committed by the Defendants were “punishment” for 2Source’s insistence that consequential damages be capped in the Supply Agreement. 2Source also alleges that the Defendants were seeking to retaliate for a dispute over the quality assurance inspection process applicable to products supplied by 2Source pursuant to the Supply Agreement. It alleges that the Defendants’ deceit was designed, in part, to ensure an uninterrupted supply of parts under the Agreement. Indeed, 2Source’s fundamental complaint is that the Defendants fraudulently misrepresented their intention to renew the Agreement. All of these claims and concerns relate directly or indirectly to the performance, termination or renewal of the Supply Agreement and, in that sense, are clearly in pith and substance contractual.

[35] It is evident that these facts are quite different from those considered in Matrix. In that case, the plaintiff Matrix had commenced an action against two former employees who had left the company and were allegedly competing with Matrix, in breach of their fiduciary duty and duty of loyalty. Matrix further claimed that Radiant Hospitality had knowingly assisted the former employees in breaching their fiduciary duties. On these facts, the claim was in substance one for breach of duty and, on this basis, the action could be commenced in Ontario despite a forum selection clause in a contract between Matrix and Radiant.

[36] In contrast, the claims in this case all arose during the performance of the contract, and relate directly or indirectly to its performance, termination or renewal. 2Source cannot escape the application of the FSC by framing what are in substance contractual claims as being ones in tort or for breach of a statutory duty. Moreover, the fact that they have also claimed against Soave, who is not a party to the contract, does not preclude the application of the FSC where the claim against Soave arises out of the same transactions and occurrences and raises common questions of fact and law. Novatrax at paragraph 21.

[37] I conclude that the FSC is valid and enforceable and that it applies to the claim by 2Source.

Pompey Stage 2: “Strong Cause”?

[38] Once it has been determined that there is an enforceable forum selection clause that is applicable to the action in question, the burden then shifts to the plaintiff to demonstrate “strong cause” as to why the court should decline to give effect to the clause. The Court of Appeal has held that the factors that may justify a departure from the general principle that forum selection clauses are to be enforced are “few”:

“The factors that may justify departure from that general principle are few. The few factors that might be considered include the plaintiff was induced to agree to the clause by fraud or improper inducement or the contract is otherwise unenforceable, the court in the selected forum does not accept jurisdiction or otherwise is unable to deal with the claim, the claim or the circumstances that have arisen are outside of what was reasonably contemplated by the parties when they agreed to the clause, the plaintiff can no longer expect a fair trial in the selected forum due to subsequent events that could not have been reasonably anticipated, or enforcing the clause in the particular case would frustrate some clear public policy. Apart from circumstances such as these a forum selection clause in a commercial contract should be enforced. Expedition Helicopters at paragraph 24.

[39] There is no reason why 2Source should not be held to its bargain. It has not alleged that it was induced to agree to the FSC by fraud or some improper inducement, or that the initial Supply Agreement is otherwise unenforceable. It has not provided any evidence that the State of New York does not accept jurisdiction or is otherwise unable to deal with the claim, or that it could not receive a fair trial in New York. Moreover, a dispute over the renewal of the Supply Agreement is the very sort of dispute that would have been reasonably contemplated by the parties when they agreed to the FSC.

[40] 2Source does not avoid the FSC by pleading a statutory cause of action under the Competition Act. The interpretation and application of the Competition Act claim advanced by 2Source would be entirely straight forward for a New York court. There is no suggestion that a New York court would refuse to apply Canadian law and the facts pleaded in support of the Competition Act claim are materially identical to the facts pleaded in support of the other causes of action it advances. The legal elements of the Competition Act claim substantially overlap with the legal elements of several of the other claims. The damages associated with the Competition Act claim are the same general damages 2Source claims in respect of all of its causes of action.

[41] If 2Source wished to have the option of bringing this claim in Ontario it could have negotiated this term of the Supply Agreement. 2Source was a sophisticated commercial party and the Supply Agreement included a number of other negotiated modifications to UTAS’ standard terms, including the provision capping consequential damages.

Conclusion

[42] 2Source seeks to use the Supply Agreement as the factual basis for its allegations while at the same time ignoring the FSC contained in the Supply Agreement. The FSC is clearly applicable to the claims advanced and 2Source has not shown any cause as to why it should not be held to its bargain. It has also not demonstrated any prejudice that will result from it bringing this claim in New York as per the terms of the Supply Agreement.

[43] For the foregoing reasons, I would order a stay of proceedings pursuant to section 106 of the Courts of Justice Act and grant the applicants their costs of this proceeding on a partial indemnity basis, payable within 30 days. If the parties are unable to agree on the quantum of costs, I will receive submissions in writing of up to three (3) pages excluding any bills of costs or offer to settle, three (3) weeks from today’s date.

Monahan, J. Date: July 19, 2017