Case Comments 1998

8. Choice of Law in Contract

Holo-Deck Adventures Ltd v Orbotron Inc
(1996) 8 CPC (4th) 376 (Ont Gen Div)

MOLLOY J.:-- The defendants Orbotron Inc. and Altare Advanced Technology Inc. are companies incorporated in California. They bring this motion for an order setting aside service of the statement of claim upon them or, in the alternative, for a stay of this proceeding on the basis that Ontario is not the convenient forum. The defendant Daniel Novak has not been served with the statement of claim.

The defendants carry on business in California as suppliers of virtual reality systems. The plaintiff is an Ontario company which distributes virtual reality systems in Canada. While at a 1994 trade show in Florida, David Berger(the plaintiffs president) saw a demonstration of the-O-Tron, one of the defendants' virtual reality amusement rides. Subsequently, on November 9, 1994, Mr. Berger wrote to Orbotron expressing Holo-Deck's interest in obtaining Canadian distribution rights for the X-O-Tron and possibly including the X-O-Tron in several Paramount Theme Parks in the United states as well. Mr. Berger stated that as a "sign of good faith" he anticipated placing an order for one machine for delivery in the first quarter of 1995 which would be used as a demo unit at Paramount Canada's Wonderland, a large amusement park near Toronto. Orbotron responded with a price quotation sent by fax from California on November 21, 1994. Thereafter there were a number of telephone discussions to negotiate the terms of the purchase of one unit. There was also a dinner meeting in Toronto in January 1994 between representatives of the plaintiff and the defendants. Although there is a factual dispute as to the extent to which business was discussed at this dinner, it is clear that there was some discussion and that as a result a new quotation was sent by Orbotron on January, 16, 1995. Further telephone discussions followed and then an amendment to the quotation was faxed by Orbotron from California on January 30, 1995. Ultimately terms were agree upon for the purchase of one X-O-Tron machine and in March 1995 Holo-Deck placed an order by telephone.

The agreement required payment of a portion of the purchase price at the time of the order, with the balance to be paid into Orbotron's bank account in California before the goods were shipped. The agreement also stipulated that the goods would be F.O.B. San Diego, California.

Orbotron produced in its motion materials a document entitled Order Acknowledgment dated March 6, 1995 to which was attached a second page setting out a number of standard form terms and conditions. One of those terms provides:

California Law Governs: Customer agrees and hereby acknowledges that this agreement is made and entered into in the State of California and shall in all respects be interpreted, enforced and governed under the laws of California. The language and all parts of this agreement shall be construed as a whole, according to its fair meaning. Should an action be necessary to enforce the terms of this agreement, then venue for said action shall be Los Angeles, California, U.S.A.

The plaintiff denies ever receiving this document and denies having chosen California as the venue for any action to enforce the contract. Orbotron has no direct proof that the document was sent except that it believes this to be the case because it is their normal practice and official policy, on the advice of their attorney, to fax both pages of the document to the customer.

The plaintiff alleges that when the X-O-Tron arrived at Canada's Wonderland in May 1995, it was defective and missing vital parts. Other allegations of breach of contract are also made. The plaintiff further claims damages for fraudulent, negligent and reckless misrepresentations which it alleges induced the plaintiff to enter into the agreement. Finally, the plaintiff claims damages for loss of profits which it had expected to earn if the X-O-Tron had operated as represented.

The circumstances in which a party may, without a court order, be served outside Ontario with a statement of claim are set out in Rule 17.02. The plaintiff argues that the defendant corporations were properly served outside Ontario in this case because the claim is in respect of: personal property in Ontario (17.02(a)); a contract made in Ontario (17.02(f)(I)); a breach of contract committed in ontario (17.02(f)(iv)); a tort committed in Ontario(17.02(g)); and damage sustained in Ontario arising from a breach of contract or tort wherever committed (17.02)(h)).

Although the machine which was the subject of the contract is now located in Ontario, there is no issue with respect to the ownership or possession of the goods. I therefore do not consider subparagraph (a) to be particularly relevant. Further, although the statement of claim alleges the tort of negligent misrepresentation, there is no affidavit evidence to establish that any of the alleged misrepresentations were actually made in Ontario so as to make subparagraph (g) applicable. The real issues, therefore are whether the contract was made in Ontario, whether it was breached in Ontario, or whether the plaintiff claims damages sustained in Ontario.

The plaintiff is an Ontario company with its head office and financial records here. The X-O-Tron was delivered to Ontario to be used by the plaintiff at an amusement park here. The plaintiff claims as damages the money it paid to purchase the machine, the money it paid to have repairs done in Ontario and the profit it lost because it alleges that the machine did not work properly. All of those financial losses occurred in Ontario. Accordingly, the plaintiff's claim falls within Rule 17.02(h) and the defendants were properly served with process: Skyrotors Ltd. v. Carriere Technical Industries Ltd. (1979), 26 O.R. (2d) 207, 102 D.L.R. (3d) 323, 15 C.P.C.105 (H.C.J.). That being the case, it is not necessary for me to determine whether the contract was formed in Ontario or breached in Ontario although both questions are somewhat related to the forum non conveniens issues referred to below.

A defendant who is properly served with process under Rule 17.02 may nevertheless move for a stay of those proceedings on the basis that Ontario is not a convenient forum for the hearing of the proceeding. Although such amotion is specifically authorized by Rule 17.06, the full scope of the principles to be applied flows from the jurisprudence relating to forum non conveniens which has developed over the years and is not limited by the wording of the Rule itself: Frymer v. Brettschneider (1994), 19 O.R.(3d) 60 at 84 (C.A.). If a defendant is sued in a jurisdiction in which he resides, he may apply to stay the proceeding on the grounds of forum non conveniens, in which event he will bear the onus of establishing that there"clearly is a more appropriate jurisdiction than the domestic forum chosen by the plaintiff": Frymer v. Brettschneider, supra, at 79 and 84-85. If the defendant seeking a stay does not reside in Ontario but has been properly served ex juris, the essential test remains the same in that the question to be answered is whether there is a more appropriate forum based on the relevant factors: Amchem Products Inc. v. British Columbia (Workers' Compensation Board), [1993] 1 S.C.R. 897 at 919-920. In both cases the court must determine which jurisdiction "has the closest connection with the action and the parties": Frymer v. Brettschneider, supra, at 79.However, in a situation in which the plaintiff has brought proceedings in Ontario against a foreign defendant, the onus is on the plaintiff to establish that Ontario is the more convenient forum: Frymer v. Brettschneider, supra, at 84-85.

In the case before me, the moving party defendants are foreign corporations and do not carry on business in Ontario. Therefore, the onus is on the plaintiff to show that Ontario is the convenient forum. In particular, there being only two jurisdictions with real or substantial connections to the dispute, it is for the plaintiff to prove that Ontario is a more convenient forum than California.

Where parties have agreed in advance on the appropriate forum for the enforcement of their contract, the court will not lightly overrule that choice, particularly where the forum chosen has a substantial connection to the matters in issue: Mithras Management Ltd. v. New Visions Entertainment Corp. (1992), 90 D.L.R. (4th) 726 (Ont. Gen.Div.). In this case, both California and Ontario have a substantial connection to the issues. Therefore, regardless of which has the more substantial connection, I would be loathe to interfere with an agreement between the parties which chose either of those two jurisdictions.

I must therefore consider whether there was any agreement between the parties as to the appropriate forum in which to enforce the contract. There was certainly no such agreement with respect to Ontario. There is also no evidence that the choice of California as the appropriate forum was ever discussed. Accordingly, if there was any agreement, it is entirely based on the two page document which the defendants allege was sent by fax to the plaintiff on March 6,1995. The first page of the document is an invoice and order acknowledgment dated March 6, 1995. It is specific to this contract, is addressed to the plaintiff, and includes the plaintiff's fax number. It states on its face "Page 1". Its date coincides with the timing of the order placed by the plaintiff and the plaintiff acknowledges that the information on this page accurately sets out their agreement. Also, the plaintiff has not specifically denied receiving this part of the document. However, the plaintiff did, by affidavit, deny ever receiving the second page of the document which sets out the defendants' standard form terms and conditions including the choice of forum clause. In response to the plaintiff=s affidavit, the defendants delivered a further affidavit sworn September 27, 1996. In that affidavit, the deponent Chris Altare, a principal of the defendant companies, stated as follows:

4. Despite diligent efforts to locate it, I have unfortunately been unable to find the fax transmission report confirming that pages 1 and 2 of the Order Acknowledgment dated March 6, 1995, exhibit "C" to my affidavit sworn April 18, 1996, were sent. I expect that the fax transmission report has gotten lost either due to either (sic) the passage of time or the move in the fall, 1995 of the administrative offices of the defendants.

5. It was in 1995 and still is the standard practice of the defendants in all cases to send to customers the order acknowledgments, page 1 and the printed terms and conditions on page 2, upon receipt of orders. I have no reason to believe that this practice was not followed in this case. I note that the order acknowledgment, exhibit "C" to my affidavit sworn April 18, 1996, contains the fax number of the plaintiff printed under its address. Based upon the standard office practices of the defendants, I know that this menas(sic) that this particular document was sent by fax to that number on or about the date of the document. Upon the advice of our attorney, it was office policy to always send the printed terms and conditions together with page 1.

There was no cross-examination on the affidavits and no application to call viva voce evidence at trial. Although it is not entirely satisfactory to make factual findings on the basis of the written record alone, particularly where credibility may be a factor, both parties were represented by counsel and have left this issue to be determined based on the record as it exists and I will therefore do so.

The defendants were obviously concerned to structure their business dealings so that California would be the proper forum for the resolution of any disputes. They had legal advice on how to do this, which included sending the standard-form terms and conditions with the acknowledgment of order received. Acceptance by the purchaser was by payment directly into the defendants' California bank account. Delivery to the purchaser was also stipulated to be "free onboard" in California. It appears that the first page of the document was prepared and sent. Although the defendants are unable to find the fax transmission report to show that the second page terms and conditions were also sent to the plaintiff, it is clear that the defendants meant to do so and that it was their usual practice to do so. The loss of the fax report is explained and is not particularly unusual or surprising. Finally, the plaintiff decided not to cross-examine. Taking all of these factors into account, I find it more probable than not that the defendants sent both pages of the document. The plaintiff subsequently accepted the contract by payment into the defendants' bank account. Therefore, in my opinion, the parties have entered into a contract which stipulates California as the forum for its enforcement and I ought to give force to that. If the plaintiff failed to read the terms or conditions or to pay any attention to them, then the consequences of that failure should rest with the plaintiff. I would stay this proceeding solely on the basis of the choice of forum by the parties.

Although my determination with respect to choice of forum in the contract is sufficient to dispose of this motion, I consider it appropriate in the circumstances to rule, in the alternative, on whether Ontario is the more convenient forum without regard to any agreement between the parties as to choice of forum. There was no evidence from either party as to any juridical advantage to either forum. Therefore, the relevant factors to be weighed in the balance include the proper law of the contract, the place where the contract was made, the place where the breach of contract or tort occurred, and the location of witnesses.

The agreement was negotiated by correspondence and telephone calls between Toronto and California. After the submission of the final quotation by the defendants, the plaintiff placed an order by telephone, which was acknowledged by fax sent from California to Toronto. Counsel for both parties stated in oral submissions that the plaintiff formally accepted the defendants' offer by depositing the first portion of the purchase monies due into the defendants' California bank account. The plaintiff performed all of its obligations under the agreement by transferring funds in U.S. currency into the defendants' bank account in California. The defendants completed their obligations under the agreement by delivering the goods, as required by the agreement, F.O.B. in San Diego California. Thus, although the plaintiff did not see the machine at the time it was shipped, ownership was transferred to the plaintiff upon delivery to the carrier in california. If the machine was defective, or if there was a failure to deliver certain components, or if there was late delivery, then those breaches occurred in California. Based on these facts, it would appear that the contract was formed in California and performed in California. Further, if the contract was breached as alleged, those breaches would have occurred, at least primarily, in California.

However, the machine was received by the plaintiff in Ontario and it was in Ontario that the breaches of contract and misrepresentations were discovered by the plaintiff. The plaintiff also alleges that the defendants had an obligation to repair the machine in Ontario and that, at least in that respect, there is a breach of contract in ontario. Also, all of the plaintiff's damages were sustained in Ontario.

The proper law of the contract is one of the factors to be considered in determining which of the two jurisdictions is the convenient forum. If the parties agree on the proper law of the contract, that agreement will almost invariably be enforced. However, for purposes of this portion of my Reasons I am assuming that there was no such agreement. Therefore, the proper law of the contract is determined according to which system of law has "the closest and most real connection" with the transaction having regard to such factors as the place of contracting, the place of performance, the place of business of the parties, and the nature and subject matter of the contract: see Castel, Canadian Conflict of Laws, 3rd. ed., at pages 553-564 and the cases referred to therein. In this case, although some of the contract negotiations took place in Ontario, the contract was actually formed in California and was to be performed there. The plaintiff sought out the defendants in California for the purpose of purchasing goods from them and the defendants carried on business only in California. Although the plaintiff's head office is in Ontario, the plaintiff described itself as carrying on business throughout Canada and also at various locations in the United States. Taking these factors into account as at the time the contract was, made, it seems to me that California has the most real and closest connection with the transaction and that the law of California is therefore the proper law to be applied.

The fact that California law is the proper law to be applied is only one of the relevant factors to be considered in determining the most convenient forum. There may not be any difference between the relevant provisions of Ontario and California law in which case the proper law of the contract will not be a major factor in determining convenient forum. Even if there is a difference, California law can be proved through expert evidence in the Ontario action, although clearly this is not as convenient as having a court apply its own domestic law. In this case, no evidence was presented by either party as to any difference in the applicable laws of the two jurisdictions. However, since California law applies and since the onus is on the plaintiff to show why Ontario is the more convenient forum, I consider this factor to weigh against the plaintiff's position. In terms of the evidence at trial, it would appear that all of the witnesses with respect to damages are in Ontario. Also, all of the witnesses who were involved in unpacking the machine when it arrived and in attempting to make the machine operational, including the plaintiff's expert witnesses in that regard, are in Ontario. On the other hand, all of the defendants' witnesses are located in California, although they will likely be fewer in number than those for the plaintiff. The location of witnesses is the strongest factor supporting the plaintiff=s choice of forum. However, even with respect to that factor, there would be some inconvenience to the defendants in having to bring their witnesses to Ontario. Also, if the action proceeds in California, it will not be necessary for the defendants to even consider whether there is a difference in the Ontario law as the law of California will simply be applied. Taking these factors into account as well as the fact that a substantial portion of the alleged breaches occurred in California, and bearing in mind that the onus is on the plaintiff, in my opinion California is the more convenient forum to hear this matter. The fact that the defendants intended California to be the forum merely reinforces that view, as I would have reached the same conclusion regardless of the defendants' standard form terms and conditions.

As California is a more convenient forum than Ontario, this action is stayed. Costs of the action to date, including this motion, shall be to the defendants Altare and Orbotron payable forthwith after assessment.