Throwback Thursday: Canada, Cannabis, and Forum Selection Clauses
June 23, 2022
Image by jorono from Pixabay
Companies engaged in transnational litigation prefer, as a rule, to litigate disputes at home. Litigating at home allows a party to rely on lawyers and procedures with which it is already familiar. It also forces the other party to bear the costs of litigating in an unfamiliar legal system and (sometimes) in a foreign language. To lock in this home-field advantage, companies will sometimes write exclusive forum selection clauses selecting the courts of their home jurisdiction into their contracts. After a dispute arises, however, some companies belatedly realize that their interests would be better served by litigating somewhere else. This shift in preferences presents a doctrinal puzzle. Can the company simply ignore its own forum selection clause? Or can it be forced to litigate at home against its wishes?
The Colorado Court of Appeals addressed these questions in a 2019 case – Avicanna, Inc. v. Mewhinney. In this post, I first review the facts of that case and walk through the (counterintuitive) positions taken by the litigants. I then draw upon this analysis to offer two insights. First, party preferences with respect to forum can change between the day the contract is signed and the day the suit is filed. In such cases, the language used in the forum selection clause will determine whether that provision may be waived. Second, some litigants find it useful to invoke a forum selection clause even when they have no desire to litigate in the chosen forum. In such cases, the clause offers an inexpensive ticket to a dismissal.
Shifting Party Preferences
In Avicanna, Inc. v. Mewhinney, an Ontario company (Avicanna) entered into contracts to purchase “certain assets” from companies and individuals based in Colorado. Although the precise nature of the assets is not stated in the opinion, they were related to the cannabis industry. As the party with the bargaining leverage, Avicanna insisted that each of the contracts contain a forum selection clause mandating that disputes be resolved in Ontario, Canada and nowhere else. If a dispute arose in the future, Avicanna wanted to litigate that dispute at home.
At some point after the contracts were signed, however, Avicanna’s forum preferences changed. It no longer wanted to litigate in Ontario. It wanted to litigate in Colorado. While the reasons for this change of heart are not spelled out in the opinion, there are a number of possibilities. First, it is possible that the law firm representing Avicanna – which had offices in both Toronto and Denver – advised Avicanna that the costs of a lawsuit would be lower in Colorado. Second, it is possible that Avicanna was concerned that a U.S. court would hesitate to enforce a Canadian judgment where the underlying contract related to cannabis. Third, it is possible that Avicanna was nervous about the strength of its case and preferred to sue in a jurisdiction where each party typically bears its own legal fees (Colorado) as opposed to a jurisdiction where the loser must pay the fees of the winner (Ontario). There is no way to know for sure.
In any event, Avicanna sued its counterparties in Colorado, not Ontario. While most defendants would have no objection to being sued in in their own backyard, these defendants saw an opportunity. They announced that they wanted to litigate in Ontario and asked the Colorado court to enforce the forum selection clause.
An Inexpensive Ticket to Dismissal
To understand the Colorado defendants’ counterintuitive decision, it is important to recognize the challenges they faced. First, they were facing lawsuits from two directions—the suit from Avicanna and crossclaims from other defendants based in Colorado. Second, they had been publicly named in a lawsuit relating to a substance that was (and remains) illegal under federal law. Third, they were resource constrained and uninterested in incurring tens of thousands of dollars in legal fees.
Enter the Ontario forum selection clause. The defendants suspected—correctly, as it turns out—that Avicanna did not want to sue them in Canada. As discussed above, Canada follows a loser-pays rule with respect to attorney’s fees. The defendants believed that they had strong defenses to Avicanna’s breach of contract claims. If the case was brought in Canada, they could potentially win the case and have Avicanna pay their legal fees. The defendants also believed it was unlikely that the cross-claimants (all of whom were based in Colorado) would go to the time and trouble of filing claims against them in Ontario if the suit were refiled in Canada. If the case had to be brought in Ontario, they reasoned, it was entirely possible that the lawsuit would go away. The defendants also knew that Canada had recently legalized cannabis and that litigating the case in Canada would reduce the risk that the lawsuit would attract unwanted attention from federal authorities in the United States.
Above all, the defendants wanted an inexpensive way to dismiss the lawsuit. If they could persuade the court to enforce the forum selection clause mandating the suit proceed in Ontario, that goal would be realized. If Avicanna declined to refile the suit in Ontario, so much the better.
The Colorado Court of Appeals acknowledged the “topsy turvy” character of the positions staked by the litigants at the outset of its decision. The legal question presented to the court was whether Avicanna could “waive” the forum selection clause on the grounds that it had been written into the agreement for its “sole benefit.” After considering arguments from both parties, the court concluded that the clause could not be waived.
The court advanced three rationales in support of its decision. First, it held that it was not clear that the “sole” beneficiary of the clause was Avicanna. The court reasoned that the Colorado defendants could have derived a benefit from the Ontario forum selection clause if they had agreed to it in exchange for a favorable provision elsewhere in the contract. Second, the court held that the language in the clause – which stated that “Each Party irrevocably attorns and submits to the exclusive jurisdiction of the courts of Ontario” – suggested that the parties intended for it to apply equally to both signatories. Third, the court held that the presence of the word “irrevocably” in the clause indicated that the clause could not be waived. Accordingly, the court granted the defendants’ motion and dismissed the case.
This outcome is entirely defensible. Indeed, the South Dakota Supreme Court handed down a very similar decision two weeks ago. There is, however, an argument that might have swung the case in Avicanna’s favor. State courts in the United States sometimes refuse to enforce forum selection clauses when to do so would result in duplicative litigation. The theory underpinning these decisions is that it is a waste of judicial resources to litigate a dispute growing out of the same set of facts in two separate courts. If Avicanna had argued that the clause was unenforceable on this basis – citing the ongoing litigation with the other Colorado defendants relating to the same transactions – then the court may well have declined to enforce it. Avicanna opted, however, to put all of its eggs in the waiver basket.
Under most litigation scenarios, locking in a home-field advantage via a forum selection clause is strategically sound. If a company wants to preserve the option of waiving the clause if its preferences shift, however, there are drafting techniques to achieve this end. Here is a sample clause (based on an actual contract) that would have been helpful to Avicanna:
Unless waived by Avicanna in writing for the particular instance (which Avicanna may do at its option), the sole jurisdiction and venue for any disputes relating to this agreement shall be the courts of Ontario.
The second lesson from this case relates to litigation strategy. More than two thousand years ago, the Chinese military strategist Sun Tzu observed: “If your enemy . . . is in superior strength, evade him.” The defendants in Avicanna followed this advice to the letter. When they were sued by their better-resourced counterparty, they took a contract provision intended to benefit that counterparty and used it to evade an expensive, time-consuming lawsuit. This case highlights the fact that there are situations where it is rational for a defendant to seek to enforce a forum selection clause selecting a foreign forum even when they have no particular desire to litigate there. This incentive is particularly strong when the defendant has reason to believe that the plaintiff will not file the suit in the chosen forum. Companies have long relied on this strategy in the context of forum non conveniens; they argue to the court that a case should be brought abroad knowing full well that the plaintiffs are unlikely to refile the suit in the foreign forum. Avicanna suggests that precisely the same maneuver may work in cases with forum selection clauses. Indeed, it appears to have worked here. According to an attorney involved in the case, Avicanna never refiled the suit against the Colorado defendants in Ontario.