We live in an increasingly interconnected world with trade liberalization and globalization continuing unabated. These changes present many opportunities for businesses but also raise new challenges for businesses operating across borders.
One such challenge arises when litigation commences over a contract that is performed in multiple jurisdictions. Although some contracts contain forum selection clauses, parties are not always that lucky. And although a choice of jurisdiction often comes down to convenience, in some cases there can be substantive differences between jurisdictions that change a winning case into a losing one. As a result, it is vitally important for parties to consider the question of the proper forum before commencing an action concerning an international commercial contract. Fortunately, the B.C. Court of Appeal has recently provided fresh guidance on that question in JTG Management Services Ltd. v. Bank of Nanjing Co. Ltd.
JTG Management Services Ltd. (“JTG”) was a B.C. corporation that engaged in lumber trading from Richmond, B.C., including the export of softwood lumber to customers in China. Nanjing Bank is a Chinese Bank. JTG agreed to sell three lumber shipments to Nanjing Overseas Wood Co. (“Nanjing Overseas”).
In order to secure payment, Nanjing Overseas caused Nanjing Bank to issue an irrevocable letter of credit in favour of JTG. Nanjing Bank in turn provided the letter of credit to RBC (acting as an advising bank) who then delivered it to JTG’s bank, BMO.
In October 2011, in connection with the second shipment of lumber, Nanjing Bank refused to honour the Letter of Credit. At first, due to an alleged discrepancy and then without a stated reason. Then in November, Nanjing Overseas obtained an order from a Chinese Court freezing certain documents and subsequently commenced an action in China against JTG.
JTG sued Nanjing Bank in B.C. and the Bank brought an application to dismiss or stay JTG’s action on the basis that there was no real and substantial connection and that China was the more appropriate forum. The application judge dismissed Nanjing Bank’s motion on both counts finding a real and substantial connection on the basis of section 10(e)(i) of the Court Jurisdiction and Proceedings Transfer Act as to a “substantial extent” the contractual obligations were to be performed in B.C. and that China was not a more appropriate forum.
Nanjing Bank appealed.
Writing for the Court, Justice Kirkpatrick unanimously upheld the application judge’s decision.
On the question of real and substantial connection, Nanjing Bank argued that the key questions was: where did the viable cause of action arise? For a multitude of reasons, including that Nanjing Bank was under no obligation to make payment under the Letter of Credit until documents were presented in Nanjin, China, Nanjing Bank argued that there was no basis on which to find that the viable cause of action arose in B.C. The Court of Appeal disagreed with Nanjing Bank’s view of the central issue:
Fundamentally, the inquiry with respect to s. 10(e)(i) of the Act concerns the existence of circumstances that connect performance of the contract to the forum. In asking whether the obligations were to be performed in British Columbia, the inquiry focuses on the expectations of the parties as to performance at contract formation… (para 37)
And with the Bank’s view of the relevant factors to be considered:
In this case, it was a clear and implied term of the letter of credit that Trapa would perform its obligations under the letter of credit (e.g., preparation of the Required Documents) in British Columbia. In this regard, I note that Trapa was entitled to provide instructions that it receive payment in British Columbia and it was free to prepare the Required Documents in British Columbia. It was, moreover, reasonably foreseeable at formation of the contract that Trapa would perform its obligations in British Columbia. The receipt of payment and the preparation of the Required Documents constitutes, in my view, a substantial portion of the contractual obligations arising under the letter of credit for the purpose of the jurisdictional analysis… (para 38)
Turning to forum non conveniens, the Court reiterated that the question of forum non conveniens is a discretionary one, the application judge is entitled to deference, and that the moving party must show that there is a clearly more appropriate forum for the dispute.
On the merits, Nanjing Bank advanced four fact specific arguments as to why the application judge erred in finding China was not the preferable forum. All were rejected but the most interesting concerned the application judge’s finding that there might be a jurisdictional advantage:
Given the incorporation of the UCP in the letter of credit indicates the parties’ intention, formalized by contract, to be governed by international standards, I find that there is a prospect of possible juridical disadvantage to the plaintiff if required to proceed in China as a result of the possible default application of Chinese Law. (para 74 of application judge’s reasons, cited at para 58)
The Court of Appeal endorsed the above reasoning and noted that the above does not “impugn China.” Rather, it simply “acknowledged that there was a prospect that the Chinese law may be applied in suits involving a foreign party.” (para 61)
Helpful Guidance from the Court
In arriving at its decision, the Court of Appeal provided some useful guidance to contracting parties. First, the Court of Appeal endorsed the concept of forum selection clauses:
in general, if the parties to an international commercial agreement wish to have disputes flowing from agreements adjudicated in a particular jurisdiction, regardless of where the contract is to be performed, then it is always open to them to include a forum selection clause in the agreement. (para 41)
Second, the Court provided helpful guidance regarding jurisdictional analysis of letters of credit:
…The essential obligation arising under a letter of credit, which is an instrument designed to facilitate international trade, is for the issuing bank to pay the named beneficiary on the presentation of certain predetermined documents. It is a fundamental feature of such arrangements that the parties connected to it are doing business in separate jurisdictions, which is what necessitates the use of letters of credit in the first place. I say “connected” to it because the motivating force behind a letter of credit is the sale of goods from exporters in one jurisdiction to importers in another, with the issuing bank becoming involved at the behest of the importer. All of this is to say that the jurisdictional analysis must take into account the basic international character of the letter of credit and the possibility that the issuing bank and the beneficiary to it will each perform their respective obligations in their respective home jurisdictions (para 36)
The Court of Appeal conducted its analysis within the framework of the B.C. Court Jurisdiction and Proceedings Transfer Act, which is based on the model act prepared by the Uniform Law Conference of Canada. As more provinces (hopefully) adopt the model act, the Court of Appeal’s reasoning will be directly applicable.
In any event, the case is a helpful example of the type of contextual analysis courts will engage in when considering conflict of laws in the case of international commercial contracts. As always, context is king and each case turns on its facts. With that said, this should now be considered the leading case on the question in B.C. and should carry significant weight throughout the rest of Canada.
Date of Decision: May 6, 2015