When can a Canadian court take jurisdiction over an action to set aside a foreign asset purchase transaction? That is the issue recently considered by the Ontario Divisional Court in Harrowand S.L. v. DeWind Turbines Ltd.,[1] in which a Korean company appealed a lower court order that had held that the Ontario court had jurisdiction. The Divisional Court overturned that decision and, in doing so, provided useful guidance on the extent to which Canadian courts can assume jurisdiction over foreign entities and foreign transactions.[2]

Background

In 2009, a Korean company entered into a $46-million asset purchase agreement to acquire a wind turbine business from Composite Technology Corporation (CTC), based in Nevada. The asset purchase agreement had nothing to do with Ontario, or indeed Canada. It was a transaction between a Korean buyer and an American seller. The contract was negotiated entirely in California and was governed by California law. The conveyed assets were located around the world, with most in California.

The only connection to Ontario was that the asset purchase agreement disclosed that CTC was engaged in litigation in Ontario with an Andorran company called Harrowand S.L. in respect of a letter of intent entered into in Ontario in 2006 (the LOI). The asset purchase agreement also expressly provided that the Korean company did not assume any liability in respect of the Ontario litigation or Harrowand’s LOI claim. None of that was particularly surprising. Of course, in an asset sale, the buyer chooses which assets to buy and which liabilities to assume. No rational buyer would choose to buy its way into a lawsuit and would naturally want to leave such a liability with the seller.

In 2011, CTC went bankrupt and Harrowand found itself suing an insolvent entity. In response, Harrowand reached across the Pacific to Korea and hauled the Korean company before the Ontario courts, suing the Korean company in Ontario and alleging that the 2009 asset sale had been a fraudulent conveyance intended to defeat Harrowand’s claim against CTC.

The Korean company contested the jurisdiction of the Ontario court, saying that it could not hear an action to set aside a foreign transaction. At first instance, the Ontario court found jurisdiction, concluding that the Ontario LOI asset purchase agreement was a “contract connected with” the fraudulent conveyance action, providing a sufficient nexus to Ontario to sue here.

Contract Connected with the Dispute

The Supreme Court of Canada has held that for a Canadian court to assume jurisdiction over a tort claim if the defendant is not served in the jurisdiction and does not consent to the court’s jurisdiction, at least one of four “presumptive connecting factors” must be present:

  • The defendant is domiciled or resident in the province;
  • The defendant carries on business in the province;
  • The tort was committed in the province; or
  • A contract connected with the dispute was made in the province.[3]

Courts have struggled with the fourth presumptive connecting factor because the Supreme Court of Canada did not explain the degree of connection required between the dispute and the contract to confer jurisdiction upon a Canadian court.[4]

The court at first instance concluded that the LOI was a “contract connected with” the fraudulent conveyance action, but the Divisional Court disagreed. It held that this logic was faulty because it would mean that “if any party to litigation in Ontario divested itself of assets outside the jurisdiction, Ontario could follow that transaction and assume jurisdiction,” a proposition that “goes too far” because it would extend the court’s jurisdiction on the basis of contracts with very weak connections to the province.

Implications

The Divisional Court’s decision represents a victory for foreign entities engaged in foreign commercial transactions with some passing reference to a Canadian jurisdiction. It confirms that a run-of-mill asset purchase agreement that excludes an Ontario liability will not generally be sufficient to leverage an attack on the transaction in an Ontario court. As courts continue to map out the extent of the connection required between a contract and a claim to ground jurisdiction under the fourth Van Breda factor, decisions likeHarrowand v. DeWind Turbines Ltd. stand for commercially sensible limits on Canadian courts’ jurisdiction.

But stay tuned. Harrowand has filed a motion for leave to appeal to the Ontario Court of Appeal, so the Divisional Court’s decision may not be the last word on the topic.