In a recent decision,4 the Ontario Court of Appeal has ruled that a judgment of a U.S. District Court will not be the final word on the matter in a case where there are parallel proceedings in Ontario, Ontario has the closest connection to the dispute, and the US proceedings were not defended by the Ontario respondent.

Background

Appliance Recycling Centers of America (“ARCA”) is a Minnesota corporation whose business operations involve collecting, disposing and recycling of major appliances. In 2007, ARCA entered into agreements with Amtim Capital Inc. (“Amtim”), an Ontario corporation, to manage ARCA's Canadian operations. The agreements specified the governing law as that of Ontario but did not expressly indicate a forum for litigation. 

A dispute arose between ARCA and Amtim over the interpretation of the provisions in the agreements pertaining to the calculation of Amtim’s compensation. The dispute crystallized in 2011, leading ARCA to commence litigation in Minnesota in March of that year. ARCA sought declaratory relief to the effect that the compensation paid to Amtim had been correctly computed under the terms of the contracts and that no further payments were due. Amtim did not raise any defences to the Minnesota proceedings or make any claims or counterclaims against ARCA.

About two weeks after the commencement of the Minnesota action, Amtim commenced an action in Ontario to address the issue of amounts owing pursuant to the agreements. The claim in the Ontario action sought positive coercive payment by ARCA of $1.6 million.

Amtim moved on the basis of forum non conveniens and a lack of personal jurisdiction to stay the Minnesota proceedings in April 2011. Amtim had never conducted any form of business in Minnesota and all of the services where compensation was sought were provided in Ontario and elsewhere in Canada. Nonetheless, Amtim’s motion was dismissed by the U.S. District Court on August 20, 2011.  

Since Amtim did not file an answer to ARCA’s complaint in the Minnesota proceedings, in December 2011, ARCA obtained default judgment from the U.S. District Court. Amtim did not appeal the default judgment.

Proceedings in Ontario

Meanwhile in Ontario, by notice of motion dated May 30, 2011, ARCA sought an order staying the Ontario action and for an order setting aside the service of the statement of claim. ARCA’s motion was also on the basis of forum non conveniens

On February 21, 2012, based on the factors set out in Muscutt v Courcelles (2002), 60 OR (3d) 20 (Ont. C.A.), Justice Gordon concluded that while both forums could entertain the action, Ontario had the closest connection because the business activities had taken place in the province.  ARCA’s motion was dismissed. 

On appeal,2 ARCA argued that the granting of default judgment in the Minnesota action trumped all other factors in the Muscutt analysis, and therefore the Ontario action should be stayed. ARCA’s arguments were rejected, Goudge J.A. stating:

To find that the Minnesota default judgment necessitates the conclusion that Ontario is not the more convenient forum, is simply to reduce the determination of the forum conveniens issue into a race to the courthouse and then to judgment. To do so would impair the flexibility of the full forum conveniens analysis that must be conducted.

ARCA then moved for an order dismissing or staying the Ontario action on the basis of res judicata, issue estoppel or abuse of process. In July 2013, Lofchik J. dismissed ARCA’s motion stating that the doctrine of res judicata should not be applied mechanically to work an injustice. Moreover, the Court held that a foreign judgment will only be recognized and enforced in Canada where the foreign court has jurisdiction according to Canadian conflict of law rules. ARCA’s judgment, premised upon Minnesota’s long-arm statute and the “minimum contacts” with Minnesota, was insufficient to ground jurisdiction according to Canadian conflict of laws rules, and had no enforcement capability except as a defensive response to a positive claim by the plaintiff.  

Noting that the issues had not been adjudicated on the merits in Minnesota, Lofchik J. concluded3 that the doctrine of issue estoppel or res judicata did not apply. Even if these doctrines could be applied, it was appropriate to exercise the Court’s discretion not to apply them. The Minnesota proceedings were “a preemptive strike against a natural plaintiff” and giving the declaratory judgment effect would appear to sanction forum shopping. Amtim was entitled to a hearing on the merits in Ontario given that its claim for compensation was integrally tied to Ontario.3

ARCA appealed the motion judge’s decision. The Court of Appeal accepted ARCA’s argument that both Ontario and Minnesota had jurisdiction over the dispute. However, the Court affirmed Lofchik’s J. conclusion that equitable relief should not be granted where there had not been a hearing on the merits and the claim was integrally tied to Ontario. The Court considered the issue of comity, but noted the minimal connections to Minnesota, the absence of a determination on the merits and the fact that the Minnesota action had no enforcement effect and was commenced as a defensive measure. In unanimously dismissing the appeal, the Court was “comforted by the fact that the jurisprudence suggests that the U.S. District Court would be concerned by a race to res judicata and, as conceded, it was not informed of the Ontario proceedings, or apprised of any calculation with respect to the damages claimed, when it was asked to grant default declaratory judgment.”4

This decision makes clear a declaratory suit brought in a foreign jurisdiction may well count for nothing if the proceedings are effectively a defensive measure, and where giving effect to the relief obtained might deny an injured party in Ontario its legitimate choice of forum and time to bring suit.

Elka Dadmand