Where Will You Be Sued?

Alexander Holburn Beaudin & Lang LLP is a member firm of the Arc Group Canada Inc.

When drafting policies for Canadian insureds who own operations that can get them sued elsewhere, underwriters should consider where they might have to contest coverage issues and which country’s law will apply. Underwriters are often surprised that they find themselves before some district court in the United States. It is widely accepted that most American courts follow precedent that leans heavily towards granting coverage.

A recent case in British Columbia illustrates the problem, and suggests some ways to avoid the problem through policy drafting.

LLOYD’S v. COMINCO

In Lloyd’s Underwriters v. Cominco Ltd., the B.C. Court of Appeal considered whether a coverage action should be brought in British Columbia or Washington State. The case related to the operation of a B.C. smelter, the traditional practice of dumping barren slag into the river and the alleged downstream pollution of rivers and lakes in the United States. In Washington, native-American nations and the U.S. Environmental Protection Agency asserted claims against the insured. The insured, in turn, sought coverage under its liability policies. The liability insurers denied coverage, relying in part on pollution exclusions.

All of the policies were issued to the insured, located in British Columbia, through the smelter’s Vancouver broker. The policies insured domestic and global operations.

When coverage negotiations failed, the insured and the insurers sued for coverage declarations. Not surprisingly, the insured sued in Washington State (where it was sued) and the insurers sued in British Columbia (where the insured was). A flurry of court applications began in Washington and British Columbia; parties tried to seize jurisdiction and enjoin the other parties from suing the other jurisdiction.

The insured obtained a ruling in Washington, where the Federal Court asserted jurisdiction over the insurance dispute. The insurers pressed on with their coverage motions and obtained a ruling of the British Columbia Supreme Court, which also asserted jurisdiction over the coverage dispute.

The U.S. Federal Court of Appeal upheld the assertion of jurisdiction by the Washington court. The British Columbia Court of Appeal upheld the assertion of jurisdiction in British Columbia. The parties have applied for leave to bring the cases before the United States Supreme Court and the Supreme Court of Canada respectively. Presently, they have concurrent coverage proceedings in both jurisdictions.

As you can imagine, all of this has been extraordinarily expensive. And yet, the parties haven’t even approached the central issue, which is a determination of coverage.

One short and simple sentence in the British Columbia Court of Appeal’s reasons for judgement is of particular note: “The policies do not contain choice of law or forum selection clauses.” Had such clauses had been present, a lot of expense and uncertainty might have been avoided.

Canadian courts almost always respect contracting parties’ clear and express choice of law and forum. Only in a very few circumstances — and even then, only if strong cause is shown — would courts override the clearly expressed choice of the parties.

LOCATION, LOCATION, LOCATION

In a “choice of law clause,” the parties to an insurance policy specify the country or province whose law ought to be applied to any dispute flowing from the contract. In Canada, where parties to a contract have made an express and clear choice of law, that choice will govern the dispute as long as the choice was “bona fide and legal” and was not against the public policy of the forum selected.

In an “attornment clause” or “forum clause,” the parties to the contract agree not to dispute the jurisdiction of a specific court for purposes of instituting legal proceedings.

Here is an example of a common forum clause: “It is agreed that in the event of the failure of the underwriters hereon to pay any amount claimed to be due hereunder, underwriters hereon, at the request of the assured, will submit to the jurisdiction of any court of competent jurisdiction within Canada and will comply with all requirements necessary to give such court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such court.”

But to ensure that a coverage dispute is litigated in Canada, the policy must go further and contain an “exclusive forum selection clause.” In an exclusive forum selection clause, the parties intend to give exclusive jurisdiction to the courts of a single country or province to determine all proceedings commenced by any of the parties arising out of the contract. Underwriters who want a policy to be interpreted in accordance with Canadian law and in a Canadian court must indicate that in a clear and express way.

EXCLUSIVE JURISDICTION

The British Columbia Supreme Court recently addressed these issues in Fujitsu Consulting (Canada) v Themis Program Management and Consulting Ltd. In Fujitsu, the choice of law and forum clause in the specific contract reads as follows: “This agreement shall be governed and construed in accordance with the laws of the Province of British Columbia without regard to choice of law principles. The parties agree that the sole venue for legal action related to this agreement shall be the Supreme Court of British Columbia.”

The Court reviewed the law in Canada and held that the clause was a valid exclusive forum selection clause that designated British Columbia as the sole jurisdiction for purposes of all litigation between the relevant parties. This was in spite of the fact that all the witnesses to the dispute were resident in Ontario, the dispute arose in Ontario and all the services that had to be performed under the contract was to be performed in Ontario.

In the course of its judgment, the British Columbia Supreme Court again affirmed the position in Canada that courts encourage choice of law and exclusive forum selection clauses, since they create certainty, security and fairness in transactions.

Canadian underwriters, insuring companies with operations that could give rise to suits abroad, should give serious consideration to the inclusion of exclusive forum selection and choice of law clauses in all their insurance policies. Such clauses must be drafted in clear and unambiguous language, for example: “This policy shall be governed and construed solely in accordance with the laws of the [specify a Province or Canada] without regard to choice of law principles. The parties agree that the sole venue for legal action related to this agreement shall be [name a specific Court in a province e.g. “the Supreme Court of British Columbia” or “a Superior Court in Canada”].”

Choice of law and forum selection clauses, when included in insurance policies (and if properly drafted), will afford underwriters the benefit of pre-selecting the courts in which they will appear and the law that will apply to resolve any disputes flowing from their policies.