Ontario Court Confirms Forum Selection Clause Does Not Override Place of Arbitration

Introduction

In Tehama Group Inc. v. Pythian Services Inc., the Ontario Superior Court of Justice (Court) provided insightful commentary about the interplay between arbitration and forum selection clauses and dismissed an application to set aside an arbitration award. The Court found that the arbitration agreement unambiguously designated Toronto, Ontario, as the place of arbitration, and a forum selection clause referring to the New York courts did not alter the applicable procedural forum for a challenge to the arbitration award.  

Background

Tehama Group Inc. (Tehama), an Ontario corporation, and Pythian Services Inc. (Pythian), a Delaware corporation, entered into a cross-border asset purchase agreement (APA). The APA contained provisions concerning adjustments to the purchase price at closing, including an additional earnout payment by Pythian to Tehama that was contingent upon 2021 business earnings. 

Under the APA, disputes about price adjustments and contingent payments at closing were subject to arbitration by “the Toronto office” of PricewaterhouseCoopers LLP (PwC). The APA also included forum selection and governing law clauses that stipulated that disputes would be adjudicated before the New York courts under New York law. That forum selection clause specifically carved out any dispute regarding purchase price adjustments that was required to be decided by PwC. It did not, however, carve out contingent payment disputes, such as a dispute over an earnout payment.

Disagreements arose between the parties regarding the threshold for the earnout payment, prompting Tehama to commence arbitration in Toronto. The arbitrator generally accepted Pythian’s approach to the earnout calculations.

Following the arbitration decision, Tehama applied to the Court to set aside the arbitral award pursuant to Ontario’s International Commercial Arbitration Act. In response, Pythian applied to stay Tehama's application, citing the broad forum selection and governing law clauses in the APA. Pythian argued that an application to set aside the award had to be brought before the courts of New York under New York law. Pythian also argued that it was not clear that Toronto, Ontario was the place of arbitration.

Decision

The Court dismissed the motion to stay Tehama’s application to set aside the arbitral award. The Court held that the parties chose Toronto as the place of arbitration for all disputes arising out of both purchase price adjustments and contingent payments. It further found that these disputes were specifically exempted from the forum selection clause giving New York courts exclusive jurisdiction. Having chosen Toronto as the place of the arbitration, any application to set aside the arbitral award was to be made to the Ontario Superior Court of Justice.

In its reasoning, the Court emphasized the principle of contract interpretation that seeks to avoid logical inconsistencies and affirmed that because the contingent payment sections of the APA incorporated the dispute resolution clause "mutatis mutandis," it was clearly intended for disputes over contingent payments to follow a similar arbitration process. The Court also found that it was significant that the parties specifically named “the Toronto office” of PwC as the arbitrator for the dispute. An interpretation that the parties intended contingent payment disputes to be arbitrated with the place of arbitration being Toronto also aligned with the parties’ conduct, as they engaged with the Toronto office of PwC for arbitration, according to the APA’s terms. 

The Court also dismissed Pythian’s argument that the carve-out in the forum selection clause was limited to disputes over purchase price adjustments and did not extend to disputes about contingent payments. The Court commented that this interpretation would lead to a commercial absurdity because it would subject contingent payment disputes to the exclusive jurisdiction of the courts of New York while also requiring those disputes to be resolved by PwC in Toronto. 

Key Takeaways

Dispute resolution provisions that carve out purchase price adjustments are very common in cross-border transactions. It is important to have an arbitration expert review and consider both the dispute resolution clause and the interplay of that clause with any intended carve-outs for either arbitration or expert determination, to ensure that the processes planned by the parties are enforced as intended.

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