Corporate Veil Pierced to Enforce Forum Selection Clause

The recent Ontario Court of Appeal decision in Downey v. Ecore International  [2012] O.J. No. 3086 suggests that the courts’ pro-enforcement policy toward forum selection clauses (“FSC’s”) goes beyond the presumption of enforceability approach laid down by the Supreme Court of Canada in ECU Line v Z I Pompey Industrie. The Supreme Court decided there that FSC’s are to be enforced unless there is  “strong cause” on the facts of a particular case not to enforce them.  Downey strongly signals that  a court will even pierce the corporate veil if necessary in order to give effect to an otherwise enforceable FSC.   

The Facts

The facts are that Ecore, a Pennsylvania company, offered Paul Downey employment.  Downey arranged instead, for tax reasons, for a contract between his consulting company CSR and Ecore, whereby CSR would provide Downey’s services to Ecore.  Ecore signed the consulting agreement with CSR, not Downey.  This agreement required CSR to sign a confidentiality agreement.  CSR never signed one, but Ecore had Downey sign one in his personal capacity on his first day at work in 1999.  That agreement did not mention CSR at all, and referred to Downey as an employee, contrary to the consulting agreement. That confidentiality agreement contained an FSC that required Ecore and Downey to litigate in Pennsylvania any action that “in any way relates to [Ecore’s] business relations with the Employee”.    The consulting arrangement continued from 1999 to 2011; the parties never replaced it with an employment agreement with Downey personally.  In 2011, Downey sued Ecore in Ontario, in his personal capacity, to enforce a separate 2001 assignment agreement between Downey and Ecore pertaining to a product he had invented then assigned to Ecore.  Ecore moved to stay that action, saying that the invention was governed by that confidentiality agreement and thus the FSC should apply. 

The motion court dismissed the motion on the ground that the FSC was invalid because the confidentiality agreement lacked consideration for Downey, in that the recipient of the confidential information would be CSR, not Downey himself.  That court held that but for the lack of consideration, the FSC would have been enforceable in that it covered the subject matter of the dispute and there was no strong cause not to enforce it.

The Appellate Ruling

The Court of Appeal held unanimously that Downey did get consideration under the confidentiality agreement, and that therefore the FSC is valid and the action should be stayed.   The consideration for Downey was that he gained access to Ecore’s proprietary, confidential information which was necessary if the services under the consulting agreement were to be provided, which “thereby permitted Downey, both personally and through CSR, to realize the benefits of the Consulting agreement”.  The Court stated the “de facto relationship between the parties was between Downey and Ecore”, having regard for the intentions of the parties as shown by the two agreements read together as a whole.  The consulting agreement identified Downey as being a “Key person”.   The parties must have intended the confidentiality agreement to bind Downey personally because as a practical matter it would be Downey who would actually receive Ecore’s confidential information.   The Court called the consulting arrangement with CSR “simply a tax device”. 

Comment

If the relationship was between Ecore and CSR, not Downey, the benefit of the confidentiality agreement would go to CSR, not Downey, and the FSC would not be enforceable.  The ruling that the de facto relationship between the parties was between Downey and Ecore is at odds with the law as to when courts will disregard separate corporate personality.  According to Anthony VanDuzer’s book The Law of Partnerships and Corporations (2^nd edition, 2003), courts will disregard separate corporate personality on three grounds:  a.) that to not do so is “flagrantly opposed to justice”; b.) that the corporation was created for an improper purpose, typically fraud, or c.)  that the corporation is merely an agent for a person or other corporation that completely dominates the first corporation and that corporation has been set up for an improper purpose.  None of these grounds apply here; Downey’s purpose for setting up CSR was certainly not improper.  The Court did not clearly explain which of these three grounds supported its ruling.   The inconsistencies between the consulting agreement and the confidentiality agreement (i.e. that the latter makes no mention of CSR and refers to Downey as an employee) and the fact the consulting agreement stated that the confidentiality agreement was supposed to be with CSR, not Downey, indicate the confidentiality agreement probably named Downey in error.   The fact that the Ecore-CSR consulting agreement continued for over eleven years is a further indication that the de facto relationship was between Ecore and CSR, not Downey.

The fact the confidentiality agreement arguably applied to the subject matter of the action likely carried great weight in the decision to find that agreement and its FSC valid.   Downey v. Ecore tells us that courts will go to considerable lengths to find an FSC enforceable.

Internal CEITAC Dispute Causes Confusion

             My May 18, 2012 post covered the new procedural rules of CEITAC, which went into effect on May 1, 2012.  Since then, a dispute has arisen between the head office of CEITAC and its Shanghai Sub-commission and its South China Sub-commission (earlier known as the Shenzhen Sub-Commission).  Last month the head office of CEITAC announced that because these two sub-commissions have not abided by the new rules, they are not permitted to take on or administer any CEITAC arbitrations.  The disputes are to be submitted instead to the CEITAC secretariat for it to administer.  The arbitration hearings will still take place in Shanghai and Shenzhen, as per the parties’ arbitration agreement.

It is said that the sub-commissions have taken exception to a new rule that says that where the arbitration agreement does not clearly specify the sub-commission, the choice of sub-commission will be made by the CEITAC secretariat.   The previous rule said it is the party commencing the arbitration who makes that decision.  

The sub-commissions have stated that they will continue to accept disputes for arbitration, and have established their own rules.  However, parties whose arbitration clauses require a CEITAC arbitration must consider whether arbitration by one of these sub-commissions absent CEITAC approval might undermine the validity and enforceability of the award.