Beware of Outdated Partner & Channel Contracts: When More Than You Bargained For is Not a Good Thing

When negotiating partnership and channel agreements, the choices of governing law and venue often take a back seat to the financial terms.  After all, the main goal of most such agreements is for the parties to make money together; any potential disputes and the process to resolve them become an afterthought, especially during the courtship phase.  However, this benign neglect can easily become a time bomb if the terms of the agreement are not evolved or updated in sync with changes in the business relationship.

The nature of the contract and the governing law (jurisdiction) can combine to form a trap once an agreement has aged.  Jurisdiction would seem to be straightforward.  For example, if a contract and its related dispute resolution were pursuant to Ontario law, then logically, any future issues ought to be addressed in accordance with Ontario law.  However…

Evolution of the Business Relationship

The problems arise when the business relationship has changed or evolved to a point that the original agreement no longer reflects the actual business activities between the parties.  Then, when a dispute arises, the provisions, including jurisdiction, may be completely inappropriate for the matter at hand and thus create complications and unnecessary expense for the parties.  Such is the case with Trends Electronics International Inc. v. Dana Innovations 2023 BCSC 1438.

Exclusive Relationship for 2 years | Open Relationship for 23 years

Trends and Dana are now facing duplicate legal proceedings in both British Columbia and California.  How did this happen? In 1997 the parties signed a 1-year agreement for Trends to be the exclusive Canadian distributor of Dana’s products.  The agreement auto-renewed for successive 1-year terms, and it specified that the agreement itself, and any related dispute resolution were to be governed by California law.  Though the business arrangement appeared to have operated well, by 1999 Dana had opted to use additional go-to-market channels in Canada.  This meant that Trends was no longer an exclusive dealer, and the parties were in an ‘open’ relationship for the next 23 years.

Since the relationship was no longer exclusive, it would stand to reason that the contract ought to have been updated or replaced to reflect the new realities of the business arrangement. However, it does not appear that either party revisited the agreement, and the business relationship continued until 2022, when Dana opted to terminate the relationship with Trends in favour of a direct sales model.  As with the unwind of any long-term relationship, business or personal, there were and are disputes to be resolved.

Duplicate Legal Proceedings Without a Clear Resolution Path

Most of the dispute is related to events and activities that took place in British Columbia, the location of Trends’ headquarters.  However, Dana pre-emptively filed suit in California, pursuant to the terms of the 1997 agreement.  Trends asked the California court to stay the proceedings on the basis that the agreement hadn’t reflected the actual business relationship for decades, and that the jurisdiction clause specifying California was no longer relevant because the relationship had not been exclusive for decades. The California court refused, and in turn, Trends applied to the British Columbia Supreme Court to resolve the question of venue.  In their August 18, 2023, judgement, the BC Supreme Court ruled that BC was indeed the appropriate jurisdiction for the claims raised in the action. 

So, the parties now got more than they bargained for: twice the number of legal proceedings. One in California and one in BC.  Both parties are now faced with the expense of litigation in two venues, instead of one, and it is not clear at this stage, short of capitulation or settlement, how the matter will be resolved.  Taken to its logical endpoint, the parties could end up with two conflicting judgements and no mechanism by which to reconcile those differences, and in turn incur significant expenditure and business risk.

The Lesson? Review Your Agreements & Their Operation Often

Let the lessons from Trends inform your practices.  Periodic review and cataloguing of your agreements for their business relevance and dispute resolution provisions can pay dividends in mitigated risk and avoided expense.  Not sure where to start?  We can help – contact us at info@accordadr.ca.