When two companies based in different provinces enter into a commercial contract and a dispute occurs, the question often arises as to which province's laws will govern. This can be a significant issue since laws vary from jurisdiction to jurisdiction and such variations can have significant impacts on how disputes are resolved. A "governing law" clause allows the parties to a commercial contract to choose the "proper law of the contract" i.e. the system of law by which the parties intend the contract to be governed.1
An example of provincial law differences exists in variations in limitation periods across the provinces. These differences could mean that a claim could be statute barred under Alberta law if it is not commenced within 10 years while still valid in Ontario for an additional 5 years. In light of such differences, there are serious implications of one jurisdiction's laws being chosen over another as the governing law of a commercial contract.
A governing law clause may or may not include a "choice of forum" component. A choice of forum clause allows the parties to choose the court or jurisdiction that will hear an action relating to the contract. 2
Where the governing law and choice of forum are not expressly specified in the contract, courts will look to other terms of the agreement and relevant surrounding circumstances to determine the appropriate law and forum. If the parties to an agreement wish to have certainty as to the governing law and choice of forum, they must clearly and precisely indicate this in the agreement.
The Absence of a Governing Law Clause
The proper law of the contract is the law that the parties intended to apply at the time the contract was created. As a rule, if the choice of governing law in a contract is bona fide and legal, and if there is no reason for avoiding the choice on public policy grounds, the choice of law specified by the parties in a governing law clause will be upheld by the courts as the proper law of the contract. 3
Where the parties have not expressly chosen a governing law in the agreement, the proper law of the contract will be established by the courts by determining the system of law with which the transaction has the "closest and most substantial connection." 4 Courts will evaluate the following factors to determine the "closest and most substantial connection":
- the domicile and residence of the parties;
- the national character of a corporation and the place where its principal place of business is situated;
- the place where the contract is made and the place where it is to be performed;
- the style in which the contract is drafted, as, for instance, whether the language is appropriate to one system of law, but inappropriate to another;
- the fact that a certain stipulation is valid under one law but void under another;
- the economic connection of the contract with some other transaction;
- the nature and subject matter of the contract;
- the location of the head office of a corporation; and
- any other fact which serves to localize the contract. 5
In the absence of a clearly chosen governing law, there is a possibility that a court may determine that the proper law of the contract is a law that the parties never intended to apply, exposing the parties to the risk that the court's determination may have negative or unforeseen consequences should a dispute arise.
Including the Federal Jurisdiction
In Canada, parties often draft governing law clauses by citing the laws of one specific province, followed by the phrase "and the laws of Canada applicable therein." There is some debate whether this phrase is necessary. The phrase implies the possibility that certain federal laws of Canada may not be applicable in a province. Elderkin and Doi suggest the door is open for federal laws of Canada that do not apply in each province and, therefore, recommend the phrase should be used to provide certainty when drafting governing law clauses. 6
The Choice of Forum
Governing law and choice of forum are separate issues that can be dealt with in one clause, as in the example below, or in separate provisions. Parties may specify a forum that does not correspond with the choice of law for the contract. For example, the parties may choose the laws of the province of Alberta to govern the contract while submitting to the jurisdiction of the courts of British Columbia. Parties may choose that arrangement if they prefer the benefit of applying a particular province's laws to substantive matters, while taking advantage of the procedural rules or convenient location of another province's courts.
A choice of forum provision will generally be upheld by the courts unless one of the parties can show "strong cause" that the parties should not be bound by the clause. 7 The burden is on the party arguing against the choice of forum to prove its case. In the absence of a strong cause, courts will strive to promote certainty and fairness in commercial transactions by holding contracting parties to the terms of their agreements.
In a choice of forum provision, the parties may choose whether a specific court has "exclusive" or "non-exclusive" jurisdiction. While it may be possible to confer exclusive jurisdiction without express use of the term "exclusive", parties are advised to explicitly state that the chosen jurisdiction has "exclusive" or "non-exclusive" jurisdiction, as the case may be, in order to provide greater certainty.
Drafting the Clauses
When drafting governing law and choice of forum clauses, it is important to ensure the parties' intention is properly captured. For example, the terms "submit" and "attorn" are often used interchangeably. However, in Naccarato v Brio Beverages Inc.8 the Court held that use of the word "submit" in a choice of forum clause meant the clause was permissive and non-mandatory. This allowed the Court to find it had concurrent jurisdiction to hear the matter. The need for precision and the use of mandatory language, where intended, applies equally to the choice of governing law clause.
An example of a governing law clause that includes choice of forum is as follows:
This Agreement and each of the documents contemplated by or delivered under or in connection with this Agreement are governed by and are to be construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and treated in all respects as an Ontario contract. The parties hereby irrevocably and unconditionally attorn to the exclusive jurisdiction of the courts of the Province of Ontario and all courts competent to hear appeals therefrom. 9
When drafting commercial contracts, drafters should clearly and precisely provide for both choice of law and choice of forum, keeping in mind the forum does not have to correspond to the governing law. Issues of substantive law will be determined by the proper law of the contract, while issues of procedure will be determined by the law of the forum. In complex agreements, the parties may wish to have different parts of the agreement governed by different systems of law and the governing law and choice of forum clauses can be drafted accordingly.
If the parties wish to confer exclusive jurisdiction to a specific court, the term "exclusive" as well as other mandatory language should be used to ensure that no other court has concurrent jurisdiction to determine issues under the contract. If the parties wish to confer concurrent jurisdiction, then the term "non-exclusive" should be used. 10
1 Cynthia L. Elderkin & Julia S. Shin Doi, Behind and Beyond Boilerplate: Drafting Commercial Agreements, 3d ed (Toronto: Carswell, 2011) at 81. [Elderkin and Doi]
3 Vita Food Products Inc. v Unus Shipping Co. Ltd.,  1 All ER 513 (PC).
4 Imperial Life Assurance Co. of Canada v Colmenares,  SCR 443 at 448.
5 Lilydale Cooperative Limited v Meyn Canada Inc., 2015 0NCA 281 at para 10, citing GC Cheshire, Private International Law, 7th ed, (London: Butterworths, 1965) at 190.
6 Elderkin and Doi, Supra note 1 at 85.
7 Z.I. Pompey Insustrie v ECU-Line N.V.,  1 SCR 450.
8 1998 ABQB 1.
9 Elderkin and Doi, supra note 1 at 81.
10 Elderkin and Doi, supra note 1 at 91.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.