Much of business involves promises or guarantees made by one party in support of another – to pay for goods shipped, to repay a loan, or other commitment. This can be challenging enough when the party granting the guarantee is located in Canada, where legal remedies are accessible. It becomes more challenging when the guarantor is located outside Canada.
It is becoming more common for loans to be supported by guarantees from foreign parent or subsidiary companies with assets located outside of Canada. A common question asked by lenders is "What law should govern a guarantee from a foreign guarantor?" It's an important question, one that I've recently been asked in various ways by a number of lenders. And the answer is, as you might expect, "It depends."
The choice of governing law for a guarantee in a Canadian loan transaction involving foreign guarantors depends on a variety of factors, including the strength of the guarantor, the foreign jurisdiction involved and the amount of the loan. Here are some considerations for lenders and other creditors when taking a foreign guarantee.
What type of guarantee?
When considering a guarantee from a foreign entity, lenders should examine the value of the foreign entity's assets and whether recourse to these assets is intended to be a primary method of recovery in an enforcement proceeding, or instead is supplemental to the borrower's security package. Lenders should also consider whether such a guarantee will be unlimited or limited in recourse to a particular dollar amount or to specific collateral such as a pledge of shares.
What law will govern the guarantee?
Depending on the foreign jurisdiction and the nature of any collateral securing the guarantee, the contracting parties may be able to negotiate and decide on the governing law of the loan documents. It is a well-established principle in common law that courts will uphold the governing law clause of a contract, even when the contracting parties have no connection to the jurisdiction chosen, if the choice of law is bona fide, legal and not against public policy. In a cross border transaction, it is often more cost-efficient for a lender to choose the same governing law for the underlying loan agreement, the guarantee and any security documents. Choosing the same jurisdiction to govern the loan documents typically allows for predictability and familiarity if the lender needs to commence any enforcement proceedings.
However, for the purposes of enforcing a guarantee given by a foreign entity, it may be in the lender's best interest to have the foreign law govern the guarantee. To enforce a guarantee governed by Canadian law in a foreign jurisdiction, the court of the foreign jurisdiction must correctly interpret and impose Canadian laws within a foreign proceeding. That introduces the potential for delays, unpredictable interpretations of law, additional costs and, at worst, the possibility for the guarantee to be held unenforceable.
In the context of cross-border loans involving US entities, US courts have generally enforced guarantees governed by Canadian law, absent fraud or public policy concerns. However, given the potential risks, jurisdiction-specific guarantees are usually obtained if the likelihood of enforcement and value of the collateral securing the guarantee outweigh the cost associated with engaging foreign counsel.
In some cases where the value of the guarantee is high, lenders may choose to obtain a guarantee governed under each of the foreign jurisdictions applicable to the guarantor, to maximize their options for enforcing on the guarantee.
Should an opinion be obtained?
Foreign counsel can advise on local requirements for granting guarantees and render an opinion regarding the enforceability of the guarantee. When acting on behalf of lenders, we also recommend obtaining opinions from foreign counsel on the enforceability of choice of law and submission to jurisdiction clauses with respect to the Canadian-law governed documents. There are other foreign opinions that a lender should consider obtaining, including what is known as a 'business of banking' opinion which assures the lender that it will not be deemed to be carrying on the business of banking in the local jurisdiction, and thus subject to local regulatory requirements, because of the subject loan.
A final point of consideration is cost – opinions from foreign law firms can be surprisingly expensive. It's important for a lender to weigh the cost of obtaining foreign opinions against the value of the guarantee, the strength of the borrower and the value of the loan.
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