How to Draft Choice of Law and Forum Clauses Part 1: Dealer’s Choice – Selecting the Applicable Law

September 23, 2022 /


When drafting a contract, parties often overlook (and occasionally conflate) two clauses: choice of law and choice of forum. At the time of drafting, the parties may consider it obvious which law applies or which court has jurisdiction. The situation may be much less clear by the time a dispute arises. Both law and forum may substantively affect parties’ rights and remedies.

In this two-part series, we’ll explore some recently litigated contracts with poorly crafted or absent choice of law and forum clauses to reveal how courts interpret these contracts. We’ll begin with the most exciting of the two; Choice of Law.

Choice of Law

Contracts should specify which region’s laws will govern the interpretation, performance, and expiration/termination of the contract. This is known as the choice of law clause. The elected law that applies to the contract will affect the substantive rights of the contracting parties – think limitation periods and good faith requirements. For example, the Canadian common law requires parties to exercise contractual discretion in good faith, but other jurisdictions’ laws do not (Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7). Adjudicative bodies interpreting the law with this good faith principle will require parties to exercise discretion in a manner that aligns with the contractual purpose (e.g., not act arbitrarily/capriciously). Unlike parties bound by law without good faith requirements, parties contracting under the Canadian common law will be held to a higher standard, resulting in different judicial consequences.

Where the Law is Specified

In addition to international disputes, the jurisdictional complexities of globalization and the rise of remote work make the choice of law clause more salient than ever. Take the example of McMichael v. The New Zealand & Australian Lamb Company, 2018 ONSC 5422. The plaintiff signed an employment agreement with the defendant company — an American corporation — while he was situated in Ontario, working for the defendant’s Canadian arm. The plaintiff relocated from Ontario to California before his employment was terminated. The employment agreement arguably allowed for termination without cause, but the employment laws of Ontario did not. Since the parties had specified that Ontario law governed the agreement, those laws applied even though the employee was located in California and the employer was located in New Jersey. As such, the Court found the plaintiff was entitled to reasonable notice.

Although courts typically assume parties intend to be governed by the rights and obligations of the laws within their jurisdiction (e.g., employees in BC want the laws of BC to apply to their relationship), this Court upheld the choice of law clause. So long as the elected law is bona fide, legal, and not offensive to public policy, courts will enforce the clause regardless of where the contract is performed. An exception applies to corporate law disputes. Irrespective of the choice of law clause, courts will typically enforce the laws of the region where the corporation was incorporated.

Where No Law is Specified

Where contracting parties fail to include a choice of law clause, the court looks to the system of law with “the closest and most substantial connection” with the contract in all circumstances (Imperial Life Assurance Co. of Canada v. Colmenares, [1967] SCR 443). The factors are set out in Cheshire on Private International Law, 7th ed. at page 190 as referenced in Imperial Life Assurance Co. of Canada v. Colmenares, [1967] SCR 443:

  • the domicile and even the 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 (e.g., 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 another transaction;
  • the nature and subject matter of the contract;
  • the location of the head office of the corporation; and
  • any other fact which serves to localize the contract.

In the 2015 decision of Lilydale Cooperative Ltd. v. Meyn Canada Inc., 2015 ONCA 281, the Ontario Court of Appeal narrowed in on four criteria:

  • the place of performance of the contract;
  • the nature and subject matter of the contract;
  • the place of contracting; and
  • the domicile and residence of the parties.

The recent decision of Sofina Foods Inc., v Meyn Canada Inc., 2017 ONSC 6957 followed suit by exploring these four factors. This case involved a dispute as to whether the laws of Belgium or Ontario governed the contract. Factors suggesting the contract had the closest and most substantial connection with Belgium were as follows, the parties: (1) made the contract in Belgium; (2) performed the contract in Belgium; and (3) paid the purchase price in Belgian currency. The factor that weighed in favour of Ontario law was that Ontario law governed a related contract to the one in question. With overwhelming factors favouring the law of Belgium and an emphasis on the place of performance, the Court found in favour of the law of Belgium. This case reveals how court engage in a weighing of numerous factors to determine the appropriate law for the contract.

Conclusion: Choose – and draft – wisely!

It’s fairly apparent that poorly drafted choice of law clauses can cause serious headaches for parties who must resort to litigation. Laws greatly differ, and this will inevitably affect the potential outcomes. While a reviewing court might allow the assumption that parties intend to be governed by the laws of their home jurisdiction, they might also give effect to a choice of law clause that says otherwise. Needless expenditures of time, resources, and patience can be avoided by thoughtfully drafting choice of law clauses.

Want More?

Contracting, like any art, takes time and experience to perfect. You can safeguard your interests by hiring a lawyer to help you draft a contract with choice of law and forum clauses. Remember, the stronger the contract is, the less likely it will be litigated. If you are considering drafting a contract, the experienced team at MT+Co. would be happy to support you in this endeavour. For more information, contact Myles Brown of our Dispute Resolution + Litigation Group with questions and comments.