Legal Drafting Tip: Governing law

Monday, September 21, 2015       By Tilly Gray

A governing law clause.[1] specifies that the laws of a particular jurisdiction will govern the interpretation, construction, and enforcement of the terms of the contract. The parties to a contract mutually agree upon the governing law to create certainty. It allows them to analyse their legal position with confidence and also informs a court, should a dispute arise, of the law that the parties intended to apply to their contractual relationship.

We recommend you consider the following:

  • Include a governing law clause to minimize the possibility that a court, arbitrator, or other decision-maker determines that another law ought to apply despite the parties’ intentions.

    • If the parties have not chosen the governing law, the courts will try to determine the parties’ intention.
       
    • If that fails, the contract will be governed by the law of the jurisdiction having the closest and most substantial connection to the contract.
       
    • The court will consider factors such as the domicile and residence of the parties, where the principal business of a corporation is situated, where the agreement is made, and where the contract is to be performed.[2] 
       
  • Making a choice of law is not, however, determinative. A court may not uphold a governing law clause if it is not bona fide or legal or if the clause or the applicable law is contrary to public policy.[3] 
     
  • The choice of governing law is not the same concept as the jurisdiction chosen for the “Submission to jurisdiction” clause (or “venue” or “choice of forum” clause, as it may be called), which indicates in which jurisdiction the parties have agreed to have contractual disputes heard. It is not necessary for the governing law and jurisdiction chosen to “match”; however, if they do not match and a contractual dispute arises, the time and costs associated with resolving the dispute may be higher than it would be if the governing law and jurisdiction do “match”..[4] 

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[1] The governing law clause in our firm’s Boilerplate Agreement is as follows: The laws of [Ontario/British Columbia] and the laws of Canada applicable in that province, excluding any rule or principle of conflicts of law that may provide otherwise, govern this agreement.

[2] In Imperial Life Assurance Co of Canada v Segundo Casteleiro Y Colmenares, the courts took into consideration factors such as the place where the contract was drafted and the place where the applications for life insurance were made in determining what the governing law should be.

[3] For example, if the laws of a particular jurisdiction are chosen to avoid the laws of another jurisdiction or the parties and the subject matter of the agreement have no connection to the chosen jurisdiction. This issue was discussed in length in the leading case of Vita Food Products Inc v Unus Shipping Co Ltd where the courts held that an express choice of law clause in a contract should be honoured as long as the agreement was bona fide and not against public policy. This judgment established the test for the recognition by Canadian courts of a choice of law clause.

[4] For example, if a dispute is being heard by an Ontario court, and the governing law is different than Ontario law, then the governing law will need to be proved as a fact through evidence from persons who are experts in the governing law. This has the effect of increasing the length and cost of the litigation proceeding.