Choice of Law

Attention forum shoppers! Your governing law clause could buy you a lot more than you bargained for

There are many good reasons to “forum shop” when choosing the governing law of an outsourcing contract. Proximity to the place of performance and comfort with the commercial sophistication of the selected jurisdiction are two. In a ruling relating to a franchisee class action, the Ontario Court of Appeal has recently added another (maybe not so “good”) reason to the list: the possibility that the jurisdiction’s general body of statute law may apply to operations outside the jurisdiction even if you have not specifically named any statutes in your agreement – and even where the statutes being applied disclaim application outside their jurisdiction.

In 405341 Ontario Limited v. Midas Canada Inc., the court considered, inter alia, whether an Ontario choice of law clause in a franchise agreement resulted in the application of Ontario’s franchise legislation, the Arthur Wishart Act (the “Act”), to the franchise relationship. Section 2(1) of the Act specifically states that it applies “if the business operated by the franchisee under the franchise agreement or its renewal or extension is to be operated partly or wholly in Ontario.” The question before the Court was whether the Act should apply to franchises operating outside of Ontario as a result of the parties having chosen Ontario law to govern the contract.

The Court of Appeal affirmed the motion judge’s ruling that, by choosing Ontario law as the governing law, the parties imported the obligations under the Act but not the jurisdictional limit contained within the Act.

The franchise agreement at issue contained the following choice of law provision:

Controlling Law: This Agreement, including all matters relating to the validity, construction, performance, and enforcement thereof, shall be governed by the laws of the Province of Ontario.

In finding that the Act applied to the franchisees located outside of Ontario despite the territorial limitation, the motion judge stated:

I believe the most reasonable inference is that, by agreeing that the laws of Ontario are to govern the validity, construction, performance and enforcement of a franchise agreement applicable to franchises operating in another province, the intention of the parties was that their rights and obligations – including the reciprocal and inviolable rights and duties of fair dealing – are to be the same as if the business of the franchise was operated in Ontario. The territorial limitations in section 2 of the AWA have, in my opinion, no more effect for this purpose than that of the general presumption that statues are not ‘intended to apply extraterritorially to persons, things or events outside the boundaries of the enacting jurisdiction’.

The Court of Appeal agreed with the motion judge’s ruling without specifically addressing the territorial limitation contained in the Act. Instead, the appellate court merely elaborated on the tendency for contemporary commercial contracts to contain a choice of law clause that “bears no relationship with where the contract is to be carried out.”

Many outsourcing agreements involving Canadian-based customers are governed by the laws of Ontario. Prior to this decision, I would have thought that the Ontario governing law clause would only import Ontario law that is specifically part of the province’s law of contract. For example, a contract governed by Ontario law clearly could not be interpreted without reference to Ontario’s Statute of Frauds, so a governing law clause would have to include the Statute of Frauds. I would not have thought that a choice of law clause would result in the automatic application of other legislation – especially not legislation that, on its terms, would not apply due to jurisdictional limitations contained within the legislation.

Most Ontario laws, from the Accessibility for Ontarians with Disabilities Act, 2005 to the Workplace Safety and Insurance Act, 1997, contain jurisdictional limits on their application, for example, to persons with disabilities or workplaces located within Ontario. While the obligations within these (or any other) pieces of legislation can be contractually adopted by parties, this would generally be effected by specifically incorporating the legislation by reference. Before Midas came along, one would have thought the absence of any such specific reference to the Act, coupled with the jurisdictional limits contained within the legislation itself, would preclude its automatic application to a relationship that falls outside those limits, despite the parties having chosen Ontario law as the governing law.

The concern arising from this decision does not only apply to contracts which are governed by Ontario law, but to any contract which is the subject of judicial interpretation in Ontario. If an outsourcing agreement is governed by the laws of New York but litigated in Ontario, Ontario courts may import, solely by virtue of the governing law clause, laws of New York which the parties had not initially intended to incorporate into the contractual relationship.

In light of this decision, and the many pieces of legislation that could apply to long term outsourcing arrangements, parties to an outsourcing arrangement (or any contractual relationship) should carefully review their choice of clause to ensure that local laws, other than foundational contract laws, are not inadvertently imported. It may not be sufficient to rely on the internal jurisdictional limits contained in Ontario (or other) legislation to avoid their application. In addition, when choosing language intended to preclude the application of conflicts of law principles, be cognizant of the implications of language implying that a court should view the performance of the contract as occurring within a specified jurisdiction.

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Comments

  1. Antonin I. Pribetic

    While your blog post title refers to “Choice of Law”, you appear to have confused forum shopping with the doctrine of renvoi. The 405341 Ontario Limited v. Midas Canada Inc. decision is not about forum shopping. Forum shopping involves a litigant (usually the plaintiff) attempting to have the case heard in a jurisdiction that will yield the most favourable result. The usual response is for the defendant to challenge the plaintiff’s choice of forum by bringing a motion to stay the action based upon lack of subject-matter jurisdiction and/or personal jurisdiction (the reformulated Van Breda test for assumed jurisdiction based upon a “real and substantial connection”). What the Midas Canada decision holds is that the parties’ choice of law implicates the extra-territorial application of Ontario law (in this case, the Arthur Wishart Act) to out-of-province franchisees in provincial class action proceedings.

    Under conflict of laws analysis, choice of forum and choice of law are conceptually distinct; albeit the latter is one, among a number of factors in the jurisdictional analysis for consent-based jurisdiction (the “strong cause” test) and the discretionary forum non conveniens test. Since the defendants attorned to the Ontario court’s adjudicatory jurisdiction by delivering statements of defence, there was never any issue of personal jurisdiction: Landsbridge Auto Corp. v. Midas Canada Inc., 2009 CanLII 13628 (ON S.C.)

  2. The article seems well titled, to me. It is about the implications of a choice of law. The opening line was clever but misleading, as Antonin points out.

    I don’t find the result in the Midas case all that surprising. An agreement that Ontario law will apply means all Ontario law – common law (as judicially created and interpreted) and statute law. The Court of Appeal says that the parties agree to be bound by a parcel of rights that would normally apply in Ontario.

    That a provincial statute has limits to its operation by its own terms is not a surprise either – and often such statutes have no express limits since the ability of the provincial legislature to pass laws only for the province goes without saying. (Sometimes it may be hard to tell just where the limits are for people crossing the provincial border, so some statutory guidance is useful, as in the franchise legislation at issue here.)

    The Court seems to me to get it right in saying that the statutory provisions about how it affects border-crossing fact situations are not relevant when people outside the province have adopted Ontario law generally. That moves them all inside the province for purposes of applying of the statute.

  3. I’ve said it before and I’ll say it again: all that a choice of law clause can (and should) do is indicate the background law against which the agreement was drafted. (If you want support for this proposition, look at the standard TOROG language on the Slaw site.) Midas is a case where the most appropriate response is, “Be careful what you ask for”.

    The “choice of law” language in the Midas case is not, of course, usual in Canadian agreements. I prefer language which simply says that the interpretation and construction of the agreement is to be governed by Ontario law. If you add in “performance and enforcement”, you only have yourself to blame if the court does what you ask.

    It is, of course, quite possible for parties to incorporate the provisions of a statute (just as they can incorporate another agreement) as part of their agreement. The difference between incorporation and a choice of law clause is that the provisions of the law (foreign or domestic) in the former case are fixed as of the date of the agreement; the provisions of the law chosen by a governing law clause change as that law changes. It would have been nice if the Court of Appeal had noticed this distinction.

    We would avoid all this uncertainty, nonsense and (frequently) injustice if could ever accept that the whole structure of traditional conflicts is fundamentally and irremedially misconceived.

    On a narrower point; Mr. Ng’s argument that, if Ontario is the “governing law”, the Ontario Statute of Frauds would apply outside Ontario may not be correct. The sale of foreign land is almost certainly governed by the lex situs and not by the law of the agreement—why should Ontario care whether the contract for the sale of foreign land is or is not recorded in a signed writing? The more obvious laws that apply, whatever the choice of law is are section 347 of the Criminal Code, the Interest Act and any legislation requiring, say, a licence or registration.