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.