Archive for February, 2010

Whose Law is it Anyways?

Wednesday, February 24th, 2010

I spent my lunch hour today with my colleague John Moore giving a seminar to small business owners on contract law and litigation issues relating to contracts.  One of the issues that arose related to governing law and attornment provisions.

Governing law provisions state what law is to apply to the contract.  For example, if a person in Ontario does a deal with a person in New York and they subsequently get into a dispute, is the contract subject to the laws of Ontario or New York?  There are a whole set of complex rules to determine this, but to avoid having to wade through these rules, it is much easier to simply say in the contract that the law of X will apply (whichever jurisdiction is X – and, in my example, X does not have to be the laws of either Ontario or New York if the parties want something different).  Meanwhile, attornment clauses provide for which courts have jurisdiction.  So the parties could say that all disputes will be determined by the courts in Ontario (or wherever the parties might agree).

In the context of this discussion a series of questions were raised about whether this really means anything.  For example, who cares if the law governing the contract is that of Ontario or that of Quebec.  It’s all the same thing anyways, isn’t it?  No it’s not.  It can be very close but in some instances there can be significant differences between the Common Law as exists in 9 of the 10 Canadian provinces and 49 of the 50 U.S. States and the Civil Law province (Quebec) or State (Louisiana).  In this case, “Civil Law” refers to those jurisdictions that take their laws from the French Napoleonic Code (aka Civil Code).  Let me give you two simple examples.

First, the common law has three basic requirements for a valid contract: there must be an offer made, that offer must be accepted and there must be “consideration” flowing from one party to another.  What is required for there to be “consideration”?  Something of value.  How much value?  Not much at all.  This has resulted in what is known as the “peppercorn theory”.  If, for example, I agreed to provide you with one year’s legal services in exchange for a single peppercorn, that is one heck of a bad deal on my part.  BUT, no matter how little the value of the peppercorn that’s enough as SOME value has been given for my year’s worth of services.  The common law courts require that there be some consideration, but they won’t look into its adequacy.  (Now, there are a whole host of exceptions to this general rule, but for the moment just run with it as being applicable.)  Consideration is a key element to having a binding contract.  So, if A says to B, “You’ll paint my house” and B says “Okay, I agree to paint your house”, under the common law there is no contract because no consideration flows from A to B in exchange for B agreeing to paint the house.  HOWEVER, under the Civil Law consideration is NOT a requirement.  Thus, using this example, by simply consenting to the obligation put forward by A, B has made a binding contract.  Long story short, if you are dealing with a business or customer in Quebec or other Civil Law jurisdiction, what you may have thought was not a binding obligation or a binding contract based on, for example, Ontario law could very well turn out to be  a binding contract under Quebec law.

The second example arises from Article 1375 of the Quebec Civil Code, which states:  “The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished.”  Good faith performance of contracts is not a foreign concept to the Common Law.  However, despite several attempts to introduce the requirement of “good faith bargaining” leading up to the creation of the contract, the Common Law courts have gone to great pains to avoid finding that there is such an obligation.  As a result, unless you have made misrepresentations that  induced the contract, you can drive as hard a bargain as you wish.  That’s not the case in Quebec thanks to Article 1375.  Thus, an Ontario business looking to negotiate a deal with a Quebec business may find itself on the wrong end of a lawsuit if the Quebec business ultimately feels that the Ontario business took unfair advantage during the negotiations.

So, when you are negotiating a deal with a customer or supplier that is based in Quebec (or in Europe or other French colonies), there could be very significant differences as to whether the governing law for the contract is that of, say, Ontario or that of the other province or country.  Yes, in many ways the laws are the same, but where they differ the differences can be quite significant.

Something to think about.