What Law Should Govern?

There are two key considerations that should be made when dealing with transactions involving parties in different locations: what law should govern the transaction and whose courts should be able to determine any disputes that arise from the transaction. The first consideration is known as a “choice of law” while the second is known as a “choice of forum”. So, for example, if Person A is in Toronto and Person B is in New York City and they enter into a contract, which law will govern – Ontario or New York? Similarly, can Person A sue in Ontario? Can Person B sue in New York? What if Person B wants to sue in Ontario or Person A in New York?

There are numerous rules that will determine which law would apply and which courts would agree to assume jurisdiction to hear the dispute. However, the best way of doing this would be to make an express provision for this in the contract. For example, one can add a provision in the contract that says something along the lines of “The parties hereto agree that the subject-matter of the within Agreement shall be construed in accordance with the laws of [whichever location is selected] and the parties hereby agree to attorn to the exclusive jurisdiction of the Courts of that [state / province / country] for the resolution or determination of any disputes arising out of this Agreement.” [Please note that this is not properly worded and has been used solely for illustrative purposes - I wouldn't want you to simply cut and paste this and think that it will do the trick for you.]

So, this then takes us to the next question – which laws and which courts should you use? In my example, the two obvious choices are Ontario and New York. But are you restricted to just those two choices? Nope. If you wanted to choose the law of the Ivory Coast and the courts of that country to govern, you could do so if you really wanted. It probably wouldn’t be a very cost-effective choice to make, but both parties could do that if they really wanted to. Why would they want some other location? The objective answer would be that the courts of that other location would not necessarily prefer one party over the other. As well, it could be that the law in that other location is seen as being more favourable to the parties than, in my example, either the law of Ontario or the law of New York State.

So which one should you choose? That I cannot tell you because it will depend on your particular circumstances. However, I did read this evening the June 2010 issue of the American Bar Association Journal and they had a little note that indicated that the 2010 survey of U.S. businesses showed that for the fourth year in a row the worst tort liability system among the U.S. States is West Virginia while the State of Delaware is viewed as the best lawsuit climate (and this has been the case since this survey’s inception in 2002). So, if you are negotiating a contract and the other party wants to have disputes resolved by the Delaware Court applying Delaware law, you should be more willing to agree to this than if they suggest that the Court in West Virginia have authority to apply West Virginia law.

Whichever location you are thinking about, please bear in mind one thing: speak to a lawyer in that location! I often get calls from clients or potential clients asking me to look at a contract that will be governed by the laws of somewhere other than Ontario or New York State. I would like to say that all laws are the same but they are not. Let’s suppose that you are selling your business (and it is an asset sale – as opposed to a share sale). If you are selling here in Ontario, then there are special rules under the Bulk Sales Act that you have to comply with. Most other Canadian provinces have repealed their versions of the Bulk Sales Act. If you are in Saskatchewan and agree to a contract being governed by the law of Ontario, your Saskatchewan lawyer may not know about the Bulk Sales Act requirements. Similarly, I will not know whether there is some quirky legislation in Saskatchewan, in West Virginia or in Delaware that you should be aware of before you enter into the transaction. So, before you agree to any clause that is for the law to apply of someplace other than where you are conducting business, you should definitely check with a lawyer there to avoid any unpleasant discoveries regarding that law after the litigation has started.

Something to think about.


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