Governing Law And Choice Of Forum Clauses

When two companies based in different provinces enter into a commercial contract and a dispute occurs, the question often arises as to which province's laws will govern. This can be a significant issue since laws vary from jurisdiction to jurisdiction and such variations can have significant impacts on how disputes are resolved. A "governing law" clause allows the parties to a commercial contract to choose the "proper law of the contract" i.e. the system of law by which the parties intend the contract to be governed.1

An example of provincial law differences exists in variations in limitation periods across the provinces. These differences could mean that a claim could be statute barred under Alberta law if it is not commenced within 10 years while still valid in Ontario for an additional 5 years. In light of such differences, there are serious implications of one jurisdiction's laws being chosen over another as the governing law of a commercial contract.

A governing law clause may or may not include a "choice of forum" component. A choice of forum clause allows the parties to choose the court or jurisdiction that will hear an action relating to the contract. 2

Where the governing law and choice of forum are not expressly specified in the contract, courts will look to other terms of the agreement and relevant surrounding circumstances to determine the appropriate law and forum. If the parties to an agreement wish to have certainty as to the governing law and choice of forum, they must clearly and precisely indicate this in the agreement.

The Absence of a Governing Law Clause

The proper law of the contract is the law that the parties intended to apply at the time the contract was created. As a rule, if the choice of governing law in a contract is bona fide and legal, and if there is no reason for avoiding the choice on public policy grounds, the choice of law specified by the parties in a governing law clause will be upheld by the courts as the proper law of the contract. 3

Where the parties have not expressly chosen a governing law in the agreement, the proper law of the contract will be established by the courts by determining the system of law with which the transaction has the "closest and most substantial connection." 4 Courts will evaluate the following factors to determine the "closest and most substantial connection":

the domicile and residence of the parties; the national character of a corporation and the place where its principal...