What's The 'Connection'? Ontario Court Of Appeal Confirms Continuing Divide Between Jurisdiction And Choice Of Law

Two companies based in different provinces enter into a contract. One company sues the other for breach of that contract. If the contract does not say which province's laws govern the agreement, how does a court determine which law to apply? The Ontario Court of Appeal recently addressed this question - the choice of law rule for contracts - in Lilydale Cooperative Limited v. Meyn Canada Inc. ("Lilydale").1

Fire in A Poultry Plant

Lilydale is an Alberta company that operates a poultry processing plant in Edmonton. In 1993, it purchased a fryer and oven system from Meyn Canada, a multi-national corporation that, in Canada, operates only in Ontario. In January 2004, there was a fire at Lilydale's plant. Lilydale sued Meyn for breach of contract and negligence,2 alleging that the fryer caused the fire. Lilydale commenced its claim in January 2006.

The parties' contract did not state whether Alberta or Ontario law applied. The issue of which province's law applied was critical to the dispute because of the ultimate limitation period within which Lilydale could commence its claim. Under Ontario law, a party potentially has up to 15 years to commence an action; in Alberta, the analogous limit is 10 years. For purposes of determining which province's law applied, the parties agreed that Lilydale's cause of action arose no later than August 31, 1994. Under Alberta law, then, the claim would necessarily be statute-barred, but if Ontario law applied, Lilydale might be able to succeed.

"Closest and Most Substantial Connection" - The Traditional Test

Nearly half a century ago, the Supreme Court of Canada set out the test to determine the law applicable to a contract in which the parties did not select the governing law:3

... the problem of determining the proper law of a contract is to be solved by considering the contract as a whole in light of all of the circumstances which surround it and applying the law with which it appears to have the closest and most substantial connection.4

The "closest and most substantial connection" is to be discerned through consideration of a series of factors, including:

the domicile and residence of the parties; the national character of a corporation and the place of its principal business; the place the contract was made and where it is to be performed; the style in which the contract is drafted, such as whether the language is appropriate for one system of law as opposed to another; the fact that certain terms are valid in one system of law and invalid in another; the economic connection of the contract to another transaction; the nature and subject matter; the head office of a corporation; and "any other fact which serves to localize the contract".5 In Lilydale, the three...