When operating in multiple jurisdictions, it is crucial to draft contracts with provisions that may help you select an optimal litigation venue for your business and to avoid litigation in favour of arbitration. If a court recognizes the conflict of laws provisions embedded into your contracts, this can allow you to position yourself in an optimal venue for proceedings.
Parties that operate in several jurisdictions must be aware of the risk of litigating in unfamiliar or sub-optimal venues. A choice of law and forum (or venue) selection provision can help deal with two primary issues arising from an agreement: (a) the law that will govern the dispute; and (b) which court will hear the dispute. We will discuss these clauses, as well as a “conflict of laws provision”, and we will also think about how these clauses affect the litigation or arbitration provisions in your dispute resolution provisions.
What is a choice of law provision?
The choice of law clause is designed to allow parties privy to a contract to select the law that governs the terms of the contract. If there is no express law chosen, the court will select the law that has the closest connection to the parties or the transaction which resulted in a dispute, in accordance with conflict of laws principles. An example of a choice of law clause is as follows:
This Agreement shall be governed by and construed in accordance with the laws of Ontario and the laws of Canada applicable therein.
If a choice of law clause is not recognized by a court, the stakes and positioning of a case can change drastically, and you can find yourself facing sub-optimal laws.
What is a forum or venue selection clause?
A forum selection clause specifies the court venue where a dispute will be resolved. The forum that hears the case does not need to be the same as the governing law set out in the choice of law clause.
Parties can benefit from the substantive laws of one jurisdiction, yet be contractually bound to adhere to the procedural laws of the venue selected to hear the case. An example of a forum selection clause is as follows:
The parties hereby agree that all demands, claims, actions, causes of action, suits, proceedings and litigation between or among the parties or arising out of the employment relationship shall be filed, tried and litigated only in a federal or provincial court located in Ontario, Canada. In connection with the foregoing, the parties hereto irrevocably consent to the jurisdiction and venue of such court and expressly waive any claims or defenses of lack of jurisdiction of or proper venue by such court.
If a forum or venue selection clause is not recognized or cast aside by a court, one or both of the parties can face a jurisdiction with procedural laws that are not the most favourable for your business.
Because new methods of presiding over a dispute including video arbitration and litigation allow for both access and timeliness, the choice of law provision can often select video dispute resolution as the primary method of resolving, thereby rejecting travel altogether.
What is a “conflict of laws” provision
A conflict of law provision attempts to avoid the imposition of laws of another jurisdiction when the scenario rises to that possibility. This provision precludes either party from arguing that the principles of conflict of laws would require the court to apply laws of one jurisdiction, other than the express jurisdiction set out in the choice of law provision. A common phrase used in contracts is as follows: “Without regard to conflict of law principles or forum non conveniens”.
The choice of law and venue for dispute resolution clause, and the conflict of law provision - these clauses are ordinarily recognized by courts as valid, since the parties often, as commercial counterparts, have autonomously negotiated and made a decision on their choice of law, and therefore that decision should not be disrupted by the court.
As the next section of this article reveals, this declaration is not always sufficient to reject a change in the choice of law or location of dispute resolution.
It should also be noted that including both an arbitration clause and a choice of venue can be a risky proposition. In Graves v. Correactology Healthcare Group Inc. 2018 ONSC 4263, a judge refused a motion to stay action in Ontario Court because the presence of both a jurisdictional clause and arbitration clause created ambiguity. When drafting your contracts, be as clear as possible about both parties agreed upon intentions to resolve a dispute.
When is a “choice of law” provision rejected by a court?
In Canada, Vita Food Products Inc v Unus Shipping (Appeal No. 82 of 1938) v Unus Shipping Company Limited in liquidation (Nova Scotia, 1939 “Vita Food”) determined that if choice of law is expressly made in the contract, courts cannot interfere so long as the clause is 1) bonafide 2) legal 3) not contrary to public policy.
A.) When there is not a bona fide connection to the location/jurisdiction
A choice of law provision can be rejected if there is no bonafide connection to the selected jurisdiction (paraphrased to be a sincere, thoughtful, explainable decision of the parties). In some cases this is referred to as jurisdiction simpliciter (absolute jurisdiction) for the court or arbitrator to preside.
In Vita Food, Lord Wright explained this point at p. 521: “That intention is objectively ascertained, and, if not expressed, will be presumed from the terms of the contract and the relevant surrounding circumstances … but, where the English rule that intention is the test applies and where there is an express statement by the parties of their intention to select the law of the contract, it is difficult to see what qualifications are possible, provided the intention expressed is bona fide and legal, and provided there is no reason for avoiding the choice on the ground of public policy.”
The inability of a party to explain the rationale behind a particular choice of law can result in the clause being considered not bonafide. In 2106701 Ontario Inc. (c.o.b. Novajet) v. 2288450 Ontario Ltd., (016 ONSC 2673), it was held that the choice of law of Nova Scotia as set out in the choice of law clause in their agreement was not bona fide. In this case, there was no connection whatsoever between the management agreement that was entered into between the parties and Nova Scotia as a jurisdiction, aside from the fact that the choice of law clause identified Nova Scotia as the applicable law. The court held that if a clause is made in bad faith, even if it is not illegal or against public policy, it can be cast aside.
To provide another example, in Club Resorts Ltd. v. Van Breda (Ontario Court of Appeal, 2012), a plaintiff who suffered catastrophic injuries on a beach in Cuba argued against the jurisdiction of the courts of Cuba, and instead wanted the case litigated in Ontario. In this case, the Court held that the presumptive connecting factors as to whether a real and substantial connection exists are the following:
- The defendant is domiciled/resident in the jurisdiction;
- The defendant carries on business in the jurisdiction;
- The (alleged) tort was committed in the jurisdiction; and/or
- A contract connected with the dispute was made in the jurisdiction.
In this case, the Ontario court assumed jurisdiction, and forum non conveniens was denied, because Ontario was considered more appropriate due to connecting factors (such as entering into the contract in Ontario) and also undue burden and unknowns of having to launch a lawsuit in Cuba.
By way of counterexample, Bristol-Myers Squibb Co. v. Superior Court of California (2017), the plaintiffs who suffered injuries were attempting to bring a case to California courts, apparently due to the court’s track record as being particularly hard on corporate defendants. The court could not find a bona fide connection of this case to be argued in California because (1) the plaintiffs were not domiciles of California and (2) the injury was not suffered in california.
Where the connection to the jurisdiction/location is bona fide, and the parties intentionally agreed to choose the law/venue, the parties will argue to protect the justified expectations, that were bargained for in the contract; and therefore the certainty or predictability of the approach to dispute resolution.
Forum Non Conveniens
Despite that the parties have agreed to a venue for dispute resolution, a court may defer a case pursuant to the doctrine of forum non conveniens if another forum or court is more appropriate to hear the case. Forum non conveniens is generally congruent across common law jurisdictions. The application of the doctrine of forum non conveniens involves an examination of a variety of factors including: access to witnesses, existence of parallel proceedings in another jurisdiction, enforceability of a judgement, and other factors already related to a bona fide connection with the location/jurisdiction. Anecdotally, In Canada and the US, the plaintiffs’ choice of forum carries less weight when it was motivated by window shopping for an optimal forum, rather than a rational basis.
In Carnival Cruise Lines, Inc. v. Shute (U.S. 585, 1991), it was held that forum (or venue) selection clauses are enforceable, unless such a clause eradicates the defendant’s liability completely or prevents a claimant from having a case heard in court of competent jurisdiction. In this case, the Plaintiffs, the Shutes, bought tickets for a cruise and signed a contract in Washington, that contained a forum selection clause in Florida, excluding all other jurisdictions. One plaintiff was injured on the cruise off the coast of Mexico, and they commenced a lawsuit in Washington Court. Carnival Cruises sought summary judgement based upon:
- The forum selection clause
- A lack of minimum contacts between the defendant and the forum state (Washington)
Within the US Court of Appeal, the parties were found to have an imbalance of bargaining power, and the clause was deemed to cause undue hardship for the Shutes. Carnival’s forum selection clause was therefore found to be unenforceable. However, on appeal at the Supreme Court of the United States, Justice Blackmun held that the forum selection clause was generally enforceable in federal courts so long as it was “fundamentally fair”. It was held that despite the lack of bargaining power and alleged inconvenience to Shutes’, the forum selection clause was held to be enforceable because:
- Including a reasonable, non negotiated forum-selection clause in a form ticket contract may be permissible;
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The couple had not satisfied the heavy burden of proof required to set the clause aside on grounds of inconvenience given that:
- Florida is not a remote alien forum;
- in view of the location of the accident, this was not an essentially local dispute inherently more suited to resolution in the state of Washington than in Florida; and
- the couple did not claim lack of notice of the forum clause
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Although forum-selection clauses contained in form passage contracts are subject to judicial scrutiny for fundamental fairness:
- There was no indication Florida was chosen as a means of discouraging legitimate claims by passengers;
- There was no evidence that the couples accession to the forum clause was obtained through fraud or overreaching; and
- The couple concededly had received notice of the forum clause and therefore had the option of rejecting the contract with impunity.
- 46 USCS Appx 183c—which prohibits the owners of passenger vessels from inserting in contracts any provision that would “lessen, weaken, or avoid” a claimant’s right to trial “by a court of competent jurisdiction”—was not violated by the clause at issue, as a court located in Florida is a “court of competent jurisdiction” within the meaning of the statute.
Through analysis and contrasting of both Heller v. Uber and Carnival Cruise Lines Inc. v. Shute, we can see that there is a fine line between enforceable clauses and invalid clauses. The facts of these cases were quite similar, yet, in Heller, the clause was deemed to be invalid, while in Carnival the clause was eventually overturned and found to be enforceable. The difference concerning enforceability in these cases (and in Carnival in particular) is primarily a result of the closer connection to Florida and the injury suffered, and the confirmed receipt of the notice of the jurisdiction clause within the terms of the agreement.
Forum Selection As A Foreign Entity in the US
Forum selection clauses will often be upheld by courts but not always, as every state has different jurisprudence. Some states will uphold choice, while other states will only uphold choice if there is any connection to the forum.
When trying to select an optimal US forum when not based in the United States, it is important to keep in mind that large counterparties will often refuse to let you choose your local venue, for example Ontario. So you might want to argue for a neutral jurisdiction, that will be amenable to both parties. Delaware is a popular choice for foreign companies as a neutral jurisdiction because:
- Corporate Law is comprehensive
- Case law is developed
- Bench is skilled
- Delaware Chancery Court is the gold standard for commercial courts in the United States
- Easy to get in front of a judge
On the other hand, especially related to consumer contracts, California is generally avoided by many litigation counsel as a venue due to its track record for contract disputes and tort claims; California is regarded to be a plaintiff friendly jurisdiction and tough on corporate defendants.
If there is no close connection to a venue, the forum selection clause may not be upheld by the courts. However, anecdotally, New York state seems to generally honour parties’ choice on the basis that the parties, as commercial counterparts, have autonomously negotiated and made a decision on their choice of law, and therefore that decision should not be disrupted by the court. New York as a venue can be particularly advantageous because of this fact.
It is possible that an Ontario business could argue that because New York is a border state, it plays into the close connection test and should be the choice of venue. Where you register your business is also a legal consideration in this way. Registering your business increases your business’s close connection with a respective venue. If you want your business’s choice of venue to be Delaware, it may be prudent to register your business there.
B.) Where the rejection of local laws is Illegal
i. Illegal because unconscionable.
A clause can be deemed illegal for various reasons. For example, a clause could be found by the court to be unconscionable (paraphrased to be “so harsh that it goes against good conscience”) in order to reject such clause. For example In Uber Technologies Inc. v. Heller (Supreme Court of Canada, 2019), an arbitration clause used as a choice of law clause was ultimately deemed to be invalid for unconscionability. The clause required an Uber driver making modest income to travel to the Netherlands and pay hefty administrative fees to commence arbitration against Uber.
This case explains that “unconscionability is an equitable doctrine that is used to set aside unfair agreements that resulted from an inequality of bargaining power. “The unconscionability test was discussed in Heller in paragraph 60, in which four elements to the test were provided:
- A grossly unfair and improvident transaction
- A victim’s lack of independent legal advice or other suitable advice;
- An overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
- the other party’s knowingly **taking advantage of this vulnerability **.
In paragraph 41, the Justices in Heller noted that the arbitration clause constituted a contracting out of the Employment Standards Act:
“Given my conclusion regarding the meaning of “employment standard”, it follows that the Arbitration Clause constitutes a contracting out of the ESA. It eliminates the right of the appellant (or any other driver) to make a complaint to the Ministry of Labour regarding the actions of Uber and their possible violation of the requirements of the ESA. In doing so, it deprives the appellant of the right to have an ESO investigate his complaint. This is of some importance for, among other reasons, if a complaint is made then the Ministry of Labour bears the burden of investigating the complaint. That burden does not fall on the appellant. Under the Arbitration Clause, of course, the appellant would bear the entire burden of proving his claim.”
ii. illegal because contrary to Public Policy
A clause that is deemed contrary to public policy can be deemed to be invalid. The arbitration agreement in Heller v. Uber (discussed above) effectively barred any claim Heller might have against Uber in Canadian courts, and put substantial logistical and financial hardship on Heller when faced with filing arbitration. The court noted that, beyond mere unconscionability:
Contractual stipulations that foreclose access to legally determined dispute resolution — as the arbitration agreement in this case does — are unenforceable not because they are unconscionable, but because they undermine the rule of law by denying access to justice. They are therefore contrary to public policy.
Access to justice was distinguished from unconscionability, providing another avenue for rejecting the clause.
iii. illegal because contrary to legislation.
Many provincial and territorial Acts contain clauses that determine choice of law and subsequently override any choice of law clause that parties to a contract may have decided upon. A clause embedded in a commercial contract that attempts to supersede or displace statutory provisions is illegal because it is contrary to legislation. Some acts use the doctrine of lex loci contractus, or, the law of the place where the contract is made. This can be seen in Section 123 of the Insurance Act of Ontario:
123. Where the subject-matter of a contract of insurance is property in Ontario or an insurable interest of a person resident in Ontario, the contract of insurance, if signed, countersigned, issued or delivered in Ontario or committed to the post office or to any carrier, messenger or agent to be delivered or handed over to the insured or the insured’s assign or agent in Ontario shall be deemed to evidence a contract made therein, and the contract shall be construed according to the law thereof, and all money payable under the contract shall be paid at the office of the chief officer or agent in Ontario of the insurer in lawful money of Canada. R.S.O. 1990, c. I.8, s. 123
Another example can be seen in personal property and security law. In Gimli Auto Ltd. v. BDO Dunwoody [1998] A.J. No. 537, the Alberta court analyzed the Alberta PPS legislation conflict of law provision in paragraph 8 and 9:
One need not consider common-law choice-of-law rules, because Alberta’s P.P.S.A. replaces them with new statutory choice-of-law rules. (So do all the other P.P.S.A.’s, and they are very similar, though that probably does not matter much here.) Nor need one consider a choice-of-law clause in a lease, for the statute sets which law applies. Nor is this a suit between two parties to a contract. The whole point of the P.P.S.A. is to overrule certain contractual or property rights: Re Giffen, The lessor and lessee could not, by contracting that the lease would be valid even if not registered, bind others.
Takeaways
To ensure your choice of law and forum for dispute resolution clauses are enforceable, they must be bonafide, legal and consistent with public policy goals:
- Bonafide: Choice of venue or law is not a window-shopping exercise, passes the close connection test, and is appropriate and logical
- Legal: Choice of venue or law is consistent with legislation
- Not unconscionable: No Imbalance of bargaining power, no unduly harsh terms
- Not contrary to public policy: No restriction of justice will occur as a result of impossible-to-fulfil terms
Editor: Rajah Lehal