GOVERNING LAW CLAUSE IN MARITIME SUPPLY CONTRACT USED TO DETERMINE GOVERNING LAW

JPMorgan Chase Bank v. Lanner (The) [2009] 4 FCR 109, 2008 FCA 399 (CanLII)

The Federal Court of Appeal used the governing law clauses in maritime supply contracts to determine the law governing the contracts, in spite of the fact that maritime liens are extra-contractual rights.

Drafters should ensure that contracts contain clear governing law clauses. If specific laws of a particular jurisdiction are to be applied, they should be expressly mentioned in the clause.

In JPMORGAN CHASE BANK v. LANNER (THE), 2008 FCA 399, [2009] 4 F.C.R. 109, a Liberian-flagged ship was arrested and sold in Halifax at the request of the respondent mortgagees. At issue was which parties would be paid in priority out of the proceeds of the sale. The appellants are creditors who supplied fuel, and parts for the repair of the ship. All three appellants were non-US corporations, but two of the contracts provided for US law to govern, and the third had an arbitration clause that stated the law of the State of Washington would govern. At issue was whether Canadian law (the law of the forum of the court) or the US law should govern. Under US law the appellants as suppliers of necessaries to a vessel would have a maritime lien, which would rank in priority to the respondent’s mortgage. Under Canadian law, the appellants would have an interest that would rank after the mortgage.The court stated that: “The common law contractual choice of law rules provide that where there is an express or implied choice of law by the parties to the contract, this law will normally govern the contract and legal rights and obligations generated by the contract…Absent an express or implied choice of law by the parties, the proper law of the contract is determined by assessing which jurisdiction has the closest and most substantial connection.” In this case, maritime liens are extra-contractual rights, but since there were no other factors to indicate that any particular jurisdiction had a more substantial connection, the court chose to apply the US law chosen in the contacts. The majority and minority disagreed on whether the US laws had been sufficiently proven to apply to the case.

To read the full case on CanLII, click here.