In the absence of a governing law clause, what constitutes a 'substantial connection' when deciding what law will govern a contract?

June 01, 2017


Lilydale Cooperative Limited v. Meyn Canada Inc. 2015 ONCA 281 (CanLII)

The Ontario Court of Appeal applied the “substantial connection” test to determine whether Alberta or Ontario law applied to a contract that did not contain a choice of law or governing law clause. The court considered several factors to determine the substantial connection, including the nature and subject matter of the contract, the place of performance of the contract; the place of contracting, and the domicile and residence of the parties.

Drafters should ensure that the agreement contains a governing law clause (also known as a choice of law clause). This is especially important if the agreement is a template or an online contract, because of the strong possibility that future parties will come from different jurisdictions.

In Lilydale Cooperative Limited v. Meyn Canada Inc., 2015 ONCA 281 (CanLII), the appellant, who operated out of Alberta, purchased equipment designed for them by the respondent, who operated out of Ontario. The equipment caused a fire and the appellant sued for negligence and breach of contract. The issue was which laws applied, since the limitation period had expired to prevent the claim in Alberta but not in Ontario. The court approved the “substantial connection test” to be applied if a contract did not contain a governing law clause, which included any facts that could serve to localize the contract. The court stated that if facts cancelled each other they could be considered neutral (eg. residence). The fact that the design and manufacture of the equipment took place in Ontario lead the court to confirm that the contract had a substantial connection to Ontario. The court held that the motion judge had applied the law to the facts in a reasonable manner and denied the appeal.

To read the full case on CanLII, click here.

Governing Law
Choice of Law
Equipment Purchase