Choice of law clause

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In contract law, a choice of law clause or proper law clause [1] is a term of a contract in which the parties specify that any dispute arising under the contract shall be determined in accordance with the law of a particular jurisdiction. [2] It determines the controlling law: the state which will be relied upon in settling disputes. An example is "This Agreement shall be governed by, and construed in accordance with, the law of the State of New York." [3]

Contents

A choice of law clause may be combined with a forum selection clause. The combined clause would include the choice of law that is to govern any dispute arising under the agreement and the choice of forum where disputes will be heard. [4] Once implemented, a choice of law clause will generally be upheld by courts, as long as it is bona fide , legal, and not contrary to public policy. [5]

Operation

Choice of law clauses add predictability about the law to be applied should a contractual dispute arise. [3] As business transactions and contractual obligations may cross jurisdictional borders within a nation, as well as international borders, both physically and electronically, choice of law issues may arise. As laws vary between jurisdictions, it is possible that contract terms could be interpreted differently between jurisdictions, or that portions of a contract that are enforceable in one jurisdiction would not be enforceable under the laws of another. The parties may therefore agree in advance to interpret the contract in accord with the laws of a jurisdiction that is identified within their contract. [6]

In determining the choice of law, parties may consider the types of dispute which could arise from their agreement, whether the law will be from a common or civil law jurisdiction, how friendly or hostile a jurisdiction would be to their claim, and whether sufficient precedent exists in that jurisdiction. Parties often seek a jurisdiction that would be neutral to their claims. However, where one party has more bargaining power, they may impose the law of their jurisdiction or choose a more favourable law. [7]

In some situations a court may find that there are public policy reasons to disregard a choice of law clause, and instead interpret a contract under the laws of the jurisdiction in which a lawsuit is filed. For example, a jurisdiction may find, as a matter of public policy, it will apply its own consumer protection laws to a dispute between a consumer and a business even if the contract calls for the application of the laws of a different jurisdiction. [6] [8]

Worldwide

Canada

Parties drafting contracts in Canada may indicate the laws of a specific province, followed by the phrase "and the laws of Canada applicable therein" to ensure that federal law is also applicable. [9] Federal, provincial or territorial stature can inhibit parties' ability to negotiate a choice of law. For example, the Bills of Exchange Act, Canada Shipping Act , and the Insurance Act (Ontario). [10]

The Canadian position for autonomy for choice of law negotiations was established in Vita Food Products Inc. v Unus Shipping Co “the proper law of the contract ‘is the law which parties intended to apply.” For the choice of law clause to be enforceable, the choice of law must be bona fide, the contract must be legal, and there must be no reason for avoiding the choice of law on public policy. [11]

In order to be bona fide, the parties must not have intended to use that law in order to evade the legal system that the contract has the most substantial connection with. Where a contract which is illegal, or its performance is illegal, it will not be treated as a legal contract. The contract may also not be contrary to public policy. For example, gambling was once considered contrary to public policy, so foreign gambling debts would not be enforced in Canada. [12] Courts may also refuse to enforce choice of law or forum selection clauses in consumer contracts where the plaintiff demonstrates strong cause that it should not be enforced, including demonstrating an inequality in bargaining power. [13] [14]

In Canada, whether the term "submit" or "attorn" is used may determine whether the choice of law clause is enforced. In Naccarato v Brio Beverages Inc. a Court of Queen's Bench in Alberta found that the term "submit" indicated that the clause was permissive, giving the Court concurrent jurisdiction to hear the matter. [9] In Forbes Energy Group Inc. v. Parsian Energy Rad Gas, 2019 ONCA 372, the Ontario Court of Appeal held that the clause (“attorn to the courts of England”) meant that the laws of England would apply, but the clause was not sufficient to provide the courts with exclusive jurisdiction. The action was allowed to proceed in Ontario. [15] [16] The term "exclusive" and other mandatory language provides more certainty that another court will not assume concurrent jurisdiction. [17]

United States

Empirical studies in the early 21st century have found that the law of the state of New York is by far the most popular choice for choice of law clauses in American contracts, followed by either Delaware or California. [18]

How choice of law clauses are interpreted may vary by forum. In Delaware, a standard choice of law clause can cover liability arising in either tort or contract in order to avoid uncertainty. [19] [20] In New York, the express language of the provision must be “sufficiently broad” as to encompass the entire relationship between the contracting parties. [3] For example, in Krock v. Lipsay, the United States Court of Appeals for the Second Circuit determined that a generic choice-of-law clause did not cover a claim for fraudulent misrepresentation. [21] [22]

Related Research Articles

Arbitration, in the context of the law of the United States, is a form of alternative dispute resolution. Specifically, arbitration is an alternative to litigation through which the parties to a dispute agree to submit their respective evidence and legal arguments to a third party for resolution. In practice, arbitration is generally used as a substitute for litigation. In some contexts, an arbitrator has been described as an umpire. Arbitration is broadly authorized by the Federal Arbitration Act. State regulation of arbitration is significantly limited by federal legislation and judicial decisions applying that law.

Conflict of laws is the set of rules or laws a jurisdiction applies to a case, transaction, or other occurrence that has connections to more than one jurisdiction. This body of law deals with three broad topics: jurisdiction, rules regarding when it is appropriate for a court to hear such a case; foreign judgments, dealing with the rules by which a court in one jurisdiction mandates compliance with a ruling of a court in another jurisdiction; and choice of law, which addresses the question of which substantive laws will be applied in such a case. These issues can arise in any private-law context, but they are especially prevalent in contract law and tort law.

<span class="mw-page-title-main">Standard form contract</span> Type of contract between two parties

A standard form contract is a contract between two parties, where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate more favorable terms and is thus placed in a "take it or leave it" position.

Forum non conveniens (FNC) is a mostly common law legal doctrine through which a court acknowledges that another forum or court where the case might have been brought is a more appropriate venue for a legal case, and dismisses the case. Forum non conveniens may be used to dismiss a case, for example, to encourage parties to file a case in another jurisdiction within which an accident or incident underlying the litigation occurred and where all the witnesses reside.

Choice of law is a procedural stage in the litigation of a case involving the conflict of laws when it is necessary to reconcile the differences between the laws of different legal jurisdictions, such as sovereign states, federated states, or provinces. The outcome of this process is potentially to require the courts of one jurisdiction to apply the law of a different jurisdiction in lawsuits arising from, say, family law, tort, or contract. The law which is applied is sometimes referred to as the "proper law." Dépeçage is an issue within choice of law.

<span class="mw-page-title-main">Forum selection clause</span> Contract clause which requires disputes to be resolved in a given manner or court

In contract law, a forum selection clause in a contract with a conflict of laws element allows the parties to agree that any disputes relating to that contract will be resolved in a specific forum. They usually operate in conjunction with a choice of law clause which determines the proper law of the relevant contract.

<span class="mw-page-title-main">Unconscionability</span> Doctrine in contract law

Unconscionability is a doctrine in contract law that describes terms that are so extremely unjust, or overwhelmingly one-sided in favor of the party who has the superior bargaining power, that they are contrary to good conscience. Typically, an unconscionable contract is held to be unenforceable because no reasonable or informed person would otherwise agree to it. The perpetrator of the conduct is not allowed to benefit, because the consideration offered is lacking, or is so obviously inadequate, that to enforce the contract would be unfair to the party seeking to escape the contract.

In law, the enforcement of foreign judgments is the recognition and enforcement in one jurisdiction of judgments rendered in another ("foreign") jurisdiction. Foreign judgments may be recognized based on bilateral or multilateral treaties or understandings, or unilaterally without an express international agreement.

In conflict of laws, the term lex loci is a shorthand version of the choice of law rules that determine the lex causae.

In law, a special referee acts as a judge on matters of fact only.

<span class="mw-page-title-main">Arbitration clause</span> Contract clause requiring parties to resolve disputes via arbitration

In contract law, an arbitration clause is a clause in a contract that requires the parties to resolve their disputes through an arbitration process. Although such a clause may or may not specify that arbitration occur within a specific jurisdiction, it always binds the parties to a type of resolution outside the courts, and is therefore considered a kind of forum selection clause.

<span class="mw-page-title-main">Arbitration</span> Method of dispute resolution

Arbitration is a formal method of dispute resolution involving a third party neutral who makes a binding decision. The third party neutral renders the decision in the form of an 'arbitration award'. An arbitration award is legally binding on both sides and enforceable in local courts, unless all parties stipulate that the arbitration process and decision are non-binding.

<span class="mw-page-title-main">Good faith (law)</span> Implied covenant of honesty and fair dealing in contract law

In contract law, the implied covenant of good faith and fair dealing is a general presumption that the parties to a contract will deal with each other honestly, fairly, and in good faith, so as to not destroy the right of the other party or parties to receive the benefits of the contract. It is implied in a number of contract types in order to reinforce the express covenants or promises of the contract.

<span class="mw-page-title-main">Canadian contract law</span> Overview of contract law in Canada

Canadian contract law is composed of two parallel systems: a common law framework outside Québec and a civil law framework within Québec. Outside Québec, Canadian contract law is derived from English contract law, though it has developed distinctly since Canadian Confederation in 1867. While Québecois contract law was originally derived from that which existed in France at the time of Québec's annexation into the British Empire, it was overhauled and codified first in the Civil Code of Lower Canada and later in the current Civil Code of Quebec, which codifies most elements of contract law as part of its provisions on the broader law of obligations. Individual common law provinces have codified certain contractual rules in a Sale of Goods Act, resembling equivalent statutes elsewhere in the Commonwealth. As most aspects of contract law in Canada are the subject of provincial jurisdiction under the Canadian Constitution, contract law may differ even between the country's common law provinces and territories. Conversely; as the law regarding bills of exchange and promissory notes, trade and commerce, maritime law, and banking among other related areas is governed by federal law under Section 91 of the Constitution Act, 1867; aspects of contract law pertaining to these topics are harmonised between Québec and the common law provinces.

<i>Vita Food Products Inc v Unus Shipping Co Ltd</i> JCPC decision on choice of law clauses

Vita Food Products Inc v Unus Shipping Co Ltd [1939] UKPC 7, is a leading decision of the Judicial Committee of the Privy Council on the conflict of laws. The case stands for the proposition that an express choice of law clause in a contract should be honoured as long as the agreement was bona fide and not against public policy. The case is significant in the field of contract law, as it greatly expanded the ability of parties to choose the jurisdiction of their contacts.

<span class="mw-page-title-main">Contract</span> Legally binding document establishing rights and duties between parties

A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of those at a future date. The activities and intentions of the parties entering into a contract may be referred to as contracting. In the event of a breach of contract, the injured party may seek judicial remedies such as damages or equitable remedies such as specific performance or rescission. A binding agreement between actors in international law is known as a treaty.

Disputes between consumers and businesses that are arbitrated are resolved by an independent neutral arbitrator rather than in court. Although parties can agree to arbitrate a particular dispute after it arises or may agree that the award is non-binding, most consumer arbitrations occur pursuant to a pre-dispute arbitration clause where the arbitrator's award is binding.

<span class="mw-page-title-main">Brussels I Regulation 2012</span>

The Brussels I Regulation (EU) 1215/2012 contains a jurisdictional regime: the rules which courts of European Union Member States use to determine if they have jurisdiction in cases with links to more than one country in the European Union. The basic principle is that the court in the member state of the party that gets sued has jurisdiction, while other grounds exist, which are diverse in content and scope, and are often classified in descending order of exclusivity and specificity. The original Brussels Regulation (44/2001) is, with regard to jurisdiction rules, very similar to the 2007 Lugano Convention, containing the same provisions with the same numbering. Numbering and certain substantial issues are different in the 2012 recast version of the Regulation, which has applied since 1 January 2015 (1215/2012).

<span class="mw-page-title-main">Douez v Facebook</span> Supreme Court of Canada case

Douez v Facebook Inc., 2017 SCC 33 is a Supreme Court of Canada case which analyzes the enforceability of forum selection clauses in consumer facing contracts.

Great Lakes Insurance SE v. Raiders Retreat Realty Co., LLC, 601 U.S. 65 (2024), is a United States Supreme Court case regarding federal admiralty law.

References

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  2. "choice of law clause", Webster's New World Law Dictionary, Hoboken, New Jersey: Wiley Publishing, Inc., 2006
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  7. "PracticalLaw Choice of Law Selection Factors".
  8. Homle, Julia (2017). "Global social media vs local values: Private international law should protect local consumer rights by using the public policy exception?". Computer Law & Security Review. 33 (6): 391–397. doi:10.1016/j.clsr.2017.08.008.
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  12. Leon, Barry. "A Canadian Perspective: Choice of Law and Choice of Forum" (PDF). Archived (PDF) from the original on 2021-08-27.
  13. "Douez v Facebook Inc, 2017 SCC 33". Archived from the original on 2017-08-01.
  14. "Supreme Court of Canada Confirms in Douez v. Facebook that a Business Cannot Contract Out of Local Privacy Law". CanLii Connects. Archived from the original on 2018-04-14.
  15. "Forbes Energy Group Inc. v. Parsian Energy Rad Gas, 2019 ONCA 372 (CanLII)".
  16. "Taking Jurisdiction: the latest ONCA case overturning a forum selection clause". CanLii Connects. Archived from the original on 2020-09-20.
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  18. Coyle, John F.; Drahozal, Christopher R. (March 2019). "An Empirical Study of Dispute Resolution Clauses in International Supply Contracts". Vanderbilt Journal of Transnational Law. 52 (2): 323–386.
  19. "FindLaw's Court of Chancery of Delaware case and opinions". Findlaw. Retrieved 2021-02-18.
  20. "Delaware Court of Chancery upholds freedom of contract (with narrow exception)". Lexology. 19 January 2007. Archived from the original on 2013-01-23.
  21. Geller, Mitchell J. (7 July 2009). "Ensuring Choice-of-Law Provision Includes Non-Contractual Claims" (PDF). New York Law Journal. 242 (4): 1. Retrieved 5 March 2021.
  22. "Krock v. Lipsay, 97 F. 3d 640 (1996)". Google Scholar. Retrieved 5 March 2021.

Further reading

See also