Making the Right Choice of Law in Commercial Contracts Really Matters

Commercial contracts usually provide that they are to be governed by the law of a particular country or state – but what happens if no such choice is explicitly made? The High Court tackled that thorny issue in a case concerning the overseas sale of poultry processing equipment.

A businessman, through his corporate vehicle, entered into an agreement to act as commercial agent for the equipment’s manufacturer – an English company – with a view to boosting its sales in North America. Following termination of the agreement, he launched proceedings against the manufacturer in England, seeking unpaid commission and alleging repudiatory breach of contract.

The agreement stated that, in the event of serious disputes, the parties would submit themselves to the jurisdiction of the English courts. However, it was silent as to which state’s law would govern the agreement. If the manufacturer succeeded in its argument that the law of Ontario prevailed, it was agreed that the businessman’s claim was time-barred under Ontario law and could not proceed.

Ruling on the matter, the Court accepted that the parties may well have assumed, in the light of the agreement’s jurisdiction clause, that English courts would probably apply English law. However, they had made no positive choice as to which law should govern their relationship and no such choice could be implied.

The default position was that the agreement was governed by the law of the state to which it was most closely connected. The businessman and the manufacturer were both English, but the purpose of the agreement was focused on eastern Canada. The businessman operated as a travelling salesman, but his domestic and business base was at his home in Ontario, which constituted the agreement’s centre of gravity. The Court ruled that the agreement was thus governed by the law of Ontario.

Share this article