In order to meet the demands of a constantly evolving global marketplace, companies often seek to expand their operations through cross-border mergers and acquisitions. When pursuing an international transaction, the parties must consider a unique aspect of the deal – the legal framework in which the deal and any contractual agreements within it are to be governed.
Governing law provisions
Canadian law generally espouses the principles of contractual autonomy and international comity (being respect for a foreign court’s jurisdiction and laws). As a result, when multiple jurisdictions are involved in an M&A transaction, the contracting parties have an opportunity to identify the law by which an agreement should be interpreted. This can be achieved by incorporating a “governing law” or “choice of law” provision into an agreement. For example, a choice of law provision may be drafted to establish Ontario as the preferred jurisdiction of law (i.e., “the laws of Ontario”). In this scenario, the governing law provision will provide evidence of the parties’ express intention to have the laws of Ontario applied to the interpretation, construction and enforcement of any substantive aspects of the contract. Essentially, the objective is to ensure that a particular body of law will be applied in the event of a dispute, and correspondingly, to avoid the laws of a jurisdiction which are thought to be less predictable or favourable. However, to further minimize the possibility that a court may apply the laws of another jurisdiction, contrary to parties’ written intention, conflict of law principles must also be considered.
Conflict of law principles
Where a party is concerned about the application of less favourable laws, counsel can also protect their client’s interests by warding off the application of conflict of law principles. In order to do so, the phrase “without regard to conflict of law principles” should be included in the governing law provision. This phrase further clarifies the parties’ intention that the governing law is to apply regardless of which court has jurisdiction over the dispute or the nature of the dispute itself. In the absence of such language, a party may argue that conflict of law principles permit the application of laws which differ from those chosen to govern in the case of a dispute.
Furthermore, the clause “without regard to conflict of law principles” can be useful in avoiding a renvoi, as it signals the parties’ intent to have the governing law provision apply regardless of whether the matter is considered to be substantive or procedural. As mentioned, the governing law provision would otherwise only apply to the substantive issues of a contract which may prove to be problematic and create a circular argument. For example, consider a situation where a contract is governed by the law of Ontario, but an action is commenced in Delaware to determine whether a limitation period has expired. In Ontario, limitation periods may be considered procedural (as opposed to substantive) and therefore adjudicated by reference to the law of the jurisdiction where the action was commenced. As a result, an argument might be made that Delaware should apply its own laws concerning limitation periods. A renvoi would occur if the limitation period is seen as a matter of substantive law in Delaware and the parties are referred back to the laws of Ontario. In these circumstance, a circular argument would be created as Ontario then refers the matter back to Delaware to determine what limitation periods should apply. The “without regard to conflict of law principles” clause can negate these intricacies created by the renvoi doctrine and the unpredictable circumstances they offer.
Public policy exception
With all this being said, there is one caveat – a party’s ability to expressly choose which law is to govern a contract is subject to narrow exceptions. In particular, the choice of governing law must be bona fide, legal and not contrary to public policy. Despite legal drafting, a choice that appears to circumvent commercial sensibilities will be scrutinized under the bona fide and legal test. In addition, if there appears to be an intention to evade mandatory provisions of the legal system with which the contract had its most substantial connection, the court would likely refuse to uphold the choice of law as a valid one.
In any event, where a party has a preference for the laws of a particular jurisdiction to govern, an analysis of the legal framework to be applied in the case of a future dispute remains key.
The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.
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