Two companies based in different provinces enter into a contract. One company sues the other for breach of that contract. If the contract does not say which province’s laws govern the agreement, how does a court determine which law to apply? The Ontario Court of Appeal recently addressed this question – the choice of law rule for contracts – in Lilydale Cooperative Limited v. Meyn Canada Inc. (“Lilydale”).
Fire in A Poultry Plant
Lilydale is an Alberta company that operates a poultry processing plant in Edmonton. In 1993, it purchased a fryer and oven system from Meyn Canada, a multi-national corporation that, in Canada, operates only in Ontario. In January 2004, there was a fire at Lilydale’s plant. Lilydale sued Meyn for breach of contract and negligence, alleging that the fryer caused the fire. Lilydale commenced its claim in January 2006.
The parties’ contract did not state whether Alberta or Ontario law applied. The issue of which province’s law applied was critical to the dispute because of the ultimate limitation period within which Lilydale could commence its claim. Under Ontario law, a party potentially has up to 15 years to commence an action; in Alberta, the analogous limit is 10 years. For purposes of determining which province’s law applied, the parties agreed that Lilydale’s cause of action arose no later than August 31, 1994. Under Alberta law, then, the claim would necessarily be statute-barred, but if Ontario law applied, Lilydale might be able to succeed.
“Closest and Most Substantial Connection” – The Traditional Test
Nearly half a century ago, the Supreme Court of Canada set out the test to determine the law applicable to a contract in which the parties did not select the governing law:
… the problem of determining the proper law of a contract is to be solved by considering the contract as a whole in light of all of the circumstances which surround it and applying the law with which it appears to have the closest and most substantial connection.
The “closest and most substantial connection” is to be discerned through consideration of a series of factors, including:
- the domicile and residence of the parties;
- the national character of a corporation and the place of its principal business;
- the place the contract was made and where it is to be performed;
- the style in which the contract is drafted, such as whether the language is appropriate for one system of law as opposed to another;
- the fact that certain terms are valid in one system of law and invalid in another;
- the economic connection of the contract to another transaction;
- the nature and subject matter;
- the head office of a corporation; and
- “any other fact which serves to localize the contract”.
In Lilydale, the three factors on which the lower court judge had relied were in issue on appeal – (1) the nature and subject matter of the contract; (2) the place of performance; and (3) the domicile and residence of the parties. Applying those factors, the judge had determined that Ontario law applied.
For the first two of the factors, the essential fact was that the contract between Lilydale and Meyn was not only for the delivery and installation of the fryer and oven system, but also involved the design of the system. The design element of the contract occurred primarily in Ontario. On that basis, the Court of Appeal refused to interfere with the judge’s conclusion that the nature and subject matter and performance of the contract favoured Ontario’s having the closest and most substantial connection. Because one party was resident in Ontario and the other in Alberta, the domicile and residence of the parties was neutral. Taking the factors together, the Court of Appeal deferred what it considered a discretionary balancing by the judge below and dismissed the appeal.
Before concluding, the Court of Appeal noted the irony that Meyn, an Ontario-based company, sought to rely on Alberta law, and observed that Meyn “could have inserted a choice of law clause in its contract with Lilydale.”
Choice of Law and Jurisdiction – What’s the Connection?
In addition to which law applies, the other major question in a multi-forum case is which court gets to apply that law. In Lilydale, the question of jurisdiction had already been resolved – the Ontario courts had refused to give way to the courts of Alberta. It is nonetheless worth considering the interplay between the two tests and the implications for cases like Lilydale.
The “closest and most substantial connection” test that governs contract choice of law at first blush seems as though it should be similar to the “real and substantial connection” test that determines jurisdiction. Although the objective of the two tests is substantially the same, they are structured quite differently. As we have seen, the choice of law test is a multi-factor balancing analysis. The jurisdiction test has recently moved away from this kind of analysis.
In Club Resorts Ltd. v. Van Breda, the Supreme Court altered the test that applies to jurisdiction inquiry, at least for tort cases. The Court expressly decided to abandon a multi-factor, discretionary balancing approach:
The real and substantial connection test does not mean that problems of assumption of jurisdiction or other matters, such as the choice of the proper law applicable to a situation or the recognition of interprovincial judgments, must be dealt with on a case-by-case basis by discretionary decisions of courts, which would determine, on the facts of each case, whether a sufficient connection with the forum has been established. Judicial discretion has an honourable history, and the proper operation of our legal system often depends on its being exercised wisely. Nevertheless, the rely completely on it to flesh out the real and substantial connection test in such a way that the test itself becomes a conflicts rule would be incompatible with certain key objectives of a private international law system.
The Court instead adopted a list of presumptive connecting factors, all in the name of increasing the “clarity and predictability” of results in the jurisdiction analysis. In the same decision, the Supreme Court held that the approach to jurisdiction might well have an “impact” on choice of law rules:
the framework established for the purpose of determining whether a court has jurisdiction may have an impact on the choice of law and on the recognition of judgments, and vice versa. Judicial decisions on choice of law and recognition of judgments have played a central role in the evolution of the rules related to jurisdiction. None of the divisions in private international law can be safely analysed and applied in isolation from the others.
In a similar vein, over two decades ago, the Supreme Court eschewed a connections-based approach to choice of law for torts in Tolofson v. Jensen. The Court rejected such an approach principally because of “its extreme uncertainty”:
A means of achieving [avoidance of multiplicity of proceedings] has been attempted in the United States through an approach often referred to as the proper law of the tort. This involves qualitatively weighing the relevant contacts with the competing jurisdictions to determine which has the most significant connections with the wrong. The approach was adopted by the majority in a strongly divided Court of Appeals of New York … [in a case in which] [t]he plaintiff, while a gratuitous passenger in the defendant’s automobile, suffered injuries when the automobile was in an accident. Both plaintiff and defendant were residents of New York, but the accident occurred in Ontario where a statute absolved the owner and driver from liability for gratuitous passengers. In an action in New York, the defendant moved for dismissal on the ground that the law of Ontario applied. A majority denied the motion to dismiss. The court stated that while the jurisdiction where the wrongful conduct occurred will usually govern, justice, fairness and best practical results may better be achieved in tort cases with multi-state contacts by according controlling effect to the law of the jurisdiction which, because of its relationship and contact with the occurrence and the parties, has the greatest concern with the issue raised in the litigation…
I leave aside for the moment the assumptions that a flexible rule better meets the demands of justice, fairness and practical results and underline what seems to be the most obvious defect of this approach -- its extreme uncertainty. [Emphasis added.]
Instead, the Supreme Court adopted a more rigid rule of applying the law of the forum in which the tort occurred.
Conclusion – Will the Traditional Test Continue to Govern?
In Lilydale, the Ontario Court of Appeal confidently applied a venerable precedent to decide the issue of choice of law for a contract. That traditional choice of law test – and the manner in which the Court of Appeal deferred to a discretionary balancing exercise of a lower court judge – looks similar to the jurisdiction analysis Ontario courts employed before the Supreme Court’s decision in Van Breda. The Court of Appeal in Lilydale made no mention of the potential impact of Van Breda on the choice of law analysis, nor did it note the possibility of extending the earlier reasoning of the Supreme Court in Tolofson to choice of law in contracts and adopt a bright line test of, for example, applying the law of the forum in which the contract was made.
For now, the traditional test continues to guide a court’s choice of law for a contract when the parties fail to do so themselves. However, there may be a shift in this area the implications of the Supreme Court’s decision in Van Breda continue to reverberate through Ontario’s – and Canada’s – rules of private international law.
Lilydale Cooperative Limited v. Meyn Canada Inc., 2015 0NCA 281
Date of Decision: April 22, 2015e Trillium Motor World Ltd. v. General Motors of Canada Limited, 2014 ONCA 497 at paras. 56-72.