It is customary for agreements that are drafted by lawyers to have what is called a “choice of law clause.” (Some agreements also have what is called a “forum selection clause” which seeks to control where litigation between the parties may take place. The need for and enforceability of such a clause is a topic for another day.) There is a great deal of misunderstanding over both the need for a choice of law clause and its effect.

When a court is asked to interpret a contract, it will look at the contract from the place, the province or country, where it is. In the case of a simple transaction, made and completed in one province, this solipsistic view will cause no problems and will not defeat the expectations of the parties. A choice of law clause is an attempt by the parties to direct the court to look at the law of the specified jurisdiction for the interpretation of the agreement. It is very important to notice that a choice of law clause—at least in the usual case and with the usual wording of such clauses—is concerned with and deals only with questions of interpretation. The drafter of a contract will have used words and phrases that he or she understands in the context of the place where he or she practises.

A choice of law clause can be used in two ways. In the case of an agreement, particularly a standard-form agreement, drafted by one party (e.g., a franchisor) and offered to many others (e.g., franchisees) who may be in several provinces, it makes sense to pick the law of one province as the law, against which the agreement will be interpreted (and in the context of which the agreement was drafted).

The other way involves what can be regarded by the courts as abusive. An agreement between, say, an employer and employee in Ontario which “chooses” the law of some jurisdiction other than Ontario may be seen by the courts as an attempt by the employer to escape what the employer may regard as undesirable features of Ontario law. In such a case, the clause is likely to be ineffective.

It is important to keep in mind that the choice by a franchisor of, for example, the law of Manitoba in a choice of law clause will not avoid the application of the Arthur Wishart Act (the “Act”) to franchisees in Ontario. The law of Ontario, represented by the Act, will be regarded as a law of “mandatory application” and it will be applied, certainly by an Ontario court, whatever the agreement may say.

It is unusual, but perfectly possible, for the parties to do more and incorporate in their agreement, just as they can incorporate a schedule or some other document, the provisions of a statute. The fact that they can do this is the reason why it is important to be careful in drafting a choice of law clause. The decision that will be examined in the next paragraph is an example of the franchisor doing (or being held to have done) precisely that.

In 405341 Ontario Ltd. v. Midas Canada Inc., 2010 ONCA 478, 322 D.L.R. (4th) 177 (C.A.), the plaintiff, a franchisee, sought certification of a class action against the defendant, a franchisor. The franchise agreement had this choice of law clause:

Controlling Law: This Agreement, including all matters relating to the validity, construction, performance, and enforcement thereof, shall be governed by the laws of the Province of Ontario.

The trial judge and the Court of Appeal held that this clause was effective to impose on the franchisor the terms of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000, c. 3, sections 4 and 11, with respect to all its franchisees, notwithstanding that some of them were not in Ontario. The application of the Act in these circumstances was held not to involve the extra-territorial (and unconstitutional) application of Ontario law; it was as if the franchisor had said to all its franchisees, “We’re happy to extend to you all the rights you would have, were you Ontario franchisees.” In other words, it had (or, again, was taken to have) incorporated the Arthur Wishart Act into its franchise agreement.

The Court did not draw the distinction between a choice of law clause (as I have explained it) and a clause incorporating the provisions of a law, foreign or domestic, into an agreement, just as one might incorporate the terms or definitions of another agreement. (The difference lies in the fact that the changes in the governing law apply to the agreement, while the provisions of the law incorporated into the agreement are fixed at the date of the agreement.)

The important observation on the case is to say, “Be very careful what you ask for!”

The choice of law clause in Midas Canada is very unusual; I do not remember ever seeing one like this before.

In my opinion, a choice of law clause should say no more than this:

This agreement is governed by the laws of [Ontario] and the laws of Canada applicable therein.

A clause in this form is very common. (The reference to the “laws of Canada” is technically unnecessary, “Ontario law” includes the laws of Canada.) Given the risks to franchisors created by the Arthur Wishart Act and Midas Canada, it might, however, be safer to say:

This agreement is to be construed and interpreted in accordance with the laws of [Ontario] and the laws of Canada applicable therein.

While I have often suggested this form of the clause to clients, it’s not common, though it has the advantage of stating precisely what the chosen law is to do and recognizes that it can do no more.

Whatever you do, stay away from the language used by Midas; it’s far too dangerous.

The clauses I have offered, particularly the first one, may not avoid the problems faced by Midas in Midas Canada, but they do not invite, as the Midas clause obviously did, the court to do more. In a situation where, for example, you know that there is idiosyncratic (and perhaps unwanted) legislation in, say, Ontario, you might want to make the governing law, the chosen law, the law of the province where the franchisee is. Such a clause could easily be included in a standard-form agreement. Remember that you cannot avoid the application of, say, the Arthur Wishart Act or similar legislation in any other province by choosing the law of another province where there is no such legislation. By choosing the law of the place where the franchisee is, you largely eliminate the possibility that a court would be moved to apply a law like the Arthur Wishart Act to a franchisee who is not in the province with legislation like that.

The Midas Canada case does not mean that the choice of Ontario law in a choice of law clause, regardless of how the clause is drafted, will make the Arthur Wishart Act applicable to all franchisees wherever they are. A clause choosing, say, Ontario law must, however, be carefully drafted to make it very clear that the choice identifies only what can be called the background law against which the agreement was drafted and is not to be taken as a decision to give all franchisees the rights they would have had under the Arthur Wishart Act, had they been Ontario franchisees.