Parties doing business across different jurisdictions should include a choice of law clause in their contracts in order to ensure an efficient dispute resolution process. In Lilydale Cooperative Limited v Meyn Canada Inc(1) the Ontario Court of Appeal examined the issue of which province's law applies to a multi-jurisdictional sale of goods contract in which the parties themselves failed to address the matter in their agreement. The decision is significant because the court affirmed the longstanding choice of law test that focuses on which jurisdiction has the "closest and most substantial connection" to the contract and listed the relevant criteria that inform the court's analysis.(2)
The plaintiff, Lilydale Cooperative Limited, operated a poultry processing plant in Alberta. The defendant, Meyn Canada Inc, was a multinational provider of poultry processing solutions that carried on business in Ontario.
In 1993 Lilydale purchased a fryer and oven system from Meyn. Lilydale used the oven for 10 years until 2004 when a fire occurred in its plant. In 2006 Lilydale brought an action against Meyn in Ontario for negligence and breach of contract. Lilydale alleged that the oven was defective and started the fire in its plant.
Under Rule 22 of the Ontario Rules of Civil Procedure,(3) the parties to a proceeding may bring a motion in the form of a special case for the opinion of the court. A judge may hear the special case where he or she is satisfied that the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in substantial cost savings.(4)
Lilydale and Meyn jointly brought a motion by special case for the opinion of the court to decide whether Alberta or Ontario law applied to Lilydale's action in tort and contract. The issue was important because the two provinces have different ultimate limitation periods. In Ontario, the ultimate limitation period is 15 years, whereas in Alberta, the ultimate limitation period is 10 years.(5) Lilydale's claim arose no later than August 31 1994. Therefore, since Lilydale did not commence an action until January 2006, its action would be statute-barred under Alberta law but within the ultimate limitation period under Ontario law.
The motion judge determined that Alberta law applied to the tort claim but that Ontario law applied to the breach of contract claim. Since the contract between Lilydale and Meyn did not include a choice of law provision, the motion judge considered which jurisdiction had the closest and most substantial connection to the contract. The motion judge relied on four criteria:
- the nature and subject matter of the contract;
- the place of performance of the contract;
- the place of contracting; and
- the residence and domicile of the parties.
The motion judge held that while the last two criteria were neutral, the first two criteria – namely, the nature and subject matter of the contract and the place of performance of the contract – favoured Ontario. Consequently, the motion judge decided that Ontario law governed the claim for breach of contract and, perhaps most importantly, Lilydale's action was not statute barred by the ultimate limitation period.
On appeal, Meyn acknowledged that the motion judge cited the correct legal test but misapplied it to the factual circumstances. In particular, Meyn appealed the motion judge's findings in respect of the nature and subject matter of the contract and the place of performance of the contract.
In Lilydale Cooperative the Ontario Court of Appeal took the opportunity to review the closest and most substantial connection test, which was first established by the Supreme Court in Imperial Life Assurance Co of Canada v Colmenares.(6) In that case the Supreme Court, relying on English case law, held that:
"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 the circumstances which surround it and applying the law with which it appears to have the closest and most substantial connection."(7)
The Supreme Court referenced Professor Cheshire's Private International Law(8) for the criteria that inform the closest and most substantial connection test:
- the domicile and even the residence of the parties;
- the national character of a corporation and the place where its principal place of business is situated;
- the place where the contract is made and the place where it is to be performed;
- the style in which the contract is drafted (eg, whether the language is appropriate to one system of law but inappropriate to another);
- the fact that a certain stipulation is valid under one law but void under another;
- the economic connection of the contract with some other transaction;
- the nature of the subject matter or its location;
- the head office of a company whose activities range over many countries; and
- any other fact which serves to localise the contract.(9)
The identification and balancing of the relevant criteria that inform the closest and most substantial connection test in each particular case necessarily involves an exercise of judicial discretion. The Ontario Court of Appeal indicated that unless the motion judge "made an error of law or an unreasonable finding of fact or balanced the criteria in an unreasonable way", an appellate court should not interfere.(10) In that context, the appeal court dismissed Meyn's appeal and held that the motion judge did not err in concluding that Ontario law applied to Lilydale's action for breach of contract.
The parties' agreed statement of facts characterised the nature and subject matter of the contract as a transaction "regarding the design and sale of a fryer and oven system by Meyn to Lilydale".(11) The design of the oven system required Meyn to order several different components from various suppliers and arrange for them to be delivered to Lilydale. The ordering of the components and the design of the oven system occurred in Ontario.
According to the appeal court, "[t]he place of performance of the contract is related to its subject matter and, for determining the applicable law, is perhaps the most important criterion".(12) The contract required Meyn to deliver the oven system to Lilydale's plant in Edmonton, Alberta and arrange for installation and start-up by a technician. Although there is case law involving multi-jurisdictional contracts for the sale of goods in which the jurisdiction where delivery and installation take place constitute the jurisdiction whose law applies to the contract, the appeal court confirmed that the place of delivery is not necessarily determinative of the issue.(13)
Indeed, the contract between Lilydale and Meyn was performed partly in Alberta and partly in Ontario. The system design component of the contract was significant and was ultimately performed in Ontario. Therefore, the motion judge's finding that most of the contract was performed in Ontario was a reasonable conclusion that was buttressed by the parties' agreed statement of facts. In this regard, however, the appeal court recognised that "[a]nother judge might have found that performance of [the] contract favoured Alberta instead of Ontario".(14)
The Ontario Court of Appeal's decision in Lilydale Cooperative demonstrates the contextual application of the closest and most substantial connection test, which involves a discretionary balancing of several criteria. The case also serves to underscore the importance of choice of law and other dispute resolution clauses in multi-jurisdictional contracts, and how the failure to include such clauses can leave a relatively straightforward dispute mired in jurisdictional challenges.
For further information on this topic please contact Michael D Schafler or Ara Basmadjian at Dentons Canada LLP by telephone (+1 416 863 4511) or email ([email protected] or [email protected]). The Dentons website can be accessed at www.dentons.com.
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