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Growth Beware of forum and governing law clauses in commercial contracts

All too often, proprietorships, partnerships, startups and even established small business owners negotiate business contracts without the use of a lawyer. In my experience, many of these small business owners can be very astute and adept negotiators, concentrating on the important issues pertaining to money. Sometimes, however, they ignore the importance of the "boilerplate" (the parts of a contract that are often considered standard non-negotiable legalese ) because it's only "boilerplate" and not really a "money issue".

Nothing could be further from the truth.

Although I could write article after article about the pros and cons of various boilerplate clauses, perhaps the most significant boilerplate clauses involve the law under which disputes will be governed, and the forum where disputes will be heard by a court or an arbitrator. Not paying attention to governing law and forum could cost a lot of money.

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Generally, there will be a clause in all commercial agreements where the parties agree that "governing law" will be the law of a particular Canadian province or U.S. state (although the parties can choose the law of any jurisdiction in the world if they want). Basically, the way the governing law clause works is that even if the governing law chosen by the parties is the law of Newfoundland and Labrador, if the action is brought in British Columbia, and the agreement is silent on forum (or the parties have otherwise agreed to resolve the dispute in B.C.), the court or arbitrator will still apply Newfoundland and Labrador law to the extent that it is different than B.C. law. Forum, on the other hand, is the jurisdiction where the the dispute will be heard, as agreed by the parties.

If the governing law and forum clauses specify Newfoundland and Labrador as the governing law and the jurisdiction where all disputes will be heard, then the small businessperson has no choice. It must use the courts of N.L. and the laws of that province in the event that he or she wants to sue the other company. Likewise, the other side must use the courts of Newfoundland and Labrador as well.

Vancouver litigation lawyer Scott MacKenzie says: "absent something like fraud or improper inducement which would justify departure from a forum selection clause, as long as a forum selection clause establishes exclusive jurisdiction, a Canadian court is likely to enforce it, particularly in the commercial context."

In many contracts where there is an inequality of bargaining power, (i.e. Big Company vs. Mom and Pop), the larger company will choose a governing law and jurisdiction that benefits it the most. For example, an Ontario corporation contracting with a B.C. small business may insist on Ont. governing law and forum for three reasons: First, they are familiar with the laws of the province. Second, their lawyers are in the province. And third, any action commenced by the other party (who may be in B.C. or N.L.) will have to go to the trouble to hire Ont. counsel and indeed travel to Ontario to litigate the dispute, whether as plaintiff or as defendant. This could conceivably put the weaker party from B.C. or N.L. in a financial bind because of the added costs of litigating the dispute in a jurisdiction 2,500 kilometres away and with Ontario counsel.

It comes as a shock to clients when I review their contracts and advise them that they can only bring legal action against the other party (or arbitrate the contract) in Florida, and under Florida law, for example. This presents a huge challenge to litigants, especially those with valid claims who may not be able to afford to litigate in a foreign jurisdiction far away (and it's even more challenging given the recent decline in the Canadian dollar).

There's an important exception to this and it involves franchise laws: A few months ago, someone at a franchise law conference I attended criticized the franchise legislation in force in in Alberta, Manitoba, Ontario, Prince Edward Island, and New Brunswick, stating – among other things – that it doesn't help small business.

Well, one good example where franchise legislation is beneficial to small business is in respect to governing law and forum for the resolution of franchise disputes.

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Each of Canada's provincial franchise laws requires that all franchise agreements will be governed by the laws of the jurisdiction in which the franchisee is situate, and that disputes will be heard within the jurisdiction of that province. Accordingly, if a Florida-based franchisor contracts with an Ontario franchisee in Stratford, then regardless of what the franchise agreement says, all franchise related disputes with respect to the Stratford franchise will be heard in Ontario and under Ontario law. Alberta, Manitoba, PEI and New Brunswick franchise laws have similar provisions. A U.S. based franchisor cant take strategic advantage of a franchisee in Ontario, Alberta and the other legislation provinces by requiring all disputes be litigated in, say, Florida.

B.C., Nova Scotia, Newfoundland and Saskatchewan do not have franchise legislation. So if a B.C.-based franchisee has a claim against its Florida based franchisor, if the contract prescribes Florida as governing law and forum, a court in B.C. would normally reject jurisdiction because the contract specifies Florida as the jurisdiction where disputes must be heard.

This puts B.C.-based franchisees, who are, in essence, small businesspersons, at an extreme disadvantage in circumstances where they have a dispute and the contract requires them to go to Florida to litigate their claim, whether as plaintiff or defendant. And as noted earlier, if these franchisees were in other provinces like Ontario, Alberta, PEI, Manitoba or New Brunswick, they would receive the protection of the respective statutes and could litigate "at home". Not so in BC.

The B.C. government is currently studying the possible implementation of franchise laws in that province. Certainly, levelling the playing field and prescribing that all disputes involving B.C. based franchisees must be heard in this province under BC law would be a significant benefit to those in the small business community who own franchises.

Tony Wilson is a franchising, licensing and intellectual property lawyer at Boughton Law Corp. in Vancouver, he is an adjunct professor at Simon Fraser University (SFU), and he is the author of two books: Manage Your Online Reputation, and Buying a Franchise in Canada. His opinions do not reflect those of the Law Society of British Columbia, SFU or any other organization.

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