Transactional Risk Insurance in CanadaCountdown to Canada’s Comeback: What to Expect for Mergers & Acquisitions in 2016Piercing the Corporate Veil: What is the Threshold of Wrongdoing?Governing Law and Choice of Forum Clauses

COMMERCIAL TRANSACTIONSon record

JANUARY 2016

On Record Contents:

1 Transactional Risk Insurance in Canada

3 Countdown to Canada’s Comeback: What to Expect for Mergers & Acquisitions in 2016

5 Piercing the Corporate Veil: What is the Threshold of Wrongdoing?

6 Governing Law and Choice of Forum Clauses

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COMMERCIAL TRANSACTIONS, EDITORS-IN-CHIEFMichael G. Martinmgm@bdplaw.com 403-260-5738Brianna Guentherbguenthier@bdplaw.com 403-806-0194

COMMERCIAL TRANSACTIONS, MANAGING EDITORRhonda G. Wishartrwishart@bdplaw.com 403-260-0268

GENERAL NOTICEOn Record is published by BD&P to provide our clients with timely information as a value-added service. The articles contained here should not be considered as legal advice due to their general nature. Please contact the authors, or other members of our Commercial Transactions team directly for more detailed information or specific professional advice.

Commercial Transactions LawyersAsh, Lauren lash@bdplaw.com ...................................................................................... 403-260-0199Dewart, Colby cdewart@bdplaw.com ....................................................................................... 403-260-0369Etchell, Adrian aetchell@bdplaw.com ....................................................................................... 403-260-0267Fridhandler, q.c., Daryl S. dsf@bdplaw.com ....................................................................................... 403-260-0113Grout, David A. dag@bdplaw.com ....................................................................................... 403-260-0326Guenther, Brianna bguenther@bdplaw.com ....................................................................................... 403-260-0194Josan, Sheena sjosan@bdplaw.com ....................................................................................... 403-260-5722LaBranche, Brittney N. blabranche@bdplaw.com ....................................................................................... 403-260-0344Luke, Colin A. cal@bdplaw.com ....................................................................................... 403-260-9468Martin, Michael G. mgm@bdplaw.com ....................................................................................... 403-260-5738Maxwell, David C. dcm@bdplaw.com ....................................................................................... 403-260-5741Otrhalek, Jordan jorthalek@bdplaw.com ....................................................................................... 403-260-0362Pettie, q.c., Alan T. atp@bdplaw.com ....................................................................................... 403-260-0127Quesnel, Alicia K. akq@bdplaw.com ....................................................................................... 403-260-0233Saffery, Hazel hsaffery@bdplaw.com ....................................................................................... 403-260-0173Sanche, John jsanche@bdplaw.com ....................................................................................... 403-260-0310Weldon, Ashley aweldon@bdplaw.com ....................................................................................... 403-260-0125Wivcharuk, Jody L. jlw@bdplaw.com ....................................................................................... 403-260-0129Wright, Carolyn A. caw@bdplaw.com ....................................................................................... 403-260-5721

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PAGE 1COMMERCIAL TRANSACTIONS

The seller, on the other hand, wants to limit its exposure under the transaction, make a clean break and receive the full purchase price at the closing of the deal. To this end, sellers will try to avoid escrows and holdbacks, seek narrow representations and warranties with short survival periods, and negotiate for high deductibles and low caps on indemnity obligations. These competing goals can create tension between parties, cause significant delays and may ultimately threaten to derail an entire deal.Sensing a window of opportunity, insurance companies have created Transactional Risk Insurance (“TRI”) products, providing solutions for parties concerned about encountering hold-ups in negotiations due to these contrary motivations. Various forms of TRI exist, including:• Representation and Warranty Insurance (“RWI”), which exists

to provide protection in the event of an inaccuracy or breach of a representation or warranty that results in a loss;

• Tax Liability Insurance (“TLI”), which is designed to provide protection for costs arising from a challenge by a tax authority to a specific tax position taken by a party to an M&A transaction; and

• Contingent Liability Insurance (“CLI”), which provides coverage for known exposures within the context of a particular transaction.

This article takes an in-depth look at RWI, and briefly considers TLI and CLI.

Recent TrendsTRI products have been offered in Canada since the 1990s, and these products are becoming increasingly popular as a risk-allocation tool in negotiated M&A transactions.

In recent years, there has been a significant increase in the Canadian market for TRI. Estimates say that in 2014, the amount of policy limits placed was $12 billion, as compared to $3 billion in 2012. While estimates suggest that only 2% of Canadian deals employ TRI, policies are used in approximately 5-10% of US deals and as high as 85-90% of Australian private equity deals.2

Representation and Warranty InsuranceInaccuracies in representations and warranties made in the course of a negotiated M&A transaction can result in costly liabilities. Buyers may find themselves without recourse to recover losses and sellers may be forced to return a portion of the purchase price. Because of the incredibly high stakes, negotiations regarding representations and warranties can become heated. RWI can facilitate negotiations by bridging gaps on contentious deal points.

What is RWI?When a party suffers a loss as a result of a breach of a representation or warranty provided for in a purchase and sale agreement (“PSA”) — RWI comes into play. The RWI policy supplements indemnification provisions in the PSA and shifts transactional risks from the contracting parties to a third party insurer. Either a buyer or a seller may purchase an RWI policy, and each would have unique motivations for doing so.

IntroductionIn any M&A transaction, risk allocation is a primary concern, with each side wanting the other to hold the lion’s share of the risks inherent in the deal. The buyer wants to minimize liabilities inherited from the target company, and will seek to employ various mechanisms to help mitigate these risks. They may negotiate for holdback and escrow mechanisms, seek broad representations and warranties and request comprehensive indemnities with long survival periods.

Transactional Risk Insurance in CanadaBy Brianna Guenther and Larissa Roche, Students-at-Law

PAGE 2COMMERCIAL TRANSACTIONS

Some of the reasons a buyer may be motivated to purchase an RWI policy include:• to enhance and distinguish a bid and gain a competitive

advantage over other bidders in an auction scenario;• to offset the credit risk of collecting from the seller in the

case of a breach; and• to preserve key relationships in cases where members of

the seller’s management group are remaining with the company — for example, the buyer may wish to avoid the awkward situation of having to sue its own management team in the case of a breach.

Some of the reasons a seller may be motivated to purchase an RWI policy include:• to obtain proceeds immediately (RWI minimizes the need

for escrow or holdback mechanisms); • to relieve future risk of having to repay a part of the purchase

price at a later date, providing for a clean exit for the seller; and • to create value — a seller may rely on RWI to negotiate a

higher purchase price in exchange for agreeing to enhanced representations, warranties and indemnities in the PSA.

Obtaining RWIMost reputable insurers now have sophisticated M&A groups and processes, dedicated exclusively to dealing with RWI. Members of these groups are experienced in M&A transactions in a variety of roles. The key steps to putting an RWI policy into place include:• Non-Disclosure Agreement: The insurer and the party

seeking insurance typically execute a non-disclosure agreement.• Submission of Materials: The party seeking insurance

submits the draft PSA and related materials in order for the insurer to come up with a preliminary price and coverage quote (this typically takes between 2 to 3 business days).

• Underwriting Process: The insurer collects a non-refundable underwriting fee (typically between $25,000 and $50,000, credited against the final cost of the policy when issued) before it begins its review of any due diligence materials. This fee is intended to cover the insurer’s costs of retaining outside legal counsel to assist with the due diligence process, as well as the negotiation of the policy. The underwriting process is typically completed in 3 to 10 days.

• Negotiation of the Policy: Each policy will have unique considerations for the insured and insurer to take into account during negotiations, but some key issues they must deal with include defining the scope of insured losses and exclusions, the coverage term and subrogation rights.

• Cost: Premiums will vary from deal to deal, but typically range between 2 to 4% of the amount of insurance purchased. Various factors will influence the cost of an RWI policy, however in sum, the premium will depend on the insurer’s assessment of the deal’s risk profile.

Insurers indicate that RWI is best suited for companies valued between $25 million and $1 billion, and that generally speaking, coverage up to $50 million is available per transaction.6

Making a Claim under an RWI PolicyIn order to make a claim under an RWI policy, the insured must establish that a breach of one or more of the representations or warranties contained in the PSA occurred and that it suffered a loss as a result.Some parties that are new to the TRI scene may be hesitant to buy-in due to the possibility that an insurer may not pay out on a claim. However, in the U.S., reputable insurance providers have developed a track record of paying out claims. Canadian insurers will most likely continue this trend, as it is in their best interests to build up confidence in the use of their products.

Tax Liability InsuranceAnother TRI product is TLI. Often, parties cannot agree on the allocation of the potential costs arising from a challenge to a specific tax position taken by a party to an M&A transaction. TLI allows parties to reduce or eliminate these known tax exposures, enabling them to negotiate the rest of the deal more efficiently.Parties typically purchase TLI when the likelihood of a tax liability is low, but the potential amount of liability is substantial. Parties may also purchase TLI where tax authorities refuse to provide advance rulings on identified tax issues.8

Contingent Liability InsuranceFinally, CLI is another form of TRI. Known exposures, such as litigation exposures, environmental issues and employment matters can be addressed through the use of CLI. As with TLI, parties often purchase CLI when the likelihood of a contingent liability is low, but the potential amount of the liability is substantial. Insurers will only issue a CLI policy where the risk is quantifiable, where a probability assessment is possible and where no moral hazard exists (in other words, when the seller or buyer knows a liability will arise, yet seeks insurance for that liability anyways, CLI will not be available).9

ConclusionThe popularity of TRI products in the Canadian M&A marketplace continues to grow. These products provide flexibility in M&A transactions, allowing parties to negotiate deals quickly and efficiently. As more people learn about the benefits of using TRI products, parties will increasingly rely on them as a risk-allocation tool.

Footnotes

1 Law 360, Insurers Fight To Keep Up As Deal Insurance Goes Mainstream Law 360 dated January 26, 2015, accessible online at: http//www.kirkland.com/sitecontent.cfm?contentID=230&itemId=11410.

2 Presentation Using Transaction Insurance to Solve Risk Allocation In the Current M&A Transaction Environment co-hosted by Burnet, Duckworth & Palmer LLP, Gallagher Energy Risk Services and Ironshore Canada, June 10, 2015, estimate provided by Ironshore Canada.

3 Presentation by AIG, “Transactional Insurance: Winning Deals and Eliminating Liabilities”, Mergers & Acquisitions.

4 Ibid.5 AIG, “Representations and Warranties Insurance”, Financial Lines (Newsletter), online: http//

www.aig.com/Chartis/internet/US/en/RepsandWarranties_FINAL_0513_tcm3171-423913.pdf.6 Ibid.7 Marsh, “Transactional Risk Insurance” (2011), Private Equity and M&A Services (Newsletter),

online: http://canada.marsh.com/Portals/15/documents/Marsh%20Transactional%20Risk%20Primer.pdf

8 ACE Insured, “Transactional Risk Insurance Products” ( 2015), (Newsletter), online: http//www.acegroup.com/us-en/assets/617519-transactional-risk-products-01.15.pdf.

9 Supra note 7.

What We Expected for 2015Early predictions for M&A activity in 2015 were mixed. On one hand, low oil prices and continued weakness in the Canadian dollar pointed towards strong M&A market activity in Canada, driven by an expectation of large-scale foreign investment. On the other, chronic volatility in the oil and gas industry painted a picture of uncertainty and trepidation.

Nonetheless, strong performance of the markets throughout 2014 lent Canadian corporations a sense of cautious optimism in terms of M&A for 2015. Following the first quarter of 2015, PWC reported that 80% of Canadian CEOs planned to enter a strategic alliance or joint venture over the next year, with 30% of Canadian CEOs expecting to undertake cross-border M&A over the next year.1

What We Saw in 2015In keeping with mixed predictions, results too were varied. Crosbie & Company reported that Canada had 652 deals valued at $75 billion in Q2 2015, down from 768 deals worth $58 billion in Q2 2014. Thus, while the number of deals decreased more than 15%, deal value increased approximately 29%. It is worth noting however, that fewer larger deals

PAGE 3COMMERCIAL TRANSACTIONS

By now it’s no secret that Canadian business has been reeling from the effects of the plunge in oil prices this year. Having begun its decline from US$100 in mid-2014, the price of West Texas Intermediate has been flirting with the US$40 mark of late. While a 60% dive in oil prices is certainly not unprecedented, the speed with which it occurred has surprised many. And still, the question remains — when will we see Canada rebound from recession?

Countdown to Canada’s Comeback:What to Expect for Mergers & Acquisitions in 2016By Sheena Josan

are not necessarily indicative of a healthy M&A market. This is particularly the case where certain sectors experience prolonged weakness, such as the current state of the energy sector in Canada. Not surprisingly, M&A activity in the energy sector declined by 45% from 97 deals in Q2 2014 to 53 deals in Q2 2015.In its Q3 2015 trend report, Mergermarket reported that Canadian M&A activity was lagging significantly behind 2014 numbers. Through the first three quarters of 2015, there were 447 deals worth US$62.4 billion, down 16.2% in value compared to the same period in 2014. With these numbers, Canada contributed only 4.2% to total North American M&A deal value, a record low. Underlying Canada’s poor performance was the significant decline in inbound M&A activity, calculated at a 51% decrease in value compared to 2014. The slump in inbound activity is a clear indicator that the expected influx of foreign acquirers attracted by the low Canadian dollar has not yet materialized.

The news is not all bad, however. Outbound M&A from Q1-Q3 2015 reached a record high with 213 deals worth US$125.4 billion, up approximately 165% compared to 2014’s full year deal value (260 deals worth US$47.3 billion). Similarly, Canada had impressive activity in private equity through Q3, with 43 transactions worth US$8.5 billion. Private equity activity numbers from Q1-Q3 have already overtaken all annual totals since 2010.3

While the Canadian market has undoubtedly seen the effects of its struggling energy industry, it appears the slump may not have created the shockwaves initially expected. August saw Canada’s economy grow for the third straight month, solidifying what many

viewed to be an official rebound from the oil shock. Interestingly, the global M&A market saw record values, with both deal value and number of deals substantially increasing from 2014. Caught between a robust global economy and a weak energy industry at home, Canada’s 2015 economic performance has been, perhaps expectedly, unremarkable.

What We Might See in 2016Despite somewhat modest numbers so far, the Canadian market looks poised for resurgence in M&A activity through 2016. In particular, 2016 may usher in a new wave of M&A pursued by Canadian companies as a solution to financial distress. During the financial crisis of 2008, M&A was one of the most common exit strategies for companies not able to withstand the troubled economy. The popularity of M&A as a chosen strategy in financial crisis is illustrative of the “buy or be bought” mentality that inevitably surfaces during economic distress. We can perhaps expect more M&A activity as a result of the reconciliation of buyer and seller expectations in the coming months. Companies looking for injection of new capital to continue operations, as well as those seeking reprieve from debt covenant problems, will look to healthier suitors for transactional opportunities.

Some industry players maintain that the 2008-2009 financial crisis was exponentially worse than current market conditions, and understandably so. The current slump in oil prices comes amidst an otherwise generally healthy global economy, whereas the 2009 tumble in oil prices was more a microcosm of the widespread global financial crisis. A better global sense of security and predictability than 2009 may be just the silver lining Canadian business needs to stimulate its inclination for M&A.

It is also possible that the foreign investment expected due to low oil prices and the low Canadian dollar has simply not yet come to fruition. Increased stability in world markets, strong global M&A activity and distressed and strategic transactions may all induce greater cross-border activity than 2015. Similarly, we can expect an increase in M&A activity simply due to decisions having been deferred from 2015. It’s likely that many Canadian corporations opted to postpone significant business decisions amidst market uncertainty over the course of the past year. Those transactions could very well materialize in the coming year. Lastly, not to be overlooked is the overall fitness of Canada’s economy. Where oil and gas has struggled, the real estate, retail and technology industries in Canada have all experienced steady growth. M&A activity in those sectors, among others, can be expected to remain at favourable levels, given industry trends.

Notwithstanding encouraging predictions, Canadian business decisions will undoubtedly stay driven by caution. A volatile year like 2015 will push corporations to be conservative and selective, pursuing only those opportunities that align well with their long-term strategy. Despite that, 2016 still looks set to mark the start of Canada’s foray into M&A revival.

Footnotes

1 “Capital Markets Flash”, Canadian M&A Deals Quarterly, PricewaterhouseCoopers LLP, 2015, available online: www.pwc.com/ca/en/services/deals/publications/capital-markets-flash.html

2 “Mergermarket trend report Q1-Q3 2015”, Mergermarket, 2015

3 Ibid.4 “Canada’s Economy Grows for Third Straight Month

in August”, Bloomberg Business, October 30, 2015, available online: www.bloomberg.com/news/articles/2015-10-30/canada-s-economy-grows-for-third-month-in-august-on-factories

PAGE 4COMMERCIAL TRANSACTIONS

The popularity of M&A as a chosen strategy in financial crisis is illustrative of the “buy or be bought” mentality that inevitably surfaces during economic distress. We can perhaps expect more M&A activity as a result of the reconciliation of buyer and seller expectations in the coming months.

COMMERCIAL TRANSACTIONS PAGE 5

The concept that a corporation has a separate legal personality is fundamental to corporate law. Likewise is the premise that a shareholder’s liability is generally limited to what the shareholder invests — the “corporate veil” protects shareholders from liability. While the corporate veil may be permeable in certain circumstances, determining those circumstances is challenging. The Supreme Court of Canada itself has concluded that the test for piercing the corporate veil “follows no consistent principle”.1 The Supreme Court did acknowledge however, that the corporate veil should be pierced in circumstances where to not do so “would yield a result too flagrantly opposed to justice.”2

This raises the question: What qualifies as flagrantly opposed to justice? In Alberta, the courts have enumerated several extraordinary circumstances that may warrant piercing the corporate veil, including circumstances where:• A corporation is formed specifically to do a wrongful act;• Those in control specifically direct the doing of a wrongful act;• Fraud is committed;• The corporation is the mere agent of another legal entity;• Two separate entities are in fact one enterprise or operation; and• The corporation is a mere “alter ego” of the controlling

shareholder.3

The underlying theme in the determination of circumstances where the corporate veil can be pierced is that of a corporation being used as a vehicle for fraud or a substantial wrongdoing. While the decision to pierce the corporate veil is very fact specific, it is clear that a substantive wrong must have occurred — courts will not pierce the corporate veil merely because it would be fair to do so. This is illustrated clearly in the case of single shareholder corporations, where courts have held that to pierce the corporate veil the single shareholder must:• Control the actions of the corporation; and• Use that control to have the corporation act for a fraudulent

or improper purpose.By requiring the corporation both to be controlled by the shareholder and used for a fraudulent or improper purpose, the courts recognize that single shareholder corporations are often operated in the best interest of their sole shareholder. Without the further requirement for wrongdoing, the separate legal entity of a single shareholder corporation would be rendered moot.

The Threshold of Wrongdoing is Very HighThe threshold for consideration of shareholder fraud or wrongdoing as a flagrant violation of justice is very high and for

this reason, there are not many Alberta cases where the courts have been willing to pierce the corporate veil. In Massey v Brost 4 (“Massey”), the shareholder’s conduct met the high threshold. Mr. Massey agreed to finance the construction of a house by Mr. Brost and his company Extractor Industries Inc. Extractor was to construct the house for $120,000 and sell it with 75% of profits going to Mr. Massey. Funds for the house were to be handled through a bank account with joint signing authority for Mr. Massey and Extractor. A severely cold winter delayed construction of the house. When Mr. Massey left on holidays for 6 weeks, he and Mr. Brost agreed that Extractor would pay for the construction of the home using the account and then present invoices to Mr. Massey on his return. In total, Mr. Massey deposited or made direct payments to Extractor of $94,200.Construction did not progress as planned. Mr. Massey unsuccessfully attempted to receive an accounting of costs from Extractor and Mr. Brost and eventually commenced an action. The Court found that Mr. Brost had used several of Mr. Massey’s cheques to deposit funds from the joint account directly into Extractor’s general account, instead of paying for construction of the house as agreed. There were no invoices drawn up for the cheques and Mr. Brost prevented no credible evidence as to where the money went. The Court concluded that Extractor had been using Mr. Massey’s money to construct a different, unrelated home.Ultimately, the Court found that Mr. Brost had diverted $35,000 of Mr. Massey’s money to his own purposes. Based on this dishonest and morally wrong conduct the Court had “… no hesitation in piercing the corporate veil of Extractor and finding Mr. Brost personally liable to Mr. Massey as a result of his fraud and deceit…”.5

Massey is an example of clear-cut fraudulent behaviour resulting in the court piercing the corporate veil of a single shareholder corporation.

Concluding ThoughtsThe reluctance of the courts to pierce the corporate veil remains a general principle of law, with the exception being those cases of fraud and substantial wrongdoing that flagrantly violate a reasonable sense of justice.

Footnotes

1 Kosmopoulos v Constitution Ins. Co. of Canada [1987] 1 SCR 2 [Kosmopoulos]2 Kosmopoulos at para. 12.3 Bond Street Properties Inc. v Alberta Permit Pro 2010 ABQB 416 at para. 27.4 [1996] A.J. No. 424 [Massey]5 Massey at para. 93.

Piercing the Corporate Veil: What is the Threshold of Wrongdoing?

By Brianna Guenther and Riley O’Brien, Student-at-Law

WHAT THAT MEANSSO THAT’S PAGE 6

COMMERCIAL TRANSACTIONS

Governing Law and Choice of Forum Clauses — What Are They?When two companies based in different provinces enter into a commercial contract and a dispute occurs, the question often arises as to which province’s laws will govern. This can be a significant issue since laws vary from jurisdiction to jurisdiction and such variations can have significant impacts on how disputes are resolved. A “governing law” clause allows the parties to a commercial contract to choose the “proper law of the contract” i.e. the system of law by which the parties intend the contract to be governed.1

An example of provincial law differences exists in variations in limitation periods across the provinces. These differences could mean that a claim could be statute barred under Alberta law if it is not commenced within 10 years while still valid in Ontario for an additional 5 years. In light of such differences, there are serious implications of one jurisdiction’s laws being chosen over another as the governing law of a commercial contract.

A governing law clause may or may not include a “choice of forum” component. A choice of forum clause allows the parties to choose the court or jurisdiction that will hear an action relating to the contract.2 Where the governing law and choice of forum are not expressly specified in the contract, courts will look to other terms of the agreement and relevant surrounding circumstances to determine the appropriate law and forum. If the parties to an agreement wish to have certainty as to the governing law and choice of forum, they must clearly and precisely indicate this in the agreement.

The Absence of a Governing Law ClauseThe proper law of the contract is the law that the parties intended to apply at the time the contract was created. As a rule, if the choice of governing law in a contract is bona fide and legal, and if there is no reason for avoiding the choice on public policy grounds, the choice of law specified by the parties in a governing law clause will be upheld by the courts as the proper law of the contract.3

Where the parties have not expressly chosen a governing law in the agreement, the proper law of the contract will be established by the courts by determining the system of law with which the transaction has the “closest and most substantial connection.”4 Courts will evaluate the following factors to determine the “closest and most substantial connection”: • the domicile and 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, as, for instance, 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 and subject matter of the contract;

Governing Law and Choice of Forum ClausesBy Jordan Otrhalek and Larissa Roche, Student-at-Law

PAGE 7COMMERCIAL TRANSACTIONS

• the location of the head office of a corporation; and

• any other fact which serves to localize the contract.5

In the absence of a clearly chosen governing law, there is a possibility that a court may determine that the proper law of the contract is a law that the parties never intended to apply, exposing the parties to the risk that the court’s determination may have negative or unforeseen consequences should a dispute arise.

Including the Federal Jurisdiction In Canada, parties often draft governing law clauses by citing the laws of one specific province, followed by the phrase “and the laws of Canada applicable therein.” There is some debate whether this phrase is necessary. The phrase implies the possibility that certain federal laws of Canada may not be applicable in a province. Elderkin and Doi suggest the door is open for federal laws of Canada that do not apply in each province and, therefore, recommend the phrase should be used to provide certainty when drafting governing law clauses.6

The Choice of ForumGoverning law and choice of forum are separate issues that can be dealt with in one clause, as in the example below, or in separate provisions. Parties may specify a forum that does not correspond with the choice of law for the contract. For example, the parties may choose the laws of the province of Alberta to govern the contract while submitting to the jurisdiction of the courts of British Columbia. Parties may choose that arrangement if they prefer the benefit of applying a particular province’s laws to substantive matters, while taking advantage of the procedural rules or convenient location of another province’s courts.

A choice of forum provision will generally be upheld by the courts unless one of the parties can show “strong cause” that the parties should not be bound by the clause.7 The burden is on the party arguing against the choice of forum to prove its case. In the absence of a strong cause, courts will strive to promote certainty and fairness in commercial transactions by holding contracting parties to the terms of their agreements.

In a choice of forum provision, the parties may choose whether a specific court has “exclusive” or “non-exclusive” jurisdiction. While it may be possible to confer exclusive jurisdiction without express use of the term “exclusive”, parties are advised to explicitly state that the chosen jurisdiction has “exclusive” or “non-exclusive” jurisdiction, as the case may be, in order to provide greater certainty.

Drafting the ClausesWhen drafting governing law and choice of forum clauses, it is important to ensure the parties’ intention is properly captured. For example, the terms “submit” and “attorn” are often used interchangeably. However, in Naccarato v Brio Beverages Inc.8 the Court held that use of the word “submit” in a choice of forum clause meant the clause was permissive and non-mandatory. This allowed the Court to find it had concurrent jurisdiction to hear the matter. The need for precision and the use of mandatory language, where intended, applies equally to the choice of governing law clause.

An example of a governing law clause that includes choice of forum is as follows:

This Agreement and each of the documents contemplated by or delivered under or in connection with this Agreement are governed by and are to be construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and

treated in all respects as an Ontario contract. The parties hereby irrevocably and unconditionally attorn to the exclusive jurisdiction of the courts of the Province of Ontario and all courts competent to hear appeals therefrom.9

Concluding ThoughtsWhen drafting commercial contracts, drafters should clearly and precisely provide for both choice of law and choice of forum, keeping in mind the forum does not have to correspond to the governing law. Issues of substantive law will be determined by the proper law of the contract, while issues of procedure will be determined by the law of the forum. In complex agreements, the parties may wish to have different parts of the agreement governed by different systems of law and the governing law and choice of forum clauses can be drafted accordingly.

If the parties wish to confer exclusive jurisdiction to a specific court, the term “exclusive” as well as other mandatory language should be used to ensure that no other court has concurrent jurisdiction to determine issues under the contract. If the parties wish to confer concurrent jurisdiction, then the term “non-exclusive” should be used.10

Footnotes

1 Cynthia L. Elderkin & Julia S. Shin Doi, Behind and Beyond Boilerplate: Drafting Commercial Agreements, 3d ed (Toronto: Carswell, 2011) at 81. [Elderkin and Doi]

2 Ibid. 3 Vita Food Products Inc. v Unus Shipping Co. Ltd.,

[1939] 1 All ER 513 (PC). 4 Imperial Life Assurance Co. of Canada v Colmenares,

[1967] SCR 443 at 448. 5 Lilydale Cooperative Limited v Meyn Canada Inc.,

2015 0NCA 281 at para 10, citing GC Cheshire, Private International Law, 7th ed, (London: Butterworths, 1965) at 190.

6 Elderkin and Doi, Supra note 1 at 85. 7 Z.I. Pompey Insustrie v ECU-Line N.V., [2003] 1 SCR 450. 8 1998 ABQB 1. 9 Elderkin and Doi, supra note 1 at 81.10 Elderkin and Doi, supra note 1 at 91.

The burden is on the party arguing against the choice of forum to prove its case. In the absence of a strong cause, courts will strive to promote certainty and fairness in commercial transactions by holding contracting parties to the terms of their agreements.

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