The risk of remaining silent on jurisdiction in contracts
It is not uncommon for certain types of agreements to be written without governing law or jurisdiction clauses − and it’s important for contracting parties to understand the risks involved with remaining silent on those issues, says Toronto health lawyer Michael Gleeson.
“We’re coming across more situations where parties who cannot come to agreement are instead choosing to remain silent on the issues of governing law and jurisdiction, but that decision comes with real risks,” he tells AdvocateDaily.com.
Gleeson, senior corporate counsel for Dykeman Dewhirst O’Brien LLP, explains that these clauses determine which law will govern the terms of the agreement — whether it will be the laws of Ontario, the laws of British Columbia, some state in the U.S. or some other country, for example. Usually there is one section of an agreement that will set out the governing law and the jurisdiction that applies to the agreement.
“How the agreement will be interpreted will be based on the jurisdiction and governing law specified in the agreement,” he says.
Gleeson says if a dispute arises between the contracting parties in connection with an agreement and the matter in dispute needs to be resolved by a third party (such as a court, regulatory body or alternative dispute mechanism), then a determination has to be made at the time of the dispute about, first, the jurisdiction in which the matter will be heard and, second, the law that will be applied when interpreting the agreement and resolving the dispute.
“More frequently now we’re coming across situations where those clauses have been intentionally omitted,” says Gleeson. “Often, we’re seeing this in situations where the parties are not-for-profits or public sector entities, such as universities or hospitals, and the parties are located in different jurisdictions.”
In such situations, it is not uncommon for each of the parties to be prohibited from agreeing to any governing law or jurisdiction other than that of its home province, state or country, as the case may be. These prohibitions may be imposed by legislation or they may be imposed by internal policy.
Gleeson says many Ontario hospitals, for example, have insurance that won’t cover claims that are resolved outside of Canada. Consequently, these hospitals may have internal policies that prevent the hospital from agreeing to be bound by a clause that imposes a jurisdiction other than its own.
“If two or more of the contracting parties are limited in their ability to accept a foreign jurisdiction or governing law, contract negotiations can reach a stalemate. The only way forward is to remain silent — or refrain from specifying a governing law and jurisdiction in the agreement — in order to move ahead with business,” says Gleeson. “If the parties are unable to agree on a jurisdiction, then they may each choose to take a gamble by having the agreement remain silent on jurisdiction in the hopes that, should any issue arise in the future, they’ll be able to convince an applicable court that their jurisdiction should be the one that applies."
Gleeson says a court will determine the governing law and jurisdiction that should apply to a contract based on a series of factors, which may include the location of the parties to the dispute, the location of the injured parties and the jurisdiction in which a majority of the work under that agreement took place.
“It’s an issue that would have to be sorted out by the courts, the outcome of which is not very predictable," he says. "And this leaves the client with some additional risk because if the issues of governing law or jurisdiction are decided against a party, that party may need to engage legal counsel in the foreign jurisdiction, bear the costs of travel to that foreign jurisdiction, and be subject to a legal regime with remedies and penalties that the party did not consider when negotiating the agreement.”
Gleeson says it’s important for the parties to understand the risks associated with omitting governing law and jurisdiction clauses from an agreement.
“Remaining silent is a calculated risk. But, if an organization is going to take this risk, it should at least understand the implications if its gamble doesn’t pay off,” he says. “Not specifying these terms in an agreement could lead to significant upfront legal costs in the event of a contractual dispute − associated with determining what the governing law and jurisdiction will be.”