Governing Law and Jurisdiction clauses • Legal Desk, June 2018
By Dan Leduc
July 27, 2018 — I’ve noticed a common trait among the various members of the construction industry that I meet through my work and at conferences. Please don’t hate me for saying it, but many of you are loathe to read your construction contracts or, at the least, have someone read them for you.
Granted, when some construction contracts contain 350-word paragraphs, this trait is easy to forgive.
The pitfalls of not reading your contract (or any contract that is incorporated by reference into your construction contract) are obvious. I’ve often seen the excitement of a potential profit descend into dismay because of a failure to note the Liquidated Damages clause, the massive indemnity that goes beyond insurance coverage, or the Governing Law and Jurisdiction clauses, to name but a few.
Let’s have a look at that last one: what are the Governing Law and Jurisdiction clauses? Each contract needs to have applicable law, and applicable jurisdiction terms and conditions. These conditions may be implied, as when two Ontario companies contract for a project in Ontario.
But take an auto-manufacturing subcontract between an American general contractor and an Ontario sub for work at a plant in Ontario. There is the strongest likelihood that the American GC’s standard form of contract is going to state the applicable law is, say, the law of the State of Tennessee. I have also seen Quebec law applied to an Ontario project. In fact, I have seen just about every North American jurisdiction’s law applied to a contract for work in Ontario.
Should any issue arise, your dispute will fall under the foreign jurisdiction’s law, which can be very prejudicial to you.
Also prejudicial to those in Ontario — who are heading into mandatory statutory adjudication as part of their dispute resolution protocols under the new Construction Lien Act (October 2019) — is the burden of having to prove that foreign law to Ontario adjudicators.
Many believe — myself included — that you will need to tackle these issues via some kind of expert who is well-versed in your particular Governing Law. That means hiring another lawyer… another expense.
And while such clauses do not displace your right to, for example, pursue a claim for lien, the applicable law when doing so might be the law of that governing jurisdiction.
Couple that with the closely related Jurisdiction clause, which is a contractual provision mandating where you would resolve your disputes, and you can have a real headache on your hands. The location for settling your dispute may be a court in another province or state, or it may determine that you need to proceed by arbitration and, potentially, by rules not common to your jurisdiction.
Please remember that an Arbitration clause acts as a Jurisdiction clause because you are agreeing to move the jurisdiction for dispute resolution away from the courts and into an arbitration process. The rules for those arbitrations vary widely and can, as noted, be foreign to what you normally expect or experience.
For example, I have had to pursue claims involving a project in Ontario down in Memphis, Tenn., because the contract stated all disputes had to be resolved in Shelby County. I have had to pursue arbitration proceedings based on the Quebec Civil Code Rules.
In each instance, my client had not thoroughly read (if at all) the Governing Law and Jurisdiction clauses in his contract.
So how do you avoid these situations?
Well, you read, or have someone read for you. Read the contract at tender time to ensure the Governing Law and Jurisdiction clauses are ones you can live with. If not, qualify your bid to make them so.
These clauses are not typically lengthy or difficult, but can become expensive hurdles as you try to navigate the dispute resolution process.
Dan Leduc is a partner in the law firm of Norton Rose Fulbright LLP and practices exclusively in the area of construction law. He is always happy to take on new clients from anywhere in Canada and may be reached at email@example.com.
This article originally appeared in the June 2018 issue of Electrical Business Magazine.