How does a Canadian court decide which legal system applies to an international contract?
If the proper law of the contract has not been identified in the contract through a governing law clause, and it cannot be inferred from the express or implied intentions of the parties, the court will apply its jurisdiction’s conflict of laws rules to determine which legal system applies to the contract. Where that analysis dictates that another jurisdiction’s legal system applies to the contract, the court will dismiss the case. In other words, conflict of laws rules are sorting principles and each jurisdiction has them. But they are not the same in every jurisdiction.
The Supreme Court of Canada outlined the conflict of laws rules for Canada in the leading case of Imperial Life Assurance Co. of Canada v. Colmenares,  S.C.R. 443 [hereinafter Colmenares]. According to Colmenares, the legal system with the “closest and most substantial connection” to the contract applies.
Applying Colmenares results in a very fact-specific analysis that considers a list of factors, such as the domicile and residence of the parties, the principal place of business of each party, the place where the contract is made and where it is to be performed, and the list goes on. Essentially, a court is looking for facts that will localize the contract.
Colmenares has been cited by 76 courts in Canada – mostly in Ontario, British Columbia and Alberta. Of those 76 cases, 11 have reached provincial courts of appeal. As a result, Colmenares contains well-established, oft-cited and robustly interpreted rules. Interestingly enough, many of those cases involve 2 provinces as opposed to 2 countries, which highlights the fact that there are many differences in the law between provinces which are important enough to litigate. However, since these cases turn on their facts, caution should be used when assessing their precedential value. Each case has its own factual matrix and is contextual, after all.
The bottom line - include a well-drafted governing law clause in your contracts to mitigate dispute risk. Of course, the governing law should be bona fide, legal and not against public policy. If not, you open yourself up to the argument that the governing law named should not be applied.