The short answer is YES. Whether your contract is local, interprovincial, or international, it should contain a governing law clause. If you don’t include it, a court will choose a governing law for you. The court will do that by applying its jurisdiction’s conflict of laws rules to find the proper law of the contract. In Canada, the well-established rule is to apply the laws of the jurisdiction with the closest and most real connection to the contract.
The problem is that a court will look at a number of factors to determine that. The analysis itself can be long and costly. The result of that analysis can be unpredictable in any matter other than the most straight-forward of cases. Let’s face it – if the case was straight-forward, the parties would have agreed on the jurisdiction and the issue wouldn’t be in front of a court in the first place. With respect to international contracts, in particular, the parties may be in different locations and the conflict of laws rules in each jurisdiction may be completely different.
The good news is that parties to a contract can sidestep all of that analysis and achieve predictability by including a governing law clause. Interestingly enough, the governing law jurisdiction does not have to be the same as the jurisdiction named in the forum clause. For example, the parties can choose New York state law as the governing law of the contract but choose California as the location for Arbitration. There might be a very good reason for doing so, that is unique to the transaction between the parties, but usually that is a costly arrangement.
The take away – include a well-drafted, unambiguous governing law clause in all your contracts.
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