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Background: The “applicable law” clause, also known as the “choice of law” clause, allows the parties to choose the jurisdiction (for example, the law of Ontario) whose laws will govern their contract when legal questions occur.
Q: so canadian1 law governed the underlying loan agreement, but the assets of a foreign guarantor are located in a foreign jurisdiction, I would expect the foreign guarantor’s collateral agreement to be governed by the law of the jurisdiction in which the assets are located. Does it follow that the foreign law would also govern the corresponding warranty?
A: The choice of applicable law for a guarantee and security agreement in a Canadian secured loan transaction involving foreign guarantors and foreign assets depends on various considerations, including the amount of the loan, the foreign jurisdiction involved and the value of the guarantee. . . The table below provides an overview of the relative advantages associated with having a collateral and/or security agreement governed by foreign law versus Canadian law.
LAW APPLICABLE TO THE WARRANTY AND/OR SECURITY CONTRACT
Effective option when:
Choice of law in general: the advantage of the domicile court
Depending on the foreign jurisdiction and the nature of the guarantee, 2 the contracting parties may be able to negotiate and decide on the law governing the loan documents. It is a well-established common law principle that courts will uphold the governing law clause of a contract, even where the contracting parties have no connection with the chosen jurisdiction, if the choice of law is:
- legal, and
- not against public order.3
In a cross-border lending transaction, it is often more cost effective for a lender to choose the same applicable law for the underlying loan agreement, the guarantee and the collateral agreement. Choosing the same jurisdiction to govern the collateral and the underlying loan agreement generally allows for predictability and familiarity if the lender needs to bring action against creditors in a consolidated debt action.
Choice of law: taking security over foreign assets
At common law, the choice of applicable law in a guarantee and/or security agreement governed by Canada will generally be enforced by a foreign court. However, for the purpose of enforcing security located outside of Canada, it may be in the interest of the lender to have foreign law govern the security and/or security agreement. To enforce a warranty and/or security agreement governed by Canadian law in a foreign jurisdiction, the court in the foreign jurisdiction must properly interpret and impose Canadian laws in a foreign proceeding. The process to do so introduces the potential for delays, unpredictable interpretations of the law, additional costs and, at worst, the possibility that the warranty and/or security agreement may be deemed invalid or otherwise unenforceable.
In the context of cross-border lending transactions involving U.S. security interests, U.S. courts have generally applied guarantees and security agreements governed by Canadian law,4 absence of fraud or public order concerns. However, in view of the potential risks, jurisdiction-specific guarantees and/or security agreements are generally obtained if the likelihood of execution and the value of the guarantee outweighs the cost associated with engaging a foreign lawyer to help prepare foreign law documents and render legal advice. as to their enforceability.
In cases where the value of the security and the lender’s reliance on the security are high, lenders may elect to obtain a security and security agreement governed by each of the foreign jurisdictions applicable to the guarantor in order to maximize their options for enforcing their securities.
1 Governing law clauses are generally drafted to include the choice of law of a particular Canadian province or territory, with language suggesting that federal laws also apply. For the purposes of this section, the term “Canadian law” is used to include provincial and federal laws, as applicable.
2 Foreign counsel should be engaged to review the applicability of the “applicable law” provisions on a case-by-case basis; for example, security documents involving foreign real estate often require jurisdiction-specific governing law provisions.
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The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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