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Background: The “applicable law” clause, also known as the “choice of law”, allows the parties to choose the jurisdiction (for example, the law of Ontario) whose laws will govern their contract when legal issues arise. arise.
Question: 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 security 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 related guarantee?
A: The choice of applicable law for a guarantee and security agreement in a secured loan transaction in Canada 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 loan. guarantee. . The table below provides an overview of the relative strengths associated with having a guarantee and / or security agreement governed by foreign law versus Canadian law.
LAW APPLICABLE TO THE GUARANTEE AND / OR SECURITY CONTRACT
Effective option when:
Choice of law in general: the advantage of the originating court
Depending on the foreign jurisdiction and the nature of the guarantee, 2 contracting parties may be able to negotiate and decide on the law applicable to loan documents. It is a well-established principle in common law that the courts will uphold the applicable law clause of a contract, even when 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 profitable for a lender to choose the same applicable law for the underlying loan agreement, the guarantee and the surety agreement. Choosing the same jurisdiction to govern the collateral and the underlying loan agreement usually allows for predictability and familiarity if the lender is to sue the creditors in a consolidated debt action.
Choice of law: Security on assets abroad
At common law, the choice of applicable law in a guarantee and / or security agreement governed by Canada will generally be applied in a foreign court. However, for the purpose of enforcing a guarantee located outside of Canada, it may be in the interest of the lender that foreign law govern the guarantee and / or the guarantee agreement. To enforce a warranty and / or security agreement governed by Canadian law in a foreign jurisdiction, the court in the foreign jurisdiction must correctly interpret and enforce Canadian laws in a foreign proceeding. The process for doing so introduces the potential for delays, unpredictable interpretations of the law, additional costs and, at worst, the possibility that the warranty and / or safety agreement will be deemed invalid or otherwise unenforceable.
In the context of cross-border lending transactions involving US-based guarantees, US courts have generally applied guarantees and security agreements governed by Canadian law,4 in the absence of fraud or public order concerns. However, given the potential risks, jurisdiction-specific guarantees and / or security arrangements are usually obtained if the likelihood of performance and the value of the security outweighs the cost associated with hiring a collateral. foreign lawyer to help prepare foreign law documents and provide legal advice. as to their enforceability.
In cases where both the value of the collateral and the lender’s reliance on the collateral are high, lenders may choose to obtain a collateral and collateral agreement governed by each of the foreign jurisdictions applicable to the guarantor. in order to maximize their options for asserting their collateral.
1 Applicable 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 article, the term “Canadian law” is used to include provincial and federal laws, where applicable.
2 A foreign counsel should be engaged to examine the applicability of the “applicable law” provisions on a case-by-case basis; for example, guarantee documents for foreign real estate often require specific legal provisions governing jurisdiction.
4 See for example: Barlow Lane Holdings Ltd. vs. Applied Carbon Tech. (Am.), Inc., 2004 US Dist. LEXIS 16194 (WDNY 11 Aug 2004)
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