The uses and abuses of party autonomy in international contracts.

• Author: Walsh, Catherine

INTRODUCTION

The Supreme Court's decision in Morguard Investments Ltd. v. De Savoye (1) heralded a radical shift in the theory of private international law as practiced in common law Canada. The homeward trend of the classical English approach was rejected in favour of extending respect to the policies of other states with a concomitant claim to exercise adjudicative and prescriptive authority over activities connected to more than one jurisdiction. This new emphasis on comity was driven by the perceived need to facilitate interprovincial and international trade and commerce in response to the spread of the market economy to the four corners of the world.

This paper focuses on a principle that forms the cornerstone of the intersection between international commerce and private international law. This is the principle of party autonomy: the idea that those involved in international commerce should be free to choose the law to govern their relations and the forum to adjudicate any disputes that might arise between them. The progressive expansion in cross-border commerce that inspired the Supreme Court's embrace of international comity in Morguard has led to an ever increasing level of deference being paid to party autonomy both at home and internationally. (2)

Peter Nygh, the late great Australian conflicts scholar, observed that deference to party autonomy in international contracts tends to ebb and flow according to underlying political economy trends. (3) The global financial crisis that began in 2007 has exposed the potential of private bargains between powerful market actors to generate devastating distributional effects. Even Richard Posner, the dean of that strand of law and economics that champions the efficiency of private contracting, has had his Road to Damascus moment, conceding the necessity for greater state intervention into freedom of contract in the marketplace. (4)

It therefore seems timely to ask whether the progressive expansion of the principle of party autonomy in private international law is also due for a correction. Has ceding power to contracting parties to determine the courts and laws by which they will be bound in the name of international comity come at the expense of an excessive subordination of domestic legal policies aimed at redressing imbalances in bargaining power or protecting the integrity of domestic markets? The goal of this paper is to invite debate on that question.

Part I of the paper summarizes the unique place of the party autonomy principle in private international law and the justifications for departing in cross-border contracts from the public international law principle of state territorial sovereignty that underpins conflicts rules in other subject areas. Part II reviews the theoretical limitations on the party autonomy principle drawing on Canadian and European sources. Part III looks at the extent to which Canadian courts and legislatures have been willing in practice to limit party autonomy in the interests of restraining the potential for abuse by the stronger party in cross-border consumer contracts and other contracts of adhesion. Part IV examines the extent of precedence accorded by Canadian courts to domestic policies aimed at the protection of Canadian financial and capital markets as against policies favouring deference to party autonomy and international comity. Part V concludes.

1. THE PARTY AUTONOMY PRINCIPLE

   Although there is considerable variation at the margins, choice of law rules generally adhere to a most substantial relationship principle--the law having the closest connection to the parties and the events should apply. (5) Authority to adjudicate likewise requires a real and substantial connection, albeit not the most substantial connection, between the parties or the dispute and the forum. (6) The substantial connection requirement is derived from international law--the legitimacy of the exercise of prescriptive and adjudicative authority is based in and bounded by state territorial sovereignty.

   In contrast, the party autonomy principle puts the will of private parties--not the state--at the centre of choice of forum and choice of law. (7) The principle is derived not from international law but from free will theories of contract law under which contractual obligations flow from the agreement of the parties, not the state. (8) At the private international law level, it follows that the parties likewise should be free to choose which state's laws will govern and which authority should be vested with authority to adjudicate. Deference to party autonomy in international commerce also advances commercial values of certainty and predictability, relieving the contracting parties from having to deal with multiple overlapping state claims to exercise prescriptive and judicial authority over their affairs.

   The common law jurisprudence has long favoured party autonomy to select the governing law without the necessity for there to be any connections between that law and the parties or the dispute. (9) When it comes to party autonomy in choice of forum, the courts retain discretion to exercise jurisdiction notwithstanding the presence of an exclusive jurisdiction clause in favour of the courts of a different state. However, that discretion is largely theoretical. (10) In practice, the jurisprudence increasingly favours giving effect to exclusive jurisdiction agreements especially in the post-Morguardera. The leading case is the Supreme Court of Canada's 2003 decision in Z.I. Pompey Industrie v. ECU-Line N. V. (11) In ruling that a forum selection clause in a bill of lading in favour of Belgian courts (and Belgian law) justified granting a stay of Canadian proceedings, the Supreme Court emphasized that "strong cause" must be shown for displacing the contractually chosen forum. (12) While the factors to be taken into account in determining whether strong cause has been established are similar to those that apply in an ordinary forum non conveniens proceedings, the Court stressed that the analysis is distinct. The starting point is that the parties should be held to their bargain, the plaintiff has the burden of showing why a stay should not be granted, and the parties' intention is to be given primary weight in all but "exceptional circumstances." (13) In Quebec, the Civil Code reflects unequivocal support, as a general proposition, for the party autonomy principle at both the choice of law and choice of forum levels. (14) With respect to the efficacy of forum selection clauses in particular, article 3148 provides explicitly for the ouster of the jurisdiction of Quebec courts where the parties have chosen to submit their disputes to a foreign court or arbitrator. (15)

   In GreCon Dimter inc. v. J.R. Normand inc., (16) the Supreme Court of Canada was asked to consider whether article 3148 took precedence over article 3139 of the Code, which extends the jurisdiction of the Quebec courts to an incidental demand or a cross demand in the interests of fostering efficiency in the administration of justice. The Court concluded that in the hierarchy of Code articles, the policy of deference to the autonomy of the parties in article 3148 took precedence over the policy favouring consolidation of actions in article 3139.

   Three considerations informed the Court's conclusion. First, respecting the parties' intention was a core imperative of the rules of private international law aimed at the promotion of legal certainty and predictability in international transactions. (17) Second, binding the parties to an exclusive forum selection clause was consistent with international trends. (18) Third, Canadian law, again consistent with international developments, had adopted a policy of giving primacy to party autonomy over domestic procedural policies in the context of arbitration clauses; it would be incongruous to treat choice-of court clauses differently since both shared the same function--to oust the jurisdiction of the domestic courts and the same policy--to foster legal certainty in international transactions. (19)

2. PUBLIC POLICY LIMITATIONS ON PARTY AUTONOMY

   Party autonomy in domestic contract law is rarely unbounded. States generally impose some limits on freedom of contract. These typically fall into two categories. The first comprises rules aimed at protecting the weaker party in contractual relationships characterized by a systemic disparity in bargaining power, for example, consumer and individual employment contracts. The second comprises provisions aimed at protecting the social, economic, or political policies of the enacting state in the collective interest, for example, provisions giving investors the right to rescind contracts and claim compensation for the failure of those soliciting their investments to comply with financial disclosure requirements.

   The global integration of markets has increased the likelihood of a crossborder transaction having sufficient contacts with multiple jurisdictions to justify the exercise of overlapping prescriptive authority by all of them. However, state policies can differ sharply on the extent of the regulatory boundaries considered appropriate to impose on private contracts. In resolving the resulting conflicts in prescriptive authority, giving free rein to the parties to select the governing law is not a universally palatable solution. While appealing to states with a preference for market self-regulation, deference to party choice would severely limit the ability of states with a more interventionist regulatory philosophy to protect local markets from the activities of foreign entities that target those markets.

   In Europe, the Rome 1 Regulation seeks to resolve these tensions through the concept of "overriding mandatory provisions," defined as imperative rules that are so fundamental to a state's political, social, or economic interests as to command application even in international contractual...