Governing Law, Forum Clauses and Enforcing Judgments Across the Canada–US Border

The short answer

Canada and the US generally enforce each other's money judgments, and both respect well-drafted forum and governing-law clauses between commercial parties. Two limits stay constant: a court in one country cannot order the sale of land in the other, and every guarantor must have assets or a presence where you plan to collect. Draft for where the assets are.

Three separate questions in every cross-border loan

• Governing law: which law decides whether the contract is valid and what it means?
• Forum: which courts may, or must, hear disputes?
• Enforcement: where will a judgment actually be collected, and will that court recognize it?

Most disputes come from answering the first two without thinking about the third.

Governing law

In Canada, parties may choose the governing law of their contract provided the choice is bona fide, legal and not contrary to public policy, a common law rule traced to Vita Food Products Inc. v. Unus Shipping Co., [1939] A.C. 277 (P.C.). In the US, courts apply Restatement (Second) of Conflict of Laws § 187 and statutes such as New York General Obligations Law § 5-1401, which permits parties to contracts of $250,000 or more to choose New York law.

The mortgage or charge itself is different. Questions about title, priority, enforcement procedure and redemption are governed by the law where the land sits (the lex situs). A Canadian lender can choose Ontario law for the loan agreement, but a Florida mortgage will be enforced under Florida law in Florida courts.

Forum selection

Canada. The Supreme Court enforces forum selection clauses unless the party resisting shows "strong cause": Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27. In consumer and adhesion contexts, courts are more willing to refuse enforcement: Douez v. Facebook, Inc., 2017 SCC 33. Where the clause is silent, jurisdiction rests on a "real and substantial connection", with presumptive connecting factors set out in Club Resorts Ltd. v. Van Breda, 2012 SCC 17.

United States. Forum selection clauses are prima facie valid and enforced unless unreasonable: The Bremen v. Zapata Off-Shore Co., 407 U.S. 1 (1972). In federal court, a valid clause is generally enforced through transfer: Atlantic Marine Construction Co. v. U.S. District Court, 571 U.S. 49 (2013). New York General Obligations Law § 5-1402 lets parties to contracts of $1 million or more agree to New York courts.

Practical drafting. For a Canadian lender, a non-exclusive clause naming the home province, with a right to sue wherever the borrower or assets are, usually works best. Always add a consent to jurisdiction and an agent for service in each guarantor's location.

Enforcing a US judgment in Canada

Canadian courts enforce foreign money judgments where the foreign court had a real and substantial connection to the dispute. The Supreme Court extended the Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077, test to foreign judgments in Beals v. Saldanha, 2003 SCC 72. The available defenses are narrow: fraud, denial of natural justice and public policy.

In Chevron Corp. v. Yaiguaje, 2015 SCC 42, the Court held that the enforcing court need not have a connection to the defendant or the dispute; the defendant only needs to be served in the province. Enforcement is by a fresh action on the judgment, often resolved by summary judgment. Some provinces also have statutory registration schemes for judgments from reciprocating jurisdictions; British Columbia's Court Order Enforcement Act is one example. Confirm whether the relevant US state is reciprocating before choosing a route.

Enforcing a Canadian judgment in the US

Recognition is a matter of state law. Most states have adopted the Uniform Foreign-Country Money Judgments Recognition Act (2005) or its 1962 predecessor, including New York (CPLR Article 53), California (Code Civ. Proc. §§ 1713–1725) and Texas (Civ. Prac. & Rem. Code ch. 36A). Florida has its own Uniform Out-of-Country Foreign Money-Judgment Recognition Act (Fla. Stat. §§ 55.601–55.607). The historical foundation is comity under Hilton v. Guyot, 159 U.S. 113 (1895).

Under the Uniform Act, a final money judgment is recognized unless a mandatory ground for refusal (such as lack of an impartial system or jurisdiction) or a discretionary ground (such as fraud or public policy) applies. Canadian judgments are routinely recognized.

The land rule

No court can directly transfer or order the sale of land in another country; that power belongs to the courts where the land is. This is sometimes called the Moçambique rule, from British South Africa Co. v. Companhia de Moçambique, [1893] A.C. 602 (H.L.). An Ontario judgment on the covenant can be enforced against a US guarantor's bank account, but foreclosing a Texas property requires Texas procedure.

Arbitration as an alternative

Both countries are parties to the New York Convention on arbitral awards (implemented in the US at 9 U.S.C. § 201 et seq., and in Canada through federal and provincial statutes such as Ontario's International Commercial Arbitration Act, 2017). Arbitration can suit disputes between lenders, co-lenders and participants, but it is rarely the best tool for straightforward collection against a defaulting borrower.

Clause checklist

• Governing law for the loan agreement, with a real connection to the parties
• Lex situs for each security instrument
• Non-exclusive forum clause plus consent to jurisdiction
• Agent for service in each guarantor's jurisdiction
• Waiver of jury trial where enforceable (US)
• Currency indemnity and judgment currency clause

Frequently asked questions

This content is general information for industry professionals and is not legal, tax or financial advice. Laws change and apply differently to each transaction; obtain advice from qualified counsel in each relevant jurisdiction. Legal counsel to the Cross-Border Private Lenders Association: Jasmine Daya & Co. Questions: info@cbpla.com