- A governing law clause specifies which jurisdiction's law will be used to interpret the agreement — for an Ontario business sale, that is almost always Ontario law, even where one party…
- Purchase agreements can direct disputes to the courts or require them to go to private arbitration instead.
- Post-closing disputes in Ontario business sales tend to cluster around a few recurring issues: - Indemnity claims for an alleged breach of a representation or warranty made in the…
Near the back of almost every business purchase agreement sits a cluster of clauses that rarely get much attention during negotiation — governing law, jurisdiction, and dispute resolution. They read like boilerplate, and for most of the deal's life, they are simply ignored. Then a dispute happens, and these clauses become some of the most important pages in the entire agreement, because they decide where, how, and under what rules the fight actually gets resolved.
This article explains what these clauses do, why choosing arbitration over court litigation, or vice versa, matters more than it looks, and how they interact with the way most post-closing disputes in an Ontario business sale actually arise.
What the Governing Law Clause Actually Does
A governing law clause specifies which jurisdiction's law will be used to interpret the agreement — for an Ontario business sale, that is almost always Ontario law, even where one party is located elsewhere. This matters because contract interpretation, available remedies, and even basic concepts like what counts as a reasonable effort or a material breach can differ meaningfully from one jurisdiction to another.
A related but separate clause addresses jurisdiction — which courts, or which arbitral seat, have the authority to hear a dispute in the first place. It's possible, though usually avoided by careful drafting, to end up with Ontario law governing an agreement while a dispute is technically fought somewhere else — a mismatch worth catching at the drafting stage rather than in the middle of a dispute.
Litigation vs Arbitration: What the Choice Actually Means
Purchase agreements can direct disputes to the courts or require them to go to private arbitration instead. Neither is universally better — the right choice depends on the deal, the parties, and what kind of dispute is most likely to arise.
| Consideration | Court litigation | Arbitration |
|---|---|---|
| Privacy | Generally a public record | Generally private, unless the parties agree otherwise |
| Process | Follows court procedure and rules of civil procedure | Follows whatever procedure the parties and arbitrator agree on |
| Appeal rights | Broader appeal rights generally available | Typically limited grounds to challenge an award |
| Decision-maker | Assigned judge, not chosen by the parties | Parties typically have input into selecting the arbitrator, including one with relevant industry or transactional expertise |
| Enforcement | Well-established domestic enforcement mechanisms | Can be advantageous for enforcement across jurisdictions, depending on the parties involved |
Neither column above should be read as "faster" or "cheaper" in the abstract. How a dispute actually plays out depends heavily on its complexity, the parties' conduct, and the specific arbitration or court process involved, and shouldn't be assumed in advance.
Where This Actually Comes Up in a Business Sale
Post-closing disputes in Ontario business sales tend to cluster around a few recurring issues:
- Indemnity claims for an alleged breach of a representation or warranty made in the purchase agreement.
- Working-capital adjustment disagreements, comparing the estimated closing statement to the final post-closing statement.
- Earn-out calculation disputes, where part of the price depended on the business's performance after closing.
Well-drafted purchase agreements often don't send every one of these to the same forum. It's common to see financial and accounting disputes, like a working-capital or earn-out disagreement, routed to an independent accountant for a binding determination, while broader legal disputes, like an indemnity claim for breach of a representation, go to arbitration or the courts under the agreement's general dispute resolution clause. Knowing which mechanism applies to which type of dispute avoids a fight about where to fight before the real dispute is even addressed.
Practical Points to Negotiate
- [ ] Confirm the governing law and jurisdiction or arbitration seat are both set to Ontario, or are at least consistent with each other, unless there's a specific reason to do otherwise.
- [ ] Decide whether arbitration or court litigation better suits the likely disputes in your deal, considering privacy, expertise of the decision-maker, and enforcement.
- [ ] Make sure financial disputes, like working capital or earn-out calculations, are routed to an accountant or expert determination mechanism, separate from the general dispute resolution clause, if that's the intent.
- [ ] Check that the dispute resolution clause covers the whole agreement, including any related schedules, side letters, or ancillary agreements signed at closing.
Frequently asked questions
Does it matter if the other party is outside Ontario?
Yes, and it's one of the main reasons to be deliberate about these clauses rather than treating them as boilerplate. Confirming Ontario law and an Ontario, or otherwise agreed, forum reduces the risk of a dispute being fought under unfamiliar rules or in an inconvenient location.
Is arbitration always faster than going to court?
Not necessarily, and it shouldn't be assumed either way. Arbitration can offer more control over timing and process in some cases, but complexity, the parties' conduct, and the specific arbitrator or process chosen all affect how long a dispute actually takes to resolve.
Can a dispute resolution clause treat different types of disputes differently?
Yes, and this is common in business sale agreements — routing financial or accounting disagreements to an independent expert while sending other disputes to arbitration or the courts under a separate clause. This needs to be drafted carefully so the different mechanisms don't conflict or leave gaps.
What if the purchase agreement doesn't address dispute resolution at all?
Silence doesn't mean there's no answer. General legal rules about jurisdiction and applicable law would still apply, but relying on default rules rather than a clear, negotiated clause leaves more open to argument if a dispute actually arises, which is exactly the kind of gap worth closing at the drafting stage.
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