Legal System: State and Federal Law

Like the United States (except Louisiana), the legal system in Canada (except Quebec) is based on the English common law.

The United States has a federal system of government. This means that laws are made at the national (federal), state, and local levels. “Local” laws are those made by cities and counties that apply in those geographic regions. All 50 states (along with US territories and the District of Columbia) have their own state and local laws that apply in those jurisdictions. Some areas of law, such as patent and copyright, are governed exclusively by federal law. Many other laws, including laws governing contracts, employment relationships, and sales transactions, are primarily set by individual states. And many other areas of law are governed by both federal and state law. When doing business in the US, foreign companies should be aware that they are subject to these parallel systems of laws which often differ from state to state.

Legal procedure is generally alike to that of the United States– Ontario’s Rules of Federal Procedure, for example, are modeled on the U.S. Federal Rules of Civil Procedure. In most U.S. jurisdictions, litigants are expected to pay their own way, and losing parties are not generally required to pay more than a nominal amount of the winning party’s legal costs. In Canada, the normal practice is that the loser pays the winner’s costs.

Contracts.  Contracts are governed by state law. Generally speaking, if parties enter into a written agreement, courts will interpret that agreement based on the plain language of the writing, the parties’ conduct, industry custom, and applicable laws. However, all 50 states have adopted some variation of the Uniform Commercial Code (UCC) which makes US commercial law rather standardized across the states.

Limiting Liability. Beyond obtaining insurance, companies should manage their risks with carefully crafted contracts, terms and conditions that limit liability, and clearly allocates liability to parties who cause harm.

Product Liability.  If you are building your own products, you will need to be aware of product liability law. To limit liability, you will want to use proper customer labels, limit liability in agreements (where possible), but also be sure to get product liability insurance.

US product liability laws differ greatly from product liability laws in other countries. Unlike in many other countries, a majority of US states have adopted the doctrine of strict liability in tort. The adoption of strict liability expanded the scope of entities that can be liable for product injuries and lessened the proof necessary to establish such liability. Under strict liability, a company anywhere in the production chain (makers, distributors, retailers) can be liable if they sell a product in a defective condition that is “unreasonably dangerous” to the user. This is true even if the seller was not negligent (meaning the seller exercised reasonable care) and even if the consumer did not enter into a contractual relationship with the seller. The focus of the inquiry is on the product and not the conduct of the seller.

Unlike in many other countries, damages for product liability cases are commonly decided by juries and may include compensation for all direct and indirect losses caused by the injury. This means that damages in product liability cases can be very high.

Because the entire production chain could potentially be liable for harm caused by a product, it is important for businesses to include indemnification provisions in US sales contracts.

In addition to negotiating indemnification and defense clauses, foreign companies doing business in the US should consider carrying adequate insurance coverage to protect against product liability claims.

Written by : Doug McCullough, Partner at McCullough Sudan PLLCdoug@canada-texas.com

Last modified: April 21, 2022