This is the first in a series of bulletins highlighting
practical strategies for dealing with common issues in
international business transactions and disputes. This bulletin is
about choice of contractual governing law – a key risk
management tool in international business transactions
What Is the Contractual Governing Law?
It's the law that governs the interpretation of the
contract. The parties can expressly choose it themselves. If they
don't, a court or other tribunal considering the contract will
choose it for them. But, as a matter of law, every contract
has a governing law.
Why Is It Important?
Because it governs the contract. It determines how the parties,
and any tribunal, interpret the contractual language, and therefore
what the contract means. Not much could be more important than
that. Particularly in international transactions, where the parties
may come from jurisdictions with different legal traditions.
Obviously, until the contractual governing law is chosen there
is uncertainty about what the contract means. That uncertainty
creates a risk of disputes about that meaning. So, the key point is
to manage that risk by expressly choosing a governing law and so
minimizing that uncertainty.
And it's important to make that choice as early as possible
in the negotiation process. Think about it. The governing law
determines how the contract is interpreted, the meaning of all the
detailed language which will be the product of the negotiations.
Surely it makes most sense to agree on the governing law, and so
set the interpretation parameters, before going to the effort of
negotiating the detailed language. After all, that language could
be interpreted one way under one governing law and completely
differently under another.
If the parties don't choose a contractual governing law,
they create uncertainty. If a dispute arises about the meaning of
the contract, they will have no interpretive parameters to help
resolve it. If they can't resolve the dispute some other way,
they'll have to ask a tribunal to do it for them. The first
thing that tribunal will do will be to impose on the parties its
own choice of governing law. The tribunal will say it is looking
all the circumstances of the transaction to divine the parties'
own implicit choice. But the reality is that the parties didn't
choose, expressly or implicitly, and the tribunal will impose its
choice on them instead.
In doing so, the tribunal will look at all kinds of factors,
such as, where the parties carry on business, where the transaction
was to be performed, where products were to be delivered, services
provided or money paid, and even the language and format of the
contract and the currency of payments. Who knows what jurisdiction
those factors might lead the tribunal to choose? One thing for
certain, the parties' contract will be interpreted, and their
legal rights and obligations determined, under a governing law they
didn't chose – not a good situation.
One Final Point: Just Choose One Governing Law
Why? Here's a real life answer: Apparently
the contract for the construction of the Chunnel provided that it
would be governed by "the principles common to both English
law and French law and, in the absence of such common
principles, by such general principles of international trade law
as have been applied by national and international tribunals."
Think about that for a minute. England is a common-law country.
France is a civil law country. I don't imagine their
contractual laws have much in common. And what the heck are the
general principles of international trade law, at least in the
context of a construction contract? Legal lore has it that the
resolution of the dispute over how that contract was to be
interpreted financed construction booms in Mallorca and the Algarve
as City silks thrashed out the issue and commissioned vacation
homes with the resulting legal fees. (Presumably the construction
contracts for those homes were governed by only one law.)
No need to go there. Manage the risk. Reduce the
uncertainty. Just choose a contractual governing law at
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