18 April 2024

Which Governing Law should I choose as a supplier dealing with international clients?



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A governing law clause in the contract shows which country's laws the parties want to follow for the agreement.
Australia International Law
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Business owners engaging in international transactions often face the challenging task of determining the governing law for their contracts. This decision carries significant implications, influencing not only your business operations but also the potential legal costs. This article will explore the details of governing laws, offering guidance on selecting the most suitable:

What is the "Governing Law" of a Contract?

A commercial contract outlines the relationship and obligations between two or more parties. However, the way these rules are understood and followed may vary depending on the laws of the country overseeing the contract. The governing law clause in the contract shows which country's laws the parties want to follow for the agreement. This clause is closely connected to where the contract applies and how parties should resolve disputes. 

What if My Contract Doesn't Specify a Governing Law?

If your contract does not specify a governing law, a court must decide which one to use. There are generally two considerations to think about:

  • the court will see if the parties meant for a specific governing law to apply. If neither party showed what they wanted, the court must look at other circumstances when the parties made the contract; and
  • if there is no proof that parties wanted a specific governing law to apply, a court must objectively decide which law most connects to the contract.

To decide, the court might look at many factors, including: 

  • where each party is located and operates;
  • the place or places where you negotiated and entered into the contract;
  • where performance under the contract has taken or will take place;
  • the kind of contract and what it covers; and
  • the parties' relationship, particularly at the time you entered into the contract

How Do I Pick Which Governing Law Should Apply?

The governing law clause specifies which country or state's laws will apply if there is a dispute or legal issue. When dealing with international clients, the choice of governing law can affect what happens if there is a problem. 

Ideally, the governing law clause would specify the one you are familiar with or one that aligns with the law where your business operates. In practice the parties' choice of law may often be straightforward, based on market practice or the law agreed between the parties. However, there may be some additional considerations that impact a choice of law in an  international contract.

For example:

  •  a certain place's laws may recognise specific technical legal concepts that benefit your arrangement.
  •  the enforcement and inclusion of any pre-contractual dealings in the final contract.

Generally, parties usually preferconsistency between their choice of law and jurisdiction. For example, if most of your business operates in New South Wales, it would benefit you if the laws of New South Wales apply. This provides consistency and a clear understanding of how the law applies. It is important to remember that laws vary across jurisdictions, even across Australian states and territories. 

How Do I Pick Which Jurisdiction Should Apply?

A jurisdiction clause determines where disputes will be settled, such as:

  • courts; 
  • arbitration; and
  • expert determination.

They may also control how to start and manage a dispute.

The contract's jurisdiction should match the chosen law. This can make legal processes simple in terms of time and cost. However, in international contracts, where parties are in different countries, assigning a jurisdiction can be more complex and a fair judgement of a dispute is not guaranteed everywhere.

Understanding complex commercial matters is also an important factor to consider. In this case, the parties to the contract may pick a neutral and unbiased jurisdiction, which can help avoid any unfairness if there is a dispute. Jurisdictions, such as England and Singapore, are known for their neutrality and are common choices for international contracts. 

When considering foreign jurisdictions, parties should consider the following:

  • availability and costs of legal representation with appropriate expertise;
  • location of other relevant parties and witnesses; and 
  • speed and cost of the legal process.

How Do I Choose Which Dispute Resolution Process to Use?

You should remember that solving a dispute can cost a lot of time and money. If a governing law says another country should solve the issue, or if someone involved is in another country, you can agree to arbitration. This means engaging a third party, called an arbitrator, to try to solve the problem before going to court. You can choose an arbitrator with expertise in relevant fields, enhancing the quality of decisions before engaging in costly and lengthy disputes. 

Additionally, arbitration clauses allow for additional flexibility in choosing applicable laws and procedural rules, tailoring the process to suit the specific needs of the parties and the transaction. 

Key Takeaways

You should carefully choose a governing law that you know and understand. Even if compromising on governing law does not seem important when the parties' interests align, it could cause problems if there is a dispute later. 

Parties need to ensure their governing law clauses address both the governing law and jurisdiction. In arbitration cases, parties may consider including a clear arbitration provision. Clear and unambiguous drafting benefits both parties. Failure to achieve clarity can result in lengthy and costly disputes over which courts or tribunals should resolve a dispute and which substantive law applies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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