Kara Sears
When it comes to contracts, the choice of governing law is crucial. This is because the governing law dictates the legal requirements and framework for the contract, including its formation, performance, and termination. In most cases, contracts specify a single governing law, which is typically the law of the state or country where the contract is being signed and performed. However, in certain situations, there may be a need or preference for multiple governing laws to be applicable. This is particularly relevant in cross-border contracts, where commercial dealings may be subject to the laws of different jurisdictions. The choice of governing law can have far-reaching consequences, and it is essential to seek legal advice to ensure the best governing law is chosen for the specific circumstances.
| Characteristics | Values |
|---|---|
| Purpose | To determine the law that will govern the relationship detailed in the contract and be used to interpret the agreement |
| Application | Commercial contracts, employment contracts, insurance contracts, contracts involving secured transactions and the Uniform Commercial Code (UCC), contracts governing corporate behaviour, construction and engineering contracts, etc. |
| Considerations | Type of transaction involved, location of each party, place where the contract will be performed, familiarity with governing law, jurisdiction, dispute resolution mechanism |
| Choice of Law | Governing law can be specified by the parties in the contract, or it may be determined by the habitual residence of the parties or the place of "characteristic performance" in the absence of a specified governing law |
| Jurisdiction | The jurisdiction will be the member state and court where the defendant has already appeared; if the parties agree on a member state, that will be the jurisdiction; in the EU, the Brussels Regulation 2015 governs matters of jurisdiction in commercial agreements |
| Dispute Resolution | Disputes can be resolved through arbitration or judicial litigation in the specified forum or court |
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What You'll Learn
Choice-of-law provisions
A "choice-of-law" or "governing law" provision in a contract allows the parties to agree that a particular state's laws will be used to interpret the agreement, even if they live in or the agreement is signed in a different state. Choice-of-law provisions are important as they reduce legal uncertainty by prospectively selecting a law to govern the agreement between the parties. They also facilitate settlement and reduce the cost of dispute resolution by identifying the law that will be applied to resolve any potential dispute.
When drafting a choice-of-law provision, it is important to be aware of certain nuances. For example, in the United States, contracts are generally governed by state law, but there may be exceptions for certain contracts to which the federal government is a party. Additionally, some states have enacted statutes directing their courts to ignore choice-of-law clauses that appear in certain types of contracts. For instance, Illinois has adopted a law that invalidates clauses that select the law of another state to govern building and construction contracts.
It is also worth noting that a choice-of-law provision may run into problems if it appears in an insurance contract, as some states want to ensure that their consumer protection laws relating to insurance apply within their borders. For example, Massachusetts prohibits choice-of-law provisions in insurance contracts. Similarly, contracts governing corporate behaviour usually must be decided by the law of the state of incorporation.
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Cross-border contracts
For cross-border contracts, it is important to be familiar with the contract law in your customers' countries and adapt accordingly. Some countries may require your dealings with their residents to be governed by their local laws. For example, the Personal Information Protection and Electronic Documents Act (PIPEDA) is a Canadian federal law that applies extraterritorially if your commercial activities have a "real and substantial connection to Canada".
When drafting cross-border contracts, it is important to consider the following:
- Intellectual property rights: Address ownership, licensing, and protection of intellectual property to safeguard innovations, patents, trademarks, and copyrights within your contract.
- Force majeure clauses: Include provisions to handle unforeseen events or circumstances beyond the parties' control, such as natural disasters, political instability, or pandemics.
- Risk management: Identify and assess potential risks associated with the contract, such as currency fluctuations or changes in regulations, and develop contingency plans and risk mitigation strategies to protect all parties involved.
- Choice of law and jurisdiction: Carefully consider which country's law will govern your contractual relationship with customers. Be aware that some countries may require your dealings with their residents to be governed by their local laws.
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Jurisdiction
A jurisdiction clause in a contract explicitly outlines the chosen jurisdiction for dispute resolution. This clause empowers parties to nominate a forum they deem most suitable for addressing potential disagreements. Jurisdiction clauses can be exclusive or non-exclusive. Exclusive jurisdiction clauses mandate that disputes arising from the contract must be litigated in the specified jurisdiction, leaving no room for alternative venues. On the other hand, non-exclusive jurisdiction clauses provide a preferred choice while allowing for the possibility of initiating proceedings in another jurisdiction if necessary.
The selection of jurisdiction is a critical decision that requires careful consideration. Parties should evaluate factors such as the location of the parties involved, the place of contract performance, the availability of remedies, and the enforceability of the agreement. Choosing an inconvenient forum can lead to increased costs and delays in dispute resolution.
When determining the governing law, parties can choose from a variety of laws or legal systems, such as the laws of a particular state, country, or jurisdiction. This choice is usually referred to as "choice law" and should align with public policy. It is essential to ensure that the chosen governing law will be recognized and enforceable in all relevant jurisdictions to avoid legal complications.
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Contractual requirements
Firstly, it's important to understand that the governing law dictates the legal requirements and framework for the contract, including its formation, performance, and termination. This choice ensures that the contract complies with the relevant legal system and provides a clear path for enforcement.
When selecting the governing law, parties should consider the nature of the transaction and the type of contract. For example, in employment contracts, non-compete and non-solicitation clauses may be crucial for employers, and different states or jurisdictions have varying laws regarding the enforceability of such restrictions. Similarly, certain jurisdictions may have technicalities that impact commercial transactions, so the chosen governing law should facilitate rather than hinder the performance of the contract.
In the United States, contracts are typically governed by state law. When drafting a contract, it is essential to specify the governing law to increase predictability and reduce potential expenses in case of a dispute. This is particularly important in cross-border contracts, where the parties involved are from different states or countries. By selecting a specific governing law, the parties agree to use the laws of that jurisdiction to interpret the contract and resolve any disputes.
The choice of governing law can be influenced by various factors. For instance, if products are involved, strong non-compete laws, such as those in New York, may be beneficial. On the other hand, for online work, stronger data privacy laws, like those in France, could be more relevant. Choosing the governing law of the smaller party can also be a gesture of good faith in cases where one party is significantly larger.
It is worth noting that certain contracts, such as those involving insurance or secured transactions, may have restrictions on the choice of law provisions. For example, Massachusetts prohibits choice-of-law provisions in insurance contracts to ensure the application of its consumer protection laws. Additionally, contracts governing corporate behaviour are usually decided by the law of the state of incorporation.
To ensure a well-informed decision, it is advisable for all parties to consult experienced attorneys or lawyers familiar with the relevant laws and jurisdictions. By carefully considering the contractual requirements and seeking legal expertise, parties can choose the most suitable governing law for their specific needs and avoid potential legal complications.
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Dispute resolution
The choice of governing law is relatively straightforward when all parties to a contract reside in the same state and the contract will be performed within that state. In such cases, the law of that state will typically govern any disputes. However, in today's globalised world, cross-border contracts are becoming increasingly common, and choosing the governing law can be more complex.
When selecting the governing law for a cross-border contract, it is essential to consider the nature of the transaction. For instance, in employment contracts, employers may want to enforce non-compete or non-solicitation agreements, which may be easier to enforce under the laws of some states than others. Additionally, certain states may have technicalities in their laws that could complicate commercial transactions. Thus, the chosen governing law should facilitate the performance of the contract rather than create obstacles.
To avoid potential issues, it is advisable to include a "choice of law" or "governing law" provision in the contract. This provision allows the parties to agree that the laws of a particular state will govern the interpretation of the contract, even if the parties reside in or the contract is signed in a different state. For example, a contract between two American companies located in California and Texas may specify that disputes will be resolved under Texas law. This choice of law provision can be as simple as stating, "This Agreement shall be governed by the laws of Texas."
In some cases, the parties may also choose to include a jurisdiction clause, which specifies the forum or court that will hear any disputes. This clause can be exclusive, non-exclusive, or one-sided. An exclusive jurisdiction clause, for instance, would require that any disputes be brought before a specific court, and no other. Additionally, the parties may opt for arbitration instead of judicial litigation to resolve disputes.
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Frequently asked questions
A governing law is a clause in a contract that determines which location's law will be applied to resolve disputes between the parties.
The choice of governing law impacts how contracts are enforced. It is especially important in cross-border contracts to avoid costly legal battles.
Yes, parties are free to choose one or multiple applicable legal systems for their contract. They could also choose different laws for different aspects of the contract.
In the absence of a governing law clause, the governing law may be the habitual residence of the seller or buyer. This is determined by the general guidelines within 'Rome I'.
A jurisdiction clause outlines which country's laws apply to the commercial agreement and which tribunals will have jurisdiction over the matter. This is usually included alongside the governing law clause to avoid possible disputes over jurisdiction.
