Cameron Miranda
Applicable contract law refers to the legal rules and principles that govern a contract and determine which jurisdiction's laws apply in the event of a dispute. When a contract dispute arises, courts typically refer to the choice-of-law clause within the contract to determine the applicable law. If no explicit choice of law is stated, courts consider the significant relationship test, evaluating factors such as the location of contract formation and performance. In cross-border agreements, parties have the flexibility to choose the applicable law, which can be national, state, or even transnational principles. However, courts may override the chosen law if it conflicts with public policy or mandatory rules that serve public interests. The applicable law at the time of signing generally governs the contract throughout its duration, but new laws or changes in legislation can introduce complexities, especially in international contracts.
| Characteristics | Values |
|---|---|
| Applicable law | All laws, statutes, common law, regulations, ordinances, codes, rules, guidelines, orders, permits, tariffs and approvals, including those relating to the environment or health and safety, of any Governmental Authority that apply to the Parties or the subject matter of this Agreement |
| Choice of law | The law chosen by the parties to govern the contract as a whole, including performance, validity, formation, execution, etc. |
| Conflict of laws | When a court must determine which jurisdiction's law applies to a contract dispute, taking into account the location of the making and performance of the contract, and any other places related to it |
| False conflict | When different jurisdictions' laws lead to the same outcome, and the court uses local law |
| Renvoi | When the law of a foreign jurisdiction refers the matter back to the law of the forum or another legal system; accepted in civil law jurisdictions but usually rejected in common law jurisdictions |
| Dépeçage | Allowing different aspects of a single contract to be governed by different legal systems, often used in complex cross-border agreements |
| Substantive law | Governing the actual rights and duties of the parties, including contract formation, obligations, breach, and remedies |
| Regulatory law | Including matters of public policy and regulatory matters designed to protect local markets, such as food, feed, and pharmaceutical regulations |
| Arbitration law | Governed by the law of the agreed-upon place of arbitration ('seat of arbitration') |
| Non-retroactivity | The principle that the applicable law throughout a contract's duration is the one in force at the time of its signature, unless specific provisions are made for changes in the law |
| Public order | New laws of public order may apply immediately to ongoing contracts if they relate to issues of public policy and overriding public interest |
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Applicable law in contract disputes
When a contract dispute arises, the first issue that must be determined is which law applies to that contract. This is an issue termed by the legal community as "conflict of laws". In such cases, a court must determine which jurisdiction's law applies to the particular contract dispute.
The applicable law in a contract dispute refers to the legal rules and principles a court or arbitral tribunal will apply to resolve the dispute. Courts typically honour the choice-of-law clauses in the contract, unless they conflict with public policy or are irrationally chosen. The significant relationship test guides courts in the absence of a choice-of-law clause, evaluating contacts like contract formation and performance location.
In cross-border agreements, parties can designate national, state, or even non-national laws (e.g. transnational principles). The applicable law is generally fixed at the time the contract is signed but may change due to mandatory transitional legislation. In addition to selecting national laws, contracting parties—especially in international commerce—can opt for non-state legal frameworks. These include the UNIDROIT Principles of International Commercial Contracts, the Principles of European Contract Law, and general principles recognized in international trade.
In determining what jurisdiction's law should apply, courts should recognize that there may be a “false conflict”. If the laws of two applicable jurisdictions would lead to the same result on an issue present in the case, then there is a “false conflict” and the court must apply the local law. Renvoi occurs when the law of a foreign jurisdiction refers the matter back to the law of the forum or to another legal system. Dépeçage allows different aspects of a single contract to be governed by different legal systems.
The applicable law to a contract throughout its duration should be the one in force at the time of its signature. However, there are situations in which a new law may apply to an ongoing contract. For example, a new law of public order may apply to ongoing contractual relationships.
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Choice of law clauses
When a contract dispute arises, one of the first issues that must be determined is which law applies to that contract. This is particularly important when the parties to the contract are based in different countries or the contract involves working overseas.
A choice-of-law clause in a contract determines which jurisdiction's laws will govern the interpretation and enforcement of the contract. This means that if a dispute arises, the parties agree in advance that the laws of a specified state or country will apply, regardless of where the parties are located or where the contract is performed. This clause provides predictability and reduces uncertainty by clarifying which legal rules will be used to resolve any disagreements, thereby helping to prevent conflicts over applicable law.
Courts typically honour choice-of-law clauses unless they conflict with public policy or are irrationally chosen. Parties to a contract have the right to negotiate and contract as to what state's law will govern the contract as a whole, as long as the reasons for choosing said law are not against public policy. Even when parties have selected a governing law, courts may refuse to apply that law if doing so would contravene the forum state's mandatory rules or public policy.
In the absence of a choice-of-law clause, courts use the significant relationship test to determine the applicable law, evaluating contacts like contract formation and performance location. False conflicts occur when different jurisdictions' laws lead to the same outcome; in these cases, the court uses local law.
- "This Agreement shall be construed, governed, interpreted and applied in accordance with the laws of the State of New York, without regard to conflict of laws principles, except that questions affecting the construction and effect of any patent or trademark shall be determined by the law of the country in which the patent was granted."
- "This Amendment No. 1 shall be governed by and interpreted in accordance with the laws of the State of Florida, excluding any principle of conflict or choice of law provisions."
- "This Agreement shall be construed in accordance with and governed by the substantive laws of the State of Texas applicable to agreements made and to be performed in the State of Texas and the obligations, rights and remedies of the parties hereto shall be determined in accordance with such laws."
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Jurisdiction and cross-border agreements
The governing law refers to the country whose laws the contract must comply with. This is an important consideration in cross-border agreements, as different countries have different legal systems, cultural norms, and languages that can impact the interpretation and enforcement of the contract. Parties to a contract have the right to choose which country's laws will govern the agreement, as long as it does not contravene public policy or the forum state's mandatory rules.
Jurisdiction clauses, on the other hand, specify which country's courts will have the authority to hear disputes arising from the contract. There are different types of jurisdiction clauses, including exclusive jurisdiction, where parties agree to a specific court's exclusive jurisdiction, and unilateral jurisdiction, where one party must file litigation in a designated court while the other party can choose their jurisdiction. A well-drafted jurisdiction clause can prevent unwanted costs and unpredictability by avoiding unknown jurisdictions.
When drafting cross-border contracts, it is essential to be aware of cultural differences and to hire local counsel familiar with the legal system and business practices of the country where the contract will be performed. This can help prevent future issues, especially regarding jurisdictional conflicts. Additionally, parties should carefully review the entire contract to ensure all terms and conditions align with the intended agreement and applicable laws.
In the event of a dispute, it is important to consider the chosen dispute resolution mechanism, such as litigation, arbitration, or mediation. Understanding the international company's jurisdiction is crucial, as it determines the court system that will handle the dispute. Courts typically honour choice-of-law clauses unless they conflict with public policy or are irrationally chosen.
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Regulatory and arbitration law
"Applicable law" refers to the legal rules and principles that a court or arbitral tribunal will apply to resolve a contract dispute. In the context of regulatory and arbitration law, determining the applicable law can become complex, especially in cross-border agreements and international arbitration.
In regulatory law, the applicable law in a contract dispute is often termed as a "conflict of laws" issue. This occurs when a court must determine which jurisdiction's law applies to the particular contract dispute. Courts typically consider the location of the making of the contract, the performance of the contract, and any other places related to the contract to determine the applicable jurisdiction's law. In cross-border agreements, parties can designate national, state, or even non-national laws to govern the contract.
When it comes to arbitration law, the applicable law can be more flexible. Arbitration agreements are typically separate from the substantive contract and can be governed by a different law. This is known as the doctrine of separability or severability. Courts and tribunals often apply different choice-of-law rules to determine the applicable law in arbitration agreements when the parties have not expressly chosen a governing law. Factors considered include the law governing the underlying contract, the law of the arbitral seat, the law with the closest connection to the arbitration, internationally accepted principles and rules, and validation principles.
To reduce uncertainty, it is advisable to specify the law of the arbitration agreement. This can be done through careful drafting, considering the intention of the parties, and ensuring consistency with the substantive contract. Additionally, in some cases, courts may refuse to apply the chosen law if it contravenes mandatory rules or public policy, such as competition law, labour law, or consumer protection.
It is worth noting that the applicable law in a contract is generally fixed at the time the contract is signed. However, there may be situations where a new law applies to an ongoing contract, such as when a contractual claim relates to the legal effects of an ongoing legal situation or when a new law of public order comes into effect.
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Employment and consumer law
"Applicable law" refers to the legal rules and principles that a court or arbitral tribunal will apply to resolve a contract dispute. In the context of employment and consumer law, there are several aspects to consider.
Firstly, in terms of employment law, the applicable law will depend on the jurisdiction and the specific employment contract in question. For example, in the case of Timothy Lawlor v Sandvik Mining and Construction Mobile Crushers and Screens Limited, the Court determined that there was no implied choice of law, and Spanish law was applicable. This highlights the importance of express or implied choice of law in employment contracts.
Secondly, consumer law plays an increasingly relevant role in employment contracts, especially with the rise of contingent work and the "fissuring" of work, where workers are treated as consumers by their employers. This can occur when firms offer services and credit products to their employees, blurring the lines between worker and consumer. For example, ridesharing companies like Uber and Lyft treat their drivers as consumers of their platform services. In these cases, consumer law can provide protections for workers, such as in the case of BreAnn, where PetSmart engaged in unfair and deceptive acts prohibited by consumer law.
Additionally, specific consumer contract protection laws have been enacted to prevent merchants from taking advantage of consumers. These laws govern the form and structure of consumer contracts, including font size and presentation of items or prices. They also address issues such as acceleration clauses, anti-price gouging measures, and the protection of consumer reviews under the Consumer Review Fairness Act (CRFA).
Finally, when determining the applicable law in cross-border employment contracts, courts consider the location of the making of the contract, the performance of the contract, and any other places related to the contract. The principle of non-retroactivity of the law also applies, meaning that the applicable law throughout the contract's duration is typically the law in force at the time of its signature. However, there may be exceptions where a new law applies to an ongoing contract, such as in the case of public order laws or when the future effect of an ongoing legal situation is envisaged by the legislator.
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Frequently asked questions
Applicable contract law refers to the legal rules and principles a court or tribunal applies to resolve a contract dispute.
The general answer is based on the principle of non-retroactivity of the law. The applicable law to a contract throughout its duration is the law in force at the time of its signature. However, there are situations in which a new law may apply to an ongoing contract.
Dépeçage allows different aspects of a single contract to be governed by different legal systems. For example, the performance terms might be governed by German law, while dispute resolution clauses fall under New York law.
The significant relationship test guides courts in the absence of a choice of law clause. It evaluates contacts like the contract's formation and performance location to determine the jurisdiction of the applicable law.
