Cecily Zamora
Governing law and applicable law are two legal concepts that often arise in contracts and legal agreements. The governing law is a clause within a contract that establishes which rules and laws will govern the agreement in the event of legal issues. This is particularly important in international contracts, where different countries or jurisdictions are involved, as the laws that will govern the contract and how the terms will be interpreted become critical. On the other hand, applicable law refers to the law that applies to a specific dispute or case. For example, if a dispute arises between two parties in different states or countries, the applicable law is the law that will be used to resolve the dispute.
| Characteristics | Values |
|---|---|
| Applicable Law | The law that applies to a dispute |
| Governing Law | The law that governs the interpretation of a contract |
| Governing Law Clause | A clause in a contract that defines which rules and laws will govern the agreement if legal issues arise |
| Choice of Law | When a legal dispute occurs across legal boundaries, the parties can agree on which law will be used for interpretation |
| Jurisdiction | The specific location where a dispute will be heard, such as a court or forum |
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What You'll Learn
Governing law clauses in international contracts
A "Governing Law" clause is a clause used in legal agreements to declare which rules and laws will govern the agreement if legal issues arise. This clause is commonly found in contracts and legal agreements between companies and their users. Governing law clauses are especially important in international contracts, as different countries may have vastly different legal systems.
For example, a contract between a US company and a UK company might specify that the contract shall be "governed by the laws of England", ensuring that the agreement adheres to English law. This provides certainty and can prevent costly legal disputes. It also establishes clarity on which legal system will apply, which is important for consistency and predictability in global commerce.
The governing law can be of a particular state for agreements within the US, or of a specific country if the agreement is international. While US state laws are generally similar, laws differ drastically from country to country, so this is a crucial clause in terms of service with international customers.
When drafting a governing law clause, it is important to carefully consider the jurisdiction and choice of law. Jurisdiction refers to the geographical limits of a court's authority, which may not align with national boundaries. There are three main types of jurisdiction clauses: exclusive, non-exclusive, and asymmetric (or unilateral). Exclusive jurisdiction clauses specify that only the courts of a particular jurisdiction will handle disputes arising from a contract. Non-exclusive clauses acknowledge that some other courts may have jurisdiction, while asymmetric clauses restrict one party to suing in a particular jurisdiction while giving the other party more flexibility.
In addition to jurisdiction, the choice of law should be specified in the contract. This can be particularly complex in arbitration agreements, as different jurisdictions have different conclusions about which law should apply to the arbitration clause itself. The choice of law for the arbitration agreement can significantly impact the outcome of a dispute.
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Applicable law clauses in international contracts
Applicable law and governing law are often used interchangeably, but they are distinct concepts. Applicable law refers to the law that applies to a specific dispute, while governing law is the body of law chosen to govern the interpretation and enforcement of a contract. In many cases, the applicable and governing laws may be the same, but this is not always true.
In international contracts, the choice of law clause, also known as the governing law clause, is of utmost importance. This clause allows the parties to agree in advance on the legal system that will govern the contract in the event of a dispute. The chosen law can be that of one of the parties' countries or a completely different country's legal system. For example, the parties may choose to apply the UNIDROIT Principles, which aim to harmonise and modernise international contract law. This choice of law has a significant impact on the interpretation of the contract and the outcome of any disputes.
When drafting applicable law clauses in international contracts, it is crucial to carefully consider the jurisdiction and choice of law. Jurisdiction refers to the geographical limits of a court's authority, which may not align with national boundaries. There are three main types of jurisdiction clauses: exclusive, non-exclusive, and asymmetric. Exclusive jurisdiction clauses specify that only the courts of a particular jurisdiction will handle disputes, while non-exclusive clauses acknowledge that other courts may also have jurisdiction. Asymmetric clauses restrict one party to suing in a specific jurisdiction, while the other party has more flexibility.
In addition to jurisdiction, the choice of law must be carefully selected. This choice is based on the principle of autonomy of contractual consent, allowing parties to adapt the provisions to the specific characteristics of their transactions. The chosen law will impact the interpretation of the contract, the validity and enforceability of its terms, and the extent of rights and obligations. It may also lead to the application of related international conventions, such as the United Nations Convention on Contracts for the International Sale of Goods (CISG).
To ensure clarity and avoid potential issues, the applicable law clauses in international contracts should be well-defined and aligned with the jurisdiction clauses. While the two are separate, they are linked and should be given equal attention to strengthen the predictability and security of transactions.
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Applicable law and jurisdiction
Applicable law and governing law are two legal concepts that often arise in contract law. Applicable law refers to the laws that apply to a specific situation or dispute. In contrast, governing law refers to the specific laws chosen by the parties to a contract to govern the interpretation of that contract in the event of a dispute.
When drafting a contract, it is crucial to include a governing law and jurisdiction clause, especially when the contracting entities are from different geographies. This clause clarifies which laws will govern the contract and which courts will have jurisdiction over any disputes. For example, consider two companies, 'A' and 'B', incorporated in New York and India, respectively, with 'B' having a branch office in Dubai. If 'A' delivers goods to 'B' in Dubai and 'B' fails to pay, the absence of a governing law and jurisdiction clause will make it challenging for 'A' to determine where to file a lawsuit against 'B'. To avoid this ambiguity and potential expenses, it is essential to specify the governing law and jurisdiction in the contract.
The governing law can be that of a particular state or country, depending on the nature of the agreement. In the United States, while most state laws are similar, there are differences between states, and laws can vary drastically from country to country. Therefore, when selecting the governing law, it is essential to consider factors such as the state of residence of the parties, the location of the transaction, and the company's incorporation.
While the governing law focuses on the interpretation of the contract, applicable law is broader and encompasses all relevant laws that must be complied with. For example, a company selling products in multiple states must comply with the laws of each state and any applicable federal laws. In some cases, the applicable law may also include international laws, such as when a company exports goods to another country.
In conclusion, applicable law and jurisdiction are essential considerations in contract law. Applicable law refers to the broader set of laws that must be complied with, while governing law pertains specifically to the interpretation of the contract. By clearly defining the governing law and jurisdiction in a contract, entities can avoid ambiguity, expenses, and hassles in the event of a dispute.
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Governing law and jurisdiction
For example, consider two companies, 'A' and 'B', incorporated in New York and India respectively, with 'B' having a branch office in Dubai. In this case, 'A' and 'B' will have to generally comply with the laws of New York and India respectively, but 'A' will also have to comply with English laws pertaining to exports and Dubai laws pertaining to imports. Now, if 'B' fails to pay 'A' upon delivery of goods in Dubai, 'A' will have to initiate legal proceedings. Without a governing law clause, 'A' will struggle to understand where a suit can be filed and how to resolve the conflict of laws. This ambiguity will lead to unnecessary expenses and hassles for 'A', which could have been avoided by including a simple clause defining the governing law and jurisdiction.
The governing law clause allows the parties to agree on which law will be used to interpret the contract in the event of a dispute. For instance, in the case of a dispute between a New York resident and a California-headquartered company, the parties may agree to use California law to interpret the contract. This chosen law is referred to as the applicable or governing law. The parties can also select the specific jurisdiction where they want the dispute to be heard, such as a New York court, and the specific forum within that jurisdiction.
It is important to note that the dispute resolution mechanism should also be clearly defined in the contract, especially if the parties prefer methods such as arbitration or mediation over litigation. Additionally, while the parties get to declare which state's or country's laws they want to apply, the courts will look for a connection between the selected location and factors such as the state of residence of each party, the transaction location, and the company's incorporation location.
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Choice of law
The applicable law and governing law are often considered the same concept. However, the specific law within the chosen jurisdiction that will be applied to the case is typically left to the jury to decide. For instance, in a trial, if the California jury decides that the California Sale of Goods Act is relevant to the case, this specific statute would be referred to as the applicable or governing law.
In contracts, it is common to include a clause defining the governing laws and jurisdiction, especially when entities from different geographies are involved. This clause helps to clarify the terms for the users and prevent potential disputes. For example, a company incorporated in New York may have a branch office in Dubai, and the contract may specify that New York law will govern the interpretation of the contract. However, if a dispute arises in Dubai, the company will need to comply with Dubai laws pertaining to imports.
When drafting a contract, the parties can agree on the specific jurisdiction where they want a potential dispute to be heard and the specific forum within that jurisdiction. This information is typically included in the governing law clause of the contract. By doing so, the parties can ensure that their chosen jurisdiction and forum have the necessary connection to the case to "have standing" to hear the case.
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Frequently asked questions
Governing law is a clause in a contract that establishes which rules and laws will govern the agreement in case legal issues arise. Applicable law refers to the laws that are applied in a given situation.
Applicable law can be understood with the following example: Company A sells products in Texas and Colorado. For this, the company has to comply with U.S. laws and also the individual state laws.
Yes, the parties to a contract can agree upon which law will be used for the interpretation of the contract in the event of a dispute.
Courts decide whether there is a connection between the case and the court to determine if they have the authority to hear the case. If no forum is specified, the case can be filed in a state court or a federal district court within the agreed jurisdiction.
A governing law clause is crucial, especially in international contracts. It helps to clarify the terms to the users and avoid ambiguity and unnecessary hassles in case of a dispute.
