International Contracts: Which Law Applies?

When it comes to international contracts, the applicable law is critical. The interpretation and effect of the terms may differ depending on the country whose laws govern them. Definitions, damages, and even the duration of a contract may vary significantly under different legal systems. Therefore, deciding which law will regulate an international contract is crucial to maximising profit, minimising risk, and conducting business efficiently.

The parties involved may include in the agreement which law applies in disputes. Often, both parties want the law of their own country to apply. In most cases, the party with the strongest bargaining position has the final say. However, it may also be decided to include a country where neither party resides. If no law is chosen, the applicable law will be determined based on international treaties and European regulations. The main rule is that the law of the country performing the main service applies.

In addition, it is important to specify which court has jurisdiction, as this may differ from the applicable law. For example, a German court may have jurisdiction over a case that must be judged under Spanish law.

Choice of applicable law

When entering into an international contract, it is crucial to determine the choice of applicable law. This choice should be made with care and expressly included in the contract to avoid costly and time-consuming disputes. Here are some key considerations for choosing the applicable law:

• Autonomy of Will: In most cases, parties to an international contract have the autonomy to choose the law that will govern their contractual relationship. This is known as the principle of autonomy of will. The selected law can be that of a country where one or both parties are established or a different country altogether. However, some legal systems may limit this freedom of choice.
• Contractual Clauses: The choice of applicable law should be clearly stated in the contract. This can be done through express clauses or by implication through the terms of the contract or the circumstances of the case. It is important to ensure that the chosen law aligns with the parties' interests and provides adequate protection.
• International Conventions: When choosing the applicable law, consider relevant international conventions, such as the Vienna Convention on the International Sale of Goods. These conventions provide automatically applicable rules for cross-border contracts and offer additional protection to specific parties.
• Conflict of Laws: If no choice of law is made by the parties, the applicable law will be determined based on conflict of laws rules, international treaties, and European regulations. The main rule in the EU, excluding the UK and Denmark, is that the law of the country where the main service is performed applies.
• Centre of Gravity Test: In the absence of a choice by the parties, the contract is typically governed by the law with which it has the closest connection. This is known as the "centre of gravity test." This connection is often determined by the country where the party providing the characteristic performance is based.
• Specific Types of Contracts: Different types of contracts may have specific rules for determining the applicable law. For example, a contract for the sale of goods is usually governed by the law of the seller's country, while a contract for the provision of services is governed by the law of the service provider's country.
• Jurisdiction: It is important to distinguish between the applicable law and the jurisdiction of the court. They may be different, and it is not uncommon for a judge to apply the legislation of another country. Therefore, the contract should specify both the applicable law and the jurisdiction of the court to avoid confusion.

Applicable law and competent court

When entering into an international contract, it is important to determine the applicable law and competent court. This is because the applicable law is decisive for the outcome in court, and the costs and duration of court proceedings can extend if the chosen law is disputed by the opposing party.

Firstly, the parties to the contract may themselves include in the agreement which law applies in any disputes. For example, a Polish supplier and their counterparty may agree that Polish law applies to any disputes. In most cases, the party with the stronger bargaining position will have the final say. However, it may also be decided to include a country where neither party is established.

Secondly, if neither party opts for a choice of law in the contract, the law applicable to the agreement will be determined based on international treaties and European regulations. The main rule, with EU countries except the United Kingdom and Denmark, is that the law of the country of the party that performs the main service applies. For instance, in a sales contract, the law of the country of the seller applies, and in the case of an agency agreement, the law of the agent's country applies.

In addition to the applicable law, it is also crucial to specify the competent court with jurisdiction. For example, a contract may specify that a German court has jurisdiction, but that Spanish law is applicable. In this case, the German judge must apply Spanish law to the case, which is usually not desirable. Therefore, specifying both the competent court and the applicable law in the contract is essential to avoid confusion and potential conflicts.

When choosing the applicable law and competent court, it is wise to consider the costs associated with your choice. By choosing a legal system that you are familiar with, you can avoid unexpected costs during the negotiation stage. Additionally, choosing the same jurisdiction as the asset's location or where the service is provided can reduce costs when enforcing the contract.

Moreover, ensuring consistency between the governing law and jurisdictional clause is crucial to avoid lengthy and expensive disputes. The speed of court proceedings, disclosure rules, follow-on costs, rules of evidence, and specialist courts should also be considered when determining the applicable law and competent court.

One of the main reasons for inserting a governing law is to achieve legal certainty. Therefore, it is essential to select a legal system known for certainty and predictability, with an established body of precedents and well-reasoned decisions. Additionally, choosing a legal system that speaks your language and the language of international business can be beneficial.

Other factors to consider when choosing the applicable law include party autonomy, freedom of contract, a pro-business approach, and the court system's accessibility and experience in cross-border business matters. Selecting a legal system that supports modern commerce and evolves with current market practices is crucial for future success.

Contractual language and legal capacity

When entering into an international contract, it is crucial to first choose the language of the contract. English is the most commonly used contractual language, but some partners may request that the contract be drawn up in their language as well. In such cases, the clauses must be written in both languages to avoid any misunderstandings, and the prevailing language must be specified.

The choice of language is free, except in some cases where the law of a country forces the contract to be drafted in its language to protect its interests. The choice will depend on many factors, such as the language used most often in the activity sector of the parties. It is important to choose the same language as the applicable law and the court that will resolve disputes between the parties.

If the international contract is in two or more languages, the language clause must establish which version prevails over the others in case of disputes. If not, international regulations such as the UNIDROIT Principles should be applied. Article 7.7 of these Principles deals with linguistic discrepancies:

> Where a contract is drawn up in two or more language versions which are equally authoritative there is, in case of discrepancies between the versions, a preference for the interpretation according to a version in which the contract was originally drawn up.

When the parties of an international contract use different languages, a language clause should be included in the contract. Even if the parties adopt a single language, there must be a clause specifying which version of the document is the official one. It should also be mentioned that when there are two language versions of a contract, it is advisable to insert a clause specifying which language prevails in case of differences among the parties. It is also important to specify which language to use for notifications, especially in long-term contracts.

Governing law and jurisdiction

When entering into an international contract, it is crucial to determine the governing law and jurisdiction that will apply. This decision is critical as it sets the framework for the parties' relationship, rights, and responsibilities, and provides a guide for resolving disputes. Here are some key considerations for choosing the governing law and jurisdiction:

Choice of Law:

• The parties to the contract can choose the law that will govern their contractual relationship. This choice should be expressly stated in the contract or clearly demonstrated by its terms or circumstances.
• If the parties do not make a choice, the contract is typically governed by the law with which it has the closest connection. This is usually the law of the country where the party performing the characteristic or most significant obligations has its residence, seat, or place of business.
• In the case of international sales contracts, the Vienna Sales Convention may apply, in addition to the law of one of the parties' countries.

Choice of Jurisdiction:

• In addition to choosing the applicable law, it is important to specify the jurisdiction or court that will handle any disputes. These choices can be different; for example, a contract governed by German law may specify that a Spanish court has jurisdiction.
• Choosing the same jurisdiction as the location of the asset or service can reduce costs and avoid the complexity of navigating foreign procedures.
• Ensuring consistency between the governing law and jurisdictional clause can prevent lengthy and costly disputes.

Other Considerations:

• Costs: At each stage of the contract, from negotiation to enforcement, consider the costs associated with your choice of law and jurisdiction. Choosing a legal system you are familiar with can help avoid unexpected expenses.
• Legal Certainty: Choose a legal system known for certainty and predictability, with an established body of precedents and well-reasoned decisions.
• Language: Consider a legal system that uses a language you are comfortable with, such as English, the most commonly used contractual language.
• Party Autonomy: Select a legal system that respects party autonomy and freedom of contract, allowing you to tailor the contract to your specific needs.
• Pro-Business Approach: Opt for a jurisdiction with laws that promote a pro-business approach and courts experienced in cross-border business matters.
• Modern Commerce: Choose a legal system that supports modern commerce and evolves with current market practices to increase your chances of future success.

Applicable law and dispute resolution

When it comes to international contracts, diverging national laws can increase the complexity of rules governing aspects such as applicable law, jurisdiction for cross-border disputes, and country-specific public policy. Thus, it is crucial to carefully choose the applicable law and dispute resolution methods to ensure a smooth and efficient contractual process. Here are some key considerations for "Applicable Law and Dispute Resolution" in international contracts:

Choice of Applicable Law:

• The parties involved in the contract can choose the applicable law, and this should be expressly included in the contract. For example, if a Polish supplier and a buyer agree to Polish law, Polish law applies.
• In the absence of a choice, the main rule is that the law of the country where the party performing the main service is located applies. For instance, in a sales contract, the law of the seller's country applies.
• In the case of international purchase agreements, the Vienna Sales Convention is usually applicable, along with the law of one of the parties' countries.

Dispute Resolution:

• It is important to specify the court or arbitration process that will handle disputes. For example, the contract may specify ad hoc arbitration or institutional arbitration.
• When choosing a court or arbitration, consider the associated costs, disclosure rules, follow-on costs, rules of evidence, specialist courts, and the speed of proceedings.
• To avoid costly disputes, include out-of-court negotiation or mediation clauses, which require parties to meet and attempt to resolve issues before starting any legal action.
• Ensure consistency between the governing law and the jurisdictional clause to avoid lengthy disputes.

Frequently asked questions