Applicable Law: Contractual Considerations For International Agreements

When it comes to contract law, determining the applicable jurisdiction can be a complex task, especially when the contract spans multiple states or countries. This is known as a conflict of laws case, where a court must decide which jurisdiction's laws take precedence. The location of the contract's formation, performance, and any other relevant connections play a crucial role in this determination. In the United States, each state has its own policies and procedures for making this decision, with courts generally applying the law of the forum state where the lawsuit was filed. To avoid confusion, most contracts include choice of law provisions, specifying which state's laws will govern disputes. However, courts will only enforce these provisions if they don't contradict a state with a more substantial relationship to the contract. Additionally, certain types of contracts, such as insurance contracts, may be subject to specific state laws regardless of the choice of law provision.

Choice of law

A choice-of-law clause is a provision in a contract that selects the law to govern the contract and any claims relating to the contract. The purpose of a choice-of-law clause is to reduce legal uncertainty by selecting a law to govern the agreement between the parties in advance. This facilitates settlement and reduces the cost of dispute resolution by making it unnecessary for the court to conduct a choice-of-law analysis if the dispute goes to litigation.

In the United States, contracts are governed by state law. Therefore, the choice of law will be a particular state's law. The choice of law must bear a reasonable relationship to the parties or the transaction and be bona fide, legal, and not contrary to public policy. For example, a court may find public policy reasons to disregard a choice-of-law clause and interpret a contract under the laws of the jurisdiction in which a lawsuit is filed.

The drafting attorney should be aware of certain nuances when including a choice-of-law clause in a contract. For example, a U.S. court may apply different laws to different issues in the same case. Therefore, if the drafting attorney intends for their preferred law to govern all aspects of the parties' relationship and not just contractual rights and obligations, a broader choice-of-law provision is desirable.

> "This Agreement, and all claims or defenses based on, arising out of, or related to this Agreement or the relationship of the Parties created hereby, including without limitation those arising from or related to the negotiation, execution, performance, or breach of this Agreement, whether sounding in contract, tort, law, equity, or otherwise, shall be governed by, and enforced in accordance with, the internal laws of the State of [chosen state], including its statute of limitations, without reference to its choice of law rules or any principle calling for application of the law of any other jurisdiction."

On the other hand, an attorney who wishes to have a provision that is likely to apply to extra-contractual claims but views a broad provision as unnecessary or provocative may prefer a simpler choice-of-law provision:

> "Any disputes arising out of or related to this Agreement, or the Parties' relationship created hereby, shall be governed by the internal law of the State of [chosen state]."

Contract claims

When it comes to contract claims, determining the applicable law is referred to as "choice of law". This determination is typically made early in the case. Given that laws can vary significantly from state to state, the decision about which state's laws to apply can have a substantial impact on the case outcome.

In general, each state has its own policies and procedures for determining the choice of law. Courts will refer to their own state's law to decide whether the law of another state should be applied. This means that the process for determining the choice of law is governed by the law of the state where the lawsuit was filed, known as the "forum state".

Some common considerations for determining the choice of law include:

• Whether the parties agreed to have a particular state's law applied.
• The contacts of the parties to a particular state.
• Which state has the most significant relationships with the transaction of the parties.

In the context of contract claims, since there is no federal contract law, contract law is governed by state law. Additionally, as business is frequently conducted across state lines, issues often arise regarding which state's laws to apply. To avoid potential choice-of-law issues, most contracts include specific terms, known as "choice-of-law provisions", that indicate which state's laws should be applied in the event of a dispute. These provisions are generally enforceable in a lawsuit, and courts will typically apply the law of the state specified in the provision.

However, it's important to note that courts will decline to enforce a choice-of-law provision if another state has a more substantial relationship with the contract. For example, if the contract specifies the application of a particular state's law, but none of the parties have connections to that state, and the contract doesn't require any performance in that state, the court will likely apply the law of the state with the most substantial contacts instead.

When determining the state with the most substantial relationships to the contract, courts typically consider factors such as:

• The needs of the interstate and international systems.
• The relevant policies of the forum state and other interested states.
• The protection of justified expectations.
• The basic policies underlying the particular field of law.
• Certainty, predictability, and uniformity of results.
• Ease in determining and applying the law.

In cases where the contract does not contain a choice-of-law provision, the determination of the applicable law is primarily focused on identifying the state with the most substantial relationships with the contract. Factors considered in this scenario include:

• The place of contracting.
• The place of contract negotiation.
• The place of performance.
• The location of the subject matter of the contract.
• The domicile, residence, nationality, place of incorporation, and place of business of the parties.

For service contracts without a choice-of-law provision, there is a presumption that the law of the state where the services were to be performed should be applied. However, this presumption can be overcome if other factors indicate that a different state has a more substantial relationship with the contract.

Contract formation

Offer and Acceptance

The foundation of any contract lies in the offer made by one party and its subsequent acceptance by the other party. Both parties must agree to all terms outlined in the offer for the contract to be valid. Any changes to the original offer transform it into a counteroffer.

Consideration

Consideration is the concept of a bargained-for exchange between the parties. Each party must benefit from the contract for it to be valid. This benefit can take various forms, such as monetary payment, services, or goods.

Signatures and Notarization

Depending on the jurisdiction and type of contract, signatures, notarization, and recording may be required. For example, contracts for services or real estate often necessitate these formalities.

Choice of Law

A critical aspect of contract formation is determining which jurisdiction's law will apply in case of disputes. This is known as the "choice of law" or "governing law." The chosen law will interpret and govern the agreement, even if the parties reside or sign the contract in different states. For instance, many large corporations opt for Delaware law in their contracts due to its business-friendly nature.

Jurisdiction

Jurisdiction refers to the location where any disputes arising from the contract will be resolved. It is essential to note that the choice of jurisdiction can be more crucial than the choice of law, as it determines the physical location for dispute resolution.

Contract Negotiation and Performance

The places of contract negotiation and performance also play a role in contract formation. Courts consider these factors when determining the jurisdiction with the most significant relationship to the contract and the parties.

Validity and Interpretation

The validity and interpretation of a contract are typically governed by the law of the jurisdiction where the contract was formed. However, parties to a contract may agree to have a particular state's law govern these aspects, as long as it does not contradict public policy.

Changes in Law

When legal rules change after a contract is concluded, the general principle of non-retroactivity applies, meaning the law in force at the time of the contract's signature governs its duration. However, there are exceptions, such as transitional legal provisions, public order laws, and contractual claims relating to the legal effects of an ongoing legal situation.

In summary, contract formation entails a comprehensive process that ensures the agreement is valid, enforceable, and governed by the appropriate jurisdiction's laws. It is essential to consider the offer, acceptance, consideration, choice of law, jurisdiction, negotiation, performance, and potential changes in the law that may impact the contract's duration.

Contract performance

In the context of contract performance, the choice of law considers factors such as the location of performance, the place where the contract was formed, and the relationship between the parties. This ensures that the appropriate jurisdiction's laws govern the rights and duties of the parties involved.

To avoid potential issues, most contracts include "choice of law provisions," which specify which state's laws will be applied in case of a dispute. These provisions are generally enforceable, but courts may decline to enforce them if another state has a more substantial relationship to the contract. For example, if the chosen state's laws favour one party significantly, the court may decide to apply the laws of a different state to ensure a fair outcome.

In the absence of a valid choice of law provision, courts will determine the applicable law by assessing which state has the most significant relationship to the transaction and the parties. This is known as the "significant relationship rule" and considers factors such as the location of contract formation, the centre of the parties' relationship, and the location of performance.

It's worth noting that the applicable law to a contract typically remains the law that was in force at the time of its signature. However, there are exceptions, such as when a new law provides for its immediate application through transitional legal provisions or when a new public order law affects ongoing contractual relationships.

Contract parties

A contract is an agreement between two or more parties that creates mutual obligations that are enforceable by law. The parties to a contract are the individuals or businesses who enter into a legally binding contract. Once they have formalised the contract, they become contracting parties.

The parties to a contract must have an intention to be legally bound and to be valid, the agreement must have both proper "form" and a lawful object. The parties must also exchange "consideration" to create a "mutuality of obligation".

The parties to a contract are usually referred to as the signatories. The signatories are anyone that has signed or will sign a contract. Once they have signed a contract, the signatory is therefore bound by the obligations outlined in the legal agreement.

The parties to a contract can be natural persons (individuals) or juristic persons (corporations).

Frequently asked questions