Contract Silence: Determining Applicable Law

When a contract is silent on the law that applies, the court will determine which law applies to the contract and any non-contractual obligations before it can resolve the dispute. This is known as the choice of law. Typically, if the contract does not address the choice of law, the court will use the law of the state in which the transaction was completed or where a substantial portion of the subject matter of the agreement occurs. However, if the contract stipulates which state's laws govern disputes, courts will adhere to these provisions.

The court will determine the law that applies to the contract

When a contract is silent on the law that applies, the court will determine the law that applies to the contract. This process can be complex and unpredictable, and it is preferable for commercial contracts to specify what law governs.

In the United States, contracts are governed by state law, and there is no overarching US contract law. When a contract dispute arises between parties in different states, the court will have to determine which state's law applies. This is known as "choice of law." Typically, if the contract does not specify a choice of law, the court will apply the law of the state where the transaction took place or where a significant part of the contract's subject matter will occur. However, if the contract stipulates which state's laws govern disputes, courts will generally adhere to these provisions.

The choice of law can have a significant impact on the outcome of a dispute, as different states have different rules regarding damages, contract termination, and other issues. For example, a contract dispute between a New York company and a New Jersey company could be brought in either state, but the court will have to determine which state's law to apply.

In international cross-border disputes, the court will have to determine whether to apply domestic law or the law of the other country. The litigants may agree on which law governs, or they may agree that the choice of law does not matter because the governing principles are similar under both legal systems. In these cases, the court will usually rely on the contract law of the state in which it sits.

However, if the litigants cannot agree on the applicable law, the court will apply its own choice-of-law rules, which can vary from state to state. If the case is heard in a federal court, it will apply the choice-of-law rules of the state in which it is located.

Determining the applicable law can be even more challenging when dealing with non-English speaking, non-common law jurisdictions. In such cases, the court may rely on treatises, translations, and expert witness testimony to understand the relevant foreign law.

To avoid uncertainty and potential costs, it is advisable for businesses to carefully consider and negotiate choice-of-law provisions in their contracts. By specifying the governing law, businesses can reduce uncertainty and reduce the risk of being subjected to unfamiliar laws and unfavorable rules in the event of a dispute.

The court will consider the contract's non-contractual obligations

When a contract is silent on the law that applies, the court will consider the contracts' non-contractual obligations. This means that the court will first have to determine what law applies to the contract and any non-contractual obligations before it can resolve the dispute.

Non-contractual obligations can cover both parties' rights and obligations and disputes (subject to certain exceptions). It is important to understand the consequences of choosing a governing law, as some legal systems have very different rules on the recoverability of damages, the circumstances in which a party can terminate a contract, and the consequences of termination.

For example, if an employee has a negative obligation not to share confidential company information with competitors, and they breach this obligation, the company will need to understand the consequences of choosing a governing law as some legal systems will have different rules on how to resolve this dispute.

When determining what law applies, the court will consider the following:

• The specific needs and goals of each party
• The scope, timelines, and conditions of the obligations
• The consequences of breaching obligations

The court will determine the law that applies to non-contractual obligations

In the absence of a governing law clause, the court hearing the dispute will first have to determine what law applies to the contract and any non-contractual obligations before it can resolve the dispute.

The law that applies to non-contractual obligations is determined by Regulation (EC) No 864/2007, also known as Rome II. This regulation brings greater legal certainty as to the law applicable with respect to non-contractual obligations, particularly in cases of tort (a wrong under civil law) and delict (civil liability). It also ensures a reasonable balance between the interests of the person claimed to be liable and those of the person who has suffered damage.

The law applicable to a non-contractual obligation arising out of a tort/delict is:

• The law of the country where the damage occurs
• The law of the country where both parties were primarily living or had their main place of business when the damage occurred
• If the case is more closely connected with the law of another country, the law of that country

Under certain conditions, the regulation also allows the parties to choose, by mutual agreement, which law applies to a non-contractual obligation.

The scope of the law applicable to non-contractual obligations includes:

• The basis and extent of liability, including determining who may be held liable
• The grounds for exemption from liability and the limitation or division of liability
• The existence, nature and assessment of damage and the remedy claimed
• The measures the court may take to prevent or terminate injury or damage and ensure compensation
• The manner in which an obligation may be extinguished and the rules relating to prescription or limitation
• The question as to whether the right to seek compensation can be transferred to someone else, including by inheritance
• Persons entitled to compensation for damage they have sustained
• Liability for the acts of another person

There are specific rules for certain non-contractual obligations, such as product liability and intellectual property. Certain non-contractual obligations are excluded from the scope of the regulation, including revenue, customs and administrative matters, as well as specific non-contractual obligations arising out of matrimonial property regimes and family relationships, nuclear damage or violations of privacy and rights relating to personality, including defamation.

The court will consider the contract's terms and conditions

When a contract is silent on the law that applies, the court will consider the terms and conditions of the contract to determine the appropriate law to apply. This analysis will involve examining the specific circumstances of the case and the intentions of the parties involved.

In such cases, the court will first look at the contract itself and interpret its terms and conditions. The court will consider the language used in the contract, the context in which it was written, and the purpose of the agreement. The court will also take into account the nature of the dispute and the specific issues that need to be resolved.

For example, if the dispute involves a breach of contract, the court will focus on the terms relating to the parties' obligations and rights under the contract. If the dispute is about a particular service being provided, the court will look at the terms and conditions related to that service. The court may also consider any relevant industry standards or practices that could help interpret the contract.

The court will also examine the relationship between the parties and the circumstances surrounding the formation of the contract. This includes looking at the parties' intentions, the location where the contract was signed, and the laws of that jurisdiction. The court may consider any negotiations or communications between the parties that could provide insight into their understanding of the agreement.

Additionally, the court will take into account the nature of the transaction and the subject matter of the contract. This includes considering the type of goods or services involved, the value of the transaction, and any unique characteristics of the deal. The court may also look at the parties' habitual residence or the place where the contract is to be performed to determine if there is a closer connection to a particular jurisdiction.

In some cases, the court may also consider the potential consequences of applying a particular law. This includes evaluating the fairness and practicality of applying a specific jurisdiction's law, especially if it could result in unfamiliar or uncertain outcomes for the parties. The court may also take into account the impact of any mandatory rules or public policy considerations that could override the chosen law.

It is important to note that the analysis may vary depending on the specific jurisdiction and the circumstances of the case. Each state or country may have its own rules and approaches to determining the applicable law when a contract is silent on the matter. Therefore, it is always advisable to seek legal guidance or consult with a contract lawyer to understand the specific laws and requirements that may apply.

The court will consider the contract's performance

When a contract is silent on the law that applies, the court will consider the contract's performance. This means that the court will look at the contract's terms and how it has been carried out to determine the applicable law.

The court will consider the intention of the parties involved in the contract. The mutual intention of the parties at the time of contracting will be given effect, as long as it is ascertainable and lawful. The language of the contract will govern its interpretation if it is clear and explicit and does not involve any absurdity.

The location of the contract's performance is also relevant. The contract will be interpreted according to the law and usage of the place where it is to be performed. If the contract does not indicate a place of performance, it will be interpreted according to the law and usage of the place where it was made.

In the United States, contracts are governed by state law. If a dispute arises, the court will determine whether to apply its own law or the law of another state. For example, in a suit for breach of contract between companies from New York and New Jersey, the court will decide which state's law to apply.

The court will also consider the subject matter of the contract. For instance, if the contract involves the sale of unique items such as artwork or real estate property, specific performance may be ordered to enforce the original terms of the contract.

Overall, the court will carefully consider the practicalities of enforcement and the underlying principles of equity and fairness when interpreting a contract that is silent on the applicable law.

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