Cross-border contracts are the tools that oil the machine of globalisation. But it would be a mistake to think it only exists in modern times. Records show that prehistoric humans traded goods across long distances well before nation-states were created. One of the prime examples is the trading of salt, transported along 'salt roads'. Money itself may have been invented to facilitate international trade, as it was a way of trusting 'foreigners' to sell goods. Although we don't know when the first cross-border contract was agreed upon, as countries developed their own legal systems, it became essential for the law to mature so parties to commercial contracts could have certainty over the jurisdiction which would govern the interpretation of the contract and contractual disputes. This has led to the concepts of 'governing law' and 'jurisdictional clauses' that will be explained in detail below.
Summary
- What is a Governing Law Clause?
- How Does the Court Determine the Governing Law of a Contract?
- Will English Courts Hear a Case Governed By a Foreign Law?
- How Do You Decide Which Governing Law to Choose?
- How We Can Help
What is a Governing Law Clause?
A governing law (sometimes referred to as choice of law) clause states which country's law will be applied to interpret the meaning of clauses and the rights and obligations of the parties to the agreement.
English law is the preferred governing law for international contracts, even if the purpose of the contract is not connected to the UK. This is due to the high quality of English Solicitors, Barristers, and Judges, the stability of the UK Government, and the independence of the judiciary.
Why is it essential to select a Governing Law?
Without stipulating the governing law, parties to an international contract risk costly disputes regarding how specific clauses should be interpreted, the rights and obligations of the contracting parties, and whether a breach has been committed.
How Does the Court Determine the Governing Law of a Contract?
There are three instruments courts in England and Wales use to interpret the governing law of a contract, namely:
- The Rome Convention – applies to contracts entered into between 1 April 1991 and 16 December 2009.
- Rome I – applies to contracts entered into between 17 December 2009 and 11.00 pm (UK time) on 31 December 2020 (the end of the UK-EU transition period).
- UK Rome I – applies to contracts entered into after 11.00 pm (UK time) on 31 December 2020.
The application of the above three instruments does not depend on the nationality or domicile of the parties to the contract. They each follow the principle that contractual parties should be free to decide what law will apply to the agreement. Parties can also choose a particular law to apply to the whole or only part of the contract.
Under all three instruments, a court must recognise an express choice of law, except in certain situations where the express choice of law is modified. Modification can result from general contract law principles such as mistake, fraud, or non-incorporation. In certain consumer contracts, consumers are protected by "mandatory rules of law" (Articles 5 and 6, Rome Convention) or "provisions that cannot be derogated from by agreement" (Articles 6 and 8, Rome I and UK Rome I). Contracting parties cannot deprive consumers of the legal protection provided by the standard consumer protection law afforded by the choice of law set out in the document.
What if a Non-EU Court has Jurisdiction?
Where a court outside the EU has jurisdiction, and there is no governing law clause, you will need to instruct a Solicitor in that jurisdiction to advise on what law the Court is likely to use.
Including a governing law clause where litigation is likely to be heard in a Court outside the UK or EU can mitigate the risk of lengthy, expensive legal proceedings.
Will English Courts Hear a Case Governed By a Foreign Law?
Where the parties have agreed (in their jurisdiction clause) to submit disputes to the English Courts, they can choose a foreign governing law. However, in Dana Gas PJSC v Dana Gas Sukuk Limited and others [2018] EWHC 277 (Comm), the judge acknowledged that it is always preferable, other things being equal, for questions about the law of another country to be decided by the Courts of that country, mainly where there are substantial differences between the jurisprudence of the two systems.
How Do You Decide Which Governing Law to Choose?
You need to consider several factors when deciding what governing law should apply to your cross-border contract, including:
- The jurisdiction any disputes will be heard in (the Jurisdictional Clause).
- The remedies are available in cases of a dispute or breach of contract.
- The ability to enforce a judgment.
Can Governing Law be Implied?
Yes, the Courts can imply a governing law if there is no express provision in the contract. One of the reasons it is so important to include an express term stating the governing law is that, when it comes to interpreting an implication of such a term, the Courts will consider a wider range of factors than they would if they were determining any other implied term. For instance, they will look at whether the parties have chosen a particular jurisdiction to hear disputes (jurisdictional clause) and look at any previous contracts between the parties and the governing law that applied.
How We Can Help
It is always best to have an experienced Commercial Solicitor draft cross-border agreements as they will ensure an express term concerning the governing law is included and that complies with any applicable mandatory rules. This will give you peace of mind that your cross-border project is governed by an agreed law, eliminating the risk of costly legal disputes that will delay the project and investment returns. As experts in commercial law, Witan Solicitors can provide expert advice and representation on all contract law matters. Contact us on 0300 303 2071 or send us an email for more information.
