What Law Governs My Contract?

When you enter into a contract with a foreign party you will often get into a discussion as to which country’s laws should govern the contract. Usually the parties will make an express choice in the contract but if they do not do so it will be left to the courts to make that choice when a dispute arises. Generally the court will look to see whether the parties implied a choice even if they did not express it very clearly but if the court is unable to make a decision on that ground it will then select the laws of the country that seems most closely associated with the contract, this will most commonly be the country where the main element of the contract is to be performed in preference over say, the country where mere payment is to be made. Obviously this approach leads to uncertainty as where the parties cannot agree they are faced with the unpredictability of court proceedings. This matter will become a lot more certain as of 17 December when the Rome Convention on the Law Applicable to Contractual Obligations (Rome I) becomes applicable across the EU with the exception of Denmark.

Rome I preserves the parties right to choose the law to apply to their contract and indeed to separate parts of the contract however it introduces much greater certainty where the parties have not made an express choice. Where the choice is not “clear” the court will have much more limited opportunities to declare an “implied” choice in particular in relation to the most common types of contract which are listed in the regulation. Thus, in the absence of express choice contracts for the sale of goods are to be governed by the law of the country where the seller is based, or the auction is conducted in the case of auctions, a contract for the provision of services by the law in which the service provider is based, contracts relating to immovable property will be governed by the country where that property is situated, franchise contracts by the law of the country where the franchisee is resident and distribution contracts by the law of the country where the distributor is resident. There are special rules set out for the contract of carriage, consumer contracts, employment contracts and contract of insurance.

While the convention introduces much needed certainty and will generally be helpful to small businesses that have found it difficult in the past to argue for their laws against powerful customers some uncertainties remain. In particular where a contract appears to contain elements of several specified categories the court will again be faced with selecting the applicable system of law. Generally they are instructed to select the law of the country where the party “required to effect the characteristic performance of the contract has his habitual residence”-in the case of businesses this is where they have their administrative centre. However the court does have a let out in that “where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with” some other country the law of that other country is to be applied. If even this test fails the courts are to revert to the traditional test of selecting the country with which the contract is most closely connected. “Implied” choice of law is not entirely eliminated either as the courts can imply clarity of choice where the courts of a particular country are given exclusive jurisdiction over the contract, although that is only one element to be considered.

It generally remains best practice to include an express choice of law clause in any contract where the other party is based in another country or where any part of the contract is to be conducted abroad however businesses should familiarise themselves with the new laws applicable to the type of business that they conduct prior to 17 December in order that they do not settle for silence where that is to their disadvantage. We are happy to advise on the point.

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