(a) Applicable law (choice-of-law clauses)
Most contracts contain a provision on the applicable law: a clause that determines which law will apply to the transaction or contractual relationship. The effect of a choice of law is that, with only very few exceptions, the contract is governed by the law referred to in that clause.[1] A standard and sufficient choice of law provision is:
This Agreement is governed by the laws of [specify the relevant national law].
The ITC Model Contracts approach. The ITC Model Contracts provide an attractive compromise for those who are unable to agree on a national law for this provision. Instead of appointing an applicable national law, a staggered approach is adopted:
Questions relating to this contract which are not settled by the provisions contained in this contract itself shall be governed by the United Nations Convention on Contracts for the International Sale of Goods (Vienna Convention of 1980, hereafter referred to as CISG) as well as the Unidroit Principles of International Commercial Contracts, and to the extent that such questions are not covered by CISG or the Unidroit Principles, by reference to [specify the relevant national law].
Scope of a choice of law. Despite the fact that a choice-of-law clause designates the law that applies to the agreement, the parties may be unable to avoid certain mandatory law provisions of the contracting parties’ national laws. By operation of the applicable conflicts of law provisions, a distinction must be made in relation to:
- non-contractual matters – subject matters that qualify as a category of private international law, for the parties cannot choose another law other than the lex causae – this may be the case in connection with the transfer of ownership of real estate, movable property in a foreign jurisdiction, aspects of company law, insolvency law, securities law, competition law, ;
- regulatory matters – for example regulatory matters designed to protect a local market, such as food, feed and pharmaceutical regulations, regulations relating to the registration or authorisation of chemical substances, laws and regulations relating to the financial markets, insurance and provision of financial advice, telecom and energy laws ;
- ‘super-mandatory rules’ – subject matters covered by a scope rule (e. a ‘super-mandatory’ rule that applies regardless of the law governing the contract). – usually matters related to social-economic politics (employment law or employee codetermination law) or environmental. These super-mandatory rules are limitation to the freedom of contract, and apply despite the choice of law that the parties may have made.;
- public policy – a local rule or provision is preferable if the otherwise applicable law would violate or be contrary to social, moral and even religious values of a society;
- consumers and employees – in the case of employment agreements and consumer contracts, different choice-of-law rules apply in order to protect the interests of the weaker party. In some countries, this is consider an extension of public policy.
- civil procedural law – the applicable arbitration law (or other law of civil procedure), as an arbitration is governed by the law of the agreed place of arbitration, whereas a choice of court implies a choice for the civil procedural laws applicable in the chosen jurisdiction – if, exceptionally, the parties wish to agree on a particular other arbitration law, they may do so explicitly;[2]
The law applicable to the subject matters listed above is determined on the basis of provisions of private international law (or public international law, as the case may be) different from those of contractual obligations. Of course, they might be subject to the law chosen by the parties, but that would be because the relevant provisions point to the same legal system. The following sections present a few particularities of legal practice.
Which law to choose? In most contracts, the applicable law is chosen by the ‘strongest party’. Alternatively, that party may be willing to revert to the law of a neutral country. English common law and Swiss law are popular alternatives. In any case, it is recommended but not mandatory that, if the parties choose a public court (as opposed to arbitration), they also opt for the law of that court’s jurisdiction. If the United States is chosen, the clause should specify the state (e.g. New York, California, Florida, Illinois) because contract law is state law in the U.S. not federal law.[3]
Of course, if an external law firm has been engaged, the external lawyer will need to give up the job, as many professional insurance companies reject coverage for professional liability in such cases. In-house lawyers will be more inclined to compromise: a large European multinational might opt for the laws of another country from which it could provide legal support (or simply because it believes it should be able to stand for its approach in any modern jurisdiction).
Applicability of Incoterms and UCP600. In principle, the chosen law applies to the contract in its entirety. The parties are free, however, to identify specific parts of their contract (or agreements attached as a schedule or annex) and submit those parts to a different applicable law. This is called ‘depeçage’. It is also worth mentioning supranational rules and regulations such as the Incoterms and UCP600[4] in this context. The legal status of these rules is not always clear; in some jurisdictions they are considered ‘contractual arrangements incorporated into the contract by reference’, whereas in other contracts they are seen as a separate body of law. In any case, a proper reference to such rules or regulations could be considered as depeçage and be valid and enforceable.
International nature. In order for a choice-of-law clause to be effective, a contract must be ‘international’. If a contract is not ‘international’, the effect of the choice-of-law clause is that only the supplementary law (ius dispositivum) from the local law of the contracting parties is replaced by the chosen law; the local mandatory law of the contracting parties’ jurisdiction cannot be contracted away.
When is it ‘international’? A contract is ‘international’ if an element of some significance in the agreement points to a jurisdiction other than the law that would otherwise be assumed to apply in the usual course of things. This is most obvious if the two parties are established in different jurisdictions but also exists when both contracting parties are from the same jurisdiction and delivery of the goods takes place abroad. A sales contract is generally considered to be ‘international’. It is not clear in all jurisdictions when a contract becomes ‘international’, but the prevailing opinion is that the criteria are relatively easily met.
Relevant moment. In determining whether a contract is ‘international’, the relevant time is always the moment of contracting – the time of consensus – between the parties. This implies that if one party subsequently relocates abroad, in principle this does not affect the internationality of the agreement (i.e. the agreement does not become international as a result). Nevertheless, as mentioned above, the threshold for assuming internationality is low: if the parties anticipate a relocation, this might be sufficient to expressly choose the applicable law (and accordingly, but subject to the court’s assessment, a foreign law can be chosen).
Dispense with ‘…excluding its conflicts of law provisions’. Choice-of-law clauses regularly contain the phrase excluding its conflicts of law provisions. It is used so often and yet is so useless that clarification is desirable.
Relevance. The phrase excluding its conflicts of law provisions attempts to exclude the private international law[5] provisions of the law chosen under that same choice-of-law clause. The phrase excluding its conflicts of law provisions is meaningful only if the private international law rules of the chosen law would ‘refer’ the same matter to another law. This is only possible under the (private international law) concept of ‘renvoi’.
What is renvoi? Many systems of private international law reject renvoi, which is understandable because renvoi is a source of legal uncertainty, potentially leading to circular or endless referrals. Moreover, renvoi would not necessarily lead to an unequivocally acceptable solution. Finally, many legal systems reject renvoi because it may introduce inefficiencies into the case at hand. Countries that do accept renvoi normally reduce its scope to a minimum. Areas typically excluded from the working sphere of renvoi are contractual obligations and areas that permit broad party autonomy (ius dispositivum). In essence, the applicability of renvoi in a choice-of-law clause, and hence the phrase excluding its conflicts of law provisions, seems rather exceptional.
Exclude the applicability of the Vienna Convention? Many contracts opt out of the applicability of the ‘Vienna Convention’ (also called ‘CISG’)[6]. Most lawyers do this ‘because everyone does’, and many opt out even if it is not applicable. But there are very good reasons not to exclude the Vienna Convention and hardly any reasons to do so.
Reasons not to exclude CISG. Is it important to exclude its application? The (international) sale of goods is one of the bodies of law that has become considerably harmonised over the centuries (and being predictable has always been an important factor for trading companies to do business). Even the legal concepts underlying sales contract law are similar or equivalent under various legal systems. The Vienna Convention is not really different in this respect. A court is not likely to rule on important questions relating to ‘fitness for purpose,’ ‘conformity,’ ‘free from liens’ or ‘merchantability’ differently under the Vienna Convention from under any applicable national law. In many cases, handbooks on the Vienna Convention provide more details on case law developed in various national courts than any national case law is reasonably capable of addressing. It is commonly considered that opting out of the applicability of the Vienna Convention has to do with getting ‘cold feet’.
Nonetheless, if you wish to exclude the CISG, you may do so as follows:
The Convention on Contracts for the international sale of goods (Vienna 1980) does not apply.
[1] Article 3 Rome Convention of 1980 on the Law Applicable to Contractual Obligations, entry into force 1 April 1991.
[2] Theoretically, the force and effect of such deviation may be mitigated by the lex causae governing the arbitration (i.e. if the otherwise applicable arbitration law does not allow for party autonomy on such choice).
[3] But, in the U.S., intellectual property law, bankruptcy law, securities law and competition (antitrust) law are (primarily) federal law.
[4] UCP600 is the successor of UCP500, a set of rules governing the issuance of and performance under letters of credit. ICC Publication No. 600. ICC Uniform Customs and Practice for Documentary Credits.
[5] Conflict of laws is an area of private international law, which deals with determining the applicable law, as may be appointed by a choice-of-law clause.
[6] The Convention on Contracts for the International Sale of Goods (Vienna 1980).