choice of law clause

A choice of law clause is a term used in English private international law to describe a clause in a contract which states law applicable to the contract. Choice of law clauses (sometimes known as governing law clause) usually appear in conjunction with a jurisdiction clause as part of what have become known as boilerplate clauses (or provisions) of commercial and business contracts.

Importance of Contract Law

The law chosen by the parties (lex contractus) will govern the interpretation of the contract, performance of it, how variations to the contract may be made (such as waiving rights and discharge of contractual obligations), the tests to ascertain whether a breach of contract has taken place, rights of set-off, whether there is some incapacity to enter into the contract (in most cases), amongst other things. It will not play a role in the calculation of the measure of damages as that is for the lex fori.

Thus the selection of the law by the parties in the vast majority of circumstances will significantly increase the certainty with which the contractual obligations may be assessed when a dispute arises and the likely outcome should litigation ensue.

Selection of Law

Parties to a contract are free to select the law which applies to their contract, and if it is not expressly selected is able to be drawn from the terms of the contract (such as the existence of an arbitration clause or a jurisdiction clause which refers to the laws of a country) or the circumstances of the case. The law selected by the parties is able to be varied at any time by the parties by agreeing to a variation of the contract terms. The law chosen must be the law of a country or territory, or the law of a part of country or territory, other than in an arbitration.

This is not to say that the laws of one or a single country or territory must govern the entire contract; contracting parties are at liberty to decide that different parts of the contract be governed by different law. Indeed, in the absence of an express choice of law clause, this may be the result in any event by depecage at common law or as provided for in the Rome Convention as enacted by the Contracts (Applicable law) Act 1990 and after it, the Rome I Regulation 593/2008 (which applies to contracts entered into after 17 December 2009).

Where no Choice of Law

Where the law of the contract has not been chosen by parties, the Rome I Regulation provides:

1. the law of the contract is that of the habitual residence of the seller of goods, or the habitual residence of the provider of services;
2. contracts for the sale of immoveable property (such as real estate) to be govern by the law of the place the property is located, subject to limited exceptions;
3. franchisee and distributor contracts are governed by the law of the country where the franchisee and distributor is located respectively;
4. sales by auction to take place under the laws of the place of the auction;
5. contracts of carriage to be governed by the law of the place of delivery in most cases.

In contracts which do not specify the applicable law between an English company and a foreign company which is not part of the European Union, in affect the law of the contract is determined by the process taken by Mr Justice Mann in Apple Corps Limited v Apple Computer, Inc [2004] EWHC 768 (Ch):

1. identify, if possible, the characteristic performance due under the agreement.
2. If that is possible, identify the party who effects that performance.
3. Once that party is identified (if possible), identify the place of the central administration of that contracting party. That gives rise to a presumption that is the jurisdiction with which the contract is most closely connected, and that close connection provides the governing law.
4. However, having identified that party and that performance (if it is possible), consider whether or not the contract is in fact, and in the circumstances, more closely connected with another country; if that is the case then that other country provides the governing law.
5. If the characteristic performance due under the contract cannot be identified, then the country to which the contract is most closely connected must be decided, and that country again provides the governing law.

Mandatory Law

Consumer, insurance and employment contracts are subject to mandatory rules which override the effect of express choices of law. The policy for doing so is to ensure that the perceived imbalance between companies and the weaker party are adjusted so that the weaker party (the employed, insured or consumer) is able to apply the law of its domicile in the dispute.

The law which governs a contract is important, as it defines the rules by which legal obligations will be interpreted by courts. Each legal system is each country has its own rules for interpreting contracts.

United Nations Convention

England is not a party to the United Nations Convention for the International Sale of Goods 1980, and has not ratified the convention. Accordingly, unless the convention is expressly incorporated into a contract governed by English law, it will not affect the interpretation of international business contracts in disputes, and references to it are otherwise redundant.

Example of the Differences in Choice of Contract Law

Differences may take place in the construction of a contract in respect of implied terms. In English law, a term may be implied into a contract (1) in circumstances where it is reasonable and necessary to do so in order to give business efficacy to the transaction (which is the test in Liverpool City Council v Irwin [1976] UKHL 1), or (2) by statute, such as the warranties implied by the Sales of Goods Act 1979.

If the contract is governed by the law of a State of the United States:

1. terms may not be implied into the particular type of contract at all;
2. terms may not be implied in the same circumstances, such that the test in Liverpool City Council case used in English law, and/or
3. there may be an express term in the contract governing its interpretation which prevents terms being implied (which may be enforceable under the laws of the States in the United States of America, but not under English law).

Such clauses are often simply stated "This contract shall be construed in accordance with English law". Nevertheless the parties are perfectly entitled to agree such clauses as are required to suit their circumstances, and make explicit that pre-contractual representations and other contractual vitiating factors are determined by a particular law, in addition to specifying the law governing the terms of the contract.