Summary
- A governing law clause specifies which country’s laws will be used to interpret a contract in the event of a dispute.
- Parties are generally free to choose any governing law, though this freedom is limited in consumer contracts and by mandatory domestic laws.
- Governing law clauses are distinct from jurisdiction clauses, which determine which country’s courts will hear the dispute.
- This article is a plain-English guide to governing law clauses in commercial contracts for business owners operating in the UK, produced by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on governing law and commercial contract matters.
Tips for Businesses
Identify which governing law favours your position before entering negotiations. Ensure the chosen law aligns with your jurisdiction clause. In consumer contracts, confirm the governing law does not remove customers’ domestic rights. Have a lawyer qualified in the relevant jurisdiction review any clause before signing.
On this page
- Why are Governing Law Clauses Necessary?
- What Should I Consider When Choosing a Governing Law Clause?
- What is the Difference Between Governing Law Clauses and Jurisdiction Clauses?
- What Should I Know About Drafting Governing Law Clauses?
- How Do Governing Law Clauses Affect Consumer Contracts?
- What Happens When Parties Are Based in Different Parts of the UK?
- Key Takeaways
- Frequently Asked Questions
Disputes may arise when working with another business or party in your commercial operations. As a result, you must account for this risk when drafting or negotiating a contract. In particular, the governing law clause is a necessary clause to consider. A governing law clause dictates which body of law applies to the contract during a dispute. This article will explain the effect of governing law clauses and some essential considerations.
Why are Governing Law Clauses Necessary?
All contracts contain terms that create obligations on the parties. While you rarely need to consider the terms when both parties perform their obligations, if something goes wrong or the parties disagree, the dispute may go to court, arbitration, or alternative dispute resolution. In these instances, the adjudicator must know which body of law to interpret the terms.
This may strike you as odd. For instance, you may assume that a contract between two parties executed in England means that the laws of England & Wales automatically apply. While this is often the case, parties in the UK are free to specify another body of law to govern the contract. This flexibility is particularly relevant for parties with international operations.
For example, you may have a supplier in France who prefers French law. In this case, they may negotiate for the governing law clause to be French law. This means that a court or other adjudicator will interpret the contract according to French law.
What Should I Consider When Choosing a Governing Law Clause?
Some nations have bodies of law that are more favourable to parties under certain circumstances than others. For instance, lenders prefer English law because it generally favours creditors rather than debtors. Therefore, banks usually opt for English law, whereas borrowers may prefer debtor-friendly laws in countries like France.
The law your contract specifies as its governing law is a matter of negotiation for the parties. Usually, the party with the stronger negotiating position chooses the governing law. Hence, you should consult a commercial solicitor to understand the effects of the governing law clause on your agreement.
It is worth noting that the choice of governing law can have significant implications for how contractual terms are interpreted and enforced. Certain legal concepts may exist in one jurisdiction but not in another.
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What is the Difference Between Governing Law Clauses and Jurisdiction Clauses?
Governing law clauses are separate from jurisdiction clauses. Put simply, governing law clauses specify the body of law a court must use when interpreting the contract. On the other hand, a jurisdiction clause specifies which nation’s court has the power to hear the dispute. In practice, you may have requirements or provisions about governing law and jurisdiction in the same term.
Again, parties are usually free to choose their preferred jurisdiction. While choosing a jurisdiction that complements the governing law is common, it is not necessary.
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For instance, a contract specifying English law as the governing law and the French courts as the courts hearing a dispute means that:
- parties must bring the dispute in a French court according to the French court’s procedures; but
- the French court will interpret the contract through the lens of English law.
The position will be the same if you specify French law with an English jurisdiction clause. That is to say, the English courts would hear the dispute but interpret it in light of French law.
What Should I Know About Drafting Governing Law Clauses?
You must ensure that a lawyer qualified in the relevant jurisdiction reviews any contract specifying a governing law clause. For instance, you should consult a qualified French lawyer when considering a contract with a French governing clause. Some English-qualified lawyers are duly qualified in other jurisdictions.
It is important to understand that you cannot use governing law clauses to evade domestic law that would otherwise apply. This rule only applies to domestic parties. To explain, suppose you purchase goods from a supplier, and you are based in the UK. In this instance, you must specify a body of law consistent with English contract law.
How Do Governing Law Clauses Affect Consumer Contracts?
A consumer contract is any agreement you make with a consumer, for instance, a contract under which you supply goods and/or services to a consumer. In most cases, you cannot specify a governing law clause to the extent that it deprives the consumer of any rights they otherwise would have had under their domestic laws.
This is typically not a problem if you contract with consumers in the UK or the EU and specify English or EU member state law. This is because consumer protection laws are generally similar across these jurisdictions. However, this is important to consider if you wish to use another body of law that is not English or EU member state law. For instance, you may use New York state law when providing a service in the UK. However, if doing so creates a situation where the effect of this foreign law deprives a consumer in the UK of their rights under English law, the courts may not enforce the law.
What Happens When Parties Are Based in Different Parts of the UK?
The UK has three separate legal systems: England & Wales, Scotland, and Northern Ireland. This matters when drafting a governing law clause. For example, Scottish contract law differs from English contract law in several important ways.
If your contract does not specify which system applies, a court may need to decide for you. To avoid this, always name the specific legal system you intend to govern the contract. Most commercial contracts in the UK specify the law of England & Wales.
However, if your counterparty is based in Scotland, they may push for Scots law instead. Additionally, certain legislation, such as the Consumer Rights Act 2015, applies across the UK.
This means a governing law clause cannot strip consumers of their statutory rights, regardless of which UK legal system you choose. Being specific in your drafting avoids disputes before they start.
Key Takeaways
If you and another party have a contractual dispute that you choose to litigate, you need to decide which laws will help to determine it. This is done by a governing law clause specifying the body of law, and the court must interpret the contract’s terms. In the UK, you can specify a governing law clause of your choosing. Importantly, it does not have to be English or UK law and can depend on your commercial positions and those of the other party.
Some bodies of law are more favourable to certain parties compared to others. Notably, a governing law clause differs from a jurisdiction clause, which outlines which country’s court will decide your dispute. Lastly, you should know how choosing overseas laws to govern your dispute may affect your customers’ rights in a consumer contract.
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Frequently Asked Questions
While parties generally have freedom of contract, there are limitations, especially in consumer contracts or when dealing with mandatory local laws. It is best to consult with a legal professional to ensure your choice of law is appropriate and enforceable.
If a contract is silent on governing law, courts will typically apply conflict of law rules to determine which law should apply. This often involves considering factors such as where the contract was made, where it will be performed, and the parties’ intentions. It is always best to include an explicit governing law clause in your contracts to avoid uncertainty.
No. Courts will not enforce a governing law clause that deprives consumers of rights they hold under their domestic law.
The party with the stronger negotiating position usually chooses the governing law.
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