Summary
- A governing law clause names the legal system that applies to a contract, and a jurisdiction clause names the courts that hear a dispute.
- Suppliers in England usually push for the law of England and Wales, because English courts generally enforce the terms commercial parties agree.
- Where a contract names no governing law, a court applies conflict of law rules, which adds cost before the dispute itself begins.
- This article explains how supplier businesses in England negotiate governing law clauses in commercial contracts.
- LegalVision’s commercial contracts lawyers advise suppliers on drafting governing law and jurisdiction clauses, responding to an overseas customer’s demand for its own law, and the risks of running a dispute in a foreign court.
Tips for Businesses
Set the law of England and Wales as the default in every standard supplier template. Pair the governing law clause with a matching jurisdiction clause, so one country’s law and courts apply together. Check where the customer holds assets before conceding a foreign law, since enforcing a judgment abroad often needs fresh proceedings. Speak to a contracts lawyer at LegalVision about responding to a customer’s demand for foreign governing law.
On this page
- How Can a Governing Law Clause Impact a Contract?
- Why Should a Business Supplier Care About Governing Law Clauses?
- Using English Law as the Governing Law
- How Governing Law Negotiations Can Arise
- What Happens If A Contract Has No Governing Law Clause
- Taking Legal Advice
- Key Takeaways
- Frequently Asked Questions
A governing law clause states which legal system applies to a commercial contract. For a supplier in England, the law of England and Wales usually offers the most predictable position. English courts generally enforce the terms commercial parties agree. A governing law clause differs from a jurisdiction clause. Governing law sets the legal system, and a jurisdiction clause sets the courts that hear a dispute. Parties to a UK commercial contract may choose a foreign law, subject to limits on consumer contracts and mandatory rules. Where a contract names no governing law, a court applies conflict of law rules to decide the question. Suppliers therefore treat the clause as a negotiation point, not boilerplate.
This article explains how supplier businesses in England negotiate governing law clauses, and what happens when a contract names no governing law at all.
How Can a Governing Law Clause Impact a Contract?
A governing law clause specifies the legal system applicable to a contract. The chosen law governs how courts interpret the agreement and the parties’ obligations.
This applies to issues such as interpretation, performance and breach of the contract and can also affect how courts assess damages and liability issues.
It is important to know the difference between governing law and jurisdiction clauses. Put simply, a governing law clause sets the legal system, and a jurisdiction clause decides which courts will handle disputes.
| Governing law clause | Jurisdiction clause | |
| What it sets | The legal system that interprets the contract | The courts that hear a dispute |
| What it affects | Interpretation, performance, breach, damages, liability | Where you have to run proceedings, and the cost of doing so |
| Example | English law | The courts of England and Wales |
Why Should a Business Supplier Care About Governing Law Clauses?
For suppliers, the governing law clause determines the legal framework applicable to a dispute. This can affect court interpretation of obligations and the availability of remedies. These clauses often sit alongside wider dispute resolution provisions in the contract.
This consideration is even more important in contracts that involve more than one country. How the contract is understood and enforced can change depending on the law and courts involved.
A clear governing law clause is important to avoid uncertainty and helps both sides know which legal system will apply to the agreement.
Businesses sometimes treat governing law and jurisdiction clauses as standard ‘boilerplate’ clauses and give them limited attention during negotiations. However, overlooking them can create serious problems if a dispute later arises.
In practice, the importance of this clause becomes more apparent when there is a dispute related issue.
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Using English Law as the Governing Law
For a UK supplier operating in England, the law of England and Wales is often a preferred route. It is commonly included in English law commercial contracts. As such, suppliers will usually push for it in their contracts and negotiations.
English law is also widely used in international business agreements. English law is widely seen as a reliable and predictable governing law clause. Courts in England usually enforce the terms agreed by commercial parties. Companies therefore appreciate the certainty and predictability it offers.
How Governing Law Negotiations Can Arise
Negotiating governing law is usually straightforward when both parties operate in England and Wales.
In these cases, the parties normally choose the law of England and Wales to govern the contract.
However, governing law can become more complicated when a contract involves another country. This can happen when the deal or project has an international angle. For instance, it may happen if a customer is based overseas or if a supplier provides services internationally.
In these situations, each party may prefer its own legal system. For example, a UK supplier may ask to use English law, while an overseas customer may prefer the law of its own country.
The parties will usually decide the governing law through negotiation. Factors such as bargaining power and the structure of the deal can influence the outcome.
You need to think practically about any foreign law applying to your contract, such as governing law and jurisdiction clauses including foreign laws.
This could create risks. For instance, dispute proceedings in a foreign country, which could make disputes much more complex and expensive.
What Happens If A Contract Has No Governing Law Clause
Some commercial contracts contain no governing law clause at all. The parties still face the same question once a dispute begins. A court then applies conflict of law rules to decide which legal system governs the agreement. The court weighs where the parties made the contract, where the supplier performs the work, and what the parties intended. This process costs money before anyone argues the actual dispute. It also removes the certainty the supplier assumed it held.
The risk grows in cross-border work. An overseas customer may argue that its own law should apply. The supplier then funds preliminary arguments about the applicable law rather than the breach itself. Suppliers trading internationally face a further hurdle when enforcing an English judgment against an overseas customer.
Taking Legal Advice
Governing law clauses might seem simple, but they can have a big effect on how a contract works in practice. The chosen law can change how the contract is read, who is responsible, and what remedies are available if a contract is breached.
Businesses should get legal advice before signing a contract if the governing law clause is being negotiated.
For cross-border contracts, it may be necessary to get advice from lawyers in other countries. This helps make sure the governing law clause works as planned.
If negotiations involve foreign courts or laws, businesses may need advice from local lawyers in that country.
“The clause suppliers regret is not the one they lost in negotiation, it is the one nobody read. Most standard templates carry a governing law clause that suits a domestic deal only, then go out to overseas customers unchanged. Decide your position on foreign law before negotiations start, not in the final round when the commercial team wants the deal signed.”
Key Takeaways
Governing law clauses determine which legal system applies to a contract. For UK suppliers, English law often provides certainty and familiarity and will typically be the preferred option.
Cross-border contracts can bring extra risks. For example, a customer based outside of the UK might request that their country’s laws govern the agreement. Businesses should think carefully about governing law and jurisdiction when entering contracts and take legal advice before agreeing to any foreign governing law clause.
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Frequently Asked Questions
Why should a supplier include a governing law clause?
A governing law clause names the legal system that applies to the contract. Without one, a court applies conflict of law rules to decide the question, which adds cost and delay. Naming the law of England and Wales gives a supplier in England a predictable position.
Why should a supplier seek legal advice on an international contract?
An overseas customer may push for its own law and its own courts. A supplier needs local advice on how those courts read contracts, assess damages and run proceedings. Advice before signing costs far less than arguing the applicable law after a dispute starts.
What is the difference between a governing law clause and a jurisdiction clause?
A governing law clause sets the legal system that interprets the contract. A jurisdiction clause sets the courts that hear a dispute. The two can point to different countries, for example English law with French courts, though most commercial parties align them to keep disputes simple.
Can a UK supplier agree to a foreign governing law?
Yes. Parties to a UK commercial contract may choose another country’s law, subject to limits on consumer contracts and mandatory domestic rules. Before agreeing, a supplier should weigh how those courts assess damages, the language of proceedings and the cost of running a dispute overseas.
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