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If you are drafting or negotiating a contract, the governing law clause is an important term to consider. Essentially, 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. You rarely need to consider the terms when both parties perform their obligations. However, if the dispute goes to court, arbitration, or alternative dispute resolution, 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 is particularly relevant for parties with international operations. For instance, you may have a supplier in France that prefers French law. In this case, you may negotiate for the governing law clause to be French law. This means that a court or other adjudicator will interpret the law through French law.
Commercial Considerations When Choosing a Governing Law Clause
Some nations have bodies of law 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.
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Governing Law Clauses vs Jurisdiction Clauses
Governing law clauses are separate from jurisdiction clauses. In practice, you may have a governing law provision and jurisdiction provision in the same term. 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.
Again, parties are usually free to choose which jurisdiction they prefer. While choosing a jurisdiction that complements the governing law is common, it is not necessary. For instance, a contract specifying English law as the governing clause and the French courts means:
- 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.
Considerations When 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 considering a contract with a French governing clause. Some English-qualified lawyers are duly qualified in other jurisdictions.
Governing Law Clauses and Consumer Contracts
A consumer contract is any agreement you make with a consumer. For instance, say you supply goods to 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 in England. In the event the consumer is in another country, similar rules apply.
This is 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 laws are generally similar. 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 law when providing a service in the UK. However, if doing creates a situation where the effect of NY law deprives a consumer in the UK of their rights under English law, the courts may not enforce the law.
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Key Takeaways
A governing law clause specifies the body of law the court must use to interpret the contract’s terms. Parties in the UK are free to specify a governing law clause of their choosing. Importantly, it does not have to be English or UK law. The choice of governing law clause depends on the commercial positions of the parties. Some bodies of law are more favourable to certain parties compared to others. A governing law clause is not the same thing as a jurisdiction clause.
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Frequently Asked Questions
A governing law clause specifies the body of law the court must use to interpret the contract’s terms.
A jurisdiction clause specifies which nation’s court has the power to hear the dispute. You do not have to choose the same governing law as the jurisdiction. Though in practice, there are practical benefits in choosing complementary jurisdictions and governing laws.
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