2020-02-17
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The perils of not stating which law governs your contract

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Posted by Justin Byrne on 27 July 2015

Justin Byrne - Commercial Litigator
Justin Byrne Consultant

In this, the fifth of a series of articles which looks at some of the most common perils of contracts and how to avoid those perils, we look at the perils of failing to provide which law governs your contract and which country’s courts have jurisdiction to hear any dispute.

Governing law

You may have a written contract, but how will it be interpreted? This depends on which country’s laws govern the contract. This in turn depends firstly on what the contract says and, secondly, what happens if the contract does not say which law applies.

If either you or the other party to the contract are based in England or Wales and performing the contract there, it will not matter if your contract does not say which law applies. It is pretty obvious that English law was intended to apply and it will apply because you are both based in England or Wales.

If both you and the other party to the contract are not based in England or Wales, there can be problems.

Let’s consider the perils of not stating which law governs your contract:

  • If you are in England and the other party is in India, say; then you could both claim that your country’s laws applied. This creates uncertainty about how the contract will be interpreted. This, in turn, may create uncertainty about what the other parties obligations are.
  • If you do not say in the contract which country’s laws apply, there are complicated rules for determining this.
  • The applicable rules will depend where the other party is based. For example, there are rules that apply across the whole of the EU, but differing rules apply elsewhere in the world.
  • If there is a dispute about the contract, you will need to know how to interpret the contract and to know this, you will need to know which country’s laws apply.
  • If it is not clearly stated which laws apply, this is likely to add to the time and cost of resolving any dispute. This is because it will be necessary to apply the relevant rules to decide which law applies. There may be a dispute about how to apply those rules. It will then be necessary to resolve that dispute before you can then resolve the underlying dispute about the performance and/or interpretation of the contract.

Now let’s consider how to avoid these perils:

  • Ensure that your contracts are professionally drafted.
  • Consider whether the other party to your contract is based in England and Wales. If not, ensure that your contracts include a “governing law” clause saying which country’s laws govern the contract.

Jurisdiction

The same considerations apply in relation to jurisdiction. 

You may have a written contract, but which country’s laws courts can hear any dispute arising under the contract? This depends firstly on what the contract says. What happens if the contract does not say?

If either you or the other party to the contract are based in England or Wales, it will not matter if your contract does not say which law applies. It is pretty obvious that the courts of England and Wales will have jurisdiction.

If both you and the other party to the contract are not based in England or Wales, there can be problems.

Let’s consider the perils of not stating which country’s courts have jurisdiction over your contract:

  • If you are in England and the other party is in California, say; then you would want any dispute to be heard in the English Courts and they would want it heard in the Californian Courts.
  • If you do not say in the contract which country’s Courts have jurisdiction, there are complicated rules for determining this.
  • It may simply come down to which party issues legal proceedings first.
    • This encourages parties to sue first and talk later, when it is otherwise best to talk first to see if litigation can be avoided; and
    • It may also lead to a costly dispute about which country’s Courts have jurisdiction over the dispute
  • The applicable rules will depend on where the other party is based. For example, there are rules that apply across the whole of the EU, but differing rules apply elsewhere in the world.
  • If there is a dispute about the contract, you will need to know which Court you can litigate in.

Now let’s consider how to avoid these perils:

  • Ensure that your contracts are professionally drafted.
  • Consider whether the other party to your contract is based in England and Wales. Ensure that your contracts include a “jurisdiction” clause saying which country’s Courts have jurisdiction over disputes arising under the contract or, alternatively, providing that disputes are dealt with by arbitration rather than Court proceedings.

Conclusion

Ensuring that your contract specifies which law applies and which Courts have jurisdiction over any dispute can save a great deal of time, expense and uncertainty.

About the author

Justin Byrne

Consultant

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

Justin Byrne

Justin Byrne is a seasoned litigator and specialises in commercial disputes, with particular emphasis on IT.

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