By Richard Stim , Attorney. A "choice of law" or "governing law" provision in a contract allows the parties to agree that a particular state's laws will be used to interpret the agreement, even if they live in or the agreement is signed in a different state. For example, many big corporations choose Delaware law in their contracts' choice of law provisions, because that state's laws often favor corporations and offer some predictability when it comes to disputes.
Read on to learn more about choice of law provisions in contracts. For explanations of other clauses you're likely to find in a written agreement, check out Nolo's article Common Boilerplate Provisions in Contracts.
Let's say you're a potato farmer in Michigan, and you're entering into a contract with a chain of food stores. Can you request that any disputes under your contract be decided under Idaho law which you suspect favors potato farmers even though neither party has anything to do with Idaho?
That depends. In this example, using Idaho law may not fly because courts usually look for some connection between the chosen state and either the transaction let's say the contract was signed there or the parties one of the parties operates a business in the state, for example. A choice of law provision may also run into problems if it appears in an insurance contract, because some states want to make sure their consumer protection laws relating to insurance apply to those within their borders.
Massachusetts, for example, prohibits choice of law provisions in insurance contracts. Some contracts involving secured transactions and the Uniform Commercial Code UCC may also conflict with choice of law rules. We need this to enable us to match you with other users from the same organisation.
It is also part of the information that we share to our content providers "Contributors" who contribute Content for free for your use. Learn More Accept. Your LinkedIn Connections with the authors. To print this article, all you need is to be registered or login on Mondaq. First Published in The Royal Gazette, Legally Speaking, June The content of this article is intended to provide a general guide to the subject matter. Hannah Tildesley. Both trusts were created at the instigation of the father of three adult children, and were settled by relatives of the family.
A recent case in the Court of Appeal of England and Wales reiterates the importance of having trustees entered as the member of a company, rather than the trust itself being entered as the member.
Taking Stock, our sector-specific newsletter, offers fresh perspectives and updates on the private equity market. Sign Up for our free News Alerts - All the latest articles on your chosen topics condensed into a free bi-weekly email. Register For News Alerts. Article Tags. NOV Securitisation Outlook and Key Tax Updates for More Webinars. Governing law clauses often include additional wording such as " Conflict of laws principles of the selected jurisdiction can result, in certain circumstances, in the imposition of the laws of another jurisdiction.
Wording has been included to avoid this unintended consequence. Where there is no express law chosen, courts may choose the law that has the closest and most substantial connection with the parties or the transaction. The jurisdiction of the governing law and the choice of forum need not be the same, and parties may take advantage of the benefits of Alberta's substantive laws while submitting to the procedural laws of another jurisdiction. However, in most cases the parties select a governing law and forum from a single jurisdiction.
While the words "attorn" and "submit" are often used in conjunction in a jurisdiction clause, Canadian statutes and international treaties commonly refer to "submitting" to a jurisdiction. Furthermore, the use of "attorn" originated from a real property context and can confuse international parties.
If their intention in doing so was to create obscurity and difficulty for lawyers to debate in future years, they have succeeded handsomely. Parties to a contract are free to choose their governing law: it need not have any connection with the location of the contracting parties or the subject matter of the contract. In practice the parties' choice of law may often be straightforward, based on market practice or the law that they are familiar with.
We have, however, set out below a few points to consider when choosing the governing law:. Where parties want their relationship to be governed by a law other than the law of a country, they should include provision for arbitration. In particular, section 46 of the Arbitration Act expressly recognises that arbitral tribunals can and should decide disputes in accordance with the law chosen by the parties " or if the parties so agree, in accordance with such other considerations as are agreed by them or determined by the tribunals ".
When commercial parties reach an agreement, a written agreement will usually set out their "contractual" obligations. The parties may, however, also have obligations which arise out of general law and which are not contained in the terms of the contract. These "non-contractual" obligations could arise in relation to both:. Therefore, when drafting the governing law clause, thought should be given to whether to limit it to the agreement itself or to extend it so that any other non-contractual obligations related to the contract are also covered.
In light of Rome II that position has now changed. Rome II is an EC regulation 7 which sets out the regime that will govern the law applicable to non-contractual obligations in "civil and commercial matters". The Regulation came into force on 11 January and will be applied by courts in all Member States except Denmark. There are a number of circumstances in which this general rule will be disapplied.
Rome II offers commercial parties an opportunity to achieve greater commercial certainty by allowing them to contractually agree a governing law clause which covers both the parties' contractual and non-contractual obligations. In terms of drafting requirements Article 14 does not impose any specific formalities to follow. It simply provides that the parties' choice as to the law governing their non-contractual obligations "shall be expressed or demonstrated with reasonable certainty by the circumstances of the case".
For a number of reasons a clause in these terms will not guarantee that any non-contractual claims between the parties are always governed by English law. For example:. As a general proposition, however, adopting a clause in the terms set out above can only increase the prospect of parties' non-contractual obligations being governed by the law identified in the governing law clause.
This, in turn, will allow parties to analyse their legal relationships with greater certainty and, it is hoped, avoid the risk that time and cost is spent arguing over what law applies. Therefore, the English courts will continue to apply the rules currently contained in the Rome I and Rome II Regulations when deciding whether to uphold a choice of law, or in the absence of a choice of law clause, in determining the applicable law of contractual and non-contractual obligations.
Likewise, the rest of the EU should continue to give effect to English governing law clauses because the Rome I Regulation requires Member States to give effect to the governing law chosen by the contracting parties, irrespective of whether it is the law of a Member State or not, or whether the parties are from outside the EU.
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Readers should take legal advice before applying it to specific issues or transactions.
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