Freedom of choice and three choices to make

Within the EU, and in most other countries, parties are free to agree the law that governs a contract. The governing law chosen could be English law, widely used in international trade. It is perceived to provide predictability of outcome, legal certainty and fairness. Equally, it could be the other party’s national law, or, with certain safeguards, that of a country with no connection to the contract.

Secondly, the law governing non-contractual obligations, such as liability for negligence or misrepresentation, can similarly be agreed, where all parties are pursuing a commercial activity and subject to certain safeguards.

Thirdly, parties are free to choose the forum in which they wish their dispute to be determined. This is often the national courts of one of the parties, or, more rarely, those of a separate country. Alternatively, the parties may prefer the privacy and potential time and cost savings of arbitration. Arbitration allows parties to choose arbitrators expert in the relevant field and awards made are enforceable in a large number of countries around the world.

No law chosen

If no governing law has been agreed, EU law will determine the position for parties within the EU. In general terms:

• A contract for the sale of goods is governed by the law of the country where the seller has their central administration. For the provision of services, it is the law of the country where the service provider has their central administration. So far so clear, but there are two displacement rules to mention. First, where this is inconclusive, the law of the country where the party required to effect the characteristic performance of the contract has their central administration applies. Secondly, if a contract is manifestly more closely connected with another country, the law of that country can apply.
• If the seller or service provider is a branch or agency, its location is relevant.
• Non-contractual obligations are governed by the law of the country in which the damage occurs. Similarly, this may be displaced.
• There are separate rules for consumer, insurance and employment contracts and in respect of product liability, unfair competition, environmental damage and intellectual property rights.

No courts chosen

Mixing laws and forums

It may not make commercial sense to agree to mix laws and forums. An English court can for example apply German law, but this can serve to increase legal costs and decrease predictability of outcome.

A fair hearing

Courts in certain developing countries may be very slow, or subject to political interference. Judges may be less likely to have commercial experience. If so, they are best avoided, where possible. Arbitration is often an alternative.

See also: The rise in cross-border litigation: The pros and cons in multi-jurisdictional disputes