What considerations must be made when choosing a governing law for a contract? Dennis Brand explains what you need to be aware of.
In the construction and engineering sectors, while a proportion of contracts are prepared on a bespoke basis, the majority are based on an industry standard form.
Many of those standard forms contain an appendix that lists some of the more important details or elements of the contract, for example the start date, contract price, payment terms, levels of liquidated damages, retention and performance security and details of the defects liability period.
It also includes confirmation as to the governing law of the contract, a subject that is often dealt with without any real thought over its meaning or its effect on the services to be provided, whether they are design, engineering, construction, supply or maintenance.
Governing law: The options
The governing law of a contract - sometimes referred to as the applicable law - is that which governs the terms between the parties. It does not necessarily mean the law that regulates the performance of the services.
For example, a contract for the construction of a hotel in Oman will have to be made in accordance with the statutory and regulatory requirements of the Sultanate. However, the contracting parties may desire that the contract's governing law is that of the UAE.
Therefore, while the governing law of the contract is that of the UAE, the law that is applicable in respect of services or work is that of Oman.
Where however, one of the parties involved is a government ministry, department or agency, the law may require that all contracts are subject to that country's law. In this case the contractual parties will have no choice in the matter.
Where the parties do have a choice as to the governing law it is often an easy decision, particularly where the parties' domicile and the place where the services are to be performed are the same.
However, frequently the parties will have different domiciles and to perform services in a foreign jurisdiction they may be concerned about entering into a contract where the governing law is unknown to them.
The sensible step is for that party to seek legal advice from a lawyer in that country on the terms of the contract and how the proposed applicable law applies to it.
The use of neutral law
Rather than seeking legal advice, a suggestion is often made to have a neutral law as the governing law of a contract. This simply means a law which is not that of the parties' domicile nor the country where the services are to be performed.
This can be a sensible solution, but it can also cause the parties difficulties that they may not otherwise have considered.
First of all the choice of law must be one that actually exists. I personally have seen a contract where the governing law has been suggested as that of the "United States of America".
Secondly, in choosing a neutral law it is important that the parties are aware of how it will affect the contract terms.
For example, what would be the position if the proposed law did not allow interest on late payments; recognise the concept of force majeure; or allow liquidated damages or penalties?
Considering judicial systems
With regards to the governing law generally, one should also give consideration to the judicial system of the country where it is being proposed. Some judicial systems are more developed than others and have specialist courts and judges, whereas others have judges who are not specialists and rely on the appointment of court experts to inquire into issues and provide reports to the court.
It is often where judicial systems are not particularly well developed that other forms of dispute resolution such as arbitration are proposed. What is important to keep in mind when selecting a governing law for a contract is that although it is intended to have an alternative form of dispute resolution, it is often illegal to exclude the jurisdiction of the court and any contract that seeks to do so will be considered, at best, unenforceable.
Frequently contracts include a term: "The parties submit to the non-exclusive jurisdiction of the...courts". This is often included as well as an arbitration provision.
Mention of the non-exclusive jurisdiction of the courts where there is also an arbitration provision in the contract is not inconsistent. While the parties may agree to arbitration as a method of dispute resolution, there are occasions when it is necessary to seek conservatory or interlocutory relief.
This is not in conflict with the arbitration provision in the contract. Either the party may seek urgent relief from a court, for example the freezing of funds in a bank account, but this does not mean that the substantive issues before the arbitrators would be dealt with by the courts.
The choice of applicable law can be one that requires careful thought as it affects the enforcement of the contract terms in the event of a dispute and its interpretation. I would therefore urge that where appropriate, legal advice be sought for all contracts.
Dennis Brand is senior legal advisor with HBJ Gateley Wareing.
- The governing law of a contract - sometimes referred to as the applicable law - is that which governs the terms between the parties.
- Governing law does not necessarily mean that which regulates the performance of the services.
- If one of the contractual parties is a government ministry, department or agency, all contracts may be subject to that country's law.
- A neutral law is often considered as an option for the governing law of a contract. This is a law that is not that of the parties' domicile nor the law of the country where the services are to be performed.
- When applying a neutral law it must be ensured that the law actually exists as stated and parties should be aware of how it will affect the terms of the contract.