International commercial contracts - does choice of law matter?
On the Swedish Arbitration Days of 2016 distinguished arbitrators and counsel from all over the world discussed the hot topics of international commercial arbitration including choice of law: when and why does this matter in practice?

The primary set of rules applicable to the legal relationship of the parties to an international commercial contract is, very simply, the contract itself: it is the contractual provisions themselves that define the main rights and obligations of the parties, the term of the contract, the various termination possibilities, etc.

However, there are some crucial cases when the contractual provisions themselves do not provide a clear answer or do not provide an answer at all to a relevant question. In such cases one has to look further and also consider the national law chosen to be applicable by the parties to their contract, which may contain further (and thus possibly: “hidden”) rules that are also an integral part of the contract to be concluded. As a result, thorough research and consideration is needed already before the drafting of a contract to properly frame the choice of law clause to be included in the contract.

 

For example, limitation of liability is one specific area where the choice of the applicable law should not be left to chance. In this regard great caution is needed because the rules limiting the contractual freedom of the parties in the limitation or exclusion of their liability are mandatory provisions of each national law. Therefore, in this field the rules of the chosen national law cannot be simply “overruled”: this means that these mandatory provisions also become part of the contract (even though they are not explicitly mentioned), just as all the other contractual provisions that were actually negotiated and discussed in details. Moreover, the mandatory rules limiting the parties’ freedom in excluding or limiting their liability could vary from country to country, so in this regard it really matters what the designated by the parties to govern their contract.

 

Another area where the content of the law the parties would like to chose shall be examined before the drafting of the choice of law clause is the so-called “hardship clauses”. Hardship clauses play a significant role in long term contracts since their aim is to adopt long-term contracts to the circumstances that may change over the passage of time. Similarly to the limitation of liability clauses, the provisions on the modification of long term contracts to changing circumstances are also mandatory rules of national laws. This means once again that the parties cannot avoid these rules, so they have to prepare for them in advance, in particular, by making a conscious choice of the applicable law. In the course of the drafting of the choice of law clause for a long-term contract one has to examine under which circumstances the potential applicable laws make it possible, or even compulsory to have the contract modified; whether these laws regard renegotiation clauses enforceable and who (the parties? the courts? an authority?) has the power to adapt the contract to the changing circumstances.

 

Finally, the choice of the applicable law can also affect the interpretation of the contract since different national laws have different views on the role played by, for example, by “common sense” in contractual interpretation. For example English law, which seems to be the most popular choice these days, is in fact quite reluctant in applying commercial common sense in contractual interpretation and rather favors the “black letter interpretation” of contracts.

 

In conclusion, although the primary rules governing an international business transaction is certainly the contract itself, it is advisable to carefully review in advance the choice of law clauses in order to avoid any unpleasant surprises stemming from the “hidden” rules of the applicable law.


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