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Governing Law Clauses

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Governing Law Clauses


This guide highlights the relevant law and
key considerations that should be borne in
mind when drafting or considering the effect
of a governing law clause.
The guide covers:

What is a governing law clause?

Why are governing law clauses


important?

What factors should you consider when


choosing the governing law?

The scope of a governing law clause:


what should it cover?

This publication is not intended to be a comprehensive review of all


developments in the law and practice, or to cover all aspects of
those referred to. Readers should take legal advice before applying
the information contained in this publication to specific issues or
transactions. For more information please contact us at Ashurst
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Governing Law Clauses

Governing Law Clauses


1.

What is a governing law clause?

A commercial contract sets out the terms on which the contracting parties will conduct business. The
interpretation and effect of those terms may, however, vary significantly depending upon which country's laws
govern them. The purpose of a governing law clause is to express the parties' choice as to what that law should
be.

2.

Why is a governing law clause important?

The parties' choice of governing law will usually be upheld by courts and arbitral tribunals in countries with
developed legal systems.

It follows that, by inserting a governing law clause, parties achieve certainty: they

know what law is likely to be applied to determine questions regarding their rights and obligations under the
contract. This, in turn, allows them to analyse their legal position with confidence.
It is rare for commercial parties not to agree a governing law clause. Where they omit to do so, various complex
rules exist to determine what the governing law of the contract should be. 1 Where parties are located, or
obligations are to be performed, in different jurisdictions, determining the governing law of the contract may be
difficult. This may lead not only to uncertainty but also to time and cost being spent arguing at the outset of any
dispute over what law should be applied.
The problems which can arise in this regard are highlighted by the comments of Mr Justice Mann in the English
case of Apple Corps Ltd -v- Apple Computer Inc. 2 In that case a dispute arose in relation to an agreement which
did not contain either a governing law or jurisdiction clause. Mr Justice Mann noted that:
"The evidence before me showed that each of the parties was overtly adamant that it did not wish to
accept the other's jurisdiction or governing law, and could reach no agreement on any other jurisdiction or
governing law. As a result, [the relevant agreement] contains no governing law clause and no jurisdiction
clause. In addition, neither party wanted to give the other an advantage in terms of where the agreement
was finalised. If their intention in doing so was to create obscurity and difficulty for lawyers to debate in
future years, they have succeeded handsomely."

3.

What factors should you consider when choosing the governing


law?

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. 3
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:

If the parties have chosen court litigation, then they will usually want consistency between their governing
law clause and jurisdiction clause. So, for example, if disputes are to be resolved in the Hong Kong courts,
it makes sense to choose Hong Kong law. Where they are not consistent, then the parties will have to
adduce expert evidence as to the foreign law before the selected courts.

So for example, where the

parties agree that their contract shall be governed by Korean law but, if a dispute arises, it will be
resolved by the Singapore courts, then the parties will need to produce expert evidence on Korean law in
1
2
3

See for example the Law of the People's Republic of China on the Laws applicable to Foreign-related Civil Relations, adopted on 28 October 2010.
[2004] EWHC 768 (Ch).
Note, however, that in Europe the Rome I Regulation will not allow parties to circumvent certain rules of law by choosing the governing law of
another country. In particular, it makes provision for the "mandatory rules" and "public policy" of a Convention country to be applied over and
above the law chosen by the parties. The distinction between the two is not easy to draw but, generally, mandatory rules will require terms to be
written into the contract (e.g. employee rights), whilst public policy will prevent the application of elements of the foreign governing law (e.g.
where the performance of an act in a foreign state is illegal under that state's law).

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Governing Law Clauses

order for the Singapore court to determine the relevant issues. This increases the cost of litigation and
there is a risk that the court will incorrectly apply the foreign law. Another thing to consider is that where
the law of one country is chosen but the jurisdiction of a different court selected for dispute resolution,
there may be no guarantee that the particular court chosen will recognise an express choice of law
clause. 4

Arbitration presents fewer difficulties in respect of the choice of law. This is because the parties are free
to choose their arbitrator(s), and so are able to ensure that they are well versed in the governing law of
the contract. That said, if a less mainstream governing law is chosen, the pool of available arbitrators will
of course be smaller.

In certain circumstances the parties' choice of law for the contract may also determine the law which
applies to any issues arising out of the parties pre-contractual dealings.

This may represent a good

reason for choosing English law, which, unlike some civil law regimes, does not incorporate a developed
body of law imposing a duty of good faith in pre-contractual negotiations.

There may be technical reasons why a particular law should be chosen. For example, one of the reasons
for choosing English or New York law in finance transactions is that they both recognise the concept of a
trust.

Make sure that you accurately describe the particular legal system that you intend to apply (e.g. refer to
"New York law" rather than "US law").

Finally (and perhaps obviously), ensure that you choose a legal system which the courts or the arbitral
tribunal will give effect to. Courts will generally require the law of a "country" to be chosen, as illustrated
by the following English cases:
In Beximco Pharmaceuticals Ltd -v- Shamil Bank of Bahrain EC 5 , the governing law clause provided
that "Subject to the principles of the Glorious Sharia'a, this Agreement shall be governed by and
construed in accordance with the laws of England". The Court of Appeal held that the only relevant
governing law was the law of England.
In Halpern -v- Halpern 6 , there was no express choice of law, but one of the parties argued that the
agreement was governed by Jewish law. The Court of Appeal rejected this submission: the law of a
country was needed.

Where parties want their relationship to be governed by a law other than the law of a country, they should
include provision for arbitration. For example, section 32 of the Singapore Arbitration Act 2001 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 tribunal".
It is not uncommon for parties who have agreed to arbitrate to choose non-national laws to govern their
agreements. For example, the agreement may designate lex mercatoria (i.e. generally recognised principles
common to trading nations) as the governing law, or the UNIDROIT principles, a comprehensive set of legal
principles devised under the auspices of the United Nations. 7 Alternatively, the parties can empower the
arbitrator to decide matters ex aequo et bono (i.e. on the basis primarily of achieving a fair result, rather than
with regard to a conventional law). It is equally possible for parties to agree that the governing law shall be the
principles common to two distinct national laws, or state that parts of their contract should be governed by one
national law, and other parts by a second national law. However, both of these last options are discouraged, as
they can result in uncertainty, and so run the risk of generating time-consuming preliminary disputes, and
challenges to the subsequent award.

4
5
6
7

See again the Law of the People's Republic of China on the Laws applicable to Foreign-related Civil Relations.
[2004] EWCA Civ 19; [2004] 2 Lloyd's Rep 1.
[2007] EWCA Civ 291; [2007] 2 Lloyd's Rep 56.
UNIDROIT is the International Institute for the Unification of Private Law. The principles can be found at
http://www.unidroit.org/english/principles/contracts/main.htm

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Governing Law Clauses

4.

The scope of a governing law clause: what should it cover?

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:

the period before the contract is entered into; for example, claims for negligent and innocent
misrepresentation or in the tort of deceit may arise out of statements made in pre-contractual
negotiations; and

the period after the contract has been entered into; for example, in addition to any contractual
obligations, one party may owe the other a duty of care in tort to take (or not take) certain steps.

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. 8
An example of a clause which seeks to do this is as follows:
"This agreement, and any dispute, controversy, proceedings or claim of whatever nature arising out of or
in any way relating to this agreement or its formation (including any non-contractual disputes or claims),
shall be governed by and construed in accordance with English law."
A clause in these terms will not guarantee that any non-contractual claims between the parties are always
governed by English law. However, adopting these terms can only increase the prospect of parties' noncontractual 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.

The risks in not attempting to do this are illustrated by the New York Federal Court case of Telemedia Partners Worldwide Ltd. v- Hamelin
Limited 95 Civ. 2452. In that case, a claim was brought under the Racketeer Influenced and Corrupt Organisations Act (RICO) as a result of
Hamelin's alleged fraudulent representations prior to the execution of the agreement. RICO claims give rise to treble damages, a concept not
recognised by English law. In Telemedia, the clause in issue stated as follows: "This agreement shall be governed by and construed in accordance
with English law and both [Telemedia] and [Hamelin] hereby submit to the non-exclusive jurisdiction of English courts." Telemedia brought its
claim in the New York Courts, as permitted by the non-exclusive jurisdiction clause. In answer to Telemedia's claim under RICO, Hamelin argued
that the agreement, by virtue of the governing law clause, should "be governed by and construed in accordance with English Law" so that the
RICO claim was precluded. The New York Court did not agree. It stated "[t]he plain language of the clause reveals an intent for English law to
apply only to issues relating to the construction and enforcement of the agreement". Thus the RICO claim was valid as it was based on allegations
of fraud preceding the existence of the contract.

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