Governing Law

"This Agreement and any non-contractual obligations arising out of or in connection with it shall be governed by [English] law."

The governing law of the agreement is the law by which the parties’ rights and obligations under the contract are to be decided. Whether you choose litigation or arbitration, you must express a governing law of the agreement in any contract which has an international element. Otherwise the governing law will be decided by the conflicts rules of the court trying the case, or by the arbitral tribunal:

• within the EU, the rules applied by national courts are consistent, thanks to the Rome Convention on the Law Applicable to Contractual Obligations and its successor, Regulation 593/2008 on the Law Applicable to Contractual Obligations ("Rome I"), the latter of which applies to contracts entered into as from 17 December 2009. But it is much safer to include an express choice of governing law.

Rome I gives effect to an express choice of law. But this is subject to some exceptions, in particular the following may be applied despite a choice of a different governing law:

• “overriding mandatory provisions” of the forum, or of a country where the obligations arising out of the Agreement have to be or have been performed in so far as they render performance of the contract unlawful;
• provisions of the law of a country which cannot be derogated from by contract where all elements, other than the parties' choice of law, relevant to the situation at the time of that choice are located in that other country (similar provisions exist to deal with the application of non-derogable EU law where a choice of law other than that of a Member State exists); and
• public policy of the forum

In addition, there are limits on the ability to choose a governing law in contracts of carriage, consumer, employment and insurance contracts.

The Rome Convention continues to apply, in so far as any particular EU Member State court is concerned, to contracts entered into before 17 December 2009 and after the date the Rome Convention came into force in respect of that Member State. In addition, the Rome Convention also still applies in full in Denmark as it has opted out of Rome I. The Rome Convention also gives effect to the parties’ choice of law and contains similar, although not identical, exceptions to Rome I.

• In the case of arbitral tribunals, most of the main rules (e.g. the ICC and LCIA) direct the tribunal to apply the rules of law that they consider appropriate if the parties have not made a choice.

The clause also provides for a choice of governing law relating to non-contractual obligations. It is not unknown for claims framed in, for example, tort/delict to be raised in disputes involving a contractual relationship. It, therefore, can make sense to express a governing law to apply to these. This will depend to an extent on whether the forum in which any dispute is to be heard may give effect to such a choice. For example, although this is so, generally speaking, before the EU courts and before arbitral tribunals (see further below) the efficacy of such a choice may not be, so far as other national systems of law are concerned, something that has been established to the same extent as a choice of law over contractual obligations. Where such a choice may be recognised, not expressing it will again mean that it will fall to be determined by the conflicts rules of the court trying the case, or by the arbitral tribunal:

• within the EU the rules applied by national courts are again consistent due to EU Regulation 864/2007 on the Law Applicable to Non-Contractual Obligations (“Rome II”) which has been applicable before the EU Member State courts (excluding Denmark) since 11 January 2009. Under Rome II, however, the parties’ choice of law in this area will be given effect (subject to some limitations) and so this can therefore be taken advantage of if a dispute is to be heard before those courts.
• In the case of arbitral tribunals, most of the main rules would, again, direct the tribunal to apply the rules of that they consider appropriate where the parties have not made a choice.

If exercising a choice of law in respect of non-contractual obligations, parties are well advised to choose the same law as that governing the agreement itself.

Note: If choosing English law to govern matters to be heard before the English (or any other EU Member State) courts and you are concerned to know about the potential impact of Brexit, please click here to read our analysis.

Warning: Please do not provide for your contract to be governed by two systems of law simultaneously, or by "common principles of, e.g. English and French law", or by "the principles of law common to civilized nations". Each of these has been used in a commercial contract in the past and each has proved a useful little earner for the lawyers involved in the litigation to determine its effect.

Procedural Law

If you choose to have your disputes decided by the French courts, obviously French court procedural rules apply to the resulting litigation. Less obviously, if you choose arbitration in Paris, French arbitral law applies to the procedure of the arbitration (see seat).

By and large, the local arbitration law applies as a back-up, to the extent that the parties have not themselves provided for how the arbitration is to be conducted. So procedures specified in your arbitration agreement, or institutional rules incorporated by reference, will supplant local arbitration law to that extent. More radically, contracting parties might for example choose Paris as a seat in recognition of the quality of its restaurants, but choose to have the arbitration conducted under English arbitration law. This can lead to expensive complications, and is not recommended.

In either case, contracting-out is subject to any mandatory rules of the local arbitration law (ie rules which apply irrespective of the procedural law chosen): see the discussion of individual countries under seat.

What is procedure and what substance?

• questions such as the remedies available, rules of evidence, etc are usually treated as procedural, and therefore governed by the law of the forum or seat (or the chosen procedural law, if different), whereas
• questions such as the assessment of damages and limitation are usually treated as substantive, and therefore decided by the governing law of the contract.

But which is which is itself usually to be decided under the law of the forum or seat, and therefore will depend upon which country the court or arbitral tribunal is sitting in.