8.7 Applicable law clauses

Most contracts contain a provision on the applicable law. The effect of a choice of law is that, in principle, the contract is governed by the law chosen[58]. (If a contract has never been signed but the choice of law has not been disputed either, the Rome Convention provides that the agreed choice of law will apply.) The standard and sufficient pattern of a choice of law provision is:

Applicable law. This Agreement is governed by the laws of Switzerland.

The effect of the choice of law is that the chosen law applies to the agreement. Although, the parties may be unable to avoid certain mandatory law provisions of the contracting parties’ national laws (i.e. under the Rome Convention). By operation of the applicable conflicts of law provisions, a distinction must be made in relation to:

  • subject matters which qualify as a category of private international law for the parties cannot choose another law other than the lex causae. This may be the case in connection with the transfer of ownership of real estate, movable property in a foreign jurisdiction, aspects of company law, insolvency law, securities law, competition law etc.;
  • subject matters which are covered by a scope rule (i.e. a ‘super-mandatory’ rule that applies regardless of the law governing the contract), usually matters of employment law or employee codetermination law;
  • regulatory matters, including matters of public policy: examples include regulatory matters designed to protect a local market, such as food, feed and pharmaceutical regulations, regulations relating to the registration or authorisation of chemical substances, laws and regulations relating to the financial markets, insurances and provision of financial advice, telecom and energy laws etc.;
  • the applicable arbitration law (or other law of civil procedure): an arbitration is governed by the law of the agreed place of arbitration, whereas a choice of court implies a choice for the civil procedural laws applicable in the chosen jurisdiction. If exceptionally, the parties wish to agree on a particular other arbitration law, they may do so explicitly[59];
  • in the case of employment agreements and consumer contracts, different choice-of-law rules apply in order to protect the interests of the weaker party.

The law applicable to the listed subject matters is determined on the basis of different provisions of private international law (or public international law, as the case may be) than those of contractual obligations. Of course, they might well be subject to the law chosen by the parties, but that would be for the reason that the relevant provisions point to the same legal system. In the following paragraphs, a few particularities of legal practice are discussed.

In principle, the chosen law applies to the contract in its entirety. The parties are free, however, to identify specific parts of their contract (or agreements attached as a schedule or annex) and submit those parts to a different applicable law. This phenomena is called ‘depeçage‘. In this respect, it is worth mentioning supranational rules and regulations such as the Incoterms and UCP600[60]. The legal status of these rules is not always clear; in some jurisdictions they are considered ‘contractual arrangements incorporated into the contract by reference’, whereas in other contracts they are seen as a separate body of law. In any case, a reference to such rules and regulations would qualify as depeçage and be valid and enforceable.