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. (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).

Fields of law not covered by a choice-of-law clause. By operation of the applicable conflicts of law provisions, a distinction must be made in relation to:

  • Certain non-contractual fields of law. 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.;
  • Super-mandatory socio-economic laws. 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 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.;
  • Arbitration law. The applicable arbitration law (or other law of civil procedure): an arbitration is governed by the law of the agreed place of arbitration (‘seat 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;
  • Employment and consumer law. 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.

Depeçage. 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. 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 such case, a reference to such rules and regulations would qualify as depeçage and be valid and enforceable.

International nature and choice of law #

In order for a choice-of-law clause to be effective, a contract must be ‘international’. If a contract is not ‘international’, the effect of the choice-of-law clause is that only the supplementary law (ius dispositivum) from the local law of the contracting parties is replaced by the chosen law; the mandatory law of the contracting parties’ jurisdiction cannot be contracted away.

A contract is ‘international’ if there is an element of some significance in the agreement that points to a jurisdiction other than the law which would otherwise be assumed to apply in the usual course of things. This is most obvious if the two parties are established in different jurisdictions but also when both contracting parties are from the same jurisdiction and delivery of the goods takes place abroad; a sales contract is generally considered to be ‘international’. It is not clear in all jurisdictions when a contract becomes ‘international’ but the prevailing opinion is that the criteria are relatively easily met.

Dispense with “…excluding its conflicts of law provisions” #

Choice-of-law clauses regularly contain the phrase excluding its conflicts of law provisions (or, equally, …excluding its private international law rules). It is used so often and yet is so useless that a clarification is desirable.

Obviously, the phrase excluding its conflicts of law provisions attempts to exclude the private international law provisions of the law chosen under that same choice-of-law clause. (Conflict of laws is an area of private international law, which deals with determining the applicable law, as may be appointed by a choice-of-law clause.) The phrase excluding its conflicts of law provisions is meaningful only if the private international law rules of the chosen law would ‘refer’ the same matter to another law. This is only possible under the (private international law) concept of ‘renvoi‘.

Renvoi (private international law). Many systems of private international law reject renvoi, which is understandable because renvoi is a source of legal uncertainty, potentially leading to circular or endless referrals. Moreover, renvoi would not necessarily provide a solution, which is by definition unequivocally acceptable. Finally, many legal systems reject renvoi because it may introduce inefficiencies in the case at hand. Countries that do accept renvoi normally reduce its scope to a minimum. Areas typically excluded from the working sphere of renvoi are contractual obligations and areas that permit broad party autonomy (ius dispositivum). In essence, the applicability of renvoi in the case of a choice-of-law clause, and hence the phrase excluding its conflicts of law provisions, seems rather exceptional and academic (if not ridiculous).

In order for the words excluding its conflicts of law provisions to be meaningful, the following criteria should be met cumulatively:
1.     neither the private international law rules of the chosen law nor those of the lex fori (i.e. the law of the country where the court is located) may reject application of the private-international-law-concept of ‘renvoi’. If the private international law rules of the lex fori do, the court will, after applying its own private international law rules, refuse a renvoi (if any) by the private international law rules of the chosen law;
2.     the applied private international law rules should not permit contracting parties to choose the applicable contract law themselves because if they do, such a choice-of-law clause would already be conclusive, and
if these two criteria are met, the court must take a major step of sidepassing the parties, by not determining that they actually intended to apply the chosen law (e.g. because they wrote this down) or that they had a legally valid other justification for the chosen law.

Do you see how highly exceptional if not completely hypothetical the facts of a particular contract must be in order for the words excluding its conflicts of law provisions to make any sense?

Exclude the applicability of the Vienna Convention? #

Many contracts exclude the applicability of the ‘Vienna Convention. Most lawyers do this ‘because everyone does’ and many opt out even if the convention is not even applicable.

Scope of CISG

The scope of the Vienna Convention is well defined. It is limited to international sales contracts only. Accordingly, it is nonsense to exclude its applicability in licences, service contracts, manufacturing agreements or loans. Furthermore, the convention excludes certain sales contracts because of its purpose (i.e. consumer contracts), its particular nature (i.e. sales by auction, on execution or otherwise by operation of law) or because of the nature of the goods (i.e. shares, investment securities, negotiable instruments, money, ships, aircraft or electricity). Therefore, a share purchase agreement does not need to contain an exclusion of the Vienna Convention, simply because the convention would not be applicable anyway.

The Vienna Convention is most widely ratified

Considering the number of ratifications, the Vienna Convention is a great success. The convention is ratified by some 70 countries worldwide. Important countries that have not ratified the convention (yet) include: the UK, India, South Africa and several countries in the Middle East. An up-to-date map can be found on or via the websites of Uncitral or legacarta.net/maps.

If you wish to exclude the convention, you may do so as follows:

The Convention on the International Sale of Goods (Vienna 1980) does not apply.

Exclude the Vienna Convention? (No)

Is it important to exclude its application? Probably not, the law on the (international) sale of goods is one of the bodies of law, which have become harmonised considerably over the past centuries. (Its being predictable has always been an important factor for trading companies to do business.) Even the legal concepts under sales contract law are similar or equal under the various legal systems. The Vienna Convention is not really different in this respect.

A court will not likely answer important questions relating to ‘fitness for purpose,’ ‘conformity,’ ‘free from liens’ or ‘merchantability’ differently under the Vienna Convention as opposed to under the applicable national law. In many cases, the handbooks on the Vienna Convention provide more details on the case law developed in the various national courts than the national case law is reasonably capable of addressing.

It is commonly considered that opting out of the applicability of the Vienna Convention has to do with getting ‘cold feet’.

Terms of Use

I hereby accept (or reconfirm my acceptance of) Weagree’ Terms of use, in which:

Terms of Use

I hereby accept (or reconfirm my acceptance of) Weagree’ Terms of use, in which: