CHAPTER 9 SELECTION OF GOVERNING LAW

• Jurisdiction: United States

International Resources Law and Projects
(Apr 1999)
CHAPTER 9
SELECTION OF GOVERNING LAW
Tanneke B. Heersche ^*
McCarthy Tetrault
Toronto, Ontario, Canada

We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our courts.¹

Introduction

Certainty and uniformity of legal results have become important factors in the development and fostering of international trade and commerce. Increasingly, transactions have cross-border elements and, particularly in transactions involving major projects in sectors such as energy and natural resources, will typically involve multiple interrelated contracts among and between numerous participants. This globalization of commerce comes at a time of and is coupled with substantial economical and political changes throughout several regions of the world, including Europe, the Americas, Asia and Africa.

Within this broader context, choice of law together with jurisdiction/arbitration provisions are tools that can assist in addressing difficulties encountered by the diversity of legal and judicial systems that one could (and likely will) encounter over the course of a transaction/project. The choice of law applicable to a contract, for example, can determine the success or failure of the respective parties mired in a contractual dispute or, perhaps more importantly in some instances, may determine whether or not a contract exists in the first place. Despite this fact, often choice of jurisdiction and choice of law clauses are generally left to the end of

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negotiations when the commercial terms have been settled and, if included, are often agreed upon with little regard as to their potential impact.

Also within this broader context is the phenomenon of increasing intersection of the common law and civil law, both discrete and mutually exclusive legal traditions that have each, respectively, formed the basis of many of the legal systems worldwide.² For example, a common law court having to interpret and apply codes of civil law jurisdictions or the increasing harmonization of legal principles and rules internationally through the use of international conventions and/or substantive anational principles³ could each be viewed as evidence of the convergence of civil and common law systems. Generally, in view of the rapid international changes economically, politically and legally, it would not be inaccurate to say that it will be increasingly difficult for any individual nation or region to keep its legal institutions and traditions insulated from external influences.

Given these realities and the attendant increase in global commerce that is inevitable in such circumstances, an examination of instances of harmonization or convergence between the common and civil law systems, although perhaps not of immediate practical application to a sector specific practitioner, will provide insight that can be used in future dealings with transnational projects and/or litigation. Furthermore, any study of convergence, and the comparative analysis that it necessarily entails, is likely to be of benefit as the pace of novelty and growth of problems requiring resolution by law increases.

This paper will canvass aspects of selection of governing law in contractual relations, and, with a focus on parties' autonomy to choose the applicable law and those principles invoked in the absence of such express choice, will briefly survey the principles generally applicable in various geographic regions (UK/Canada, Continental Europe, Latin America and the United States of America), such survey in and of itself demonstrating an already existing convergence of principles. The uncertainties arising from having to rely on national laws as regards choice of law principles and the obvious inadequacies of this approach in establishing certainty and uniformity of results in the context of international transactions emphasize the need for

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further convergence in this field and this paper will therefor also touch on certain specific developments evidencing further harmonization of differing systems of law within this context. It will conclude with a brief discussion of the interrelationship between choice of law and jurisdiction. However, an extensive review of choice of jurisdiction issues, whether in contract or tort, and the impact of such matters is beyond the scope of this paper.

As the complexities of ascertaining applicable law in international contracts can be numerous and will by necessity be linked to the forum having jurisdiction over the dispute — any resolution depending upon the treatment of conflict of laws in contract in such jurisdiction — this paper cannot and does not purport to be a description of the general practice in this subject matter. It also does not review in detail limitations on the scope of applicable law (once chosen by the parties) or deal with specific rules applicable to choice of law in special contracts (eg., insurance). Furthermore, as a full exercise in comparative law is better left to the numerous theorists, academics, critics and others specializing in comparative law and conflicts of law theory, this paper does not purport to be a complete comparative law review of the principle choice of law issues. Its aim, rather, is to "demystify" (to some extent) this area of the law and provide the reader with a general grasp of some key principles applicable to the selection of governing law in contractual relations, particularly the parties' rights in choosing the governing law, along with an understanding of recent developments that are further contributing to the international harmonization of the law in this area. In this manner, a practitioner faced with a choice of law issue will have the basic knowledge that she or he will require in order to ensure that her or his client obtains all of the legal advice necessary (be it local or foreign) to ensure that an appropriate choice is made in the context of the type of transaction involved, that the choice of law as selected by the parties will be given effect to and to advise of the uncertainties that will inevitably arise in a situation where no express choice is made.

The Importance of Choice of Law

The law by which a contract is governed will deal with most contractual issues. It is intended to govern matters of construction and interpretation as well as the validity of the contract — that is, whether the contract is legal or the extent to which it is enforceable. To be more specific and to highlight the importance of the governing law and the impact it may have, consider the following substantive elements (as a non-exclusive list) in respect of which rights and obligations of parties will be determined in accordance with the governing law of the contract:

• necessity for consideration

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• formal validity of the contract

• third party beneficiary rights

• recognition of trust concepts

• validity of penalty clauses, limitations on liability and other possible exclusions

• presence of fiduciary duties

• limitation periods

• ability for a party to sue in both contract or tort (thereby determining the availability of a claim of contributory negligence)

In addition to the governing law concerns in respect of substantive elements, and a concept which is often overlooked, any advisor must also consider the availability of remedies appropriate to the rights one hopes to have enforced. This adds additional complicating factors as the availability of remedies is determined not by the governing law of the contract, but rather by the forum hearing the dispute. Furthermore, upon obtaining the appropriate relief and/or remedy, a party must seek to enforce it in the appropriate jurisdiction having regard to the nature of the dispute. Thus, for example, if an exclusivity or non-compete provision is absolutely essential to a party, regard must be had to the fact that injunctive relief is necessary to enforce such provisions effectively and that such relief must therefore be available in the jurisdiction in which the dispute is heard.

The governing law, whether determined by reference to the express choice of the parties or by judicial determination, refers to the internal law of the country in question. Although a reference to a particular governing law may be considered by the parties as a reference to both the domestic law and the domestic conflict of laws rules (and hence the reference to "without regard to its conflict of laws rules" in some governing law clauses), it appears to be accepted in both common and

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civil law jurisdictions that renvoi has no place in the law of contract.⁴ Renvoi results when the conflict of laws rules of one jurisdiction refer the specific issue to the laws of another, which in turn in accordance with its conflict of laws rules, refer it back to the laws of the first jurisdiction, etc.

In discussing governing law, it is important to understand the distinction between the governing law of the contract and the incorporation by reference into a contract of certain elements of foreign law. The former will be used to govern the contract as a whole and will be those elements of the law that are in force at the time the dispute arises, whereas the latter effectively become terms of the contract itself and are not affected by any changes in such laws after the entering into of the contract.

Wide scope, it is generally argued, should be given to parties to determine which law will govern issues involving the validity of their contract and the nature of their obligations.⁵ Particularly in the international arena, the choice of law will take on increasing importance. Not only will a party wish to define to the extent possible and with some amount of certainty how its rights and obligations under a particular contract will be determined in the event of a breach, but each...