Choice-of-law Agreements in International Contracts

• Publication year: 2021
• Citation: Vol. 50 No. 1

Choice-of-Law Agreements in International Contracts

Gary Born^* and Cem Kalelioglu^**

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TABLE OF CONTENTS

I. CHOICE-OF-LAW AGREEMENTS IN INTERNATIONAL COMMERCIAL CONTRACTS....................................................................................47

II. VALIDITY OF CHOICE-OF-LAW AGREEMENTS IN INTERNATIONAL COMMERCIAL CONTRACTS..............................................................50

A. Historical Treatment Of Choice-Of-Law Agreements..............50
B. Separability Of Choice-Of-Law Agreements............................53
C. Presumptive Validity Of Choice-Of-Law Agreements In International Commercial Contracts.......................................59

i. Presumptive Validity of Choice-of-Law Agreements Under International Conventions and Other International Instruments.......................................................................59
ii. Presumptive Validity of Choice-of-Law Agreements Under National Laws...................................................................62
iii. Presumptive Validity of International Choice-of-Law Agreements as A General Principle of Law.......................68

D. Law Applicable To Validity Of Choice-Of-Law Agreement......71

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E. Grounds For Challenging Validity Of Choice-Of-Law Agreements.............................................................................75

i. Defects in Choice-of-Law Agreements...............................75
ii. Insufficiently-Clear Choice-of-Law Agreements................76
iii. "Reasonable Relationship" Requirement for Validity of Parties' Choice of Substantive Law...................................78
iv. Choice of Non-National Legal System...............................85
v. Choice of "Floating" National Law..................................87

F. Public Policy Limitations On Choice-Of-Law Agreements In International Commercial Contracts.......................................88

i. Unenforceability of International Choice-of-Law Agreements Based on Public Policies or Mandatory Laws of the Forum......................................................................88
ii. Unenforceability of International Choice-of-Law Agreements Based on Foreign Mandatory Laws and Public Policies.... 96

III.INTERPRETATION OF INTERNATIONAL CHOICE-OF-LAW AGREEMENTS 100

A. Does A Choice-Of-Law Agreement Select Substantive Rules Or Conflict Of Laws Rules?: "Whole Law" Versus "Internal Law" .............................................................................................101
B. Geographically Limited Rules Of Law...................................103
C. "Procedural" And "Remedial" Issues..................................105
D. Extra-Contractual Issues.......................................................108
E. Law Applicable To Interpretation Of Choice-Of-Law Agreement .....................116

II.CONCLUSION.......................................................................................118

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Choice-of-law agreements are widely used in international business transactions, with a substantial majority of all cross-border commercial and investment contracts containing a choice-of-law provision. Virtually all legal systems, and many treaties and other international legal instruments, recognize the presumptive validity of such agreements. Nonetheless, there are significant variations in the treatment of international choice-of-law provisions, including with respect to issues of validity, enforceability, and interpretation, which can lead to a degree of unpredictability in the application of such provisions. This uncertainty undermines the basic purposes of choice-of-law agreements and private international law more generally.

This Article examines the treatment of international choice-of-law agreements under both national and international law. In particular, the Article considers the rules governing the validity and enforceability of such agreements, the exceptions to their presumptive validity and enforceability, and the interpretation of international choice-of-law provisions.

The Article argues that the basic rule of presumptive validity of choice-of-law provisions in international commercial and investment contracts now has the status of a general principle of law and is therefore binding on states as a matter of international law and, in any event, should be adopted as a matter of national policy. This Article also argues that, although there are substantial similarities in the treatment of exceptions to the validity of international choice-of-law provisions in different national and other legal systems, important differences persist. These differences undermine the purposes of such agreements, and thereby impede international trade and investment. The Article examines these differences and proposes heightened uniformity in the rules governing the recognition of international choice-of-law agreements in commercial and investment contracts. Among other things, choice-of-law agreements (i) should not be subject to any "reasonable relationship" requirement, (ii) should be presumptively valid where a non-national legal system is selected and (iii) should be unenforceable on public policy grounds only in exceptional circumstances.

The Article also contends that similar differences exist with respect to the interpretation of international choice-of-law agreements in different legal systems, and that these differences frustrate the intentions of commercial parties. The Article proposes rules of interpretation of international choice-of-law provisions, including presumptions that choice-of-law agreements select only the "local law," not the "whole law," of a jurisdiction and that choice-of-law provisions be interpreted liberally, to include most issues of procedure and remedy, as well as non-contractual issues. These uniform rules of interpretation would better serve the objectives of commercial parties and purposes of private international law regimes and the international legal system than does existing treatment of international choice-of-law provisions.

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I. CHOICE-OF-LAW AGREEMENTS IN INTERNATIONAL COMMERCIAL CONTRACTS

A significant majority of international commercial and investment contracts contain choice-of-law provisions addressing the law applicable to the parties' contract. That conclusion is confirmed by a number of empirical studies, examining the use of choice-of-law agreements, which report that more than 90% of cross-border commercial contracts contain choice-of-law clauses.¹ Similarly, standard commercial reference works uniformly recommend inclusion of choice-of-law provisions in international contracts.²

There are compelling reasons for parties to include choice-of-law provisions in commercial contracts. A choice-of-law clause, often accompanied by a forum selection agreement, provides enhanced predictability, security and efficiency in the interpretation and enforcement of the parties' rights and obligations, which are critical to commercial parties.³ As the Supreme Court of the United States has explained:

Such uncertainty will almost inevitably exist with respect to any contract touching two or more countries, each with its own substantive laws and conflict-of-laws rules. A contractual provision specifying in advance the forum in which disputes shall be litigated and the law to be applied is, therefore, an almost indispensable precondition to achievement of the orderliness and predictability essential to any international business transaction. ... [Absent such agreements, one enters] the dicey atmosphere of ... a legal

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no-man's-land [which] would surely damage the fabric of international commerce and trade, and imperil the willingness and ability of businessmen to enter into international commercial agreements.⁴

Enhanced predictability and efficiency are especially important in international settings because of the significant differences between national laws and decision-makers and the availability of multiple potential forums. Achieving a degree of predictability, and reducing the costs of uncertainty, as to the applicable law in these circumstances is particularly important for commercial parties.⁵

Prior agreement on the substantive law governing a commercial contract may, in some cases, also provide important security to one of the parties to an international transaction. For example, a choice-of-law provision in a contract with a state or state-owned entity can provide foreign investors or traders with protections against a host state's unilateral changes in local law, which is particularly helpful where the local law is designed to disadvantage foreign counterparties.⁶ Similarly, a choice-of-law provision in a credit agreement can provide a lender with security for recovery of amounts it has loaned.⁷ In both cases, choice-of-law clauses enable transactions to proceed which otherwise might not have done so, or to proceed on more mutually-beneficial terms, thereby facilitating international trade and

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investment.⁸

Choice-of-law provisions, like other contracts, are products of individualized arrangements between particular contracting parties, and, as consequence, can take an infinite variety of forms. Nonetheless, in practice, there is considerable standardization in contemporary choice-of-law provisions, which are often drafted in formulaic terms, reflecting the fact that there is a limit to what creative (or negligent) drafting can produce on the subject. Common formulations of choice-of-law agreements include:

This agreement shall be construed in accordance with the laws of [State X].
This agreement shall be interpreted in accordance with, and governed by, the laws of [State X].
Any dispute arising out of, in relation to, or in connection with this contract shall be governed by the laws of [State X].
The [arbitral tribunal constituted] [court specified] pursuant to this agreement shall apply the laws of [State X].⁹

Other, more complicated...