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In their day by day practice business entities very often conclude transactions that have cross border nature for example a company may conclude a contract with the entities from deferent country and even from different legal system. In this context, the important issue that need to be considered is which law would be applicable to the contract concluded between such entities. In this article the practical necessity of choosing the law applicable to the contract as well as several interesting issues related to the choose of law clauses would be discussed.

As the first option the contract may not contain any indication of the applicable law. In such a situation, the parties of the contract as a rule may come to the law applicable through so called “private international law or conflict of laws channels”. Which basically means that the parties would have to determine the law applicable to the certain contract through rules prescribed by the conflict of laws rules applicable. Here again the parties face the reality to determine which conflict of laws rules apply to their contract. If there is an international instrument (treaty; convention, directive) between the countries of the parties than of course those rules would apply but what if there is no such instrument (treaty; convention, directive) than the parties may be in trouble while determining conflict of laws rules applicable. Each of the parties would than try to analyze the problem from perspective of their own domestic conflict of laws rules. Each of which by the way may contain different approaches.

As the second option (recommended) the parties may include a special provision in their contracts to regulate the issue of the applicable law. However, it is worth to underline that the inclusion of such a clause need to be done with proper care, because this may still lead the parties to problematic situation. The parties may, for example, choice a law of the state with the federal structure where the contract law is a state law, just like in US, where there is no federal contract law. Instead there is contract law in each of the 50 states. Thus, if you want to refer to some US contract law you better mention a specific state for example “The contract will be governed by the law of California” instead of just referring to US law. However, this is not a universal rule, because there could be federal states for example Germany, where the contract law is a federal law so it would not be considered as pathological if you declare in your contract that “The contract will be governed by the German law “.

Another problem that the parties may face while implementing the choice of law clause when for example stating that “The contract will be governed by the German law”, is whether it refers to only substantive law of the chosen country or also to the conflict of laws rules, which in its turn may refer to the law of the third country. One can argue that this is absurd this was clearly not the intention of the parties, however this can happen, leading the counteragents to uncertainty and luck of predictability. To avoid this types of situation, which by the way is called as a “problem of renovi” in international private law, it is usually advised to refer to substantive law of chosen country instead of just referring to law of certain country or to exclude the possibility of application of the conflict of laws rules of chosen legal regime.

Another problematic issue related to the choice of law is so called “super mandatory” rules of the local or domestic laws. The point here is that there could be certain rules in domestic legislation which in any case cannot be overruled by agreement of the parties which determines the law applicable to the contract other than domestic law. A nice example of this situation is a decision of the European Court of Justice in Ingmar GB Ltd. vs. Eaton Technologies Inc. which held that a choice of law provision in favor of the law of a non-EU Member State (in that case Californian law) is to be set aside to the extent that it infringes upon the provisions of the EU directive provided the agency territory is within the EU.

Summarizing all the above mentioned it can be argued that having choice of law clauses in the contracts are crucial necessity for the predictable and effective implementation and even enforcement of the contract (in area of private international law). However, a bunch of factors need always been considered with due car when deciding particularly which law to choose, how to select law etc., otherwise this may give birth to problems so serious that those can decrease the positive effect of having such a clause in the contract.

Attorney, Mr. Aram V. Khachatryan

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