The “choice of law” clause is commonly included in international contracts to determine which legal system will govern the contract. This clause provides a legal framework for resolving disputes and is key in managing risk. Below is an analysis of the role of the choice of law clause and the sources of law that may be applied in international dispute resolution.
1. Role of the Choice of Law Clause
a) Managing Legal Risks
When the parties have agreed on the applicable law for dispute resolution, each party can assess the legal risks associated with its rights and obligations. Especially when the parties are from different countries with distinct legal systems, selecting the applicable law becomes essential. Once the applicable law is determined, each party can proactively take appropriate measures to ensure compliance with that law.
b) Enhancing Efficiency in Dispute Resolution
When a dispute arises, having a predetermined legal system for resolution expedites the process of dispute settlement. The parties can determine the appropriate course of action when conflicts arise, avoiding the need to review and compare multiple legal systems. This saves time and reduces legal costs, as the parties do not need to spend time researching or selecting among various legal provisions. Furthermore, the choice of law clause assists the adjudicating authority in resolving disputes, allowing it to apply the agreed-upon legal framework.
2. Sources of Law Governing the Contract
a) National Law
The parties to a contract often choose the law of a specific country to govern their contractual relationship, including dispute resolution provisions. This could be the law of the country where one of the parties is headquartered. When the law of a specific country is chosen, it serves as the legal source for addressing contract-related issues. Ideally, parties should select the law of a country familiar to at least one party to the contract. In cases where the parties do not agree on a governing law, the applicable law is determined under the provisions of international law and conflict-of-law rules.
b) International Conventions
Parties to a contract may also choose international conventions to govern the contract, including its dispute resolution provisions. Certain international conventions have been established to create consistency in international commercial contract law, such as:
• Hague Convention: Issued by the International Institute for the Unification of Private Law (UNIDROIT), this convention addresses international sales contracts. However, it is not widely applied.
• CISG 1980: Adopted by the United Nations Commission on International Trade Law in 1980, the CISG is the most widely adopted convention for international sales contracts. Many countries apply the CISG in international trade transactions.
When choosing an international convention as the governing law, parties should consider the following:
• Firstly, an international convention may automatically apply if the countries of both parties are signatories to it.
• Secondly, if the countries of the parties are not both signatories, the convention will only bind the parties if they expressly agree to apply it.
c) International Commercial Customs and Other Sources of Law
In addition to national law and international conventions, the parties may choose to apply international commercial customs, such as Incoterms, a set of international rules on delivery terms for international sales contracts, as the legal basis for the contract. Incoterms include various versions detailing delivery methods, providing a clear and consistent legal framework for contract performance. Additionally, the Principles of International Commercial Contracts (PICC) issued by UNIDROIT may be applied if the parties specify so in the contract. These international commercial customs only carry binding force when stipulated by the parties in the contract.
This article, “Choice of Law Clauses for Dispute Resolution under International Law Provisions” has been prepared by TNTP for our readers. We hope this article proves beneficial.
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