Governing law /ˈgʌvənɪŋ lɔː/ (n.)
The law by which one’s contract is governed. If it spans international borders, ideally English, but New York law always a good safe choice as long as you don’t mind the odd convenient logical impossibility for your trouble. If it doesn’t, the local laws and customs should do fine, and you shouldn’t waste your time talking about them.
If you’ve ever despaired at the pernicketiness of governing law clauses such as this:—
- This agreement and any non-contractual obligations arising out of or in connection with it shall be governed by and construed in accordance with English law.
Then you have the Rome II EU Regulation to blame. Enacted in 2007, it applies to all EU Member States and is designed to harmonise the “conflict of laws” rules across Member States dealing with with non-contractual disputes.
In this context breach of “non-contractual obligations” includes actions based on tort (e.g. negligence), competition law and statutory duty. But, fabulously, not those arising out of the negotiable nature of bills of exchange, cheques and promissory notes and other negotiable instruments, or company law or defamation — though it’s hard to see how you could have a non-contractual obligation to defame someone.
But the main thing is to ensure any concurrent claims in contract and tort can be — must be — decided in the same forum. This is mostly interesting where the parties to a contract are in different jurisdictions, and each will prefer their own jurisdiction to hear a non-contractual dispute. But even there, frankly, a concurrent claim in tort would only be relevant in most cases to builders.
A contrarian writes ...
It is said that, when William of Normandy landed on the beaches of Pevensey bay, he had his carpenters drill holes through the hulls of all his boats, so his men could not turn back should the going get too tough.
“We are here, men,” you can imagine him saying. “We stand and fight or we die. There will be no running back to maman.”
You could make the argument that the governing law clause is just that: a pretext to run back to maman. It speaks to everything that is wrong about the modern legal eagle’s approach to a commercial contract. If you take it that a good contract is one that has been so well drafted that no dispute could arise under it, then a good contract will never be read within the walls of a courtroom, and so a governing law clause ought to be entirely unnecessary. A meeting of minds is a meeting of minds, whether you are in London, Amsterdam or Timbuktu. It sends the wrong message to even talk about what laws govern the contract. It shouldn’t matter, unless one is anticipating jurisdictional arbitrage of some kind. Failing that, it is some kind of tacit acknowledgement that one has drafted a bad contract, that might need an independent arbitrator to figure out what the parties intended.
Inhouse legal eagle shop steward opportunity
The proposed governing law not being the one in which l’aigle juridique is qualified and licensed to practice is a magnificent opportunity for a busy in-house lawyer to work to rule, shunting a dreary job off his desk by lateral escalation onto Helmut’s desk, which sits in your Frankfurt office.
“This agreement is governed by German law. I simply cannot opine,” he will say, and look airily towards the work-shy rechtsadler. “Helmut will have to advise.”
Now, there is a veneer of truth about this — a sheen of cover, just thick enough to rebuff a non-specialist salesperson, who may privately be disinclined to believe it. She will harbour a suspicion that the basic precepts of the commercial bargain are, as far as makes any difference, the same whatever legal regime governs them, and that her present lawyer is simply being truculent, lazy or obtuse. But she cannot prove this. Rather brilliantly, nor can her lawyer, for he has no better idea about German law than she does. Nor that matter, can Helmut (assuming you can get a response out of him at all), for he knows nothing of the common law.
Each apex of this gristly triangle has its own distinct magisterium of expertise, and none overlaps: no-one has a grasp of German law, English law, and the intended bargain unprejudiced enough to confirm beyond reasonable doubt the obvious proposition that the governing law which applies to the bargain won’t make a fig of difference to the commercial outcome.
But unless you plan to litigate your contract — and if on the day you sign it you do, frankly you have much bigger problems — you might be better advised to compose a clear contract that is not capable of misunderstanding in the first place.
- Writing for a judge
- Governing Law - ISDA Provision
- Exclusive jurisdiction
- Governing Law and Jurisdiction - GMSLA Provision
- Rome II