What do we know about choice of law in contracts?
A choice of law determines the validity, enforceability
of the contract, the rights and obligations of the parties which are not always expressly written in the contract. It helps the parties of the contract to get
compensation for damages, penalties, injunctions, interim measures etc. Because,
not all issues are drafted and well regulated in the contract provisions agreed
by the parties.
Some lawyers, businessmen do not see the seriousness of
the choice of law clause in contracts.
Today I read the article (‘’International Arbitration in London from the perspective of a civil
law lawyer: Rome I Regulation and Contractual Penalties'') on Kluwer Arbitration Blog (http://kluwerarbitrationblog.com/2017/05/24/international-arbitration-in-london-from-the-perspective-of-a-civil-law-lawyer-rome-i-regulation-and-contractual-penalties/)
about hidden sides of the non-choice of law and/or a choice of CISG rules (Convention on International Sales of Goods) in the
contract.
The above mentioned article is worth to read, because, by reading this, most
of lawyers, who do not pay attention to the choice of law clause, shall
understand its importance, especially in arbitration (commercial)
proceedings.
Under the case analyzed in the article written by Briza & Trubac, it is clear that the applicable law of three different states and two legal systems which have
various and specified approaches to the contractual penalties
(liquidated damages) are in the edge of the collision. By the application
of laws (by choice of law or by virtue of international private law rules or by CISG) the
parties may not be allowed to apply either penalties or liquidated damages
at the same time under English law, which in this case the party of the contract may not demand any
penalty.
Of course, some of
lawyers would say; lets agree on CISG rules, however, the rules regarding
damages under CISG are not well specified and most of the issues on this are
left to national law rules.
Let’s concentrate on a hypothetical case regarding
a choice of law clause:
Two companies, Company A and Company B conclude an agreement
on purchase of the motor oils, well, Company A sells the motor oils to the
Company B, and keep in mind that the parties are from different states; Company A from UK and Company B from Germany, the conditions in the contract are the followings;
- Agreed price: 3 EUR per liter
-Agreed quantity; 20 tons
-Delivery date; June 1st 2017
-Penalty (05 % of the total price) in case of late delivery
Both states have their own legislation and legislative
requirements regarding contractual provisions. In case of any dispute, the
parties agree that the dispute shall be referred to the arbitration in New York
under the international arbitration rules of International Chamber of Commerce
(ICC).
So,the issue regarding applicable law had agreed on CSIG and let’s assume that both states are parties to the CISG.
The Company A does not deliver the goods on the agreed
timeline (June 1st 2017), in turn, the Company B demands the delivery of the
goods on time. But, the Company A says; the goods shall be delivered only
on July 1st 2017, due to technical problems in the production.
However, the Company B says; the delay has caused a loss
of profit, incidental damages, penalties etc. therefore, despite the
delivery of the goods on July 1st 2017, the Company A should pay the damages
and the agreed penalty in the contract. In turn, the Company A refuses to do
it. So, the dispute is referred to the arbitration in New York.
What should the arbitration tribunal do in the first
place?
By reading and analyzing the contract, the arbitrators
see that the CISG is clearly opted in and both states are parties of the CISG.
However, one of arbitrators, obviously he or she is a lawyer, says; No, CISG is not capable to
solve the dispute, because, the CISG does not provide enough solutions with
regard to damages etc.
What happens then?
By virtue of the
private international law rules, the tribunal should refer to national law
rules in order to solve the case on the compensation of damages and penalties etc.
The UK lawyer (Company A) knows that if the UK law is
applicable, the Company A shall pay only for damages, but not penalties,
reversely, the German lawyer (Company B) wishes German law to be applicable by
knowing the details of the contractual penalties (damages etc.) under German law.
In order to secure the company's rights, the lawyer of the Company B should insist
on the application of German law by agreeing about it beforehand. But, it is not always
possible to agree on the applicable law which is favour for the company and in
this case, the lawyer is required to analyse another neutral applicable law rules and find
a suitable one.
But, still lets assume that no choice of law is agreed in the
contract. Well, if choice of law is not agreed in the
contract, then, as a lawyer, I would include
the liquidated damages in the amount which shall cover the foreseeable damages
and penalties or if I see that by virtue of the international private law
rules, the German law shall be applicable, I would agree on non-choice of law
in the contract, because I know that the German law shall be applicable by virtue of the international private law rules anyway.
Thereby, in order to avoid any discrepancies, disadvantages, by analyzing the above mentioned scenarios, lawyers should carefully pay attention and draft a choice of law provision in the contract.
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