In an international context, the applicable law clause in negotiations almost inevitably leads to difficulties and sometimes lengthy discussions. Here you can find out how negotiating partners can find efficient solutions.
Key Message: The applicable law in contracts is important. Companies should have internal rules in which cases their "home law" must apply and where there is room for other laws.
The problem: (almost) no compromises and high relevance
With the applicable law, the parties determine the underlying contract law (in Switzerland, the Swiss Code of Obligations) according to which the contract is to be assessed. As a rule, the law of the domicile of one or the other party is determined. More rarely, the law of an independent third country is chosen. Choice of law clauses are generally permissible. However, there are restrictions in some legal systems, e.g. if there is no material connection.
In the vast majority of cases, the best solution for your company is to choose the applicable law of the country in which your company is based. Logically, however, your contractual partner also wants this solution for themselves. So as soon as you are not based in the same country, there is no simple compromise solution.
Even though the applicable law may sound like a mere formality and seem very abstract to non-lawyers, the relevance of this provision should not be underestimated. Of course, you should assume that your company will not have any problems with the contractual partner and that the contract will not have to be "pulled out of the drawer" again. However, as soon as this is necessary - and this may already be the case in the event of minor ambiguities or misunderstandings - the legal situation must be assessed on the basis of the applicable law. As soon as legal advice on the contract is required, legal advice with the relevant legal background is therefore also needed. This is time-consuming (and usually more expensive) if advice from abroad has to be obtained.
The options
It often makes sense to choose the applicable law of the contracting party that provides the typical contractual service. In the case of a software-as-a-service contract, for example, this would be the law of the party providing the software. In the case of a supply contract for a specific product, the right of the party supplying the product. This cannot be clearly assigned for all contracts.
The choice of a neutral third country law is therefore sometimes a good compromise option. There are often subject areas that are regularly negotiated under a specific national law and it may be advisable to use this as a guide. For example, as a result of EU research funding, many research collaborations are concluded under Belgian law. Between European and US companies, UK law is sometimes "sidestepped".
Another solution may be to limit the content of a contract, thereby making a specific applicable law acceptable to one party. Typically, for example, confidentiality agreements can be limited to a short term. This makes the risk more manageable and the foreign law more acceptable.
In which situations to remain “stubborn” and in which to give in? Criteria for the decision.
The decision on the applicable law should not be left to chance or to the negotiating power of the other party (although the latter is the rule in practice).
It is advisable to assess which conflicts are possible based on the specific contract. The more "conflict-prone" the contract, the more likely it is that "home law" should apply. It is also important to consider whether a company has a connection to a foreign country (e.g. branches abroad) or already has a legal representative in a particular country. If this is the case, there are fewer disadvantages with a contract under foreign law because the resources are available.
The language should also not be underestimated. If a foreign lawyer has to be called in from abroad, it is much easier (and cheaper) if a language is spoken that the relevant people in your company speak.
Practical tip 1 - Negotiate early
In negotiations, it makes sense to negotiate the applicable law at a relatively early stage so that both parties then know on which law the contract is to be examined.
Practical tip 2 - Benefit to negotiate other terms
Finally, it should be noted that every contractual clause offers scope for negotiation. So if there are very important other provisions in a contract, it may well be justifiable to negotiate those provisions in its favor and accept foreign law in return.
Practical tip 3 - Defining internal rules
Define within the company which contracts must be concluded under home law and which contracts have more scope for foreign law. The criteria should be based on the following categories, among others: Financial volume, susceptibility to conflict, duration, proximity to the company's core business.
The more contracts your company concludes, the more worthwhile such rules are in order to minimize risks in the event of litigation.
It may also make sense for certain countries to be accepted as foreign law in principle (e.g. German law because a branch office with legal counsel is available there so that these resources can be accessed quickly and easily in a specific case).
The clause on the place of jurisdiction is related to the applicable law; another blog post will follow shortly.
