What Does a Choice of Law Provision Mean?

A choice of law clause is a specific provision in any legal contract that chooses the jurisdiction whose laws will govern in the event of a dispute. Also known as a "governing law clause" or a "legal jurisdiction clause," this important clause essentially allows the parties of a contract to determine which state or country’s set of laws will apply to the agreement. In doing so, it also allows both parties to avoid a legal nightmare of having to determine in court which state or country’s laws will be applied in the event that the contract is violated or misinterpreted .
This type of clause is most important to both parties of a contract because, although international and interstate contract laws are very similar, there may be variances with respect to particular issues in certain countries or states—particularly when it comes to international websites. The purpose of this provision is to clearly outline which jurisdiction will have authority over the enforcement of the contract, thereby establishing a framework for correcting violations and resolving disputes.

Advantages to Selecting a Choice of Law Provision

Like any contract, a choice of law clause is intended to create predictability and certainty in the event of a dispute. When two or more parties to a contract reside in, and/or perform their duties under the contract, in different jurisdictions with different laws, a party could be subject to multiple lawsuits in different courts concerning the same contract. A choice of law clause aims to "alleviate the uncertainties associated with a multi-state contractual relationship" by "[providing] a single law to govern the legal relations among the parties." Colins v. Freeman, 2008 Mass. App. Div. 140, 142 (Mass. App. Div. Apr. 10, 2008) (citing Restatement (Second) Conflict of Laws § 187(1)).
The benefit of a choice of law clause is that it can eliminate the uncertainty that arises from different jurisdictions having different laws. A choice of law clause allows the parties to a contract to avoid potential forum shopping or expensive litigation costs if two or more parties subsequently file suit concerning the same contract dispute in different courts with different choice of law rules. A contract containing a choice of law provision may also encourage parties to place contractual obligations in writing when they know that, should a dispute arise, the choice of law clause will provide a clear and certain choice of which jurisdiction’s laws apply to the dispute.

Crucial Aspects of a Choice of Legislation Clause

The key elements that should be used when drafting a choice of law clause include: a specific reference to the applicable law or, even better, to the "laws of" an identified jurisdiction. If more than one jurisdiction’s laws might be involved, identification by name is preferred; a provision that provides the choice of law clause is "without regard" (or without reference) to the conflict of laws laws of that jurisdiction; and, if the chosen laws of a state or country contain provisions limiting or regulating the applicability of its laws to certain types of agreements or transactions, or providing for their enforcement under certain circumstances, then the clause may contain appropriate exceptions for those limitations or regulations.

Frequent Errors

Choice of law clauses are subject to the same fundamental rules of contract formation as any other provision. When drafting such clauses, policymakers and counsel should be aware of the most common mistakes in order to avoid disputes or even worse, failure of the clause.
The most common mistake is forgetting to include a choice of law clause in a contract. Particularly in a multi-state or international context, it is critical that the parties consider the ramifications of their contract being subject to a different jurisdiction’s law. State and national laws can differ wildly on everything from enforceability of an agreement to the substantive rights of the parties. The most famous example is probably North Carolina’s notorious statutory prohibition against covenants not to compete, which has also seen challenges in Federal Court. Failing to include a choice of law provision in a multi-jurisdictional contract can be like rolling dice with your client’s contractual rights. A second common mistake is writing a clause that is too short to be applied. A good contract will anticipate problems and plan for them. If the contract does not anticipate a problem or query, the choice of law clause is irrelevant. This is further compounded when the choice of law clause is incorporated by reference from another non-contiguous part of the agreement or another agreement entirely. An application clause should be clear and specific. A related problem is over-broad location clauses. These clauses seek to apply a blanket choice of law clause to all of your agreements with the contracting party. These clauses are almost never enforceable in international contexts and can create expensive disputes when invoked in the domestic realm. Better practice is to apply a choice of law clause to each individual agreement or process. Another common issue is contracting parties’ failure to choose an objective body of law or law from some particular country or political subdivision. Instead, they might refer to "Internationally acceptable standards." Such provisions are difficult, if not impossible to enforce because it is left to the court to determine precisely what the parties mean. An appropriate remedy is to identify the particular conventions or terms which the parties mean. An example of an enforceable convention from a peer country would be International Chamber of Commerce (ICC) Incoterms. Finally, a common mistake with regard to choice of law choices is failing to account for the fact that parties to an agreement with disparate interests and power dynamics may need to be treated differently. A common example of this error is a choice of law clause that incorporates a conflict of law provision, which is often designed to ensure that both parties receive the benefits of the contract. Unfortunately, this mistake creates a twilight zone in which the court, arbitrator, or other decisionmaker must spend significant resources to determine the real point of dispute and will regularly create a bigger dispute than the particular situation merited.

A Sample Choice of Law Provision

As an example of a choice of law provision in a contract, you might wish to consider the following: Advertiser acknowledges that Agency will be performing services in connection with the Campaign and will be acting on Advertiser’s behalf. Advertiser, therefore, acknowledges and understands that any disputes between Advertiser and Agency which arise from the services hereunder shall be governed by the laws of the State of Oregon (without regard to its conflict of law principles), and will be adjudicated in the courts of the County of Multnomah in the State of Oregon, and both parties waives any and all rights to have such disputes adjudicated elsewhere, or before any other body. Advertiser acknowledges and understands that Advertiser will be bound by the conduct of Agency’s employees and agents who are carrying out the Services, and that Advertiser’s sole remedy is against Agency and not against those individuals.
In considering the above sample choice of law clause, note that the selection of Oregon law required application of Oregon’s Uniform Commercial Code ("UCC") Section 1-302. This section permits the parties to contractually agree to "alter the effect" of the UCC, including the creation of choice of law provisions. Oregon, like many states, has adopted a version of the UCC in which a choice of law provision is invalid if, inter alia , the "chosen jurisdiction [has] no substantial relationship to the parties or their transaction." Section 1-301(8). Add to this that the Oregon Supreme Court purportedly requires that the chosen forum have some significant relation to the subject matter of the contract. See Thedall v. A. Relaciones Internationales Commitment, 239 Or. 659, 389 P.2d 714 (1964) (requirement added). Unfortunately for these types of clauses, assuming that the choice of law states that Oregon law applies to advertising contracts, it is unclear whether the clause would survive a challenge on the basis of these limitations. In our view, it is unlikely that Oregon would find that there was sufficient connection with advertising contracts to allow Oregon law to apply, although that issue has not been fully analyzed by Oregon courts, and Oregon may yet recognize the important role of advertising in commerce such that it is related to commerce, so this example choice of law clause should be viewed as an imperfect attempt at a choice of law clause. We also would worry about how reliable the language is in binding the advertiser to the conduct of agency’s employees and not creating liability on the part of the individuals who carry out the work. Relatedly, the use of the word "acknowledge" instead of something stronger, may undermine the next two sentences of the example choice of law clause.

Choice of Law Considerations for International Contracts

International contracts present a unique set of challenges for drafters of choice of law provisions. The choice of law for passively-applying parties, those without significant connections to the forum or subject matter, can be heavily influenced by international legal precedent from other countries. For example, Chinese law heavily influences the drafting of contracts in the United States as it is known that American courts have a propensity to defer to Chinese courts when parties have contractually selected Chinese law. Similarly, the choice of law of a contract may be a matter of significant import to a third country with which a party has a close relationship. For example, a Florida choice of law clause may not mean much to a bank in Argentina when there are reporting requirements for at least two countries with respect to a contract subject to a Florida choice of law clause. International contracts also require parties to consider the physicality of the choice of law clause. In the United States, choice of law clauses are best used to clarify issues of vague state laws. In the European Union, however, countries like France historically will not defer to many contract prior choice of law clauses due to their codifying nature. A clause selecting French law may add no more than a jury instruction to the French code. And European Union consumers are now protected from the harsh realities of choice of law clauses that may actually regulate the contact of parties. Under Article 6(1), a consumer may only waive the protection of consumer laws if the contract itself is written in favor of the consumer. While a skilled attorney may be able to argue around these clauses, ultimately the risk of international choice of law clauses is very high. What makes this even more difficult is that the real world provision of civil law remains very hard to research. This complex reality lacks uniformity and detailed precedent. In fact, many international companies do not even have an economist on staff to help analyze the economic impact of a dispute.

Tips for Creating a Unique Choice of Law Provision

Even though choice of law clauses are a relatively standard part of any contract, sometimes they are not enough for a party’s purposes. In these situations, a custom clause is better. A custom clause is a restatement of the international principle that the parties to a contract can agree to the jurisdictional arrangements and the sets of law that shall apply.
When evaluating whether a custom clause is appropriate, consider how many jurisdictions will potentially have interests in the dispute re: the dispute. While one or two jurisdictions might have the strongest interests, the cost bidders face when entering new jurisdictions outside of the one in which they are established might be prohibitive .
Custom choice of law clauses ought to avoid broad rules such as the law of the framework agreement or the applicable law of an unspecified free trade area. They should also provide the applicable legal regime. If the clause designates the governing law but not the governing jurisdiction, the clause may be seen as "weak". It is also important to draft specific procedural rules for the domestic courts. Exclusions of domestic laws from application is often a good step. A modern approach would be to select arbitration (as a dispute resolution method) and the seat of arbitration, then to select only procedural rules of the lex arbitri.