What is a choice of law clause?
A choice of law clause is a contractual provision in which the parties specify which country’s law will govern their agreement. It is particularly important in cross-border transactions, where the parties are based in different jurisdictions, perform obligations in different countries, or where the subject matter of the contract has an international element.
The clause does not usually determine which court will hear a dispute. Its main purpose is to identify the substantive law applicable to the contract, including rules on contract formation, interpretation, performance, remedies for breach, limitation periods, damages and the validity of contractual terms. A choice of law clause should therefore be distinguished from a jurisdiction clause, which identifies the courts competent to resolve a dispute, and from an arbitration clause, which provides for dispute resolution by arbitration.
In contracts connected with the European Union, party autonomy is generally recognised under the Rome I Regulation on the law applicable to contractual obligations. This means that commercial parties may normally choose the law of a particular country to govern their contractual relationship. However, that freedom is subject to limitations, especially where overriding mandatory rules, consumer protection, employment law or public policy are involved.
What does a choice of law clause cover?
A properly drafted choice of law clause may apply to the contract itself as well as to claims connected with it. Depending on its wording, it can cover contractual claims and questions concerning the consequences of termination. Non-contractual obligations, such as pre-contractual liability, restitution claims or claims in tort, may be subject to separate conflict-of-law rules and may require a separate, valid choice of law.
For example, a Polish company entering into a distribution agreement with a German supplier may agree that Polish law governs the agreement. This can make it easier to assess issues such as payment obligations, contractual penalties, warranty claims, termination rights or liability for non-performance. Conversely, the parties may choose German law, English law or another legal system if this is commercially justified and both parties understand the consequences of that choice.
The choice should be express and clear. General references to “applicable law”, the place of performance or the registered office of one party may not always be sufficient to establish an effective choice of law. Ambiguous wording can lead to disputes over whether the clause was intended to select a particular legal system or merely describe the contractual background.
When is a choice of law clause important?
A choice of law clause is advisable whenever a contract has an international dimension. This may concern supply agreements, distribution agreements, agency agreements, licensing agreements, technology contracts, joint venture arrangements, financing documentation, share purchase agreements, construction contracts or cross-border service contracts.
It may also be relevant where both parties operate in Poland but the agreement is performed abroad, involves foreign assets, intellectual property rights registered in another country, overseas employees, foreign subcontractors or international payment arrangements. Selecting the applicable law in advance improves legal certainty and reduces the risk that the governing law will later be determined by complex conflict-of-law rules.
For businesses, the clause can influence the commercial allocation of risk. Different legal systems may regulate limitation periods, contractual penalties, liquidated damages, implied warranties, set-off, assignment of receivables, interest, termination and available remedies in different ways. A legal system familiar to one party may also reduce the costs of contract management and dispute preparation.
Private individuals should exercise particular caution. In consumer contracts, where the relevant consumer protection rules apply, a choice of foreign law cannot deprive a consumer of mandatory protection granted by the law that would otherwise apply. Similar restrictions apply to certain employment relationships, insurance contracts and other agreements where one party requires enhanced statutory protection.
A prompt legal review of a choice of law clause can help avoid ineffective provisions, unexpected mandatory rules, unenforceable remedies and unnecessary financial loss. It is especially important to review the clause together with dispute resolution, language, service of notices, limitation of liability and contractual termination provisions.
Legal support with choice of law clauses
Legal support in relation to choice of law clauses may include in particular:
- identifying the law that is most appropriate for a planned transaction;
- drafting and negotiating choice of law provisions in commercial contracts;
- reviewing the relationship between governing law, jurisdiction and arbitration clauses;
- assessing the impact of mandatory provisions of Polish, EU and foreign law;
- verifying clauses in consumer, employment and distribution arrangements;
- advising on the law applicable where the contract does not contain an express choice of law clause;
- support in disputes concerning the interpretation or validity of governing law provisions.
Need assistance with a choice of law clause? Contact us.