A “Governing Law” clause is a clause used in contracts where it is stipulated which law will govern the agreement. The governing law applies to the formation, performance, and termination of the contractual relationship between the parties. All contracts contain terms that create obligations on the parties and if the dispute arises it is critical to know the law in order to interpret the terms. It is also worth mentioning that the applicable law is one of the main instruments to conduct the negotiations if legal issues arise. Hence, the choice of the governing law is a key consideration in commercial transactions.
If dispute arises, the courts will first have to decide on the applicable law in determining the enforceability of contractual provisions. If governing law is not specified, this may cause costly and time-consuming legal battles. The importance of having a clearly drafted governing law provision to ensure certainty was highlighted in the recent decision of China Railway (Hong Kong) Holdings Limited v Chung Kin Holdings Company Limited [2023] HKCFI 132. With an express choice of governing law, the parties’ choice of law will likely be upheld.
In another recent case Al Mana Lifestyle Trading LLC and others v United Fidelity Insurance Company PSC and others [2023] EWCA Civ 61, it was emphasised [by Nugee LJ] that “the same words may strike different readers differently”. Therefore, it is vital to avoid ambiguity and to ensure that the terms are specific, clear and express. See also a recent DIFC case Laabika and Labhdi v Ladu and Lakesh [2021] DIFC CA 008 in regard to the question of jurisdiction (note: while governing law clauses are separate from jurisdiction clauses, choosing a jurisdiction that complements the governing law is common practice).
Therefore, it is important to evaluate the practical implication and to identify all risks associated with the specific contractual terms. Choosing the most suitable law applicable to the transactions bearing in mind all circumstances is the key to avoid problems that the parties might face further down the road.
Author – Kirill Solovov, AIM expert