When drafting international commercial contracts, one of the most overlooked yet decisive elements is the choice of law clause. While businesses often concentrate on financial term such as pricing, delivery obligations, and liability cap, the governing law is the factor that ultimately determines how those terms will be interpreted and enforced. In fact, in a cross-border dispute, the choice of law can make the difference between a favorable outcome and an unexpected liability.
To begin with, it is essential to distinguish between applicable law and jurisdiction. Although they are frequently mentioned together, they serve very different purposes. The applicable law governs the rights and duties under the contract, while jurisdiction determines which court or arbitral tribunal will decide a dispute. For example, the parties may agree that the contract is governed by English law while submitting disputes to arbitration in Paris. This separation demonstrates why both issues must be considered carefully and drafted explicitly.
Moreover, the choice of law brings a high degree of predictability to commercial relationships. Without it, courts and arbitrators apply conflict of law rules, which vary significantly across countries. This leads to uncertainty and increases the risk of costly litigation. Even when the parties have agreed on a governing law, one must remember that mandatory rules such as consumer protection, employment, or competition laws may override contractual freedom. In other words, the chosen law applies, but only to the extent it does not conflict with overriding provisions of public policy.
If the parties fail to make a clear choice, the outcome becomes even more unpredictable. For instance, under the Rome Regulation in Europe, contracts for the sale of goods are generally governed by the law of the seller’s habitual residence. In arbitration, by contrast, tribunals may look to lex mercatoria or the UNIDROIT Principles of International Commercial Contracts. While these frameworks provide useful guidance, they may not reflect the expectations of either party. Consequently, the absence of a choice of law clause creates unnecessary risk.
Fortunately, international contract law recognizes the principle of party autonomy. This means businesses are free to select the law of their own country, the counterparty’s country, or even a neutral third country. In some cases, the parties may rely on transnational rules such as the UNIDROIT Principles to achieve neutrality and balance. However, this freedom is not absolute. Courts and arbitral tribunals can refuse to apply provisions that violate public policy or attempt to exclude mandatory rules.
From a practical drafting perspective, the lesson is clear. Always include a governing law clause and draft it with precisio
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