For many companies, Cross-border trading is part of everyday business. Whether you’re supplying goods into Europe, appointing an overseas distributor or buying services from abroad, international contracting isn’t unusual.
What is still surprisingly common, however, is for the choice of governing law to be treated as an afterthought. It often sits buried in standard terms or is missed entirely. That can create real uncertainty when relationships break down.
Below, we look at why governing law matters, what can go wrong when it isn’t clear, and the practical steps businesses can take to stay in control.
The hidden risk in cross-border contracts
When placing orders or conducting business outside England and Wales, it’s important to agree which country’s laws will apply to the contract. The governing law can have a significant impact on each party’s obligations and the remedies available in the event of a dispute.
In an ideal world, every commercial contract would be clear, comprehensive and unambiguous. But in reality, that isn’t always what we see. We’re regularly consulted on situations where either:
- Only the bare minimum has been agreed (for example, what is being delivered, where and at what price), or
- One or both parties have simply referred to their own standard terms when placing or acknowledging an order.
Where both parties rely on their own terms and conditions, the position can quickly become fact sensitive. Whether a party’s standard terms form part of the contract will depend on the detail of the communications between the parties and the order in which documents were exchanged. Even where terms are successfully incorporated, the next question is whether they properly deal with the choice of governing law.
Too often, they don’t.
The cost of getting it wrong
The commercial consequences of getting this wrong can be significant. Uncertainty around governing law can lead to:
- disputes about which court has jurisdiction
- increased legal costs
- delays in resolving the underlying dispute
- reduced certainty around liability and risk allocation
- enforcement difficulties if a judgment must be recognised overseas.
In short, something that looks like small print at the contracting stage can become a major pressure point later.
Default rules
If the governing law hasn’t been clearly agreed, the question of which legal system applies will be determined by default rules. That’s rarely where businesses want to be.
For contracts with EU countries entered into after 1 January 2021, UK courts apply the retained post-Brexit version of the Rome Convention, commonly referred to as UK Rome I, to determine the governing law.
UK Rome I confirms that a contract will generally be governed by the law chosen by the parties, provided that choice is clearly expressed or demonstrated by the terms of the contract. The key point to remember here is: if you make a clear choice, the courts will usually respect it.
However, where no express choice has been made, the position becomes more complex and much more uncertain.
For most contracts involving the supply of goods or services to or from the EU, the default position will usually be the law of the country where the seller or service provider is principally based, unless it can be demonstrated that the contract is “manifestly more closely connected” with the laws of a different country.
So, for example:
- Franchise and distribution agreements will generally be governed by the law where the franchisee or distributor is based.
- Property-related agreements will typically be governed by the law where the property is located.
Mandatory protections
It’s also important to note that an express choice of law can’t be used to remove mandatory protections afforded to employees or consumers. A consumer, for instance, will retain the benefit of consumer protection legislation in the country where they live, regardless of what the contract says.
Countries outside the EU
For contracts involving countries outside the EU and outside the Rome Convention, the position may be different again. In those cases, advice from lawyers qualified in the relevant jurisdiction is often essential.
Avoiding uncertainty in your contracts
The good news is that most of this risk is avoidable with relatively straightforward steps. Businesses that take a structured approach to contracting can significantly reduce the chance of unwelcome surprises.
Include a clear governing law clause
The most effective protection is also the simplest. Every commercial contract should include an express governing law clause that’s clear and unambiguous.
That clause should be consistent with the jurisdiction clause (which courts will hear disputes) and should be reviewed periodically to make sure it still reflects how and where you trade.
Don’t rely blindly on standard terms
Many businesses assume their standard terms will automatically apply. In reality, incorporation of terms can be more fragile than expected, particularly where both parties are trading on their own T&Cs.
It’s worth checking:
- whether your terms are being properly incorporated into the contract
- whether counterparties are attempting to introduce competing terms
- whether your governing law wording is robust and up to date.
A short review now can prevent a much more expensive argument later.
Strengthen internal contracting procedures
Good paperwork doesn’t happen by accident. Businesses that experience fewer disputes usually have clearer internal processes around:
- order placement and acceptance
- contract sign-off authority
- template management
- periodic legal review of standard terms
Tightening these procedures can materially reduce your legal risk without slowing commercial momentum.
Getting your contracts in order
Governing law might seem like a topic that’s unlikely to cause issues, but it plays a central role in how risk is allocated and disputes are resolved. Leaving it unclear can expose your business to unnecessary cost and uncertainty.
A relatively modest review of your contracts, standard terms and contracting procedures can significantly reduce that risk and put you back in control.
If you’re looking for help reviewing your current arrangements, contact Paul Lupton in the Commercial team today. Call him on 0161 930 5102, email him at paul.lupton@gorvins.com or fill in the online form.