29 May 2019 | Reading time: 2 minutes
What is a governing law clause?
A governing law clause expresses the parties’ intention about which laws will govern a dispute arising under their contract. Governing laws are important in any contract, but especially in contracts where parties are based in different States or Territories within Australia or in different countries.
Why is it important?
Properly drafted governing law clauses give parties greater certainty about which laws will determine their rights and obligations under the contract.
In general, courts will apply a governing law clause, unless the choice is not made in good faith. However, some courts have rejected governing law clauses used in attempt to avoid mandatory provisions of the law which would otherwise have applied to the contract. For example, choosing a foreign governing law to avoid the operation of the Australian Consumer Law as discussed in our previous post.
When parties are unable to agree on a governing law clause.
A clear choice of governing law helps bring certainty to contract terms. If a dispute arises and there is no governing law clause, the parties will have greater uncertainty about their legal position and disputes invariably cost more whilst the parties argue which law applies.
Complex rules exist to determine what the governing law of the contract should be. Depending on where parties are located, the relevant jurisdiction and where obligations are to be performed, determining the governing law may be very challenging.
Which governing law should I choose?
There may be a technical reason for your choice of law. For example, the treatment of consequential loss under English laws is different under Australian laws. Alternatively, you might consider the defences available under the French law of defamation preferable to those in Australia or England. In most cases the first considerations will be the ‘home’ jurisdiction of the parties, and where the contract will be performed.
While Australian courts will generally enforce a choice of foreign law clause, you should consider the difficulty and expense of enforcement. If an Australian court accepts the choice of foreign law governing the agreement, parties are likely to require expert evidence on the particular foreign law to assist the Australian court. This will increase the cost of litigation, delay the proceedings and moreover does not guarantee the foreign law will be applied correctly.
Get in touch with Bespoke for advice on governing law clauses and stay tuned for part 2 where we analyse jurisdiction clauses.