ArbitrationContract Law

Choice of Law in Commercial Contracts

3 Mins read

Two factions participating in a business deal are bound by a commercial contract. The legal documents that bind these parties together comprise of rules which either side needs to follow. The contractual agreement will dictate the severe consequences to actions that are not favored by either party. Contracts cover most of the issues that can arise in the future relating to the agreement.

Generally, the contract contains a list of measures and a procedure that must be followed. In the instance of a disagreement, the arbitral tribunal should decide what laws apply to the contract. If the contract fails to meet the demands of a question, the arbitral tribunal must decide what laws need to be applied to the situation. The debate among most arbitrators is what law needs to be chosen while settling issues in contracts. 

The Responsibilities of Arbitral Tribunals

The arbitral tribunal is given the responsibility to choose a law, local or international, which fits best. This law must solve the issues faced by either group in the agreement. However, this freedom often allows arbitral tribunals to use local laws for international agreements. This is seen as an unseemly approach to solving issues with contractual matters, as mentioned by Reza Beheshti in his recent article.

“A modern approach suggests that localizing legal issues originated from an international contract is inappropriate and that the tribunal should conduct an assessment to identify international or non-national rules or practices appropriate to the issues at hand.”

choice of law clause is important in commercial contracts

The Suggestion of Methods 

There are certain criteria that need to be met when it comes to choosing the law. There are many ways in which the arbitral tribunal can come to a conclusion and pick a given law. One of the most widely accepted methods is assessing the contract and analyzing if it suffices to solve the given issues.

There is another method too that Dr. Beheshti suggested in the Uniform Law Review of Oxford Academic. He suggested that the tribunal should apply ‘general principles of law,’ or ‘general principles of international commercial law.’ Also, rather than searching for these general principles or examination of the contractual terms and conditions, the tribunal should prioritize the commercial considerations as well as expectations. 

The Three Criteria of the Framework

At the end of the day, the choice of law applicable depends on the needs of the business and the requirements of the parties. It is essential that the tribunal focuses on satisfying the demands of both parties with their choice of law. The choice can be made based on a given framework dictated by Reza Beheshti. He talked about the three criteria of this framework.

These are:

  •  The first is commercial certainty. This is one of the most crucial qualities of mercantile contracts.

  • The second is performance interest. Generally, this is referred to as the only pure contractual interest.

  • The third is the relational theory of contracts. This theory focuses on informal devices for the regulation of long-term contractual relations.

Commercial Legalities Differ

If the kind of law, national, international, or local is not specified within the contract, both parties may have to face loopholes in the agreement. Many underlying rules may arise along with ambiguity in the agreements. International, local, and even state laws often differ from each other when it comes to commercial legalities. It is essential that when a contract is drafted, the proper structure of the law and the choice of laws applicable must be specified.

A great example of a case like this is the ‘hardship clause.’ Hardship clauses are subject to changes over long periods of time. This is because many organizations pick hardship clauses to determine a partnership over long time-periods. The rules and the clauses of the agreement are subject to change with changing circumstances. 

Requirements Are a Part of National Laws

The requirements for changes that need to be made to this clause come under national laws. This makes it compulsory for the parties to keep this law in mind while drafting their contract. It is important for the parties to assess each law and predict the circumstances under which these laws could be applicable. The laws that apply to hardship clauses make it necessary for modifications to be made in the future. 

What can be concluded?

In conclusion, all parties must pay close attention to the choice of law mentioned in contractual agreements. This helps avoid sneaky rules and loopholes in contracts further down the line. However, in case you do face issues where the choice of law has multiple options, the above-mentioned framework and approach should help you decide. This will work in favor of both parties and help dissolve issues with ease.

choice of law clause in contracts

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Articles written exclusively by LegaMart legal professionals.

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