Saturday, May 4, 2013

Applicable Law or Choice of Law

I had an individual ask me whether in contracting the applicable law or choice of law had to be where the project was located. I thought a simple blog post on this would be helpful for others to read. In contracts there are three things to be concerned with in dealing with the applicable or choice of law. The applicable law or choice of law identifies what country's law or other legislative unit’s laws such as State or Provence is to be applied in interpreting the contract. Once you select the applicable law, the second issue is jurisdiction, meaning the country or other governmental unit such as State or Province where the case must be brought. The third issue is forum, which means which specific court you want the case to be heard. For example even if you specified New York State as the jurisdiction, a case could be brought in either the state court or a federal district court located in New York State. For example if you wanted New York Law to apply, and have the case heard in New York and wanted it to be heard by the Federal District Court of lower New York based in the borough of Manhattan in New York City you would need to specify that.

If all you specified was the applicable law, a case could be heard in any court that feels that it has “jurisdiction”. Jurisdiction is usually found when the work is there. It can be found where one of the parties is legally located in that jurisdiction. It also can be found where there is mutual agreement by the parties that a specific jurisdiction and/or forum will be used. If there is agreement by the parties on law, jurisdiction or forum, courts will normally honor that. For example, you could have New York law apply, but have the jurisdiction and forum be located somewhere else and that court would need to interpret the contract according to New York law, but the parties would need to follow the procedural rules of that court.

So how does this work? Let me give you an example:

An English Company could hire a German contractor to manage building a manufacturing facility in Singapore.
As between them, they might agree upon English Law, German Law, the Laws of Singapore or some other country’s law that has specific expertise in dealing with the subject matter. They could also agree that the Jurisdiction or forum be in England, Germany, Singapore or another country that has specific expertise with the subject matter. If there were multiple legal forums in the jurisdiction they select, they can agree to select the forum. The parties could agree the applicable law is English Law. They could also agree that the jurisdiction and forum be in Singapore. In that case the court in Singapore would hear the case, but would apply English law rather than Singapore law in interpreting the contract.

The same applies between contractors and subcontractors. There is no hard set rule as to what law, forum or jurisdiction. There is only the requirement that the court must feel they have jurisdiction over the matter. When a contract is specialized the Prime Contractor and Subcontractor may agree upon a jurisdiction and forum that has experience, and knowledge in the specific area of the law involved. If it isn’t specialized there should be a connection with one of the parties to the contract so the courts feel they have jurisdiction over the matter. For example:

The German contractor may hire local subcontractors. They also have equipment suppliers from a number of other countries. In those subcontracts they need to decide what law, jurisdiction and forum should apply to each. For local subcontractors it would probably be local law. For foreign equipment suppliers it probably would be either that supplier's country law or Singapore, but it could be any location that has a relationship with the parties. A major influence in making those decisions may be where the parties have assets. If you get judgment in one jurisdiction where a party does not have substantial assets, to collect damages or monies due you would still need to go to court in the jurisdiction where the assets exist to get an order to enforce the other court’s judgment.

In making applicable law decisions, the parties should know if there are major differences between those applicable laws and the laws they use most often for interpreting contracts to make sure there aren't any gaps in coverage / protection. For jurisdiction and forum you would normally want:
1. A jurisdiction that can hear the case quickly.
2. A jurisdiction that shows impartiality in its decisions.
3. If there is potential complexity you may also want applicable law and jurisdiction to be a location that is familiar with and hears a number of similar cases.