How to Choose the Applicable Law for an International Commercial Contract

Mainstream

The choice of applicable law for an international commercial contract is not filling in a template. It is a conscious distribution of risks.

The question is not which legal system is more prestigious or familiar. The main question is which right, combined with the chosen dispute resolution mechanism, will provide the maximum protection of your interests, reduce uncertainty and ensure the enforcement of key conditions.

Therefore, the effective choice of applicable law is based on three tests:

1. How the law allocates commercial risks to the substance of the contract
2. How the chosen right works in conjunction with an arbitration or judicial clause
3. What mandatory rules will still apply, regardless of your choice.

If these issues are not worked out, the company does not get a set of predictable rules, but a source of costly surprises in a future dispute.

When the choice of applicable law arises

A conscious choice of law is almost always necessary, but it is critical in the following situations:

• The parties are in different jurisdictions (especially from different legal families).
• contract is complex: Delivery with installation, EPC, M&A, IP licensing;
• The contract is concluded for a long period of time;
• the amount of the transaction is significant;
• The subject matter of the treaty does not have a single international regulation;
• one of the parties insists on its national law;
• The inclusion of an arbitration clause is planned;
• The application of the Vienna Convention (CISG) should be excluded or, conversely, abandoned.
• the contract concerns distribution, agency or commercial representation in Europe;
• The legality of penalties (penalty clauses) or limitations of liability shall be assessed.

The mistake most negotiators make

Many companies approach the choice of law as follows:

“We always work under English law” or “Let the seller’s country be the right one – it’s convenient.”

It's not a strategy. It's a habit.

The right first question is:

What right, together with the dispute resolution mechanism, will create the best negotiating position for our company and predictability of the outcome?

Sometimes the best choice is the right of a third, neutral country. Sometimes - the right of the buyer's country, if he is the stronger party, but subject to counter concessions. Sometimes it is a combination of several legal instruments, for example, choice of law with the explicit exception of CISG.

The choice of applicable law requires not a pattern, but commercial calculation and legal engineering.

Step 1. Understand how the principle of autonomy of the will works in the EU

In the European context, Regulation Rome I (Regulation (EC) No 593/2008) is key. The basis is the autonomy of the will of the parties. You can choose almost any right in the world.

But this is not unlimited freedom.

Important limitations:

• Mandatory rules of the court. The EU Court of Justice will always apply its super-mandatory rules (e.g., the rules on agent protection), regardless of whether you choose English or Swiss law.
• Mandatory rules of the country of execution. If the contract is enforced in Germany, some German public rules will apply in any case.
• Public order. The Court shall not apply a foreign law if the consequences of its application are manifestly incompatible with the public policy of the country of the forum.
• Protecting your weaknesses. If the contract is consumer, employment or agency, the choice of law cannot deprive a weaker party of the protection afforded to it by the law of her country.

When you choose a right, you don’t choose it in a vacuum. You choose a coordinate system to which the court or arbitrators will add a layer of mandatory restrictions.

Step 2. Identify commercial objectives and priorities

Choice of law is derived from the business model. First, you need to answer a few business questions:

• Who in the contract assumes the most risks (supplier, buyer, licensor, contractor)?
• What is critical for the party: Flexibility of price changes, stability of terms, protection against loss of customers, limitation of liability?
• How likely are disputes over the scope and quality of execution?
• Are there any pre-assessed damages or are they inadmissible penalties?
• Is it important to be able to quickly award court costs?
• Where is the most likely decision to be made?

For example, the seller often prefers a right that allows for broad limitation of liability and short periods of limitation. For the buyer, a right that allows you to claim quality claims for a long time. For a distributor in the EU, it is a right that takes into account safeguards, but does not create double standards.

Step 3. Comparison of key legal systems

You can't choose the right without understanding how systems differ in practice. Key systems used in Europe and international trade:

English law

• Case law is well developed and predictability in commercial matters is high.
• Respects the literal text of the treaty, less inclined to its broad interpretation.
• There is no general good faith doctrine in commercial contracts (except in some cases).
• Liquidated damages should not be a fine, but a reasonable preliminary assessment of the damage.
• Limitation of claim: Usually 6 years for breach of a simple contract.
• Very popular in international arbitration.

Law of continental European countries (e.g. German, French, Swiss)

• It is based on codes, with more emphasis on system interpretation.
• The general doctrine of good faith (Treu und Glauben / bonne foi) which can adjust the stringent terms of a contract.
• The approaches to losses are more flexible, but also less certain than in English law.
• Swiss law is often chosen as neutral, especially in transactions not involving Switzerland. It gives the judge a wide margin of appreciation.
• In France, the law of obligation has been updated since 2016; For example, a substantial change of circumstances (imprévisibilité) is now directly regulated.
• The mandatory protection of agents and distributors is very strong (especially in France, Belgium, Germany). You cannot bypass it by choosing English law if the dispute is heard in the court of the agent’s country. But in arbitration, the outcome may be different.

Vienna Convention (CISG)

• It is applied by default, unless the parties have excluded it, and both are located in the participating countries (and this is most of the countries of Europe).
• It regulates only the international sale of goods (not services, not distribution).
• It has its own system of interpretation, the concept of a material violation, the rules on losses and interest.
• Many companies are excluding CISG because its rules may be unexpected and its interpretation practices are fragmented.

Step 4. Link applicable law to dispute resolution mechanism

This is a critical fork.

If you choose a court, the judge will apply the right you choose, but:

• It must establish the content of foreign law. It can be expensive, slow and unpredictable (especially in smaller jurisdictions).
• The court will always apply the peremptory lex fori (laws of the forum) and may use public policy to refuse to apply the law.

International Arbitration: Arbitrators apply the chosen law more flexibly.

• There are no automatically applicable mandatory rules of the country of arbitration (except procedural ones).
• An arbitration with a seat in London applying French law would not be bound by French public order, but could take into account super-mandatory rules relating to enforcement.
• In arbitration, it is easier to exclude CISG and to fix specific national law.
• If you want to apply Swiss law in an ICC arbitration with a seat in Geneva, it is as predictable as possible. If you want to apply English law in Dubai court, you will need experts.

Strategy: A strong “neutral law + neutral arbitration” relationship often produces the most balanced outcome for two parties from different regions.

Step 5. Checking peremptory norms that cannot be avoided

Even a perfectly drafted clause does not protect against some layers of regulation.

Typical risk areas in Europe:

• Agency and distribution agreements. Directive 86/653/EEC on agents is implemented in the national legislation of the EU countries. You cannot deprive an agent of the right to compensation upon termination of the contract by simply choosing the law of a country where there is no such compensation, if the dispute is heard in the court of the EU.
• Competition. EU Antitrust Law (Article) 101, 102 TFEU) applies irrespective of the right chosen.
• Protection of Personal Data (GDPR). It has extraterritorial effect.
• Export controls and EU sanctions. Applies directly to persons and transactions.
• Employment law. Protecting employees is a super-important priority.

The choice of applicable law must take into account these “non-removable” layers, so as not to create a false sense of freedom.

Step 6. Assess the practical implications of: Expert, language, cost of process

Choosing the law is also choosing the infrastructure of a future dispute.

• If you choose the law of a country where you do not have practicing lawyers, you will need foreign law experts. In state court, it's expensive. In arbitration, the parties often appoint co-arbitrators who know this right.
• The language of law matters. English law is supported by a huge volume of court decisions and comments in English. The law of the Netherlands or Sweden may be as good as it is, but it is harder to prove in a court of another country.
• The cost of proving the content of foreign law may be comparable to the fees of the representatives themselves.

Choosing an exotic right for the sake of giving up to a partner should be a conscious, not indifferent gesture.

Step 7. Formulate a reservation without weaknesses

Typical weak clause:

“Applicable law: law of the Russian Federation”.

Strong caveat:

“This Treaty, its interpretation, execution and all disputes arising out of or in connection with it shall be governed by and settled in accordance with the substantive law of Switzerland, except for its conflict of laws rules. Application of the United Nations Convention on Contracts for the International Sale of Goods, 1980 (CISG) is expressly excluded.”

What to pay attention to in the wording:

1. A substantive right, not a conflict of laws. The phrase “except for conflict of laws rules” prevents refoulement (renvoi) that could lead to an unexpected application of another country’s law.
2. The fate of CISG. If you do not write this, in most cases between European parties it will apply by default. Sometimes it's not desirable.
3. Volume. A reservation must cover the treaty, its breach, termination and the consequences of invalidity.
4. Compliance with the arbitration clause. The arbitration clause often states that “the law of the place of arbitration governs the arbitration agreement.” Don’t confuse this with the substantive law of the entire contract.

Step 8. Consider the “splitting” of applicable law (dépeçage)

Rules of Rome I expressly allow the parties to choose different rights for different parts of the contract. It's called dépeçage.

Example:

• The material right of the supply contract is German law.
• Arbitration clause – governed by the law of the place of arbitration (e.g. English law).
• Privacy and data processing provisions are subject to the law of the customer’s country (for convenience compliance).

It's a complicated tool. It requires jewellery precision to avoid creating inconsistencies. But in large EPC contracts or IT projects, it can be a powerful solution.

Step 9. To fix the commercial justification for the choice

If there is a future dispute as to whether the applicable law was “imposed” by a stronger party or whether the arbitrators will assess the validity of the reservation, it is important to have a documentary record: correspondence, protocols of negotiations, memorandums, where it is recorded that the parties consciously chose the right, understanding its advantages. It is an element of protection against challenge.

Step 10. Act ahead of time, not after a dispute

The choice of applicable law cannot be renegotiated after a conflict has arisen. This should be done when making a deal.

The best strategy is to include the issue of law in the initial stage of negotiations, while choosing arbitrage and determining the price. The law is not a technical detail. It's part of the deal economy.

Comparison of legal systems for an international treaty

Common Mistakes in Choosing Applicable Law

1. We are a French company, therefore, the right of France. This is not an argument for the counterparty, nor is it necessarily the best defense for you.

2. You will be surprised when arbitrators start using CISG by default and your restrictive terms are interpreted through its prism.

3. You chose Texas law, but your agent is in Germany. If you terminate, you will be subject to German super-mandatory rules, which the court in Germany will apply despite the reservation.

4. The choice of “England’s law” in a reservation does not automatically mean that the process will be conducted under the English Arbitration Act 1996, if the place of arbitration is Paris.

5. English law is much stricter in its treatment of wording that excludes liability for deception (fraud). Continental law may invalidate the exclusion of liability for gross negligence. It's different risks.

6. Swiss law is fine, but if the debtor’s assets are in a country with a difficult enforcement procedure and foreign law unfamiliar to judges, winning a decision can delay execution.

7. Not to bind law and arbitration into a single mechanism.The ingenious clause of law can be broken through public order in a state court. A clever clause on the right paired with arbitration bypasses this problem.

Checklist: 15 Questions Before Defining Applicable Law

1. In which country are the debtor’s assets located?
2. Which side bears the main operational risks?
3. What is the doctrine of the calculation of losses I want to see: Hard or flexible?
4. Is maximum freedom of contract important to me?
5. Or do I need protection from manifestly unfair conditions through the principle of good faith?
6. Should CISG be applied? If so, are the consequences agreed?
7. In which institution and place will the dispute be dealt with?
8. Will the court be able to effectively enforce the law?
9. Is there an agent or distribution agreement in the transaction?
10. Do we fall under mandatory industry regulations (GDPR, antitrust)?
11. How easy is it to find an expert on this?
12. Will judgments or arbitral awards based on this right be recognized and enforceable in key jurisdictions?
13. Does the chosen right not create a conflict with corporate law or currency control?
14. Have we eliminated conflict of laws rules?
15. Is the commercial agreement of the parties on the choice of law documented?

What a strong choice of law strategy looks like

Five levels:

1. Commercial Awareness: Understanding the business model, the balance of power in negotiations, and the geographic map of assets.
2. Substantive Analysis: A detailed comparison of the consequences of choosing different legal systems for key terms of the contract (sanctions, losses, limitation period, termination).
3. Procedural Alignment: Integration of a right clause with an arbitration or prorogation clause so that they work synergistically.
4. Mandatory Rules Screening: Identifying the “gray areas” of public law that will still pressure the contract and testing the contract for resistance to them.
5. Enforcement Perspective: A model of how a decision based on that right will be recognized and enforced where the defendant has the means.

FAQ

Can you choose a country that is not bound by the treaty? This is often the best option (neutral). The Rome I Rules and most arbitration rules allow this.

What happens if you do not choose the applicable law?Then the law is determined on the basis of conflict of laws rules of the court or arbitration. The law of the country with the closest connection to the contract (the law of the country of the representative performer) is usually applied. This creates uncertainty at the start of the dispute.

Should the Vienna Convention be excluded? In simple sales transactions between CIS and Europe, CISG can be a compromise. But if you want complete certainty about damages, timing and interpretation, national law with the exception of CISG is preferable.

Can the applicable law be changed after the contract is signed? This is done by an additional agreement. It is important to check whether this will affect the rights of third parties or the validity of obligations already arising.

Does the choice of law work in a sanctions environment?The applicable law clause does not block the application of sanctions. If the transaction falls within the jurisdiction of the country that imposed the sanctions, its restrictions will apply regardless of the law chosen.

What is the best distribution agreement in Europe? If you are a supplier and want to minimize the compensatory risks of termination, you can offer Swiss law in combination with arbitration. If you are a distributor, you may benefit from the local law of your country. Compromise – the right of the seller to arbitrate in a neutral country.

Related services

• International Trade, Distribution & Cross-Border Transactions
• International Arbitration, Commercial Litigation & Cross-Border Disputes
• Commercial Contracts
• Sanctions, Export Controls & International Compliance
• International Regulatory Risk & Strategic Advisory

Related material

• How to choose an arbitration clause for an international treaty
• Vienna Convention: apply
• Agency and Distribution Agreements in Europe: How to protect interests
• International arbitration: When it is more effective than the court
• How to Create an International Supply Contract Without Critical Errors
• Rome I: The practical implications for European transactions
• How to check a foreign counterparty before concluding a contract
• How to protect a company from non-payment for international delivery
• Antimonopoly risks in international distribution

Conclusion

The choice of applicable law is not a technical formality or a matter of patriotic preference. It is a strategic decision that determines how the treaty will breathe, die and sue.

Strong choices are based on understanding the difference between legal systems, docking law with arbitration, sober assessment of mandatory constraints, and rigorous testing of execution scenarios.

In international trade, it is not the man who insists on his right that wins, but the man who chooses the right that will give him the most accurate, quickest, and most executable instrument of defense.