Where can I sue and what law will apply?
The effect of the terms of a contract and how they are interpreted can differ a lot depending upon which country’s laws govern them. All commercial entities want to select the best governing law for their contract and make sure that their disputes are heard somewhere that is convenient and pro-business. Parties will also be interested in their chances of achieving success as well as the cost and timeframe for litigation. How can a party best reflect this in a commercial contract?
Best governing law clause – not the same as jurisdiction
A ‘governing law’ or ‘choice of law’ provision in a contract allows the parties to choose the laws of a stated country to interpret the terms of the contract and any dispute in connection with the contract. A party is free to choose a governing law that is different that the jurisdiction that will hear the dispute. Although, in practice, a party will prefer consistency between their governing law provision and jurisdiction provision. For example, if a contract states that a party can bring claims before the courts of England, it makes sense to select English law in the governing law provision of the contract.
Including a governing law clause in a technology contract provides both parties with certainty. In other words, it allows them to know what laws will be applied when a court is analysing a party’s obligations and rights in the contract. It also permits a party (and it lawyers) to review and advise on the party’s legal positions under the contract.
The common law position is that a contractual governing law clause selecting a certain country will be upheld even if both parties live in a different country, or if they have signed the contract in a another country. Unfortunately, from jurisdiction to jurisdiction, it is not always easy to determine which court or courts may try a case, and what law they will apply.
Why do I keep seeing Delaware selected as the governing law?
The majority of publicly traded corporations in the US are incorporated in Delaware along with many privately held companies who are actually headquartered in other states. Large organisations appear to select Delaware law as their choice of law in all types of contract as they believe it is the best governing law to choose. It is true that the laws of Delaware offer favourable corporate law choices, for example in relation to shareholder relationships and corporate structure, and offer predictability for certain corporate disputes heard before the courts of Delaware. But Delaware may not be the best governing law for your technology contract.
Is Delaware the best governing law election for my technology contract?
In short, unless you are acting for a party headquartered in Delaware, no. Delaware is a useful election for corporate law. However, a technology contract is usually a commercial services contract containing provisions relating to intellectual property, software licensing, subcontractors, and service levels, to name but a few. Delaware therefore offers no special advantages in the context of the laws applicable to a technology contract.
What is the best governing law to select for technology contracts?
This is a difficult question. There probably is no ‘best’ governing law. If you are a US based company, or the services will be performed in the US, you could consider selecting California or the Courts of the County of Santa Clara in your governing law provision. As the majority of the world top high-tech corporations are headquartered in California (and many in Silicon Valley itself), the laws there are often used in disputes related to technology contracts and interpreted in the context of specific technology issues that may arise.
The alternative approach is not to ‘forum shop’ but to select the governing law of the country or state in which you are based as those laws will likely be the most familiar you, or the laws of the country where most of the contract will be performed. In Ireland, many of the technology corporations that use Dublin as their European (or EMEA or world) headquarters select the Republic of Ireland as the governing law of their contract. This brings into play the European Union regulations on governing law and jurisdiction.
What governing law applies in the EU to contractual obligations?
The rules that apply in the EU are particularly tricky. In the EU, if one of the parties is domiciled in an EU member state, any dispute regarding the appropriate governing law is decided on the basis of the Rome I Regulation (Regulation (EC) No 593/2008). Very broadly, the Rome I Regulation provides that the law specified by the parties to a contract will be applied whether or not it is the law of an EU member state
To illustrate how the Rome I Regulation would work in Ireland, in a case where a party brings an action before an Irish court, but the contract states the laws of the State of California will apply, the Irish court will generally follow the Rome I Regulation and allow the governing law chosen by the parties to the contract to be applied (ie. Californian law). An Irish court would only usually jettison the law selected in the contract in favour of Irish law or the law of another state, where the law selected in the contract is manifestly incompatible with Irish public policy or consumer of employment law or in the limited circumstances where the mandatory rules of another state apply. The Rome I Regulation also contains certain technical ‘get out of jail’ provisions that try to prevent the courts having to apply the governing law of one country when the contract is “manifestly more closely connected” with another.
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