1. What is the applicable law?
Applicable law is a set of rules that determines which country’s laws should be used to recognize legal matters arising from specific legal relations like a contract concluded between parties. In international B2B contracts, the applicable law determines among others what are the legal effects of the agreements between the parties, affecting how they should cooperate and how the disputes should be resolved.
2. Where can you find regulations concerning the applicable law in a contract?
Similarly to the jurisdiction clauses, the rules regarding which country’s laws should apply to a contract are typically found at the end part of the contract. So, if you’re signing a contract with a foreign business partner, it’s a good to start reading it from the back because it is exactly there where you’ll find the section about the applicable law. The practical significance of these provisions cannot be overestimated. Everything that is not specified in the agreement between the parties will be regulated by the provisions of the applicable law that applies to it.
3. What happens if the contract does not contain provisions regarding the applicable law?
The rules about which country’s laws will apply to a contract can result either from the agreement between the parties or, if they haven’t agreed on it, from the relevant legal rules.
In relations between EU member states, special attention should be paid to the provisions of Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), as well as Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II).
In case of a situation when the contractor has a habitual residence or registered office in a non-EU country, it may be necessary to refer to international agreements regulating relations with that country. The provisions of the Polish Act of 4 February 2011 – Private International Law – may also apply to determine the applicable law, but they are only used when the issue of the applicable law is not established on the basis of higher-ranking legal acts, such as EU regulations or ratified international agreements.
In the following part, we will look into the regulations of the applicable law under the Rome I Regulation – this legal act that will apply to most cases where we will look for the applicable law for contractual obligations arising from contracts concluded with foreign contractors in relations between the contractors from EU member states.
4. Is it possible for the parties to have the freedom to choose the applicable law?
According to the provisions of Regulation Rome I, the parties have been granted freedom to choose the applicable law and the contract shall be subject to the law chosen by the parties. The choice of law can be made explicitly or clearly apparent from the terms of the contract or the circumstances. The parties may choose the applicable law for the whole contract or only for a part of it.
It is allowed to choose the law applicable in any country (including a non-EU country). Therefore, it is possible to choose a law that is not related to the contractual obligation for which the choice is made. The Regulation adopted the concept of unrestricted choice, with certain exceptions.
The choice of law should be made through explicit statements of the parties’ will. However, for the effectiveness of the choice of applicable law, it is sufficient that it is clearly apparent from the terms of the contract or the circumstances of the case (implied choice).
It’s important to have a written agreement that clearly states the applicable law for evidentiary purposes. This will help you to avoid the need for a complex interpretation of what the parties actually intended and have not confirmed that in writing.
5. What provisions will apply if the parties do not choose the applicable law?
The parties do not have any obligation to choose the law applicable to their contract. However, making such a choice is often very useful.
What if the parties fail to include provisions on applicable law in the contract?
According to the requirements of the Rome I Regulation, in cases where the applicable law has not been decided and subject to the exclusions specified in the regulation, the law that applies to the following kinds of contracts is determined as follows:
- A sale agreement is subject to country law where the seller lives on a regular basis;
- A service agreement is subject to country law where the service provider lives on a regular basis;
- Agreements involving rights in rem on real estate or rights to use the property are subject to country law where the property is located.
The above mentioned regulations apply not only in cases where the parties did not choose the applicable law, but also when the choice made by them turned out to be invalid or ineffective for some reasons.
The Rome I Regulation also introduces regulations on the law applicable to insurance contracts, consumer contracts, transport contracts and individual employment contracts. The purpose of introducing these provisions was to protect the weaker parties of those legal relations.
6. What will be determined by the applicable law?
The Rome I Regulation contract law is mostly relevant to:
- its interpretation, i.e. determining the meaning of the arrangements made between the parties;
- performance of its obligations;
- the consequences of the total or partial non-performance of these obligations, including the amount of the damage;
- different ways of expiration of obligations and limitation and loss of rights resulting from the expiry of time limits;
- the consequences of invalidity of the contract.
The above points are applicable if the parties have not defined in the other way the scope of the use of the chosen applicable law.
7. Applicable law in international contracts
When concluding contracts with a foreign business partner, it is always worth paying attention to the provisions on applicable law. The possible lack of regulation of the applicable law in the contract should be an expression of a conscious decision of the parties. In this kind of situation, the entrepreneur should have knowledge about the law that will be applicable in case of a possible court dispute. When conducting the case according to the provisions of law other than Polish one, it is advisable to seek legal assistance from a specialist practicing in the country in which the case is heard.