Setting the Ground Rules

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I’m working on a few transactions right now between companies in different countries (heck, on different continents), and there seems to be one issue none of my clients or their counterparts really want to deal with, and that’s choice of law. The problem is that choice of law is really important, and drafting a contract without knowing which law applies is kind of like playing cards but not knowing whether it’s poker or pinochle. It’s all cards in the end, but the rules matter.

The biggest differences are probably between civil law countries, like France and Germany, and common law countries, like the United States and the United Kingdom. As a rule, civil law countries are more likely to dictate the terms of a contract as a matter of law, rather than allowing the parties to work the rules out amongst themselves. This has the advantage of protecting the weaker partner, of course, but also the disadvantage of preventing two parties who both know and understand the terms of an agreement from getting the agreement they really want.

A good example is online terms and conditions, which are typically dictated by one party to the other without any meaningful opportunity to negotiate (essentially, a take-it-or-leave-it contract). In the US, those online terms are usually enforced largely as written (as long as they are properly entered into, which should be the subject of an entirely separate blog post). That means most if not all of those disclaimers, liability caps, and waiver stand a pretty good chance of being enforced. That’s not to say there’s no risk for the service provider in those situations, but ultimately most of the words in that contract stand a good chance of being enforced against the less powerful party.

Things are different in Germany, where you can pretty much toss out a significant chunk of some of those agreements, or at least contest them with a decent chance of prevailing. Your typical US online terms, with its lengthy, all-caps paragraphs, stands a pretty good chance of modification by the court if it comes to that. That’s not the only example of contract clauses which won’t survive under German law, and those issues can also come up in heavily negotiated contracts between sophisticated parties as well.

So, if you’re negotiating a contract with another party, work out the ground rules first, and decide which law and which courts will apply. Otherwise you may still be figuring out your meld while your opponent is putting down their royal flush.

Image courtesy of Benebiankie / CC BY-SA (https://creativecommons.org/licenses/by-sa/4.0)

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