Applicable Law vs. Governing Law: Understanding the Differences in Contracts
When drafting or reviewing contracts, you may come across the terms “Applicable Law” and “Governing Law.” While they may seem interchangeable, these terms have distinct meanings and implications, and understanding the difference between them is crucial for ensuring that your contract operates as intended.
What is Governing Law?
Governing Law refers to the legal framework that will be used to interpret and enforce the terms of the contract. Essentially, it is the body of laws from a specific jurisdiction that will govern the contract. This can include:
Contractual Obligations: The rights and duties of the parties involved in the contract.
Interpretation of Terms: How the terms of the contract will be understood and applied.
Dispute Resolution: The legal procedures and standards that will be used if a dispute arises between the parties.
For example, if a contract states that “This agreement shall be governed by the laws of England and Wales,” it means that the laws of England and Wales will apply when interpreting the contract and resolving any disputes.
What is Applicable Law?
Applicable Law, on the other hand, refers to the set of laws that may apply to certain aspects of the contract or to the parties involved in it. This can include:
Regulatory Compliance: Laws that the parties must adhere to in the performance of the contract, such as tax regulations, employment laws, or environmental regulations.
Jurisdiction-Specific Laws: Laws from multiple jurisdictions that might apply, depending on where the parties are located or where the contract is performed.
External Obligations: Obligations imposed by laws that are not necessarily part of the contract but still impact the performance of the contract.
For example, if a contract involves parties from different countries, the “Applicable Law” might refer to specific laws in each of those countries that the parties must follow, even though the “Governing Law” of the contract might be from one jurisdiction.
Why the Difference Matters
Jurisdictional Clarity: Understanding the difference between Governing Law and Applicable Law helps clarify which legal principles will be applied in the event of a dispute. This is particularly important in international contracts where parties are operating under different legal systems.
Risk Management: By specifying the Governing Law, parties can manage legal risks more effectively, knowing which laws will govern their contractual relationship. Meanwhile, recognizing the Applicable Law ensures that all relevant regulatory obligations are met.
Dispute Resolution: In the event of a dispute, knowing which laws govern the contract and which are applicable ensures that both parties are prepared for the legal processes that will follow, whether in arbitration or litigation.
Compliance: Being aware of the Applicable Law helps in maintaining compliance with all necessary legal requirements, avoiding potential legal pitfalls that could arise from non-compliance with local regulations.
Practical Considerations
Choosing Governing Law: Parties often choose the Governing Law based on their familiarity with a particular legal system, the fairness of that system, or the neutrality it provides in international agreements. It’s important to negotiate and agree upon the Governing Law that will best suit the nature of the contract.
Identifying Applicable Law: Ensure that all relevant laws that could impact the performance of the contract are identified and considered during contract negotiations. This is particularly crucial for cross-border agreements where multiple legal systems may be involved.
Drafting Clear Provisions: Contracts should clearly distinguish between Governing Law and Applicable Law provisions to avoid any ambiguity. Ambiguity can lead to costly disputes and legal uncertainty.
Conclusion
Understanding the distinction between Governing Law and Applicable Law is essential for any party entering into a contract, especially in international or complex agreements. Governing Law sets the legal framework for interpreting the contract, while Applicable Law covers the broader legal obligations that may impact the contract’s execution.
At JS Law, we help clients navigate these complexities, ensuring that their contracts are clear, enforceable, and compliant with all relevant laws. For expert advice on how to handle Governing Law and Applicable Law in your contracts, contact us today