Agreeing on Applicable Law

As a general rule, the parties of a transaction may decide on the law to be applied to the transaction. The parties may choose to apply the law of the buyer’s or the seller’s country, or a third country.

Even if the parties have not agreed on the applicable law, this does not as such cause any loss of rights. In such case, the issue is solved on the basis of international conventions regarding choice of law. If such conventions do not provide a clear solution to the question of choice of law, the parties need to argue their case. The need for legal argumentation already at this stage results in extra costs and, accordingly, it is advisable to agree on the applicable law.

Normally, a party’s objective is to choose the law of its country, since it means that the applicable law is familiar and more predictable. However, it should be borne in mind that as part of the negotiations, a party may often be required to accept the laws of some other country. Thus, when drafting an agreement, a party must take into account the agreement practices of the other party already at an early stage.

However, in some circumstances, foreign applicable law may be more favorable than domestic law. For example, this could be the case from the seller’s point of view, if the seller is aware that according to the law of such foreign country, seller’s liability for defects, or the amount of damages that will be awarded, is substantially smaller compared to the law of the seller’s country. To gain such advantage, however, a party must have thorough knowledge of the relevant foreign law: even if an individual element could favor application of foreign legislation, additional, negative elements may emerge at a later stage. In addition, the additional costs arising from application of the foreign law in the event of a dispute should be taken into account.

Often, the choice of applicable law is a compromise between the parties. However, in international trade, the parties should bear in mind that a court does not necessarily accept the parties’ choice of law which attempts to circumvent mandatory provisions of the law that would otherwise be applicable. It is of utmost importance that it is relatively easy to obtain information regarding the law of the chosen country. For instance, it may prove to be difficult to obtain information about the laws of China due to language issues. On the other hand, it may be hard to apply the law of countries in the common law judicial system, which differs considerably from the system in civil law countries, including Finland. In case the contracting party is from another Nordic country, it is relatively safe to choose the law of another Nordic country as the applicable law. Laws of the Nordic countries are mostly quite similar.