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Why choose English law in commercial contracts?
2nd Sep 2020
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Why choose English law in commercial contracts? - Linkilaw Solicitors
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Pressure to seal the deal quickly often means that the review of legal documentation is focused predominantly on commercial terms while what is generally viewed as “boilerplate” provisions get little to no attention. The governing law clause is a perfect example of a contractual provision that gets overlooked during the negotiation stage but gains importance in case of a dispute as it determines the law of which country would govern the interpretation of your contractual provisions. Below we discuss the benefits of choosing English law to govern your commercial contract.

High degree of certainty and predictability

The global use of the English language in business transactions coupled with the fact that English common law was one of the most influential British exports has made English law the market standard for many industries. It is widely used in finance, insurance, shipping and maritime, and more recently has become a popular choice for fintech and artificial intelligence businesses.

As a result of this long-standing tradition of selecting English law for commercial transactions, English courts have developed an unrivalled experience in hearing commercial disputes across industries and sectors. The volume of disputes reviewed by English courts have created a well-developed body of case law offering the parties a clearer understanding as to how their agreement is interpreted, however specialised or nuanced the legal issue is. The choice of English law, as compared to other legal frameworks, provides a high degree of certainty and predictability to opponents in court.

English law is pro-business

One of the core pro-business characteristics of English law is the legal principle of contractual autonomy, meaning that, except in very limited circumstances, English law will not imply or introduce terms into commercial contracts. In other words, English law honours contractual “bargains” and generally gives effect to acceleration clauses, market disclaimers and non-reliance language where sophisticated parties are involved.

Importantly, English law does not imply an overarching duty of good faith. While the implied good faith obligation has its own advantages and prompts the parties to observe moral and ethical behavioural standards, it creates uncertainty as to the expected standard of behaviour, especially in the context of cross-border transactions, where cultural differences play a role.

In reference to other jurisdictions, good faith creates an obligation for parties to inform each other of the important points that could not be discovered by another party and to apply diligence in the performance of contractual obligations. Contracting parties must observe good faith in both negotiation and performance of contracts under, for example, the German Civil Code. Despite a wealth of case law on the subject, there is no established definition of “good faith” under German contract law which leaves room for uncertainty.

Flexibility of common law

The English legal system assigns an important role to the judiciary in interpreting legislation and continuously developing it through application to specific cases, facts and scenarios. It responds to specific real-life situations that cannot be detailed and spelled out in a statute or even anticipated by legislators. As a result, English common law is highly adaptable to innovative deal structures or changes in the business environment as compared to jurisdictions where the development of the legal system is purely legislator-led. Notably, courts are not bound by political constraints of any legislative process and can therefore react and achieve change more effectively.

Adapted to foreign parties

English courts are accustomed to dealing with contracts governed by English law involving foreign parties without any geographic connection to the UK. It is not uncommon to see, for example, a software development agreement between foreign parties not affiliated geographically with the United Kingdom in any way being governed by English law. Interestingly, approximately 80% of cases reviewed by HM Courts and the London Court of International Arbitration since the Brexit referendum involved a foreign party, while almost half were entirely between foreign parties.

English law has become the preferred choice for agreements among shareholders in international joint ventures because it offers greater flexibility to agree fundamental issues such as, for example, the allocation of liability for breaching representations and warranties.  Alternative remedies offered by foreign jurisdictions, especially emerging markets with civil law systems, are often limited and do not protect the parties as does English law.

Brexit is unlikely to have any significant impact

While the political direction that the United Kingdom may take post-Brexit remains unclear, Brexit is unlikely to have any significant impact on the attractiveness of English law in the majority of cases.

Substantive English contract law has been largely unaffected by European Union law because key contractual legal principles such as offer, acceptance and consideration derive from common law, so there is no reason to think that these would change after Brexit.

The UK is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. Its subscription to the Convention will be unaffected by Brexit, and UK arbitral awards will continue to be recognised and enforced in the 157 states that are parties to it.

Under Rome I and Rome II Regulations, EU courts must respect governing law clauses agreed between commercial parties, subject only to certain limited exceptions.  So Member States courts will continue to respect a choice of English law following Brexit.

Conclusion

English law is likely to continue to be a sensible choice for commercial transactions involving both domestic and international counterparties. The reputation of English courts as well as the transparent and predictable nature of English law makes it a safe option for counterparties deciding the important question of choosing the governing law for their commercial contract.

How could we help?

Please take a look at our standard Governing Law and Jurisdiction Clause to get you started.  We are here to help and share our knowledge. Book a call with our friendly and experienced legal team to discuss your legal needs.

Our legal commentary is not intended to be a comprehensive review of all developments in the law and practice. Please seek legal advice before applying it to specific issues or transactions.

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