The choice of law is one of the most important provisions in any international contract. This is because the applicable law is relevant for the drafting, negotiation, review, interpretation and performance of the contract. In addition, the effectiveness of individual contractual clauses (limitation of liability, contractual penalties, etc.) depends largely on the applicable law.

Exclusion of private international law

International contracts often contain a clause stating that the applicable law is chosen to the exclusion of private international law. Common formulations are as follows:

Negative examples
"The contractual relationship shall be governed exclusively by German law to the exclusion of the provisions of private international law." - from a well-known book of contracts and forms (current edition)

"This contract is governed by German law with the exception of the rules of private international law." - from another well-known book of contracts and forms (current edition)

"German law applies to the exclusion of the conflict of laws rules." - from a contract between two German (!) companies

"This agreement is governed by German law to the exclusion of the conflict of laws rules of private international law." - from a contract between two German (!) companies

"The laws of the State of California govern this Agreement, without reference to conflict of laws rules."

"[...] excluding its conflicts of law provisions."

"[...] excluding its private international law rules."

"[...] without regard to any conflict of law principles."

"[...] without giving effect to any conflict of laws principles."

Mallmann rightly assumes in his essay (see further reading) that "this clause design ultimately goes back to the uncritically adapted Anglo-American contractual practice".

The user of the clause wants to ensure that there is no referral back to the law of the state of the competent court (so-called"renvoi") or a further referral to the law of a third state. Put simply, the legal system chosen by the contracting parties should actually apply.

This objective is to be achieved by the fact that the choice of law is a reference to substantive law and not a comprehensive reference. By "substantive reference", the substantive law of the respective country is meant (referred to as"internal law" in English), for example the BGB/HGB in Germany. On the other hand, "whole law" also includes the private international law of the state in question, for example the Rome I Regulation (more on this in a moment).

However, such an exclusion - if at all - is merely declaratory and therefore superfluous.

This is because it would be illogical for the competent court to initially consider the contracting parties' choice of law to be valid, only to then disregard this choice of law and come to a different conclusion via private international law. Coyle has dealt intensively and critically with choice of law clauses in several specialist papers (see further literature) and comes to the conclusion that the exclusion is unnecessary and contradictory.

In addition, the exclusion of private international law is meaningless if the choice of law and the place of jurisdiction are the same.

Example case - Concurrence between choice of law and place of jurisdiction

The contracting parties have effectively agreed to the application of German law. The place of jurisdiction is in Germany.

Even if the competent German court were to interpret a choice of law without excluding private international law as a comprehensive reference - although I am not aware of a single decision - a referral back to the law of the court or a further reference to foreign law would be excluded.

The question of whether a reference to a substantive standard or a comprehensive reference exists only arises if, in the opinion of the deciding court, foreign law is applicable.

Example case - choice of law and place of jurisdiction differ

The contracting parties have effectively agreed to the application of foreign law. The place of jurisdiction is in Germany.

Private international law applies at the place of the court seized (lex fori), in this case the Rome I Regulation. According to Art. 20 Rome I Regulation, the contracting parties' choice of law only includes the substantive law of a country (reference to substantive law) and not its private international law. A referral back or further referral is therefore already excluded.

After all, the exclusion of private international law is a contradiction in terms. This is because private international law grants the contracting parties the right to choose their own law.

Details

Private international law (abbreviated to "IPR" or conflict of laws) is - contrary to what the term suggests - not international law, but part of the national law of a country. It regulates which national legal system applies to an international situation. In other words: Private international law does not regulate international law, but international matters.

The EU member states (with the exception of Denmark) have harmonized their private international law. Regulation (EC) No. 593/2008 of the European Parliament and of the Council of June 17, 2008 on the law applicable to contractual obligations (so-called Rome I Regulation) applies to contracts.

Contracting parties are free to choose the applicable law. This internationally recognized principle of free choice of law is a consequence of freedom of contract and is expressly regulated, for example, in Art. 3 para. 1 sentence 1 Rome I Regulation: "The contract shall be governed by the law chosen by the parties." Incidentally, the Rome I Regulation applies worldwide and not only if the law of an EU member state is chosen, see Art. 2 Rome I Regulation.

In the case of contractual obligations, the solution already results from Art. 20 Rome I Regulation (see also Section 1051 (1) sentence 2 ZPO for arbitration proceedings). Accordingly, the law of a state applicable under the Rome I Regulation only includes its substantive law (reference to substantive law) and not its private international law. A possible referral back to the law of the state of the competent court or a further referral to the law of another state is therefore excluded. A clarifying exclusion of private international law is superfluous.

In the case of non-contractual obligations, this legal consequence arises from Art. 24 Rome II Regulation.

German private international law also stipulates - unless the Rome I Regulation, Rome II Regulation or the other EU regulations or international agreements mentioned in Art. 3 No. 1 EGBGB take precedence - in Art. 4 para. 2 sentence 2 EGBGB that the parties' choice of law only includes the substantive law and not the private international law of a state.

Invalidity of the choice of law clause

In addition to difficulties of interpretation in the event of a dispute, an exclusion in the worst-case scenario can lead to the ineffectiveness of the entire choice of law clause because the exclusion of private international law is not at the disposal of the contracting parties, see for example Art. 3 (3) and (4) Rome I Regulation or U.C.C. § 1-301 (c ) (2024) .

In addition, a pre-formulated exclusion under German law will already fail due to the transparency requirement within the meaning of Section 307 (1) sentence 2 BGB.

The invalidity of the choice of law clause could, ironically, have the consequence that a legal system other than the one chosen actually applies.

Conclusion

As a result, the exclusion of private international law makes no sense and can lead to the invalidity of the choice of law clause.

Gruson summarized this well in his essay (see further reading):
"[...] the intention of the drafter of an exclusion clause remains a mystery. It is curious that lawyers draft a clause that on its face is invalid and deals with an imaginary concern."

Coyle's summarizes his findings (see further reading) as follows:
"Contract drafters do not always behave rationally when it comes to these clauses. In some cases, they incorporate new language that is arguably unnecessary. In other cases, they omit language that would arguably serve to better protect their interests." And further: "Path dependence likely goes a long way towards explaining the stickiness of contract language. In the absence of any pressing reason to update a contract, the path of least resistance is to leave it be. This is particularly true when the provision at issue is of marginal interest to nonlawyers and is typically found at the very end of the contract along with other "miscellaneous" provisions."

Recommendation

Formulate choice of law clauses without excluding private international law or conflict of laws. Instead, make sure that the choice of law is effective and that the choice of law and place of jurisdiction coincide.

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Formulation example

This agreement shall be governed by the substantive laws of [-].

Further reading

  1. John F. Coyle, A Short History of the Choice-of-Law Clause (2020), 91 University of Colorado Law Review 1147 (2020), UNC Legal Studies Research Paper, https://ssrn.com/abstract=3420162
  2. John F. Coyle, Choice-of-Law Clauses in U.S. Bond Indentures (2017). 13 Capital Markets Law Journal 152 (2018), UNC Legal Studies Research Paper, https://ssrn.com/abstract=3055870
  3. John F. Coyle, The Canons of Construction for Choice-of-Law Clauses (2016). 92 Washington Law Review 631 (2017), UNC Legal Studies Research Paper No. 2789838, https://ssrn.com/abstract=2789838
  4. Mallmann, Choice of law clauses to the exclusion of IPR, NJW 2008, 2953
  5. Michael Gruson, Governing Law Clauses Excluding Principles of Conflict of Laws, 37 INT'L L. 1023 (2003), https://scholar.smu.edu/til/vol37/iss4/4