No exclusion of private international law, Perspectives, INN.LAW

Background

The choice of law is one of the most important provisions in any international contract. The applicable law governs the drafting, negotiation, review, interpretation, and performance of the contract. The validity of individual clauses (limitation of liability, contractual penalties, and so on) also turns largely on the applicable law.

Exclusion of private international law

International contracts often contain a clause stipulating that the chosen law applies to the exclusion of private international law. Typical formulations look like this:

Negative examples

The contractual relationship is governed exclusively by German law, excluding the provisions of private international law. – from a well-known German contract and form book (current edition)
This contract is subject to German law, excluding the rules of private international law. – from another well-known German contract and form book (current edition)
German law applies, excluding the conflict-of-laws rules. – from a contract between two German (!) companies
This agreement is subject to German law, excluding the referral 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.

Explanation

Mallmann rightly suspects in his essay (see further reading) that the clause design ultimately goes back to Anglo-American contract practice, adopted uncritically.

The drafter of such a clause wants to make sure that no renvoi to the law of the forum (so-called renvoi) and no onward reference to the law of a third state occurs. In plain terms: the legal system chosen by the parties should actually apply.

This goal is supposed to be achieved by treating the choice of law as a substantive-law reference rather than a whole-law reference. A substantive-law reference points to the substantive law of the respective state (in English commonly called internal law), for example the BGB and HGB in Germany. A whole-law reference (called whole law in English) covers the private international law of that state as well, for example the Rome I Regulation (more on this in a moment).

The exclusion is at best declaratory and therefore superfluous.

A competent court that treats the parties' choice of law as effective in the first place will not then disregard that choice and reach a different outcome through private international law. Coyle has examined choice-of-law clauses in several scholarly works (see further reading) and concludes that the exclusion is unnecessary and contradictory.

The exclusion of private international law is also pointless where choice of law and jurisdiction are aligned.

1. Example case: choice of law and jurisdiction aligned

The parties have validly chosen German law. Jurisdiction lies in Germany.

Even if the competent German court were to read a choice of law without an exclusion of private international law as a whole-law reference, which I have never seen in any decision, no renvoi to the law of the forum and no onward reference to foreign law would be possible.

The question of substantive-law reference versus whole-law reference only arises when, from the deciding court's perspective, foreign law is called upon to apply.

2. Example case: choice of law and jurisdiction diverge

The parties have validly chosen foreign law. Jurisdiction lies in Germany.

The private international law of the forum (lex fori) applies, here the Rome I Regulation. Under Article 20 Rome I Regulation, the parties' choice of law covers only the substantive law of a state (substantive-law reference) and not its private international law. Any renvoi or onward reference is therefore already excluded.

Beyond that, excluding private international law is a contradiction in itself: private international law is precisely what grants the parties the freedom to choose the applicable law.

Details

Private international law (abbreviated PIL or conflict of laws) is, contrary to what the name suggests, not international law but part of a state's national law. It determines which national legal system applies to an international set of facts. In other words: private international law does not regulate international law; it regulates international facts.

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

Parties are free to choose the applicable law. This internationally recognized principle of party autonomy in choice of law flows from freedom of contract and is expressly set out, for instance, in Article 3(1) sentence 1 Rome I Regulation: "A contract shall be governed by the law chosen by the parties." The Rome I Regulation, incidentally, applies worldwide and not only where the law of an EU member state is chosen, see Article 2 Rome I Regulation.

For contractual obligations, the solution already follows from Article 20 Rome I Regulation (see also Section 1051(1) sentence 2 ZPO for arbitration). The law of a state applicable under the Rome I Regulation covers only its substantive law (substantive-law reference) and not its private international law. Any renvoi to the law of the forum or onward reference to the law of another state is thereby excluded. A clarifying exclusion of private international law is superfluous.

For non-contractual obligations, the same legal consequence follows from Article 24 Rome II Regulation.

German private international law also provides, unless the Rome I Regulation, the Rome II Regulation, or one of the other EU regulations or international agreements listed in Article 3 No. 1 EGBGB takes precedence, in Article 4(2) sentence 2 EGBGB that the parties' choice of law covers only the substantive law and not the private international law of a state.

Invalidity of the choice-of-law clause

Beyond interpretation issues in a dispute, the exclusion can, in the worst case, render the entire choice-of-law clause invalid, because the exclusion of private international law is not at the parties' disposal, see for example Article 3(3) and (4) Rome I Regulation or U.C.C. § 1-301(c) (2024).

Under German law, a pre-formulated exclusion also fails the transparency requirement under Section 307(1) sentence 2 BGB.

The invalidity of the choice-of-law clause can ironically lead to a different legal system applying than the one the parties actually chose.

Conclusion

The exclusion of private international law makes no sense and can invalidate the choice-of-law clause.

Gruson summed it up 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 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: 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.

Background

Exclusion of private international law

Negative examples

Explanation

1. Example case: choice of law and jurisdiction aligned

2. Example case: choice of law and jurisdiction diverge

Details

Invalidity of the choice-of-law clause

Conclusion

Further reading