The general answer is based on the principle of non-retroactivity of the law. Consequently, the law applicable to a contract throughout its duration must be the one in force at the time of its signing. Applicable law is a contractual provision (also known as a choice of law provision) that determines which law will apply in the event of a dispute. Such a clause is generally respected by the courts, which do not interfere with the agreement of the parties with respect to the applicable law.
The provision of applicable law is commonly used by parties residing in different jurisdictions to ensure that one party does not have an advantage over the other party. When a breach of contract occurs (or when a breach is alleged), one or both parties may wish to have the contract enforced according to its terms, or may seek to recover from any financial damage caused by the alleged breach. It is a party to the United Nations Convention on Contracts for the International Sale of Goods (CISG), which according to its terms applies to commercial agreements for the sale of goods concluded between nationals of contracting states. At the risk of stating the obvious, no article on the drafting of provisions on the choice of law would be complete without stating that the choice of law does not necessarily control the choice of forum.
As with other contractual provisions that are often hidden at the end of the agreement in a section entitled Miscellaneous, they can be easy to ignore once substantive decisions are made and agreement is reached on which law applies and which forum will be used. Accordingly, choice of law and choice of court provisions in trade agreements are generally applied in accordance with the language of the contract. But if you have a contract particularly at stake or need help drafting a contract that will be used more than once, it may be a good idea to consult with a small business lawyer before signing on the dotted line. When the question arises, litigants can expressly or tacitly agree on which law governs, or they will agree that the choice of law does not matter because the guiding principles are largely the same in each possible option.
For example, a breach of contract lawsuit between a New York company and a New Jersey company can be filed in either state, but the location of the court does not itself control which law applies. If the intention is to exclude the CISG and apply only the state version of the UCC, a phrase such as, but excluding, the United Nations Convention on Contracts for the International Sale of Goods should be added after the name of the state whose law is chosen. If your contract includes this provision, the courts will apply that law, if possible, to a contractual dispute. Therefore, if drafting counsel intends for his preferred law to govern all aspects of the parties' relationship and not just the limited question of contractual rights and obligations, a broader choice of law provision is desirable.
Contracts for the sale of goods are controlled by the Uniform Commercial Code (UCC), a standardized collection of guidelines governing commercial transaction law. To resolve a conflict of laws problem, the court must determine if there is a real conflict between the application of the laws of the different states. A bilateral contract is the type of agreement that most people consider a traditional contract, a mutual exchange of promises between the parties. Regardless of the type of business you run, understanding contract law is key to creating strong business agreements that can be legally enforced should a dispute arise.
There is also some concern that a California court will not comply with the choice of law provision in a contract that includes a jury waiver if the result would be that a dispute with a significant connection to California would be heard in a different state that recognizes the validity of jury waivers. .
