The applicable law in international contracts is the national legal system that governs the contract: how it is interpreted, what counts as a breach, which limitations of liability hold and how damages are calculated. Parties may choose that law themselves in the contract. If they do not, the Rome I Regulation decides for them, and for the cross-border sale of goods the Vienna Sales Convention often applies on top of it. Choosing a law is not the same as choosing a court, and a contract that regulates only one of the two is only half finished.
What applicable law means, and how it differs from jurisdiction
Private international law answers two separate questions. The first is which court may hear a dispute (jurisdiction, or in Dutch rechtsmacht). The second is which national law that court must apply to the substance of the case (the applicable law, or toepasselijk recht). The two questions have their own rules, their own regulations and their own answers. A Dutch court can perfectly well be competent to hear a case that is governed by German law, and a German court can apply Dutch law. Agreeing that disputes go to the court in Rotterdam therefore tells you nothing about whether Dutch law governs the contract.
The distinction matters commercially because the applicable law decides the questions that determine the value of a claim. Whether a penalty clause survives, whether an exclusion of consequential loss is enforceable, how long the limitation period runs, whether a party may terminate for a minor breach and what has to be proved and by whom are all questions of substantive law. Two courts applying two different national laws to the same set of facts can reach genuinely different outcomes on the same contract.
Within the European Union the applicable law for contractual obligations is determined by Regulation (EC) No 593/2008, known as Rome I. It has universal application: the law it designates is applied whether or not it is the law of a Member State, so a Dutch court applying Rome I can end up applying the law of England, Switzerland or Japan. Denmark is not bound by Rome I and continues to apply the 1980 Rome Convention, which produces similar but not identical results.
Choosing the law yourself: article 3 of Rome I
Article 3 of Rome I gives commercial parties broad freedom to choose the law that governs their contract. The choice must be made expressly or be clearly demonstrated by the terms of the contract or the circumstances of the case. Parties may choose the law of a country with no connection to the transaction at all, they may choose different laws for different parts of the contract, and they may change the chosen law later by agreement.
An express clause is always preferable to an implied one. Courts do accept an implied choice where the contract is drafted in the terminology of one legal system, refers to specific national statutes, or contains an exclusive jurisdiction clause for the courts of one country; but reading a choice out of such indications takes a hearing, evidence and costs, all of which one sentence in the contract would have avoided.
Two limits apply even to a valid choice. Where all the other elements of the situation are located in a single country, the choice of a foreign law cannot set aside the mandatory rules of that country. Where all the other elements are located within the European Union, the choice of a non-EU law cannot set aside mandatory EU law as implemented in the forum. This is what stops a purely Dutch transaction from escaping Dutch or European law by a clause selecting the law of a distant jurisdiction.
Which law applies if you have not chosen one
Article 4 of Rome I supplies the answer where the contract is silent, and it does so through a list of contract types before falling back on a general test. A contract for the sale of goods is governed by the law of the country where the seller has its habitual residence. A contract for services is governed by the law of the country where the service provider has its habitual residence. A contract relating to immovable property is governed by the law of the country where the property is situated, and a franchise or distribution contract by the law of the country where the franchisee or distributor is habitually resident.
Where the contract does not fit any of those categories, or fits more than one, it is governed by the law of the country where the party who is to effect the characteristic performance has its habitual residence. The characteristic performance is the non-monetary one: paying the price is what every contract has in common, so it is the delivery, the service, the licence or the transport that characterises the agreement. For a company, habitual residence means its central administration; for a branch or agency that concludes the contract, the place where that establishment is located.
There is an escape. If it is clear from all the circumstances that the contract is manifestly more closely connected with another country, the law of that country applies instead. This is a genuine exception, not an invitation to reargue the connecting factor, and courts use it sparingly. Where no characteristic performance can be identified at all, the contract is governed by the law of the country with which it is most closely connected.
The limits of a choice of law: consumers, employees and overriding mandatory rules
A choice of law never removes the protection that consumers and employees enjoy under the law that would have applied without it. For consumer contracts, article 6 of Rome I provides that where a business pursues its activities in, or directs them to, the country where the consumer is habitually resident, the consumer keeps the benefit of the mandatory rules of that country whatever the contract says. A Dutch webshop selling into Belgium cannot use a choice of Dutch law to strip Belgian consumers of Belgian protection, and the reverse is equally true.
Article 8 does the same for employment. The parties may choose a law, but the choice may not deprive the employee of the protection of the mandatory provisions of the law that would apply in the absence of choice: normally the law of the country in which, or from which, the employee habitually carries out his or her work, and a temporary posting abroad does not change that country. In practice this means an employer cannot contract out of Dutch dismissal protection for an employee who works in the Netherlands by selecting a more permissive foreign law.
Beyond these protected categories sit the overriding mandatory provisions of article 9 of Rome I: rules a country regards as crucial for safeguarding its public interests, which apply irrespective of the law otherwise governing the contract. Sanctions and export controls, competition law, certain rules on agency and distribution and parts of financial supervision law operate in this way. Finally, article 21 allows a court to refuse to apply a provision of the designated foreign law where doing so would be manifestly incompatible with the public policy of the forum. This is a narrow exception and is rarely successful, but it exists.
A separate limit is practical rather than legal. If the chosen law is one that neither party, neither adviser and no likely court knows well, every dispute begins with expert evidence about foreign law before anyone reaches the merits. Choosing an unfamiliar neutral law to settle a negotiation is a decision with a price tag attached.
The Vienna Sales Convention in the international sale of goods
For the cross-border sale of goods between businesses, the United Nations Convention on Contracts for the International Sale of Goods, known in the Netherlands as the Weens Koopverdrag and internationally as the CISG, frequently applies before national sales law does. The Netherlands is a contracting state, as are Germany, France, Belgium, Italy, Spain, China and the United States. The United Kingdom is not, and never has been, which is why a contract governed by English law is not affected by the Convention.
The Convention applies where the parties have their places of business in different contracting states, and also where the rules of private international law lead to the law of a contracting state. That second route is the one that surprises people: a choice of Dutch law in a contract with a supplier outside the Convention still brings the Convention into play, because the Convention forms part of Dutch law for international sales. It does not apply to consumer sales, to auctions, to shares, securities or ships, or to contracts in which the preponderant part of the obligations of the seller consists of the supply of labour or services.
Parties may exclude the Convention, and article 6 allows them to do so entirely or in part, but the exclusion must be explicit. A clause stating only that the contract is governed by Dutch law does not exclude it; a clause stating that the contract is governed by Dutch law with the exclusion of the Vienna Sales Convention does. Whether exclusion is wise depends on which side of the transaction you are on. The Convention has a coherent regime for conformity, notice of defects and avoidance that is often more favourable to sellers than domestic law, so excluding it by reflex, as many sets of general terms and conditions still do, can be a decision made without ever being taken.
Non-contractual claims: the Rome II Regulation
A choice of law clause in a contract does not automatically cover claims that are not contractual. Tort, unjust enrichment, negotiations broken off in bad faith and product liability are governed by Regulation (EC) No 864/2007, known as Rome II. Its general rule is the law of the country in which the damage occurs, regardless of where the event giving rise to it happened and regardless of where the indirect consequences are felt. If both parties are habitually resident in the same country, the law of that country applies instead, and there is an escape clause for a manifestly closer connection, including a connection through an existing contract between the parties.
Special rules apply to specific areas. Product liability follows a cascade that starts with the country of the habitual residence of the injured person, provided the product was marketed there. Unfair competition follows the law of the country where competitive relations are affected. Infringements of intellectual property follow the law of the country for which protection is claimed, and that rule cannot be displaced by agreement. Rome II also allows parties to choose the applicable law for non-contractual obligations, but for commercial parties only by an agreement freely negotiated before the event, or by any agreement after it.
The practical consequence is that a contractual choice of law clause should be drafted broadly enough to catch non-contractual claims arising out of or in connection with the contract. A clause limited to the contract itself leaves a claim in tort to be decided by rules the parties never considered.
Jurisdiction, English-language proceedings and enforcement
Jurisdiction within the European Union is governed by Regulation (EU) No 1215/2012, the Brussels I bis Regulation. Its article 25 gives effect to a choice of court agreement between parties, in writing or evidenced in writing, and a court chosen in that way has exclusive jurisdiction unless the agreement is null and void as to its substantive validity. Absent a clause, the general rule is that a defendant is sued in the Member State where it is domiciled, with alternative fora for contract and tort. Where no European instrument applies, a Dutch court derives its jurisdiction from the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering).
The Netherlands offers a feature that is worth knowing about when the counterparty resists a Dutch forum because of language. The Netherlands Commercial Court, a chamber of the Amsterdam District Court with an appeal chamber at the Court of Appeal, hears international commercial disputes in English, with English-language judgments, provided the parties have agreed to it in writing. Court fees there are higher than in ordinary proceedings and are set by law, so they should be checked before the clause is agreed rather than after.
Costs work differently in the Netherlands than the caricature suggests. The losing party is ordinarily ordered to pay the court fee and the bailiff costs of the winner, plus a contribution to the lawyer costs calculated on a fixed court scale rather than on the actual invoice. That contribution is usually well below the real cost of the case, which is why the outcome of a Dutch case is rarely cost-neutral even for the winner. This is a material difference from jurisdictions where the losing party pays the full assessed costs, and it belongs in any comparison of forums.
Enforcement is the third question and the one most often forgotten. A judgment from a Member State circulates within the European Union without a declaration of enforceability. Outside it, enforcement depends on treaty or on national rules, and a Dutch judgment against a party with all its assets in a state with no enforcement treaty may be worth little. Where that is the position, arbitration is often the better answer, because the New York Convention on the recognition and enforcement of arbitral awards binds the great majority of trading states.
Drafting a clause that actually works
A workable clause does four things. It names the governing law and states that it applies to non-contractual as well as contractual obligations arising out of or in connection with the agreement. It states whether the Vienna Sales Convention applies or is excluded, if goods are involved. It names the competent court or the arbitral institution, the seat and the language. And it excludes renvoi by making clear that the reference is to substantive law, which Rome I in any event does by excluding the conflict rules of the designated law.
Check the clause against the rest of the contract before signing. A choice of law in the main agreement combined with a different one in the attached general terms and conditions is a common and entirely avoidable source of dispute, as is a jurisdiction clause in one language version that does not match the other. Where both parties send their own terms, the battle of forms may mean neither set applies; under Dutch law the first set referred to prevails unless the other party expressly rejects it, but the answer differs from country to country, which is exactly why the applicable law question comes first.
Finally, keep the clause proportionate. For a one-off purchase of standard goods, a short choice of Dutch law and the Dutch courts costs nothing and settles the question. For a long-term supply, licensing or joint venture arrangement, the choice deserves an actual analysis of where the assets, the counterparties and the likely disputes sit. Our corporate law guides cover the surrounding contractual issues in more detail.
Mistakes that turn up in practice
The most common mistake is treating a jurisdiction clause as a choice of law. Naming the Dutch court settles who decides, not what is decided; both need their own sentence. The second is assuming that a choice of Dutch law excludes the Vienna Sales Convention. It does not, and for an international sale of goods the Convention will govern conformity, notice periods and remedies unless it is expressly set aside.
The third is overlooking the protected categories. A choice of law clause in a contract with a consumer or an employee is valid, but it does not do what its drafter usually hopes: the mandatory protection of the country where the consumer lives and of the country where the employee works survives it. The fourth is a clause that covers contractual claims only, leaving parallel claims in tort to Rome II. The fifth is the silent contract: no choice at all, leaving both parties to discover after the dispute has started that the law of the other side applies because that side happened to be the seller or the service provider.
Frequently asked questions about applicable law
Can I always choose Dutch law for my international contracts? Between commercial parties, generally yes, and the law chosen does not need any connection to the transaction. The limits are the mandatory protection of consumers and employees, overriding mandatory provisions of other countries, and situations in which every element of the case is located in one country.
What happens if my counterparty excludes the Vienna Sales Convention? The exclusion is valid if it is agreed. The contract is then governed by the national law that the choice of law clause designates, or by the law that Rome I designates if there is no clause, and the domestic sales rules of that law apply instead of the Convention.
Does my choice of law also cover claims in tort? Only if the clause says so. Non-contractual obligations fall under Rome II, which allows commercial parties to choose the applicable law by an agreement freely negotiated in advance. Wording that refers to obligations arising out of or in connection with the agreement, whether contractual or not, is what achieves this.
Can a Dutch court apply foreign law? Yes. Where the conflict rules designate a foreign law, the Dutch court applies it and establishes its content of its own motion, if necessary with the help of expert evidence or an official report. This takes time and money, which is a reason to think carefully before choosing an exotic governing law.
Does the place of performance decide the applicable law? No. Under Rome I the place of performance is not the connecting factor; the habitual residence of the seller, service provider or other characteristic performer is. The place of performance can matter as one of the circumstances under the escape clause, but on its own it does not determine the governing law.
Advice on applicable law in international contracts
Law & More advises businesses on the law and forum that govern their cross-border agreements: drafting and reviewing choice of law and jurisdiction clauses, assessing the position when no choice was made, and conducting proceedings in the Netherlands under Dutch or foreign law. The question is cheapest to answer at the drafting stage and most expensive to answer once a dispute has arisen. Contact one of our contract lawyers to review the clauses in your international agreements.
