1. Introduction: What is Applicable Law and Why is it Crucial
Applicable law determines which national legal system applies to your international agreement and can make the difference between winning and losing a dispute. This fundamental concept of private international law determines which rules and laws apply when parties from different countries enter into an agreement. The applicable law is particularly important when at least one foreign party is involved. A choice of law prevents parties from being assigned an unfavourable legal system.
In this comprehensive guide, you will learn what applicable law entails, how to determine the right law for your international contracts, and what costly pitfalls to avoid. We cover the Rome I and II Regulations, the Vienna Sales Convention, practical steps for drafting choice of law clauses, and answer frequently asked questions.
This topic is crucial for entrepreneurs who enter into international agreements, because a miscalculation can lead to unforeseen legal risks, higher costs, and unfavourable outcomes in disputes. For example, the difference between Dutch law and foreign law can determine whether your contractual penalty clauses are valid, how damages are calculated, and which protective provisions apply. The reputation of the party or the circumstances may also be taken into account when determining the applicable law.
2. Introduction to International Law
International law plays an indispensable role in determining the applicable law in international agreements. When parties from different countries enter into a contract, the question immediately arises: which law applies? Private international law (PIL) provides the answer to this question and also regulates which court has jurisdiction to rule on a dispute. Each country has its own legal system, with unique rules and laws that influence the interpretation and enforcement of agreements. The correct application of the applicable law is therefore essential: it not only determines which rules apply, but can also completely change the outcome of a dispute in court. Whether it concerns contractual obligations, liability or the interpretation of provisions, private international law forms the basis for legal certainty in international transactions.
3. Conclusion of an international agreement
The conclusion of an international agreement requires extra attention, especially when it comes to the choice of applicable law. Parties can determine in advance which law applies to their contract by including a clear choice of law clause. If no choice of law is made, private international law comes into effect to determine which law applies. The Rome I Regulation contains specific rules for this purpose, which provide guidance on determining the applicable law in international agreements. The law of the country where the agreement is concluded often plays an important role in this regard, because the conclusion of the contract is partly influenced by the national rules of that country. It is therefore very important that parties are aware of the consequences of their choices and carefully apply the relevant provisions of private international law and the Rome I Regulation when drafting their international agreements.
2. Understanding Applicable Law: Key Concepts and Definitions
2.1 Basic definitions
Applicable law is the legal system that determines which laws and rules apply to a specific agreement or legal relationship. In the case of international contracts, this may be English law, the law of another country, or even international treaties such as the Vienna Sales Convention. Determining which law is applicable depends on the circumstances of the agreement.
Private international law (also known as conflict of laws) contains the rules that determine which national law applies when a situation involves different countries. This is fundamentally different from the question of which court has jurisdiction – that falls under the concept of legal competence. If the parties have not made a choice of law, the applicable law is determined by international treaties and European regulations.
Important related concepts are:
- Lex causae: the substantive law that ultimately applies
- Choice of law: the explicit choice of parties for a particular legal system
- Incorporation law: the law of the country where a legal entity is established
- Characteristic performance: the performance that determines the nature of the agreement
2.2 Relationships between concepts
The determination of applicable law follows a clear hierarchy:
- Choice of law by the parties (if validated)
- International treaties (such as the Vienna Sales Convention for international sales agreements)
- European regulations (Rome I for contractual obligations, Rome II for non-contractual obligations)
- National rules of private international law
In some cases, different rules apply, for example in consumer purchases or companies, which deviate from standard legislation or conflict rules.
These concepts are closely related to jurisdiction (which court has jurisdiction) and enforcement of judgments (how a judgment can be enforced), but are fundamentally different from them.
3. Why Applicable Law is Essential for International Business
Correctly determining the applicable law prevents legal uncertainty and significant financial risks. Research shows that more than 80% of international contract disputes arise in part from uncertainty about which law applies.
Protective provisions for employees and consumers always remain applicable, regardless of the choice of law. A Dutch employer cannot escape Dutch dismissal protection by choosing American law for an employment contract with an employee in the Netherlands.
The choice of legal system has far-reaching consequences:
- Contract interpretation: German judges often interpret contracts more literally than Dutch judges
- Damages: Anglo-American legal systems award higher damages than continental systems
- Performance: Dutch courts are quicker to enforce specific performance than French courts, for example
- Legal costs: English case law applies a ‘loser pays all’ principle, while in the Netherlands both parties bear their own costs
In the practice of private international law, making a clear choice of law is considered desirable because it contributes to legal certainty and predictability for all parties involved.
6. International Law and Rome I: The Rules for Choice of Law
The Rome I Regulation forms the basis for the choice of law in international agreements within the European Union. According to Article 3 of this Regulation, the parties themselves may determine which law applies to their contract. This freedom offers a great deal of flexibility, but requires that the choice of law be clearly and unambiguously established. If no choice of law has been made, Article 4 of Rome I determines which law applies. The main rule is that the law of the country of the seller or service provider applies to the agreement. This ensures predictability and legal certainty. However, there are important exceptions, for example in the case of consumer purchase agreements: in that case, the law of the consumer’s habitual residence applies, regardless of the choice of law. This provides consumers with extra protection in cross-border transactions. It is therefore essential when drafting international contracts not only to choose the applicable law, but also to take into account the specific rules and exceptions of the Rome I Regulation.
7. Closer connection with another country: exceptions to the choice of law
In some cases, an agreement may have a closer connection with a country other than the country of the seller or service provider. The Rome I Regulation therefore provides for an exception clause: if all circumstances indicate that the agreement is more closely connected with another country, the law of that country may be declared applicable, even if a different choice of law has been made. This offers flexibility to do justice to the actual economic and legal relationships between the parties. In addition, international treaties, such as the Vienna Sales Convention, may influence the applicability of the law. For example, the Vienna Sales Convention automatically applies to international sales contracts between professional parties, unless the parties expressly exclude it. Thus, despite a choice of law, the sales convention or the law of another country may still be declared applicable if there is a closer connection. It is therefore very important when drafting international contracts to consider not only the letter of the choice of law, but also the actual circumstances and the possible effect of international treaties.
4. Comparison table: When which law applies
| Contract type | With choice of law | Without Choice of Law | Special features |
|---|---|---|---|
| International sales agreement (B2B) | Chosen law | Vienna Sales Convention → Rome I (law of seller) | Vienna Sales Convention may be excluded; exception for the United Kingdom after Brexit |
| Service contract | Choice of law | Rome I: law of service provider | Exception for consumer contracts |
| Employment contract | Choice of law* | Rome I: law of the habitual place of work | *Protective provisions remain applicable |
| Consumer purchase | Chosen law* | Rome I: law of the consumer | *Consumer retains protection in country of residence |
| Transport agreement | Chosen law | Rome I: law of the carrier | International treaties often apply |
5. Step-by-step guide to determining the applicable law
Step 1: Check whether the parties have made a choice of law
First, look for choice of law clauses in the contract. These are usually found in the final provisions with wording such as:
- ‘This contract is governed by Dutch law’
- “This agreement shall be governed by Dutch law”
- “This agreement shall be governed by Dutch law”
An explicit choice of law is clearly stated in the contract. An implicit choice of law may be apparent from factors such as:
- Reference to specific legislation
- Use of terms from a specific legal system
- Choice of competent court of a specific country
According to Rome I Article 3, the choice of law must be clearly apparent from the wording of the agreement or the circumstances of the case.
Step 2: Determine Which Regulation or Convention Applies
In international sales agreements between professional parties, the Vienna Sales Convention often takes precedence. This convention applies if:
- Both parties are established in countries that have signed the convention
- The agreement concerns movable property (not immovable property or services)
- The case does not concern a consumer purchase
Please note: choosing the Dutch court as the forum does not automatically mean that Dutch law applies. The Dutch court can therefore hear a dispute to which foreign law applies.
If the applicable law is that of a country that is also a party to the Vienna Sales Convention, the convention may still apply.
- Both parties are established in countries that have signed the convention
- The case concerns movable property (not immovable property or services)
- It does not concern a consumer purchase
The Rome I Regulation determines the applicable law for contractual obligations within the European Union, while Rome II applies to non-contractual obligations such as tort and product liability.
Step 3: Apply the correct connecting factors
If no choice of law has been made, the main rule of Rome I Article 4 applies: the law of the country where the party performing the characteristic performance has its habitual residence. The characteristic performer is usually the party performing the non-monetary obligation.
Characteristic performance means:
- For sales contracts: delivery of goods (seller’s right)
- For service contracts: provision of services (service provider’s right)
- In the case of rental agreements: making the goods available (landlord’s right)
Specific rules apply to:
- Consumer purchase (Article 6): law of the country of the consumer’s habitual residence
- Employment contracts (Article 8): law of the country where the work is usually performed
The fallback clause stipulates that if it is clear from all the circumstances that there is a closer connection with another country, the law of that other country applies.
6. Common mistakes regarding applicable law
Mistake 1: Confusion between applicable law and competent court Many entrepreneurs think that if they make the Dutch court competent, Dutch law automatically applies. This is incorrect – both aspects must be explicitly regulated. In legal proceedings, a party may also invoke the law of another country, which makes it important to clearly record both choices.
Mistake 2: Use of Anglo-American terms in Dutch choice of law A choice of law for ‘Dutch law’ can be confusing, because it is not clear whether this refers to substantive Dutch law or also Dutch conflict rules.
Mistake 3: Forgetting protective provisions for employees/consumers A choice of foreign law does not exempt you from mandatory Dutch protective rules for employees or consumers.
Mistake 4: Not taking the Vienna Sales Convention into account in international sales In international sales agreements, the Vienna Sales Convention often applies automatically, even without explicit mention.
Pro Tip: Always explicitly regulate both aspects in international contracts: “This agreement is governed by Dutch law and disputes will be settled by the competent Dutch court.”
7. Practical example: Dutch IT service provider and German customer
Case: A Dutch SaaS provider enters into a service contract with a German multinational without explicitly choosing the applicable law. A dispute arises over data protection and limitation of liability after a data breach.
Initial situation:
- Contract only contains a choice of forum for Dutch courts
- No choice of law included in the contract
- Dispute concerns € 500,000 in damages
The applicable law becomes particularly relevant as soon as a dispute arises between the parties, because it must then be determined which national law applies to the conflict.
Steps in the analysis:
- No choice of law: Rome I Regulation determines applicable law
- Characteristic performance: IT services provided by Dutch party
- Main rule of Article 4: Dutch law applies
- Fallback clause check: no closer connection with Germany
Final result under Dutch law:
- Limitation of liability valid (provided reasonable)
- Compensation limited to direct damage
- Burden of proof for data breach lies with German party
Comparison with possible outcome under German law:
- Stricter liability rules
- Higher compensation possible
- Different distribution of burden of proof
| Aspect | Dutch law | German law |
|---|---|---|
| Limitation of liability | Valid if reasonable | Stricter assessment |
| Compensation | € 125,000 (limited) | € 350,000 (more generous) |
| Legal costs | Both parties bear their own costs | German party wins and Dutch party pays |
This example shows that the choice of applicable law can make a financial difference of more than €200,000.
8. Frequently asked questions about applicable law
Q1: Can I always apply Dutch law to my international contracts?
A1: Yes, you can almost always choose Dutch law, except in the case of protective provisions for consumers and employees. These mandatory rules remain applicable regardless of your choice of law.
Q2: What happens if my foreign contracting party excludes the Vienna Sales Convention?
A2: In that case, the Rome I Regulation applies to determine the applicable law. Usually, the law of the seller applies if no explicit choice of law has been made. However, the Vienna Sales Convention may apply, depending on the circumstances and whether the conditions for applicability are met.
Q3: Does my choice of law also apply to non-contractual claims such as product liability?
A3: No, the Rome II Regulation applies to this, with its own connecting factors. Product liability usually falls under the law of the country where the damage occurred.
Q4: Can a Dutch court apply foreign law?
A4: Yes, Dutch courts regularly apply foreign law if the conflict rules so require. They must then examine the foreign law and apply it correctly.
Q5: What if the contract is performed in a third country?
A5: The place of performance is only one factor. The applicable law is determined by the Rome I rules, not automatically by the place of performance.
9. Conclusion: Key Points about Applicable Law
Mastering applicable law is essential for successful international business. The five key points are:
- Always make an explicit choice of law in international agreements to avoid uncertainty
- Distinguish between applicable law and competent court â€“ regulate both aspects separately
- Take into account protective provisions for employees and consumers that always remain applicable
- Check whether the Vienna Sales Convention applies to international sales agreements
- If in doubt, consult a specialist in private international law
A well-chosen applicable law can save thousands of pounds and prevent legal uncertainty. Therefore, invest in professional legal advice when drafting international contracts.