Governing Law in International Transactions

What is Governing Law?

When we are asked to check (review) English contracts, one of the most common questions we are asked is how to define the governing law and jurisdiction. Governing law is the question of which country’s law should be used to interpret the contract in the event of doubt as to the interpretation of the law or in the event of a dispute between the parties. The general rule is that if there is a provision in the contract, the contract is to be interpreted as stated in the provision. However, in some cases, such a provision may be deemed invalid in a particular country, and if there is no provision in the contract, it is important to know which country’s law should be used to interpret the contract. For example, in the U.S., punitive damages may be awarded, but under Japanese law, punitive damages are interpreted as invalid in violation of Japanese public order and morality. Similarly, since each country has its own maximum interest rate for interest commitments and late payment of damages, interest and damages in excess of such rate may be valid in some countries, but interpreted as invalid in others. In addition, not only private law and order, but also competition policy laws such as the Antimonopoly Law have different provisions in different countries, and what is valid in one country is often held to be invalid in another. For example, under Japan’s Antimonopoly Law, a contract that constitutes abuse of a superior bargaining position is interpreted as invalid, but in countries with less stringent Antimonopoly Law, such a provision may be judged as valid.

Governing Law and Statute of Limitations

One of the most common issues in the debate over governing law is the applicability of statutes of limitation. Regarding statute of limitations, each country has different statute of limitations periods, the existence of short-term statutes of limitations, when the statute of limitations begins to run, how the statute of limitations is calculated, etc. So, for example, if a lawsuit is filed in a New York state court and Japanese law is applicable, it will be discussed in the New York court whether the statute of limitations has run under Japanese law. In this case, we will ask both Japanese attorneys representing the plaintiff and the defendant to submit a written opinion, and the New York court will finally decide whether the action is time-barred under Japanese law. In many countries, the statute of limitations for tortious acts begins to run from the time when the parties become aware of the tortious act, the occurrence of damage, and the identity of the perpetrator. The United Nations Convention on Contracts for the International Sale of Goods and the United Nations Convention on the Prescription of the Statute of Limitations for Contracts for the International Sale of Goods have also changed the substantive law content of the prescription period for claims, so it is necessary to consider whether the application of these treaties should be excluded.

Discussions on Governing Law

As described above, which country’s laws are applicable to international transactions (i.e., which country’s governing law is to be used) is an important factor to be considered. Normally, in the case of a transaction between Japan and the U.S., the governing law will be the law of one of the countries involved, whether it is Japanese law or, for example, the law of the State of New York. It is not usual to think of Chinese law as the governing law for a transaction between Japan and the US. Naturally, the Japanese party would prefer that Japanese law, which they understand best, be the governing law, and the U.S. party would probably insist that its own laws be used as the governing law. Since the contents of the contract will include various matters other than the governing law, it would be appropriate to negotiate (bargaining) to have the terms and conditions that are more advantageous to the parties (for example, in terms of payment of the price) approved in another part of the contract instead of being bound only by the governing law of the U.S. We believe that this is appropriate.

Determining the validity of the agreement on Governing Law

The validity of an agreement on governing law is determined based on the private international law of the place where the lawsuit was filed. Therefore, if a lawsuit is filed in a Japanese court, the Japanese court will determine the validity of the governing law agreement based on Japanese private international law.

General Rules for the Application of Law

The determination of the governing law in Japanese courts is governed by the Act on General Rules for Application of Laws (General Rules Act). Article 7 of the General Rules stipulates that “the formation and validity of a legal act shall be governed by the law of the place chosen by the parties at the time of said legal act,” thereby allowing the parties to choose the governing law by agreement. If the parties do not choose the governing law, “the formation and effect of a legal act shall be governed by the law of the place that is most closely related to the legal act at the time of the legal act”. In other words, the law of the place most closely related to the legal act is the governing law.

Method of Determining Governing Law

In general, it is considered straightforward to determine the governing law of the country in which jurisdiction exists. When both countries have jurisdiction, it is considered straightforward to determine the governing law of the country in which the transaction centers. In particular, labor relations are considered compulsory law in each country to protect the status of workers, so if the laws of the country where the worker actually provides labor are not used, there may be a situation where many errors may occur in the provisions of the contract itself. In the case of purchasing goods from Taiwan and receiving delivery in Taiwan, the transaction is completed in Taiwan, so it is considered straightforward to use Taiwanese law as the governing law.

Agreements on Governing Law

（Sample)
This Agreement shall be governed by and construed in accordance with the laws of Japan.

Agreement to be governed by the laws of a third country

In principle, an agreement to be governed by the laws of a third country is also valid. In the case of a transaction between a Japanese company and a Hong Kong company, Singapore law may be stipulated as the governing law. The following is an example of an agreement to be governed by Singapore law.

（Sample)
This Agreement, the rights and obligations of the Parties and all disputes arising out of or in connection with this Agreement shall be governed by and The United Nations Convention on Contracts for the International Sale of Goods or the United Nations Convention on the Limitation of Period in the International Sale of Goods, as amended, shall not apply to this Agreement.

Exclusion of the Vienna Convention on Sales and Purchase (CISG)

The Vienna Convention on the Sale of Goods, officially known as the United Nations Convention on Contracts for the International Sale of Goods (CISG), is an international treaty that establishes the rights and obligations of the parties with respect to the cross-border sale of goods. It was drafted by the United Nations Commission in International Trade Law (UNCITRAL) and published in Japan on August 1, 2009. If the application of the Vienna Convention on Sales and Purchase is not excluded, the Vienna Convention on Sales and Purchase (CISG) will apply to the interpretation of this contract. Therefore, it is necessary to stipulate that the application of the Vienna Convention on Sales and Purchase is excluded in the international sales contract for the sale of movable property.

（Sample)
This Agreement shall be governed by and interpreted under the laws of Japan as to all matters including validity, construction and performance. It is hereby explicitly agreed that the United Nations Convention on Contracts for the International Sale of Products (CISG/Vienna Convention) shall not apply to this Agreement and Individual Contracts.