Choice of law

What it means

Choice of law is the agreement of the parties to an international contract on which country's law will govern it. For example, a Slovak company and a German customer can agree that their relationship will be governed by Slovak law, avoiding uncertainty if a dispute arises.

If the parties make no choice, EU rules determine the applicable law, specifically the Rome I Regulation. For a sale of goods it is usually the law of the country where the seller has its habitual residence or seat, and for a service contract the law of the service provider's country. Specific situations have their own rules.

Choice of law does not determine which court will hear a dispute. That requires a separate jurisdiction agreement or an arbitration clause. A Slovak court may thus decide a case under German law, although this makes proceedings longer and more expensive.

How it works in practice

The choice of law is usually stated in the contract or in the general terms and conditions. For sales of goods between companies from different countries, the CISG applies automatically unless the parties expressly exclude it, even when they choose the law of a contracting state.

Choice of law is complemented by other clauses that reduce the risk of disputes, such as Incoterms on the transfer of risk and transport costs, a jurisdiction clause and the contract language. Together they create a predictable framework for international trade.

For recovering unpaid debts within the EU, the European order for payment can help, as it works regardless of the chosen law. A clear choice of law nevertheless makes it easier to assess whether and how much is owed.

What to watch out for

In consumer contracts, a choice of law cannot deprive consumers of the protection given by the mandatory rules of their country of habitual residence. An online store selling abroad must therefore respect the customer's country's consumer rules whatever law is chosen.

If a company chooses a foreign law it does not know well, it may be at a disadvantage in interpreting the contract or in a dispute. Before signing, it is sensible to weigh whether to insist on Slovak law or to choose the neutral law of a third country.