No exclusion of international private law

Background

The choice of law is one of the most important provisions in any international contract. This is because the applicable law is relevant for the drafting, negotiation, review, interpretation, and performance of the contract. Additionally, the validity of individual contractual clauses (limitation of liability, penalties, etc.) significantly depends on the applicable law.

Exclusion of Private International Law

International contracts often contain a clause stipulating that the applicable law is chosen with the exclusion of private international law. Typical formulations are as follows:

Negative Examples

• "The contractual relationship is governed exclusively by German law, excluding the provisions of private international law." – from a well-known contract and form book (current edition)

• "This contract is subject to German law, excluding the rules of private international law." – from another well-known contract and form book (current edition)

• "German law applies, excluding conflict of law rules." – from a contract between two German (!) companies

• "This agreement is subject to German law, excluding the referral rules of private international law." – from a contract between two German (!) companies

• "The laws of the State of California govern this Agreement, without reference to conflict of laws rules."

• "[…] excluding its conflicts of law provisions."

• "[…] excluding its private international law rules."

• "[…] without regard to any conflict of law principles."

• "[…] without giving effect to any conflict of laws principles."

Explanation

Mallmann rightly suspects in his essay (see further literature) that "the design of this clause ultimately goes back to the uncritically adopted Anglo-American contract practice."

The user of the clause wants to ensure that no renvoi to the law of the state of the competent court (so-called "renvoi") or a further referral to the law of a third state occurs. In simple terms, the legal system chosen by the contracting parties should indeed apply.

This goal is intended to be achieved by ensuring that the choice of law represents a reference to substantive norms rather than a complete reference. "Reference to substantive norms" refers to the substantive law of the respective state (called "internal law" in English), for example, the BGB/HGB in Germany. In contrast, a "complete reference" (called "whole law" in English) also includes the private international law of the named state, such as the Rome I Regulation (more on this in a moment).

However, such an exclusion is at most declaratory and thus superfluous.

It would be illogical if the competent court initially considered the choice of law by the contracting parties as effective, only to disregard this choice and reach a different result through private international law. Coyle has intensely and critically dealt with choice of law clauses in several scholarly works (see further literature) and concludes that the exclusion is unnecessary and contradictory.

Moreover, the exclusion of private international law is pointless if the choice of law and jurisdiction are aligned.

Example Case – Alignment Between Choice of Law and Jurisdiction

The contracting parties have effectively agreed to the application of German law. The jurisdiction is in Germany.

Even if the competent German court were to interpret a choice of law without the exclusion of private international law as a complete reference – although I am not aware of a single decision in this regard – a renvoi to the court's law or a referral to foreign law would be excluded.

The question of whether there is a reference to substantive norms or a complete reference arises only if, from the perspective of the deciding court, foreign law is deemed applicable.

Example Case – Divergence of Choice of Law and Jurisdiction

The contracting parties have effectively agreed to the application of foreign law. The jurisdiction is in Germany.

The private international law at the place of the court (lex fori) applies, in this case, the Rome I Regulation. According to Article 20 of the Rome I Regulation, the choice of law by the contracting parties includes only the substantive law of a state (reference to substantive norms) and not its private international law. Thus, a renvoi or further referral is already excluded.

Finally, excluding private international law is a contradiction in itself. This is because private international law grants the contracting parties the very right to free choice of law.

Details

Private international law (abbreviated "PIL" or conflict of laws) is – contrary to what the name suggests –not international law, but a part of the national law of a state. It determines which national legal system applies in an international context. In other words, private international law does not regulate international law, but rather international matters.

The EU member states (except for Denmark) have harmonized their private international law. For contracts, Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (known as the Rome I Regulation) applies.

Contracting parties are free to choose the applicable law. This internationally recognized principle of freedom of choice of law stems from the freedom of contract and is explicitly regulated in Article 3(1) sentence 1 of the Rome I Regulation: "The contract shall be governed by the law chosen by the parties." Incidentally, the Rome I Regulation applies worldwide and not only when the law of an EU member state is chosen, see Article 2 of the Rome I Regulation.

For contractual obligations, the solution already follows from Article 20 of the Rome I Regulation (see also § 1051(1), sentence 2 ZPO for arbitration proceedings). Accordingly, the law of a state applicable under the Rome I Regulation includes only its substantive law (reference to substantive norms) and not its private international law. Any potential renvoi to the law of the state of the competent court or a further referral to the law of another state is thereby excluded. Consequently, a clarifying exclusion of private international law is superfluous.

For non-contractual obligations, this legal consequence follows from Article 24 of the Rome II Regulation.

Moreover, German private international law regulates – unless the Rome I Regulation, Rome II Regulation, or the other EU regulations or international agreements mentioned in Article 3(1) EGBGB have precedence – in Article 4(2), sentence 2 EGBGB that the choice of law by the parties includes only the substantive law and not the private international law of a state.

Invalidity of the Choice of Law Clause

In addition to difficulties in interpretation in the event of a dispute, an exclusion can lead, in the worst-case scenario, to the invalidity of the entire choice of law clause, because the exclusion of private international law is not at the discretion of the contracting parties, see for example Articles 3(3) and 3(4) of the Rome I Regulation or U.C.C. § 1-301(c) (2024).

Furthermore, a pre-formulated exclusion under German law will already fail the transparency requirement as defined in § 307(1), sentence 2 BGB.

The invalidity of the choice of law clause could ironically result in the application of a different legal system than the one actually chosen.

Conclusion

Ultimately, the exclusion of private international law makes no sense and can lead to the invalidity of the choice of law clause.

Gruson summarized this well in his essay (see further literature):

"[...] the intention of the drafter of an exclusion clause remains a mystery. It is curious that lawyers draft a clause that on its face is invalid and deals with an imaginary concern."

Coyle summarizes his findings (see further literature) as follows:

"Contract drafters do not always behave rationally when it comes to these clauses. In some cases, they incorporate new language that is arguably unnecessary. In other cases, they omit language that would arguably serve to better protect their interests." And further: "Path dependence likely goes a long way towards explaining the stickiness of contract language. In the absence of any pressing reason to update a contract, the path of least resistance is to leave it be. This is particularly true when the provision at issue is of marginal interest to nonlawyers and is typically found at the very end of the contract along with other “miscellaneous” provisions."

Recommendation

Draft choice of law clauses without excluding private international law or conflict of laws. Instead, ensure the validity of the choice of law and the alignment of choice of law and jurisdiction.

Example Formulation

This agreement shall be governed by the substantive laws of [country].

Further Reading

1. John F. Coyle, A Short History of the Choice-of-Law Clause (2020), 91 University of Colorado Law Review 1147 (2020), UNC Legal Studies Research Paper, https://ssrn.com/abstract=3420162

2. John F. Coyle, Choice-of-Law Clauses in U.S. Bond Indentures (2017). 13 Capital Markets Law Journal 152 (2018), UNC Legal Studies Research Paper, https://ssrn.com/abstract=3055870

3. John F. Coyle, The Canons of Construction for Choice-of-Law Clauses (2016). 92 Washington Law Review 631 (2017), UNC Legal Studies Research Paper No. 2789838, https://ssrn.com/abstract=2789838

4. Mallmann, Choice of Law Clauses Excluding PIL, NJW 2008, 2953

5. Michael Gruson, Governing Law Clauses Excluding Principles of Conflict of Laws, 37 INT'L L. 1023 (2003), https://scholar.smu.edu/til/vol37/iss4/4