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Governing Law: Which to choose?

When targeting foreign European markets, prudent digital content providers should deal with the question of what happens if something goes wrong in their business relationships with foreign customers.

November 2013

If there is no other way than bringing a lawsuit against a foreign customer, or if a foreign customer threats to sue, it is highly important to ensure beforehand that the level of uncertainty and costs associated with such a lawsuit is minimised.

There are various factors that may play a role here; in this article, however, we focus on the issue of which law to choose to govern the contractual relationships with customers.

If a company offers digital products only in its own country, no problem with foreign law arises. However, once foreign consumers are reached, the situation considerably changes.

DeviceAs far as business customers of a digital content provider are concerned, the content provider is in principle free to include into his general terms of business (or other form of an agreement) clauses selecting certain governing law and jurisdiction. For instance, a UK-based content provider may insist on the application of laws of England and Wales and exclusive jurisdiction of English courts. Admittedly, from the perspective of the UK content provider, such a solution would be most desirable.

Consumers targeted in other members of the European Union are, however, much more protected. Under the EU Brussels I Regulation1 , a consumer has an option to bring proceedings against a foreign content provider in the courts of his country of domicile. On the other hand, the foreign content provider may sue the consumer only in the courts of the Member State in which the consumer is domiciled. These rules are considered mandatory, and it is not possible to derogate from them in a manner unfavourable to consumers. Accordingly, there is a high chance that a content provider may need to pursue or defend certain legal claims before the courts of a foreign jurisdiction.

If it happens, it might be very counterproductive if the content provider chooses laws of his own jurisdiction.

For example, by means of a choice of law clause inserted into his general terms of business or a licensing agreement, a UK content provider may stipulate English law as the governing law. Such a choice of law would lead to a situation in which a foreign court would need to apply English law. If a consumer were a resident of Slovakia, the competent court in Slovakia would have to interpret English law in order to decide the case.

WindowThe way foreign law (e.g., English law) is interpreted may significantly affect the legal risk associated with such cross-border litigation. Application of foreign law increases the cost and duration of proceedings as well legal uncertainty. Moreover, in contrast with the traditional English approach to establishing foreign law, in most of the European countries issues of foreign law are treated as issues of law, and the competent court must apply foreign law independent of the intentions and actions of the parties. In Slovakia, for example, in order to ascertain the content of foreign law, a judge often officially requests the Slovak Ministry of Justice to provide information on foreign law, which inevitably prolongs the proceedings.

Furthermore, according to the EU Rome I Regulation2 , a choice of law may not have the result of depriving the consumer of the protection afforded to him by mandatory provisions of the local law that would have been otherwise applicable. This means that even if English law were chosen, in addition to the application of English law, the Slovak court would need to identify applicable mandatory provisions of Slovak substantive law.

As a result of such a choice of law clause, the foreign content provider would face a considerably higher level of legal uncertainty, and the court proceedings would be much longer and significantly more expensive than the cases in which Slovak substantive law applies.

Based on our past experience, for a digital content provider who aspires to sell his products to other European countries, it is most advisable to draft the general terms of business or licensing agreements in a way that allows the application of laws of the consumer's country of domicile. The wording of the respective clauses may stipulate various legal regimes to be applied depending on the type of a customer. For example, in case of a foreign business customer, laws of the content provider’s country may be preferred, and, on the other hand, in case of a foreign consumer, laws of the foreign consumer’s country may be chosen. In any event, the content provider should minimise the risk that the court in other Member State of the EU would need to apply foreign law.

Digital screenIn summary, prior to offering digital products across borders, a content provider should carefully approach the task of setting up his contractual terms, especially a choice of law clause. Properly drafted choice of law clauses (contained either in general terms of business or licensing agreements) may help avoid possible negative consequence.

If you have any questions on this article please contact us.

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Mallet and paper
Ján Lazur

Ján Lazur looks at the importance of including a properly drafted "choice of law" clause in terms and conditions.

"As a result of such a choice of law clause, the foreign content provider would face a considerably higher level of legal uncertainty, and the court proceedings would be much longer and significantly more expensive than the cases in which Slovak substantive law applies."