Introduction

So, you’re about to sign a contract, and you notice something a little... exotic in the fine print. Right next to “Governing Law,” there’s a mention of a country that isn’t yours. Suddenly, you’re not just signing up for a new business deal—you’re signing up to play by someone else’s rules in a whole different jurisdiction.

Before you break into a cold sweat or start Googling “how to learn international law in 24 hours,” take a deep breath. Facing a contract with foreign governing law doesn’t have to be a nightmare.

Governing law: A complete guide for beginners

Step 1: Don’t panic, but don’t ignore it either

First things first: don’t panic. Contracts with foreign governing laws aren’t uncommon, especially in today’s globalized business world. However, this is also not something you can just ignore and hope for the best. The governing law determines which country’s legal system will govern and enforce the contract, and that can have significant implications for you and your business.

Think of it like being invited to play poker at a stranger’s house. Sure, it’s still poker, but they might have a few house rules you’re not familiar with—like, say, a penalty for not wearing a hat. You need to know the rules before you play.

Step 2: Understand what “governing law” means

A quick refresher: the governing law clause in a contract specifies which country’s laws will be used to interpret the agreement. So, if your contract says “governed by the laws of France,” you’re playing by French rules.

Why does this matter? Because laws vary significantly from country to country. What’s perfectly fine in one place might be a breach in another. Understanding the governing law can help you avoid unpleasant surprises down the road, like being sued in a foreign court—or discovering that something you thought was enforceable isn’t worth the paper it’s printed on.

Step 3: Consult with a lawyer (preferably one who knows the law)

If you spot a foreign governing law in a contract, your first move should be to consult with a lawyer who understands both your local laws and the foreign laws in question. This is not the time for guesswork or assuming “it’s probably fine.” You need professional advice to understand how this foreign law might impact your obligations, rights, and risks.

Find a lawyer who has expertise in international contracts or, even better, someone with experience in the specific country’s legal system. They can help you understand:

• Jurisdictional differences: Are there major differences between the foreign laws and your local laws that could affect the contract?

• Enforceability: Will the foreign law make the contract harder (or easier) to enforce if there’s a dispute?

• Dispute resolution: If things go wrong, will you end up in a foreign court or facing international arbitration? And what does that mean for your time, money, and sanity?

Read: How to read business contracts like a lawyer

Step 4: Negotiate the governing law (if you can)

If you’re not thrilled about being governed by foreign laws, try negotiating to change the governing law to something more familiar—like your home country’s laws.

Explain to the other party why you’d prefer to use your local law: it might be easier, cheaper, and less confusing for both sides. You might say, “Hey, I know you love your local laws, but wouldn’t it be nice to keep things simple and stick with laws we both understand?”

Sometimes, you can find a compromise. For example, you might agree to use the foreign country’s law but require disputes to be settled in your home courts. Or you could suggest a neutral third country’s law that’s more universally recognized, like English or New York law, which are often seen as business-friendly.

Step 5: Understand the impact of the foreign law

If you’re stuck with a foreign law governing your contract (it happens), you need to know exactly what that means for your business. Get your lawyer to spell out the key differences and risks.

• Contract interpretation: Different countries have their own ways of interpreting contracts. A clause that seems crystal clear to you might mean something completely different in another legal system.

• Contractual obligations: Foreign laws may come with extra requirements or restrictions. Some countries have specific requirements for consumer protection, labor laws, or taxes that could affect your contract in ways you didn't expect.

• Enforcement and remedies: If things go wrong, know what to expect. Can you get compensation, and how much? Is it easier or harder to take legal action there? Are there different ways to solve disputes or claim damages?

Make sure you understand the full scope of what you’re agreeing to—before you sign on the dotted line.

Read: The top 5 contracts every small to medium-sized businesses should have

Step 6: Consider adding a dispute resolution clause

If you can't change the governing law, you might still have some flexibility with the dispute resolution clause. This part of the contract decides how and where disputes will be handled.

Here are some options:

• Arbitration: Instead of going to court, you could agree to arbitration. It’s usually quicker, more flexible, and can happen in a neutral location.

• Mediation first: Before heading to court or arbitration, consider requiring mediation first. This can keep things friendly and help avoid costly legal battles—at least at the start.

Step 7: Plan for the worst (and hope for the best)

If you’re moving ahead with a contract under foreign law, it's wise to have a backup plan in case things go wrong. Here’s how to prepare:

• Know your rights: Get familiar with your rights under the foreign law. Are there any protections or loopholes that could affect you?

• Prepare for costs: Set aside funds for potential legal fees. Litigating in another country can be costly, especially if you need to hire local lawyers.

• Consider insurance: Think about getting legal expenses insurance or talking to an insurer who deals with cross-border disputes. It’s like travel insurance—better to have it and not need it than the other way around.

Step 8: Know when to walk away

At the end of the day, if the foreign governing law creates too much uncertainty or risk for your business, don’t be afraid to walk away from the deal. Some contracts just aren’t worth the potential headaches (and costs) they bring.

Explain your concerns to the other party and be clear about why you can’t agree to their terms. Sometimes, a firm stance might even bring them back to the table with a willingness to compromise.

Read: Why you should always have a contract when doing business

Conclusion

Facing a contract with foreign governing law can feel like stepping into unknown territory, but with the right preparation, it doesn’t have to be a disaster. Consult with a knowledgeable lawyer, understand the potential impacts, negotiate where you can, and plan for all scenarios.

Remember, you don’t have to be an expert in foreign law—you just need to know enough to protect your interests. So, the next time you find yourself staring at a contract governed by laws that seem as mysterious as an unsolved puzzle, take a deep breath and follow these steps. Your business will thank you for it.

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