This precedent has been authored by Stephen Humphreys, Director, Humphreys Advisory Pty Ltd and updated by Dr. Gordon Hughes, Principal, Davies Collison Cave Law.
An applicable law clause in a contract (at times referred to as a “governing law” clause or “choice of law” clause) has the purpose of specifying the law that is to govern the dispute. In other words, the parties agree on the country, state or jurisdiction that is to provide the legal rules, principles and statutes by which any dispute arising from the contract is to be resolved.
Domestic and international agreements For domestic agreements in Australia, the applicable law will generally be the law of any of the states (unless the agreement is subject to a federal law or code, such as a franchising agreement). For international contracts with parties in more than one state or jurisdiction, several outcomes for applicable law are possible, such as:
• the law of the state with which the parties have a substantial connection; or
• the law of the state in which the contract is to be performed.
This may depend on the application of private international law and common law principles.
Absence of applicable law clause
For many commercial agreements, the absence of an applicable law clause may create unnecessary problems for the parties, because the law that is to govern their contract may need to be determined as a preliminary matter to dispute resolution, with often significant cost and time implications. Apart from cost and time in relation to the resolution of the dispute itself, there may also be damage to the underlying business relationship and a lack of contractual certainty in respect of performance, interpretation and enforcement.
Choosing a governing law
Contracting parties are generally free to choose a governing law. (See Akai Pty Ltd v People’s Insurance Co Ltd  1 Lloyd’s Rep 90.) This includes a law from a third neutral state, except where the choice of law is not in good faith or amounts to a deliberate attempt to circumvent or exclude some statutory or other provision that would otherwise apply to the transaction.
Often parties choose compatible and complementary applicable law and jurisdiction clauses so that the courts or tribunals of the jurisdiction entrusted to hear any dispute will be applying their own domestic law. However, where parties have not specified their applicable law, or are for some reason precluded from doing so:
• there is no guarantee of consistency between the applicable law and the jurisdiction that will adjudicate the dispute; and
• the court hearing the matter may be required to consider expert evidence on the foreign applicable law. (See Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705; 25 NSWCCR 218;  NSWCA 305; BC200105538.)
Care should be taken with applicable law clauses because of their importance, since trade and commerce often extend beyond the borders of single states and laws across different states are likely to be dissimilar.
It is important to avoid the common area of stipulating “the law of the Commonwealth of Australia” as being the governing law, as this begs the question as to what State or Territory laws apply where applicable.