Governing Law & Contracts: Why You Should Never Forget It!

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Contractual disputes can flare up at any time

Contracts are everywhere in our lives – from employment contracts to taking out a bank loan – we consent to the terms and conditions of the agreements we sign, and we are bound to honour each agreement to the best of our abilities. But occasionally, there will be disagreements or disputes about the contract, or perhaps the other party to the contract is no longer able to fulfill their obligations to you. In such a situation, your next recourse would probably be to seek legal advice and work to get back what is owed to you. However, this brings up another question – what laws would be the most pertinent and useful in helping you? And on that note, what happens if the contract’s governing law is that of another country’s law? Would it be more beneficial to you, or to the other party in the contract?

Why is a governing law so important?

In the event of a contractual dispute, the courts will refer to a contract’s governing law in order to determine how the terms and conditions of the contract ought to be interpreted and construed. In general, the governing law has significant impact on such issues like contractual validity, interpretation, consideration, party obligation, and how the obligation/contract may be discharged, among other issues.

Would Singapore courts recognise a contract that is governed by a foreign country’s law?

Under Singapore’s legal system, parties in a contract have the autonomy and freedom to define contractual terms. As such, it is perfectly acceptable for foreign laws to govern contracts signed or performed in Singapore. For instance, imagine an English multinational corporation enters into a contract with a Singaporean company, but the English company stipulates that the governing law is under English laws. In the event that a contractual dispute arises, either side may launch a lawsuit to enforce the terms of the contract – now consider the following scenarios:

1)  The Singaporean company sues the English company (Singapore courts)

If the suit takes place in the Singapore courts, the courts would have to apply English laws in order to interpret the terms and conditions of the law before it can be enforced. Applying English law in a Singaporean court would necessarily require foreign legal experts to serve as witnesses, additional fees, and the likelihood of increased legal fees. As a result, it is advisable to choose the law of Singapore to “govern” any contract you sign.

2)  The English company sues the Singaporean company (English courts)

However, what happens if the English company sues the Singaporean company in the courts of England, which rules in favour of the English company? Note that foreign judgments may be registered and enforced in Singapore pursuant to the Choice of Court Agreements Act 2016 (“CCAA”), a landmark legislation which implements the 2005 Hague Convention on Choice of Court Agreements (the “Convention”) to which Singapore is a signatory to. What this means is that since England is a Contracting State to the Convention, the Singapore courts must uphold the ruling of the English courts, provided that the CCAA is applicable. This was exactly the scenario in the recent case of Ermgassen & Co Ltd v Sixcap Financials Pte Ltd [2018] SGHCR 8 (“Ermgassen”). In Ermgassen, an English company successfully sued for a sum of €1,013,536.48 in damages against a Singaporean company in the courts of England. Subsequently, the English company applied for an Enforcement Application against the Singaporean company in the Singapore courts. Accordingly, the Singapore courts applied the CCAA and granted the Enforcement Application with necessary consequential directions.

As illustrated, having clarity on the governing law and making sure it is accurately reflected in the contract is important because the local laws in different countries may lead to different legal outcomes, which may be enforced in local courts!

Are there any possible situations where the governing law might be ignored?

In some cases, the choice of governing law may be overruled by certain mandatory international rules. For instance, under Section 27 of Singapore’s Unfair Contract Terms Act, Singaporean law will automatically overrule any contractual term that applies, or attempts to apply a foreign law, if one or both of the following conditions are true:

1. The contractual term appears to the court, arbitrator or arbiter to have been imposed mainly (or wholly) for the purpose of allowing the party imposing it to evade the Unfair Contract Terms Act; or
2. If one of the parties in the contract was a consumer and is a habitual resident in Singapore, and that the essential steps for the creation of the contract took place in Singapore – whether in person, or by representatives.

If there is no chosen governing law, and a dispute arises, then the court which hears the lawsuit may apply a law that is the most relevant to the subject of the contract.

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Have a question on contracts and governing laws?

If you have a legal question about a contract, or if you have a contractual dispute, you can request a quote from Kennedy Chen from Eversheds Harry Elias. You can also get a Quick Consult with other lawyers. With Quick Consult, you can check out in minutes and for a transparent, flat fee, the lawyers will call you back on the phone within 1-2 days to answer your questions and give you legal advice.

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