What is the governing law of a contract?

Last updated on June 9, 2013

The myriad of contracts the average person comes across in his life, including employment, hire purchase, or loan agreements, usually contain a clause stipulating the ‘governing law’ of a contract. The governing law of a contract has extensive ramifications on contractual performance and remedies. A contract usually contains a number of terms. When a dispute arises, courts will use the governing law of a contract to construe contractual terms. The governing law of a contract governs issues of contractual validity, interpretation, consideration, party obligation, mode of performance, and the discharge of the obligation or of the contract (to name a few).

Most legal systems recognise party autonomy and freedom to define contractual terms. Therefore, contracts signed or performed in Singapore may stipulate a foreign governing law. For instance, an American MNC in Singapore may require its Singapore employees to sign employment contracts governed by American law. In the event of a dispute, the parties involved may sue in a court of law to enforce the contract. If the suing takes place before a Singapore court, the court may have to apply American law to enforce the contract.

Choosing a governing law is important because different laws may lead to different legal outcomes with respect to the same contractual terms. For example, Singapore recognises the concept of a trust, and other equitable obligations. Other foreign laws may not.

Additionally, because contracts usually stipulate a choice of court where disputes are heard, it may be wise for parties to choose the same law to govern the contract. For instance, a contract to be performed in Singapore should ideally designate Singapore law as the governing law, with the Singapore courts as the court of choice. This consistency ensures that the chosen court will apply the governing law correctly as it is most familiar with it. Applying a foreign law in a Singapore court would require foreign expert witnesses, additional evidence, and increased legal fees.

In certain situations international mandatory rules may apply to override a choice of governing law. For example, pursuant to Singapore’s Unfair Contract Terms Act, some of the provisions in the Act apply even if the contract is governed by foreign law. Exceptionally, the choice of a foreign law which is repugnant to Singapore’s public policy may not be applied if the dispute is heard in Singapore.

If a governing law is not chosen and a dispute arises, the court that hears the dispute may apply a law that is most closely connected with the subject matter of the contract.