All PPP Contracts should contain an express choice of governing law. The system of law specified in the governing law provision governs most aspects of the PPP Contract, e.g. its interpretation and validity. The objective of a governing law clause is to achieve certainty (insofar as it is possible to do so) between contracting parties as to the nature and scope of their respective rights and obligations. If the governing law is not expressly chosen, a court will decide it, with consequent possible unpredictability.
The Contracting Authority typically wishes to choose the domestic law of its own jurisdiction as the governing law of the PPP Contract, but the Parties should be aware of the factors which typically influence choice of governing law, including:
• non-legal preferences, such as market acceptability57, familiarity and convenience, relative cost;
• avoidance of a detailed investigation into an unfamiliar system of law;
• commercial orientation, stability and predictability of the chosen legal system;
• insulation of the contract from legal changes in a counterparty's country (e.g. local legislation imposing a moratorium on foreign obligations, reduction of the interest rate by legislation, the imposition of a requirement that repayment must be made in local currency to a local custodian and/or exchange controls). This is often one of the most important reasons for the choice of an external (foreign) system of law for investors. Investors in certain jurisdictions may be concerned that if the governing law is the local law of the contracting government entity, it may subsequently pass legislation which adversely impacts the contract. In PPP Contracts, however, this is typically addressed through change in law or MAGA provisions; See Section 3, Change in Law and Section 2, Material Adverse Government Action.
• a desire to coincide the governing law with the dispute resolution forum (i.e. the courts which will hear any dispute arising in connection with the contract). Legal unpredictability may result if the court is called upon to apply a foreign law with which it is not familiar;
• the ability to use lawyers who have special experience in the type of contract concerned;
• language;
• the desire for a single body of law to apply to the PPP Contract and each of the Project Agreements (which will facilitate consolidation in a single forum); and
• local law may prohibit or restrict a government entity from contracting under an external (foreign) law. Local law advice may need to be sought to clarify the position if a Contracting Authority is considering this approach.
Governing law clauses are generally straightforward to draft. The selection should be clearly specified in the PPP Contract, usually next to, or as part of, the Dispute Resolution provision (see below). The governing law specified should be the system of law of a country, not to a collection of principles or general concepts. Split governing law clauses and conditional governing law provisions should be avoided, as they add undesirable complexities.
Many PPP Contracts now also include a choice of governing law in respect of "non-contractual obligations". This term, found in EU legislation, is understood to include torts such as negligence or pre-contractual misrepresentations. If the Contracting Authority or Private Partner were to bring a tortious claim that they were induced to enter into the PPP Contract by a misrepresentation made by the other Party, a choice of non-contractual governing law should indicate to the relevant court that this claim should be determined under the chosen governing law. Such a provision in commercial contracts would be generally effective in EU Member State courts under European legislation (EU Regulation, Rome II) but the position may vary in other jurisdictions. However, over the last five years, the trend in many international commercial contracts across global markets is to include a governing law choice for non-contractual obligations to add certainty. There is little or no downside in doing so. It makes sense for all obligations relating to the PPP Contract to be governed by the same law. Any other approach would introduce unnecessary complexities. Accordingly, the choice of governing law for non-contractual obligations should match the choice for contractual obligations.
Section 8.3, Sample Drafting 8, Clause (1) includes a contractual and non-contractual governing law provision. This guidance and Section 8.3, Sample Drafting 8 are intended to be of general application, and to be used by Parties from civil and common law jurisdictions, irrespective of whether the selected law is a civil or common law system of law.
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57 This may include whether the respective choice of governing law would affect the Lenders' ability to obtain political risk insurance from multilateral or bilateral development agencies (or private insurers), which would be particularly important for PPP Projects reliant on this type of support to be bankable.