Governing law in trade agreements

Significance of the governing law in Polish-German business transactions

For purchase agreements in Polish-German business transactions, there is on one hand the possibility to agree German law as the law applicable to the contract. The business parties might on the other hand agree upon the application of Polish law.

UN-Convention on international sale of goods

When concluding international purchasing contracts it is to decide whether the provisions of the UN Convention on contracts for the international sale of goods (hereinafter referred to as „CISG“) should apply. The answer to this question depends on whether the provisions of the CISG may or may not be beneficial for the contracting parties when compared to the national German or Polish provisions, according to the circumstances in the individual case.

Personal scope of CISG application

The applicability of the CISG provisions is always given, if the contracting parties have their branch offices in different CISG contracting states. Furthermore, the CISG provisions are to be observed, if the rules of private international law of one contracting state lead to the application of the CISG.

In Polish-German business transactions, the CISG must always be observed if the contracting parties of the purchase contract have chosen expressly or by implication either German or Polish law, since both Poland (as of 01.06.1996) and Germany (as of 01.01.1991) are Contracting States of the CISG. This results from the fact that the CISG is part of national law both in Germany as well as in Poland and is superior to the national legislation as specialized law.

Material scope of CISG application

The CISG applies to purchase contracts of goods, i.e. of movable property. It is to note that the provisions of the CISG are not applicable to contracts, where the obligation of the contracting party delivering the goods consists on a vast scale in the provision of work or services. This is the case for example if the focus of contractual obligations of the supplying party lays in the provision of installation or consultancy services or similar. Among others, contracts for the delivery of goods for personal use are excluded from the material scope of CISG application.

Exclusion from application

However, there is the opportunity to exclude effectively the applicability of CISG provisions. Due to the fact that the CISG is applicable after an express or implied selection of German or Polish law as part of the respective national law, this exclusion should be included explicitly in the content of the agreement.

An appropriate formulation might be: „This contract shall be governed by German/Polish law under exclusion of the provisions of the UN Convention on contracts for the sale of goods“.

Legal issues not addressed in the CISG

The CISG governs the conclusion of purchase contracts, as well as the rights and obligations of the contracting parties arising therefrom.

It does not apply however for example to issues of transfer of property rights to the sold goods (effectiveness of an agreed reservation of title), as well as seller’s liability for death or personal injury caused to a person by goods (product liability). The effectiveness of the power of attorney must be conform among others to the provisions of the state where the power of attorney shall be used; the legal capacity of a person is determined according to the regulations of the state to which the person belongs to.

Choice of the applicable national law

Basically, the contracting parties can determine themselves which law is to be applied. The advantages of the choice of law are obvious. From the outset there is clarity for the contracting parties, which law shall be applied in case of a dispute.

The agreement of German law has obviously advantages for the German contractors who naturally know it better as Polish law. However, the choice of law should not be detached from the agreement of jurisdiction. The applying of Polish law could be for example agreed if the German contractor is not able to enforce his claims under the agreed German law.

Absence of a choice of law

Insofar as the law applicable to the contract has not been agreed upon, the contract is governed by the law of the state with which it is most closely connected.

Furthermore there shall be a general presumption that the contract is most closely connected with the state, in which the contracting party, providing the characteristic performance, has its central administration or principal place of business at the time of the conclusion of the contract. The characteristic performance provides for example the seller, in case of a purchase contract on movable property.

Agreement on the place of jurisdiction

As already indicated, the choice of law should be considered in connection with the agreement of jurisdiction.

In case if the contracting parties agreed for example upon the application of German law, as well as a place of jurisdiction in Germany and the debtor’s seat is located in Poland, the title obtained before the German court must be firstly be declared as enforceable in Poland (application to the Court, which is locally responsible for the seat / residence of the debtor in Poland). In this context, it should be referred to the Regulation of the European Parliament and of the Council of 21 April 2004 (EC) No. 805 / 2004 on the introduction of a European Enforcement Order for uncontested claims, declaring the issue of a declaration of enforceability of a foreign court unnecessary, at least for uncontested claims.

On the other hand, if the jurisdiction in Poland and German applicable law had been selected, it would mean that a Polish judge needs to confront German law (issuance of an expert’s opinion), resulting in a delay of the proceedings, as well as increased costs. Same applies of course for the opposite case (Court of jurisdiction in Germany and Polish law as governing law agreed in the contract).

It is therefore advisable to agree upon such jurisdiction in which the judge is not confronted with foreign laws.

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