Economic consequences of the choice of law applicable to international contracts

Study conducted under the direction of François Lenglart, HEC Paris, and Pascal Durand-Barthez, Fondation pour le droit continental.

It was ascertained that international contracts are with ever greater frequency subjected by their drafters to one of the legal systems belonging to the common law (English law or the law of one of the States of the United States). The scope of this phenomenon, its root causes, as well as its consequences in terms of economic impact on the French business law community as wells as in terms of its cost and legal certainty for the businesses involved, are not well understood.

Under the auspices of the Fondation pour le Droit Continental, the students in the Specialized Masters in Law and International Management program at HEC Paris have assembled the documentation available and questioned some one hundred legal professionals. The principal results of their inquiry, now in the process of being published, are summarized here below.

The legal professions are surprisingly lacking in information on the economic weight of their activities. Nonetheless, by formulating a certain number of assumptions and cross-referencing the data of the INSEE with those provided by the professional organizations, it can be ascertained that the activities taking place within the scope of business law represents a business turnover in excess of 12 billion euros. The students have attempted to pinpoint the perception held by the French practitioners of the law of international commerce – in-house counsel at companies and banks, specialized Attorneys – of the growing hold of the common law on the international contracts, and of its cost and its effectiveness compared to that of continental law.

This inquiry covered five types of international contracts:  those relating to the implementation of large projects (sale and business contracts), to “merger and acquisition” transactions and three categories of financial transactions (financing of projects and assets, syndicated loans, and derivative products).

The main conclusions are the following:  the choice of applicable law clause does not always get the attention it deserves in the course of actual negotiations; the selection of the subjecting transaction to the common law is undeniably growing, above all in the  financial sector, further assisted by dominance of the English language and the contract-types drawn up by the professional organizations; the legal consequences of resorting to either one or the other legal systems is exacerbated precisely by the use of contract language that is lengthy and detailed, leaving less room for interpretation; the costs ensuing from the choice of the common law are greater; but as to the question of the legal certainty that is provided by choosing either of the two systems, opinions are divided.

Lastly, in matters of international arbitration, the French procedural law is considered nowadays as one of the best in the world.

The study concludes that there is a need to pursue a course of action in order to continue, beyond the simple deciphering that it carried out, attaining a better understanding of the economic impact of the choice of law applicable to international contracts, both for the benefit of the legal professions and for French businesses, and it proposes several paths for consideration.