Why specify applicable law—and what happens if you don’t?
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You work with foreign partners. Do you know which country’s laws will govern your dispute if the contract doesn’t specify anything?
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Did you know that a partner can register in another jurisdiction specifically to complicate collection—and how can you protect yourself from this with just one line?
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What is better to specify in an agreement with a foreign partner—Latvian law or the law of the partner’s country—and what is the difference for you?
A Latvian company entered into a contract with a counterparty registered in Hungary but actually operating from Latvia. The contract did not contain a clause stipulating applicable law. When the counterparty failed to pay, the question arose: under which country’s law should the dispute be heard? Under Latvian law, as the country of performance? Under Hungarian law, as the defendant’s country of registration? Under European conflict of laws rules?
It took three months just to resolve this issue. And that’s before even considering the debt itself.
What is a governing law clause?
This is a clause in a contract that specifies the applicable law of the country. For example: “This agreement shall be governed by and construed in accordance with the laws of the Republic of Latvia.”
With this clause, neither the court nor the parties waste time determining the applicable law—it has already been agreed upon. Without it, complex rules of private international law apply.
What happens without a governing law clause
In disputes between partners from different EU countries, the EU Rome I Regulation (for contractual obligations) and Rome II Regulation (for non-contractual obligations) apply. They establish conflict-of-laws rules—rules for determining the applicable law.
By default, the law of the seller’s country applies to supply contracts. For service contracts, the law of the provider’s country applies. For real estate lease agreements, the law of the country where the property is located applies.
This means that if a Latvian company purchases something from a Hungarian supplier, Hungarian law applies to the contract. And in the event of a dispute, it will be necessary to understand Hungarian law or hire a Hungarian lawyer.
Why is it better to indicate Latvian law?
First, you know Latvian law—or have access to Latvian lawyers. Foreign law means additional expert review costs.
Second: the arbitration clause with the Riga Arbitration Court works best when combined with Latvian law – the court applies it every day and knows it thoroughly.
Third, enforcement of a judgment in Latvia is easier if Latvian law applies. If foreign law applies, additional expert review may be required when issuing a writ of execution.
When a different applicable law may be beneficial
In some international transactions, the parties choose neutral law—for example, English or Swiss. This is common in complex financial or construction contracts. For standard commercial transactions in Latvia, this is unnecessary.
If a partner insists on the law of their country, this is a reason to consider their intentions and how the recovery will look in the event of a dispute.
Recommended wording
This agreement shall be governed by and interpreted in accordance with the current legislation of the Republic of Latvia. All disputes arising from this agreement shall be resolved by the Riga Arbitration Court (Registration No. 40003756873) in accordance with its rules or by a court of the Republic of Latvia, at the applicant’s discretion.
Three steps to take now
First: check your contracts with foreign partners to see if there is a clause on applicable law.
Second: when concluding a new agreement with a foreign counterparty, add a clause on Latvian law along with the arbitration clause.
Third: if your partner suggests the law of their country, assess the risks and, if necessary, insist on neutral or Latvian law.
One line in the contract—and you know the rules. Without it, the rules are determined by whoever goes to court first.
This article is for informational purposes only and does not constitute legal advice.