1. Introduction
With the growth of international trade and cross-border transactions, contracts between individuals or legal entities from different countries have become increasingly common. This inevitably raises the question: Which country’s law will govern the contract?
The determination of the applicable law is crucial for interpreting contractual rights and obligations, defining performance methods, handling default situations, and selecting dispute resolution mechanisms.
2. Legal Framework
2.1. Regulation under Turkish Law
In Turkey, the matter is regulated by the International Private and Procedural Law Act No. 5718 (IPPL).
- Article 24 IPPL: A contract is subject to the law explicitly or implicitly chosen by the parties.
- If the parties have not chosen the applicable law, the law of the country with the closest connection to the contract shall apply.
- The closest connection is generally deemed to be the country where the characteristic performance is to be carried out.
2.2. International Regulations
- Rome I Regulation (EU): Grants parties the freedom to choose the applicable law; in the absence of such choice, the “characteristic performance” test applies.
- UNIDROIT Principles and CISG: Provide uniform rules for international commercial and sales contracts.
3. Party Autonomy in Choice of Law
3.1. Scope of the Principle
The parties may choose the law applicable to the entire contract or to a specific part of it. This choice may be:
- Express – Stated clearly in a “Governing Law” clause within the contract.
- Implied – Inferred from contract language, currency, or the location of the parties’ main business establishments.
3.2. Limitations
- Mandatory Rules: The choice of law cannot override public policy or overriding mandatory provisions.
- Consumer and Employment Contracts: In many jurisdictions, choice of law is restricted to protect the weaker party.
4. Absence of a Choice of Law
4.1. Characteristic Performance Criterion
Under IPPL and the Rome I Regulation, if the parties have not agreed on the applicable law, the law of the country where the characteristic performance is to be carried out applies. Examples include:
- In a sales contract – The law of the seller’s principal place of business.
- In a service contract – The law of the service provider’s principal place of business.
4.2. Closest Connection Principle
This criterion may be disregarded if it is evident from all circumstances that the contract is more closely connected with another country. In such cases, the law of that country will apply.
5. Arbitration and Applicable Law
If the parties agree to resolve disputes through arbitration, they may also determine the applicable substantive law. In the absence of such determination, the arbitral tribunal will apply the law it deems most appropriate.
In international commercial arbitration, Lex Mercatoria (the law merchant) and international trade usages may also be considered.
6. Case Law Illustrations
- Turkish Court of Cassation, 11th Civil Chamber, 2019/2370 E., 2020/5312 K.: In the absence of a choice of law, the characteristic performance test was applied, and the law of the seller’s place of business was deemed applicable.
- Turkish Court of Cassation, 15th Civil Chamber, 2018/4103 E., 2019/2501 K.: The court determined an implied choice of law based on the contract language and the locations of the parties’ business operations.
7. Practical Recommendations
- Always include a “Governing Law” clause in international contracts.
- Where contracts are bilingual (e.g., Turkish-English), ensure language discrepancies are resolved.
- Select a governing law based on the location of the main performance and the parties’ operational bases.
- Consider mandatory provisions of the jurisdiction where the weaker party (consumer/employee) is based.
8. Conclusion
The question of which party’s law will apply to a contract is not merely academic – it directly affects the validity, interpretation, and enforcement of the agreement. While the principle of party autonomy enhances commercial predictability, it requires careful, informed decision-making to avoid legal uncertainty and potential disputes.
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