Adv. Mariola Hawel-Tocker | Hawel-Tocker & Co. Law Offices
When parties from different jurisdictions enter into a commercial agreement, one fundamental question underlies their entire legal relationship: which country’s law will govern the contract? The answer can determine the outcome of a dispute worth millions, as demonstrated by a case our firm handled involving the Polish national airline LOT.
When the Applicable Law Is Not a Matter of Choice
In certain legal areas, the governing law is determined by mandatory statutory provisions. A clear example is the law of succession: under both Israeli law and the laws of most European countries, including Poland, an estate is governed by the law of the deceased’s last domicile. This means that regardless of the heirs’ nationality or residence, the law of the country where the deceased last lived determines who inherits and in what proportion. The validity of a will, however, is determined by the law of the place where it was executed.
A notable difference exists between the two legal systems: European law, including Polish law, allows a testator to designate in their will which law shall govern their estate, provided a genuine connection exists with that jurisdiction. Israeli law does not permit such a choice.
Commercial Contracts: Complete Freedom of Choice
Unlike succession law, in international commercial contracts the parties have full freedom to select the governing law. The choice may fall on the law of either party’s country or even on the law of a third jurisdiction. Regardless of where proceedings are held, the court is bound to adjudicate the dispute according to the substantive law chosen by the parties. Selecting the right governing law is not a technicality: it is a strategic decision that can determine the outcome of a dispute.
Case Study: LOT Polish Airlines: When the Choice of Law Saved the Client
Our firm represented PLL LOT, the Polish national airline, in proceedings brought against it in Israel by Open Sky Ltd. The parties had conducted extended negotiations regarding the appointment of Open Sky as LOT’s General Sales Agent (GSA) in Israel. A detailed Letter of Intent (LOI) was signed, setting out milestones and approval procedures. A decisive clause in the LOI stipulated that Polish law would govern the parties’ relationship.
The negotiations did not result in a binding agreement. Open Sky filed a claim in the Tel Aviv District Court, arguing that LOT had negotiated in bad faith and that approval under Polish law was not a prerequisite for contract formation. LOT, represented by our firm, argued that it had acted in accordance with Polish law, which requires state-owned companies to follow a structured approval process, and that there had been no breach.
The District Court accepted LOT’s position. The Supreme Court of Israel upheld this ruling (Permission to Appeal 2113/07, Polskie Linie Lotnicze LOT Polish Airlines v. Open Sky Ltd.). Under Polish law, it was determined that LOT had not committed any breach. If Israeli law had been applied, the outcome could have been entirely different.
Even Between Parties from the Same Country
The choice of governing law is relevant even when both parties are nationals of the same country but their business activity takes place abroad: for example, two Israeli partners purchasing and developing real estate in Poland. Without a governing law clause, an Israeli court would apply Israeli law. But if the assets are located in Poland, the judgment may prove unenforceable in the jurisdiction where the assets are situated, rendering it effectively worthless.
Conclusion
Selecting the governing law in an international contract is not a technical clause to be copied from a template. It is a strategic decision that may determine the outcome of a future dispute. As demonstrated in the LOT case, a single clause in a Letter of Intent that designated Polish law was what decided the case, not the underlying facts alone.
* The above does not constitute legal advice and is not a substitute for individual legal consultation. Each case is examined on its own merits.