Key Contract Terms That Change When Moving from UK to US Law

The Foundation: “Consideration” and Contract Formation

When UK companies begin to operate in the United States, they often assume that the shared language and legal heritage will translate to similar contractual principles. However, this assumption can be a costly mistake. While both legal systems are rooted in common law, their paths have diverged significantly over the centuries, leading to critical differences in contract law. One of the most fundamental distinctions lies in the doctrine of “consideration.” In both the US and the UK, consideration is the bargained-for exchange of something of value, which is essential for a contract to be enforceable. Yet, the application of this principle can differ. For instance, under the laws of many US states, a written contract can be modified without new consideration, provided the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made. This is a departure from the more rigid UK rule that generally requires new consideration for a contract modification to be binding. Furthermore, the concept of promissory estoppel, where a promise can be enforced even without formal consideration if one party has relied on it to their detriment, is often applied more broadly in US courts. These foundational differences can impact the entire lifecycle of a contract, from its formation to its potential modification. Understanding these nuances is the first step for any UK business aiming to create robust and enforceable agreements in the US. For businesses structuring their American presence, the initial choice of entity has far-reaching consequences, a topic we explore in our guide onShould You Choose a U.S. LLC or C-Corp for Your U.S. Expansion?.

Disclaimers of Warranties and Limitations of Liability

Another area ripe with differences is the treatment of warranties and the limitation of liability. In the US, the Uniform Commercial Code (UCC), which governs the sale of goods, provides for implied warranties of merchantability and fitness for a particular purpose. While UK law has similar concepts, the specific language required to effectively disclaim these implied warranties in the US is highly technical. For example, to disclaim the warranty of merchantability, the language must explicitly mention “merchantability” and, if in writing, must be conspicuous. Failing to use this precise “magic language” can render a disclaimer ineffective, leaving a company exposed to warranty claims it thought it had excluded. Similarly, while both jurisdictions permit parties to limit their liability, US courts often scrutinize these clauses, particularly in consumer contracts or where there is a significant disparity in bargaining power. Clauses that attempt to exclude liability for gross negligence or intentional misconduct are generally unenforceable in the US. The enforceability of caps on liability can also vary from state to state. UK companies accustomed to a more uniform approach under the Unfair Contract Terms Act must adapt to a state-by-state analysis in the US. These provisions are at the heart of risk allocation in any commercial agreement, and getting them wrong can have severe financial consequences. The importance of precise drafting in this area cannot be overstated, as detailed in our article onUS Commercial Contracts for UK Companies.

Governing Law, Jurisdiction, and Dispute Resolution

The clauses that dictate how and where disputes will be resolved are critically important in any cross-border agreement. A “governing law” clause specifies which jurisdiction’s laws will be used to interpret the contract. While it may seem tempting for a UK company to choose English law, a US counterparty will almost always insist on the law of a US state, such as New York or Delaware, which are common choices for commercial contracts. The choice of governing law has a significant impact on how the contract is interpreted and enforced. Closely related is the “jurisdiction” or “forum selection” clause, which determines where a lawsuit can be filed. Agreeing to jurisdiction in a US state means the UK company consents to being sued in that state’s courts, subjecting itself to US procedural rules, which can be quite different from those in the UK. For example, the scope of pre-trial “discovery” in the US is far broader and can be significantly more expensive and time-consuming than the UK’s disclosure process. Many commercial contracts now include arbitration clauses as an alternative to court litigation. Arbitration can offer a more neutral, private, and sometimes faster means of resolving disputes. However, the decision to include an arbitration clause, and the specific rules and location chosen for the arbitration, are strategic choices that require careful consideration of the potential types of disputes that might arise.

Understanding “At-Will” Employment and Restrictive Covenants

For UK companies hiring employees in the US, the differences in employment law are particularly stark and have a direct impact on employment contracts. The prevailing doctrine in nearly all US states is “employment at will,” which means that either the employer or the employee can terminate the employment relationship at any time, for any reason or no reason at all, provided the reason is not illegal (such as discrimination). This is a world away from the UK’s statutory framework of unfair dismissal protection and notice periods. Employment agreements in the US must be drafted with this principle in mind. Attempting to impose UK-style notice periods or “for cause” termination requirements can inadvertently alter the at-will relationship and create unintended contractual obligations. Another complex area is the use of restrictive covenants, such as non-compete and non-solicitation clauses. In the UK, the enforceability of these clauses is subject to a reasonableness test. In the US, the rules vary dramatically from state to state. Some states, like California, have banned virtually all employee non-compete agreements. Other states will enforce them if they are reasonable in scope, duration, and geographic reach. Because there is no federal standard, a non-compete agreement that is enforceable in one state may be void in another. This requires a state-specific approach to drafting employment agreements and restrictive covenants, which is a critical compliance step for any UK company building a team in the US.