Choosing a governing law and jurisdiction

Contracting parties will generally agree between them which law will govern the contract and whose courts will have jurisdiction to determine any potential disputes. This is of particular importance where complex contractual arrangements are in place. In this article, we provide an overview of governing law and jurisdiction provisions and highlight some considerations for companies in this context.

Governing law

The purpose of governing law provisions in a commercial contract is to clarify which country’s laws will be applied when identifying the contractual rights and obligations of the parties. This is relevant to questions of interpretation, performance, and the consequences of any potential breaches (such as the assessment of damages and limitation).

Choosing a governing law

In the context of a domestic transaction, i.e. one where the contracting parties are domiciled (legally resident) in the same jurisdiction and the contract is to be performed in that jurisdiction, the choice of governing law may be relatively straightforward. However, where the contract involves cross-border elements, more careful consideration is needed.

Cross-border elements include:

(a)   either party is domiciled in a different country;

(b)  either party holds assets in another country;

(c)   the subject matter of the contract is located in a different country; or

(d)  elements of the contract are to be performed in a different country.

It is vital that the expertise of a lawyer qualified in the relevant jurisdiction is sought, who can advise on and draft the relevant parts of contract on the terms intended by the parties. Companies may need to factor in the additional time and costs associated with involving international lawyers.

Choice of governing law will ultimately be a matter for negotiation between the parties, taking into account their specific circumstances and preferences. Failure to include clear governing law provisions may have significant implications and could lead to the contract being interpreted in a way that the parties did not intend.

Jurisdiction

Jurisdiction refers to whether a court has the power to hear a dispute. By including clear jurisdiction provisions, parties can specify which country’s (or countries’) courts can hear disputes arising from the contract. In the same respect, they allow the parties to avoid the jurisdiction of certain countries’ courts. In any event, it is vital that jurisdiction provisions are drafted in certain and unambiguous terms, as this should minimise the risk that parties will be subjected to lengthy and expensive additional disputes on the subject in future.

Choosing a jurisdiction

Jurisdiction clauses are either ‘exclusive’ or ‘non-exclusive’.

An ‘exclusive’ jurisdiction clause is intended to prevent a party bringing proceedings in the courts of any country other than the one stated in the contract. For example, the parties may agree that the courts of England and Wales have exclusive jurisdiction. This is restrictive but provides certainty.

A ‘non-exclusive’ jurisdiction clause provides a degree of flexibility – it enables the parties to bring proceedings in the courts of the country specified in the contract or in the courts of any other country that will accept jurisdiction. While flexibility may be seen as advantageous for a party who later wishes to issue proceedings in a different jurisdiction, it could be seen as a significant disadvantage to the other party, who may have to defend proceedings in an unfavourable or unfamiliar jurisdiction. It is, therefore, important that the parties ensure the clause achieves the intended outcome.

As with the choice of a governing law, cross-border elements may significantly increase the complexity of the contractual relationship and, where such elements exist, parties should carefully consider their agreed choice of jurisdiction.

Key considerations for companies

1.     Are there cross-border elements?

Cross-border elements include either party being domiciled in or holding assets in another country. These factors increase complexity, and the parties should take particular care when deciding on appropriate governing law or jurisdiction provisions in these circumstances.

2.     Exclusive or non-exclusive jurisdiction?

An exclusive jurisdiction clause provides greater certainty for the parties but is more restrictive. A non-exclusive jurisdiction clause provides a degree of flexibility, but this could be viewed as both advantageous and disadvantageous, depending on the circumstances (for example a party may have to defend proceedings in an unfamiliar jurisdiction).

3.     Legal advice

Legal advice should be obtained at the earliest opportunity (ideally, before drafting of the contract begins), to allow the parties to agree on the best approach before the contract is drafted. Where cross-border elements exist, the advice and assistance of a lawyer qualified in the relevant jurisdiction should be sought.

4.     Costs

Failure to take proper advice in relation governing law and jurisdiction clauses may ultimately be costly and inconvenient. The inclusion of clear and robust provisions should minimise the risk of lengthy and expensive disputes over governing law and jurisdiction later down the line.

If you have any queries in relation to governing law and jurisdiction provisions or would like any advice in relation to commercial contracts more generally, please contact a member of our Commercial Team who would be happy to assist.

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