Any contract of substance, and certainly one with an international element, should contain both a governing law and a jurisdiction clause. Consider the following tips on what to think about when drafting these clauses.
What does the governing law clause do? It determines what substantive law will govern the rights and obligations of the parties.
Why does it matter? If no governing law clause is included and a dispute arises, there can be great uncertainty as to the relevant law to use to resolve it. And by uncertainty, read cost. For contractual claims heard in the EU, the Rome regulation on the law applicable to contractual obligations (Rome 1) has a set of rules to deem a governing law in the absence of an express choice. The result could be that a very unfamiliar law governs your contract and those rules may not favour you.
What are the consequences? If you do choose a governing law, make sure you know the consequences of that choice (if it is not English law). Some legal systems have very different rules on say, the recoverability of damages and the circumstances in which you can terminate a contract.
Is there always a choice? In some situations, even if you do choose a governing law, Rome I may mean that certain "mandatory rules" of a country to which the contract is related, (and which is different from the express choice of law) will override that express choice of law. These rules are often related to so-called "social-legal" matters so, for example, consumer protection laws of another country may come into play despite the chosen governing law clause.
Multiple choice? It is possible, but rarely sensible, to have more than one choice of law applicable within a single contract or a choice which changes depending on who is the defendant (this is sometimes the compromise if the parties cannot agree the governing law). It will almost always lead to confusion.
Same as jurisdiction? It is usual (and preferable) for the governing law to coincide with the jurisdiction clause. This avoids a court having to apply a foreign law. But that scenario is by no means unheard of and can be the solution where parties cannot agree on which single choice of law and jurisdiction should apply.
Drafting tip: draft the clause so that it is wide enough to cover not just contractual disputes but also non-contractual ones which may arise in relation to the contract, for example, for misrepresentation claims. Otherwise, non-contractual claims will be governed by the rules of Rome II and these may result in an unexpected and unfavourable governing law.
What does the jurisdiction clause do? It determines where a dispute will be heard. If there is any disagreement over this, that dispute must be resolved first. Do not under-estimate the time and cost such a dispute can absorb. In fact sometimes the result leads to resolution of the entire dispute. Some opponents (and you!) may use the jurisdiction battle as a tactic to gain a commercial advantage at the start. Having no jurisdiction clause in your contract will mean uncertainty as to the appropriate jurisdiction but even if you want to use jurisdiction as a tactic, that uncertainty is unlikely to benefit you. Further, if there is no jurisdiction clause, the jurisdiction you end up in may not favour you. It could be an alien one and expensive to litigate in. Omitting a jurisdiction clause is not really an option.
What should be kept in mind when choosing a jurisdiction clause? There are three factors which may provide competing answers:
- Where will you feel most comfortable suing, or being sued? That is almost certainly your home court, but if you are negotiating on behalf of a foreign subsidiary, it may be that subsidiary's country. Do you know and trust the lawyers there?
- What are the respective procedural systems for the competing jurisdictions? Some jurisdictions have very onerous disclosure obligations (the US) and some have very little in the way of disclosure (France). Costs follow the event in some places (England and Wales) but not in others (the US). Consider also the rules of evidence, whether the system is inquisitorial (many Continental European countries) or adversarial (most common law countries), speed and cost generally, the availability of appeals and the quality of the judges (and lawyers). Is it worth taking local law advice at the start in order to have a better understanding of the choice? The weight of these factors may vary depending on whether you are the claimant or defendant.
- Where are your opponent's assets (assuming you will be claimant)? If you want to make enforcement as easy as possible, aim to litigate in the place of the assets to avoid having to transport a judgment from elsewhere to the location of the assets. The rules on enforcing foreign judgments are complex, so this needs careful consideration.
There are two other important matters to keep in mind:
Should the jurisdiction clause be exclusive (i.e. the parties can only go to that location) or non-exclusive (the parties can litigate elsewhere)? This is a question of certainty (exclusive) against flexibility (non-exclusive). Which is most preferable may depend on whether you are more likely to be defending or bringing a claim.
Is a court jurisdiction clause appropriate at all or should you arbitrate, and should there be built-in provisions for mediation or other alternative dispute resolution options? Contractual mediation clauses are increasingly common and, if properly drafted, are enforceable, so that the parties must mediate prior to the issue of proceedings. For more on mediation, see part 14 of our litigation survival guide. As to arbitration against litigation, arbitration can be cheaper and more flexible. It is generally confidential. The real advantage is that it is generally easier to enforce arbitration awards abroad under the New York Convention than enforcing court judgments. This topic is dealt with in more detail in an alert later in the year.