Users of contract templates with an international element will benefit from this guidance. These can include our Chinese Contracts, US documents, Agents and Distributor Agreements, and any others with cross-border application.
Especially when there are international aspects to a transaction, it is sensible to set out in the contract both the governing law and jurisdiction – i.e. which country’s laws govern the terms of the contract and in which country’s courts will any dispute be finally decided.
When does a contract need to deal with both governing law and jurisdiction?
The principal foreign element aspects that impact materially on a transaction are:
a) when the parties to the contract are not both based in the same country;
b) when each party only has substantial assets in the country where it is resident;
c) when the transaction is governed by the law of another country, e.g. because it may be considered that the contract was formed in that other country;
d) when the whole or part of the transaction is to be performed in a different country from that in which one or both parties are based.
Where any one or more of these foreign elements are present, it will be appropriate for the parties to be precise as to which system of law is to govern the contract, and which country’s courts are to have jurisdiction in the event of a dispute.
Simplistically, parties will tend to choose the system of law with which they are familiar, and such a choice of law will generally be respected by the courts of another jurisdiction – subject to matters of public policy and the mandatory laws of that other jurisdiction.
What do I need to consider when deciding which courts will have jurisdiction?
The question of which courts are to have jurisdiction in the event of a dispute, or where perhaps emergency enforcement of a contractual provision is to be sought, is also an issue. The parties may wish to submit to the exclusive jurisdiction of the courts of one country, but this may not be wise where one party has material assets in another country, or it may be necessary to obtain immediate enforcement of contractual obligations in that other country. Also, it is appropriate to consider whether there are reciprocal enforcement rights between separate jurisdictions.
For example, if an English company signs a contract for the supply of goods to a company in China, if the contract is written in English the English company may want to have the contract governed by English law and to have any dispute decided by the English courts. If the Chinese company has no assets in England and fails to comply with an English judgment against it for damages, the English company would then have to try to enforce the English judgement in the Chinese courts – an expensive and time consuming business.
Also, there is a risk that one of the parties will ignore the terms in the contract and start proceedings in another jurisdiction. For example, in the case outlined above, if the Chinese company is unhappy with the quality of goods, it might start an action in the Chinese courts and the judge might decide to allow the case to go ahead even if the contract stipulates that the English courts have jurisdiction. This risk is greater if the contract says that the English courts have non-exclusive jurisdiction as this wording would not stop a party from bringing proceedings in another (relevant) country. But even if a contract stipulates an exclusive jurisdiction, the courts in another country where proceedings are begun might choose to ignore that provision.
Partly to avoid some of these problems, arbitration is quite often chosen as the method of resolving disputes in international contracts, rather than leaving it to the courts. See our notes on arbitration – Z138.
What about the choice of governing law?
Governing law is another difficult area. While a contract might stipulate that the laws of country A apply, if the contract is for work in country B, then the laws of country B are also going to have to be taken into account.
Within the EU, in the absence of a specific choice in the contract, the applicable law is the law of the place where the party which has to perform the main obligations of the contract is normally resident.
If the contract is written in English by a lawyer who is trained in the common law system, then it makes sense for the governing law to be English law (or that of another relevant common law country). In major infrastructure and financial projects, it is quite common to have the contract governed by English law or the laws of New York, even if neither party to the contract is based in England or New York. But where the law of the country in which the project is based is of particular relevance – e.g. a property transaction – then it makes sense for the laws of that country to apply.
What does a typical governing law & jurisdiction clause look like?
A governing law and jurisdiction clause is usually in two part, for example:
This Agreement shall be governed by the laws of [ ].
The parties agree to submit any dispute or difference between them arising out of this Agreement to the exclusive jurisdiction of the courts of [ ]
Note: Be sure to specify your chosen system of law or jurisdiction correctly.
For example, when selecting English law state “the laws of England” or “the laws of England and Wales” not the laws of Great Britain or the laws of the United Kingdom. (And be aware that Scots law differs from English law in some respects)
And, when selecting governing law in a federal state such as the United States, you are normally recommended to specify the state whose laws govern the contract. For example, “the laws of the State of New York” not the laws of America or the laws of the USA.
Our conclusions/ recommendations are:
• The subject of governing law and jurisdiction is a complex one and legal advice should always be obtained;
• Consider having an arbitration clause if you are entering into a contract with a party in another country.
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