Introduction
In previous e-bulletins we have looked at a number of clauses that are
commonly found in commercial contracts but are often poorly drafted and
misunderstood. This month we discuss two more: "Governing Law" and
"Jurisdiction".
While relatively straightforward in fact, these important concepts can
appear at first sight to be complicated and technical. This e-bulletin
therefore explains the concepts and the differences between them, and
recommends how to address them in contracts. We will also highlight several
traps that can arise.
The Clauses: Purpose and Principles
Governing Law clauses
A commercial contract is a legal relationship. This raises the immediate
question: a relationship under which laws? Different countries have different
laws and the content and effect of those laws can vary greatly.
It is therefore sensible to state in a contract which set of laws will
govern it. Otherwise, if the contract terms become relevant later in a dispute
between the parties, there will be a risk of a wasteful preliminary battle
about which set of laws should be used to interpret the parties' obligations.
This is a particularly important issue in an international context, where a
contract may be connected with several places. For example, the parties may be
in different countries and the place for performance may be a third country. In
such cases there are several legal systems with potential relevance to the
contract, making it all the more necessary to decide expressly what system of
law will govern.
A governing law clause does this by setting out expressly the parties'
choice of the law that will apply.
Jurisdiction clauses
It is inevitable that contracts will produce disputes from time to time.
How will those disputes be handled?
Sometimes parties choose to resolve disputes by arbitration, in which case
they include an arbitration clause in their contract (see our e-briefing of September 2007 for drafting tips). On
other occasions, however, parties are happy to rely on the courts to handle any
disputes. In which case the question arises: which courts? As with governing
law, there is otherwise a risk of costly, time-consuming and wasteful
preliminary battles about whether disputes should be handled in the courts of
country A or country B, and also a risk of multiple claims proceeding in
parallel in several different jurisdictions simultaneously.
A jurisdiction clause therefore states that the parties have agreed to the
courts of a named country taking jurisdiction over (in other words, having the
right to hear) any disputes that may arise.
Usually a jurisdiction clause will provide for either "exclusive"
or "non-exclusive" jurisdiction. The interpretation of these terms
may vary across legal systems, but in broad terms "exclusive
jurisdiction" means that only the specified courts will
have jurisdiction to hear disputes; and "non-exclusive jurisdiction"
means those courts can hear disputes but the parties are not prevented from
litigating in other courts as well or instead if they think it is appropriate
to do so.
Drafting tips
Do not attempt to deal with governing law and jurisdiction in the same
wording. The two concepts are different and the contract should address them
separately, expressly and clearly (though they can conveniently be placed
together as separate sub-paragraphs of a 'Governing Law and Dispute Resolution'
clause).
Governing law
Here is a typical governing law clause: "This Agreement is
governed by and shall be construed in accordance with the laws of
[Thailand/England/ Singapore/etc]."
While this wording is straightforward, there are several important factors
to note:
- The choice of governing law is not a "my law or your law"
battle of strength. It may be the case that "my law" is not in
fact the best choice, which is why some international contracts are
governed by laws that have nothing to do with either party (eg,
international parties all over the world regularly choose English or New
York law to govern their contracts). Nor is it wise to choose a neutral
third-country law as a kind of compromise, unless one is sure that the
chosen law is reliable. The key point to understand is that the choice of
legal system can have fundamental, sometimes unintended consequences, even
affecting the basic validity of the contract. Therefore it is vital to get
informed advice and to ensure that the chosen law is reliable and
effective
- A common mistake is to refer to a country which has more than one
legal system, eg, "USA" or "China". Sometimes the
ambiguity can be resolved by considering the wider context, but it is
better to be clear by referring to, say, "New York" or
"Hong Kong".
- Simple is best. You should avoid phrases such as "publicly
available laws of [ ]" or the like. Similarly, you should avoid
splitting the governing law (eg, "issue X shall be governed by the
law of [place A] and issue Y shall be governed by the law of [place
B]"). Such wording is a recipe for parallel litigation and
the associated costs and delays.
- For similar reasons, one should generally avoid over-clever formulae
"excluding the conflicts of laws rules of that country",
or similar. Occasionally it can be appropriate to include such a formula,
but this is a highly technical issue on which professional advice should
be obtained.
Jurisdiction
Here is an example of a jurisdiction clause:
"The parties submit all their disputes arising
out of or in connection with this Agreement to the exclusive jurisdiction of
the Courts of [ ]".
Again, there are a number of factors to consider in drafting a clause of
this type:
- A jurisdiction clause represents the parties' decision to resolve
their disputes in court. It is therefore an alternative to arbitration. If
in doubt, you should choose a jurisdiction clause or an
arbitration clause, not both. Sometimes it can be appropriate to provide
for arbitration and to include a clause conferring
jurisdiction on certain courts to support the arbitration and to enforce
awards, but again this is an issue on which professional advice should be
obtained.
- If you want to provide for particular courts only the
clause should clearly state that the jurisdiction is
"exclusive". Conversely, if you want to include a non-exclusive
jurisdiction clause (eg, because you want to preserve your ability to sue
the counterparty in a number of possible venues), you should spell out exactly
what your intention is. That is because courts in different places have
taken different approaches as to what is meant by the shorthand phrase
"non-exclusive jurisdiction".
- As with governing law clauses, simple is usually best. Trying to
assign different types of disputes to different jurisdictions frequently
gives rise to problems, although there can be workable solutions in some
particular cases. You should also avoid words that create uncertainty and
ambiguity (eg, it is better to say that courts "shall" have
jurisdiction, not that they "may" have).
- Consider carefully whether the clause will be effective in legal and
commercial terms. Will a court take jurisdiction just because the parties
have chosen it in their contract? Will a judgment from that court be
enforceable in the place where the defendant's assets are located?
Depending upon the answers to these questions, incorporation of an
arbitration clause may be a better option on some occasions.
We have looked at the purpose of governing law and jurisdiction clauses to
explain why they are important and should be included in commercial contracts.
We have also outlined a number of common drafting mistakes. However, it is
important to bear in mind that there is no single definitive form to use; particular
contracts or circumstances may require specific solutions and wording (eg, some
places may impose restrictions on the parties' ability to specify the
jurisdiction of their choice).
Ideally, professional advice should be obtained on the form and content of
governing law and of jurisdiction clauses for any particular contract. However,
where this is not practicable, the principles outlined above may assist in
avoiding some of the problems that can arise.
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