The creation of a commercial contract signifies the creation of a legal relationship. Whilst it is tempting to avoid the issue of future disputes when only just initiating this relationship, it is important to address under which laws it will be governed. Doing so could save time and money on a preliminary battle over the governing laws and jurisdiction if a dispute arises. This need becomes even more crucial in the case of international contracts where several legal systems may be relevant to the contract, for example if the parties are based in different jurisdictions or if the place of performance is elsewhere.
The parties themselves can provide clarity in the contract through the inclusion of a governing law clause and a jurisdiction clause and, therefore, have confidence in their legal position.
Governing Law Clause
A Governing Law Clause states the system of law that will apply to the interpretation of a contract and any disputes arising out of it. Consequently, if a dispute concerning the contract arises, it will be resolved according to the rules of law of the chosen jurisdiction.
Example 1: “This Agreement shall be governed by the laws of Italy”.
Example 2: “This agreement and any dispute or claim arising out of, or in connection with, it or its subject matter or formation, shall be governed by and construed in accordance with Italian law.”
• Don’t refer to a country if it has more than one legal system. For example, one should refer to the law of New York, not of the USA.
• Choose, wherever possible, one sole governing law choice for the entire contract. For example, avoid stating that issue X is to be governed by the law of place 1, whilst issue Y is to be governed by the law of place 2.
• The chosen legal system need not have a connection with the contracting parties or subject matter. Be warned: this is, however, subject to certain restrictions in Europe by the Rome I Regulation.
• Parties can choose whether to limit the governing law clause to the agreement itself, as per example 1 above, or extend it to non-contractual claims between the parties, as per example 2 above. Be warned, clauses such as example 2 will not guarantee the choice of governing law for non-contractual obligations but will increase the prospects.
• Whichever law system is chosen, it is important to seek tailored legal advice to ensure that the selected law is effective and reliable and to identify any peculiarities.
A Jurisdiction Clause gives the courts of a specific country the right to hear any dispute concerning the contract. Consequently, if a dispute arises, it will be resolved in the appropriate forum as chosen by the parties.
Example 1: “The courts of Italy will have exclusive jurisdiction to adjudicate any dispute arising under or in connection with this Agreement”.
Example 2: “The courts of Italy will have non-exclusive jurisdiction to adjudicate any dispute arising under or in connection with this Agreement.”
• Governing law and jurisdiction clauses are different concepts. Consequently they should not be dealt with in the same wording. Instead, the two concepts should be addressed separately, expressly and plainly.
• Parties can choose whether only the specified courts will have jurisdiction to hear disputes, as per the ‘exclusive clause’ of example 1 above, or whether litigation can take place in other courts as well, as per the ‘non-exclusive clause’ of example 2 above.
• Choose, wherever possible, one jurisdiction for the entire contract. For example, avoid stating that issue X is to be heard in the jurisdiction of place 1, whilst issue Y is to be heard in the jurisdiction of place 2.
• Avoid uncertain or unambiguous wording which could lead to further litigation. For example, it is preferable to state that courts shall have jurisdiction, not that they may have jurisdiction.
• Avoid lengthy and costly disputes by choosing an efficient and well-organised judicial system.
• Seek advice as to the remedies, both interim and final, offered by a particular jurisdiction.
• Consider seriously enforceability when choosing a jurisdiction to ensure that the results of a judgement can be imposed. Factors affecting enforceability include location of the defendant’s assets as well as enforcement treaties between countries.
• Provide clearly for the range of disputes to be included in the jurisdiction clause. For example, if you want all disputes to be determined by the selected courts, an all-inclusive, wide clause should be drafted.
• Be warned: jurisdiction clauses are not always given effect. Proceedings are often brought in a different place to that provided for in the contract which, depending on the jurisdiction, could lead to the chosen courts having to stay its proceedings, to parallel proceedings or to the seeking of an anti-suit injunction.
• Whichever jurisdiction is chosen, it is important to seek tailored legal advice to ensure that the selected jurisdiction is effective and reliable and to identify any peculiarities.