How to Pick the Right Governing Law and Jurisdiction Clause for Your Contract?

If you are buying goods and services from another country, what should be the governing law of the contract? Should you opt for arbitration instead? What about exclusive and non-exclusive jurisdiction?

 

As more and more business transactions are taking place across borders, the above are common questions involving cross-border agreements that the parties would need to consider. This may have a significant impact on the interpretation and effect of the terms of the contract given by the courts as it may vary between countries and jurisdictions. Conflicts of law are a complicated area of law and below is a guide to explain the concept in simple terms. In addition, DocPro has a proprietary jurisdiction to select the right governing law and jurisdiction clause for contracts.  

 

A. Importance of Selecting the Governing Law and Jurisdiction Clause for a Contract

 

The courts will first need to decide on the right governing law and jurisdiction clause if parties do not specify them. This will often lead to costly legal battles as each party may try and seek a judgement in a jurisdiction that is most favourable to them, often leading to conflicts of law. To minimise the impact of such tricky jurisdictional issues, it is important to include a governing law clause and a jurisdictional clause to express the parties' choice of the country’s laws and the legal system should govern any contractual disputes.

 

A jurisdiction clause represents the parties' decision to resolve their disputes in court. An alternative to going to courts for contractual disputes is to go to arbitration through an arbitration clause.  If in doubt, one should choose a jurisdiction clause or an arbitration clause, not both. 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. Please refer to our documents on Arbitration and Alternate Dispute Resolution for more information. 

 

 

B. Governing Law

 

1. What is a Governing Law Clause?

 

A governing law clause determines the law which will apply to an agreement and legal disputes arising under it. It provides which set of legal principles will be applied in determining the rights and obligations of the contracting parties (e.g. whether a valid contract is formed, whether a debt is owed, how the material is breached, whether it is right to damages for breach of contract etc.). Therefore there should be a choice of law clause in any international contracts (e.g. commercial contracts). 

 

2. How to pick the right Governing Law for a Contract?

The choice of governing law comes down to the following questions:

 

• Which law is best for the interpretation of the contract?

  
  Pick a more established Common Law jurisdiction with a large number of commercial law precedents (e.g. England).
  
  
• Where are the parties are based?
  
  Pick a jurisdiction where the party with a higher likelihood of enforcement (i.e. being sued) is based. Alternatively, one may pick a neutral and established common law jurisdiction if neither parties are from a Common Law jurisdiction (e.g. Hong Kong).
  
  
• Where will the contract be performed?
  
  The most relevant legal system tends to be the one where the contract will be performed.
  
  
• Which jurisdiction is better for the contract?
  
  Although choosing a jurisdiction and a governing law are different things, nonetheless one would usually pick the same law and jurisdiction because the enforceability of the contract depends on the legal system that will enforce it.
  
  
• Are there any laws that should be avoided?
  
  Avoid courts and laws where judges are known to be corrupted, biased or take a more protectionist stance in favour of local parties.

 

3. Effectiveness of the Choice of Governing Law

In general, courts will respect the parties' selection when to do so is not contrary to public policy and the choice was bona fide. However, such a clause may not always be effective. Particular courts may in some circumstances apply their own procedural and related rules to the determination of disputes, irrespective of the parties' choice of law.

 

In the absence of an express choice of law clause, there will be considerable uncertainty in determining the validity and effect of any agreement, and the court will have regard for any choice of law that can be inferred from the terms and nature of the contract and the general circumstances. Where there is no express or implied choice of law, the contract will be governed by the law with which the transaction had its closest and most real connection.

 

Under Common Law, the applicable law will govern formation, interpretation and discharge. A contract is formally valid if made either in accordance with the law of the place where it was made or under the governing law. 

 

The governing law clause selected in a contract has no effect in relation to a non-contractual claim (i.e. in tort) between the parties relating to the same subject matter, e.g. a claim for misrepresentation may not be governed by the chosen law if the misrepresentation is made in another jurisdiction. 

 

Example - Governing law Clause

This [Agreement] and the relationship between the parties shall be governed by and interpreted in accordance with [Jurisdiction] law.

 

An optional clause to include (which may not necessarily work for “tort”) is:

 

[The parties further agree that no claim may be brought against any party in contract, tort or otherwise save in so far as such claim could be brought in [Jurisdiction] law without reference to the law of any other country.]

 

 

C. Jurisdiction Clause

 

1. What is a Jurisdiction Clause?

 

The purpose of a jurisdiction clause is to elect the Court which will hear a dispute arising under an agreement between the parties. It determines which Court will adjudicate the dispute and apply the chosen law in a selected jurisdiction.

 

Whether or not such a clause will be effective depends on several complex issues, and such questions of jurisdiction can only be determined at the time a dispute arises and proceedings are issued.

 

An express choice of jurisdiction should therefore always be made when a contract has or may have a foreign element: that is, either (i) one of the parties is not domiciled, physically present or doing business in the jurisdiction, or may at some stage cease to be or do so, or (ii) the subject matter of the contract has a `foreign element' (for instance, the contract is to be performed abroad).

 

Real advantages can be gained by including a jurisdiction clause in these circumstances. Conversely, a party may suffer real disadvantages if a jurisdiction clause is omitted. For example, the risk to the party of being sued in an unexpected or hostile jurisdiction may increase or, alternatively, the party may become involved in an expensive and time-consuming jurisdictional dispute.  

 

2. How do you pick the right Jurisdiction Clause for a contract?

 

The three key questions to ask when selecting a jurisdiction are:

• Which jurisdiction does the party want to be when suing another party?

• Which jurisdiction does the party want to be when being sued by another party?

• Which party is more likely to sue or be sued?

 

One may want to preserve a party's flexibility as far as possible concerning the first question (in particular for the party more likely to sue). If one wants to provide for particular courts only the clause should clearly state that the jurisdiction is "exclusive". 

 

3. Exclusive Jurisdiction vs. Non-Exclusive Jurisdiction

 

What is an Exclusive Jurisdiction Clause?

In a civil proceeding, the parties agreeing to the exclusive jurisdiction of a court means that only the said court has the power to adjudicate the case. Other courts are generally precluded from exercising their jurisdiction on the case unless there is a strong case against doing so. Please refer to the section on "forum non-conveniens" below.

 

What is a Non-exclusive Jurisdiction Clause?

A non-exclusive clause submitting to the chosen jurisdiction ensures that the party can start proceedings in that jurisdiction but does not restrict it to bringing proceedings there. However, a clause that simply consists of a non-exclusive submission by one or more parties does have the following disadvantages: 

• it may lead to the party being sued in an unfavourable jurisdiction; and
  
  

• a court is far more likely to grant an injunction restraining foreign proceedings if its jurisdiction is exclusive rather than non-exclusive because the foreign proceedings will constitute a breach of contract.

 

4. The Validity of the Jurisdiction Clause

 

The jurisdiction clause should be properly drafted to ensure its validity.  A jurisdiction clause does not, however, absolutely guarantee that proceedings falling within the scope of the jurisdiction clause are not commenced and/or allowed to continue outside of the chosen jurisdiction.

 

In addition, the jurisdiction clause may be ineffective in certain circumstances. Other factors to consider in choosing a suitable jurisdiction include:

 

1. the identity and domicile of the parties to the agreement; and
   
   
2. the subject matter of the agreement.
   
   
3. where the agreement is to be concluded and where the contractual obligations fall to be performed;
   
   
4. the type of remedies which might be required and where any such remedy might need to be enforced;
   
   
5. how the party will be able to obtain an effective judgment or resist a judgment obtained against it:
• identifying where the potential defendant's assets are located (which will generally determine where any judgment will need to be enforced);
• avoiding any restrictions on enforcement (for example, sovereign immunity); and
• ensuring that the assets can be preserved pending judgment; 
  
  
6. the quality of the legal system in a chosen jurisdiction and its laws of procedure (such as rules on disclosure, evidential rules (including questions of legal professional privilege), the measure and types of damages available, limitation periods etc.) which are likely to be applied rather than the laws purporting to govern the substantive issues of an agreement. The time in which courts deal with disputes may also be relevant. Advance knowledge of these procedural laws may avoid some unpleasant surprises. Such matters will also have a bearing on costs (see (g) below);
   
   
7. the convenience, costs and cost savings inherent in suing or being sued in a chosen jurisdiction, e.g. collecting evidence, transporting witnesses and expanding management time etc.; and
   
   
8. the choice of governing law of the agreement and whether it will be recognised in the chosen jurisdiction.

The courts will apply common law principles of private international law to decide whether they have jurisdiction, the governing law of a contract, and/or the validity and effect of a choice of law clause. Where a jurisdiction has been conferred on a foreign court, it is important to check to what extent that court will give effect to an express choice of law. One may seek appropriate local law advice on this point.  

 

5. Multi-states Jurisdiction

 

Where the foreign state has a federal system (for example, Australia and Canada) one must ensure that a valid choice is made. It may be necessary for these circumstances to refer to the state, rather than to federal courts. It may also be appropriate to specify the location of the appropriate court for the sake of convenience and judicial expertise.

 

Example – Jurisdiction Clause

All the parties agree that the courts of Jurisdiction are to have exclusive jurisdiction to settle any dispute (including claims for set-off and counterclaims) which may arise in connection with the creation, validity, effect, interpretation or performance of, or the legal relationships established by, this Agreement or otherwise arising in connection with this [Agreement] and for such purposes irrevocably submit to the jurisdiction of the [Jurisdiction] courts.

 

Example - Exclusive Jurisdiction Clause

The parties agree that the Courts of [Jurisdiction] are to have exclusive jurisdiction to settle any dispute (including claims for set-off and counterclaim) which may arise in connection with the creation, validity, effect, interpretation or performance of, or the legal relationships established by this [Agreement] or otherwise arising in connection with this Agreement and for such purposes irrevocably submit to the jurisdiction of the [Jurisdiction] Courts.

 

Example - Mutual Non-Exclusive Clause

1. For the benefit of the other Party hereto, each Party to this agreement irrevocably agrees subject to clause 2 below that the courts of [Jurisdiction] are to have jurisdiction to settle any dispute (including claims for set-off and counterclaims) which may arise in connection with the validity, effect, interpretation or performance of, or the legal relationships established by, this [Agreement] or otherwise in connection with this [Agreement] and for such purposes irrevocably submits to the jurisdiction of such courts.
   
   
2. Each party may in its absolute discretion take proceedings in the Courts of any other country which may have jurisdiction including the Courts of [Jurisdiction] to whose jurisdiction the parties irrevocably submit.
   
   
3. The parties irrevocably waive any objections to the jurisdiction of any court referred to in this clause.
   
   
4. The parties agree that a judgment or order of any court referred to in this clause in connection with this [Agreement] is conclusive and binding on it and may be entered against it in the courts of any other jurisdiction.

 

D. Relationship between Governing Law and Jurisdiction Clause

 

The choice of governing law needs not to be the same as the choice of forum, and the parties can choose different jurisdictions depending on the type of dispute. However, for obvious reasons, it is usually sensible to make them the same. Trying to assign different types of disputes to a different choice of law and jurisdictions frequently gives rise to problems. Such a selection should be avoided and has been held to be bad under common law.

 

E. Forum non-conveniens

 

A foreign court will apply its own procedural rules to decide whether or not to accept jurisdiction. Even when a court has the prima facie ability to exercise jurisdiction over a dispute, it may choose to stay proceedings or may have to decline to exercise jurisdiction upon application by a defendant if either:

 

1. there is a more convenient forum elsewhere (forum non-conveniens) or
   
   
2. the mandatory rules of International Conventions provide that another court has jurisdiction.

 

Even if a defendant has been properly served (in or out of the jurisdiction), the defendant may be able to stay proceedings. If served within the jurisdiction, the defendant must show that there is another available forum that is clearly more appropriate than the selected court. If the defendant is served outside the jurisdiction and challenges permission given to do so, then the claimant has to show that the selected court is the appropriate jurisdiction.

 

If a jurisdiction clause is included conferring exclusive jurisdiction on the courts of a particular jurisdiction, the prospect of avoiding a stay of proceedings is greatly increased. Courts have also become increasingly prepared to issue an anti-suit injunction to restrain a party from pursuing foreign proceedings brought in contravention of an exclusive jurisdiction clause. Conversely, if the parties have agreed that a foreign court will have exclusive jurisdiction it will be more likely that a stay of proceedings in another jurisdiction can be obtained unless a strong cause is shown for not doing so.  

 

F. Service of Process

 

1. Do you need to appoint an Agent for Service of Process?

 

The jurisdiction of the Courts is founded on the service of proceedings. Generally, the Court takes jurisdiction based on:

1. Where the defendant is physically present (however temporary) in a jurisdiction or its agent for service of process is within the jurisdiction, it can be served within the jurisdiction. In the case of a company, physical presence in a jurisdiction is resulted from them carrying on business in the jurisdiction;
   
   
2. Where a party to a dispute is not physically present in the jurisdiction, service of process outside the jurisdiction can only be done with the permission of the court under special circumstances;

Service of process is important both for legal reasons (as it founds jurisdiction at common law) and practical reasons (trying to serve a Claim Form abroad can take weeks and be costly). As such, having chosen the jurisdiction and governing law, it would be sensible to ensure that a foreign party who submits to the jurisdiction of the courts also appoints a service agent in the selected jurisdiction. This avoids the need for permission to serve out if required at common law and also makes service of process much easier to effect in practice.

 

2. Foreign Party without a Service Agent

 

For a foreign party without a service agent, permission to serve outside the jurisdiction needs to be obtained from the court. The grounds on which permission to serve outside may be granted are limited. In general: 

1. was made within the jurisdiction; or 
2. was made by or through an agent trading or residing within the jurisdiction; or
3. is governed by the law of that jurisdiction; or
4. contains a term to the effect that the court shall have exclusive jurisdiction to determine any claim in respect of the contract.

Where parties to a contract have expressly chosen the Courts to have jurisdiction over its disputes, this should provide a ground for service out of the jurisdiction in respect of a claim based on the contract in question. 

 

Example - Service of Process Clause

The parties irrevocably consent to service of process or any other documents in connection with proceedings in any court by [facsimile transmission], personal service, delivery at any address specified in this Agreement or any other usual address, mail or any other manner permitted by [Jurisdiction], the law of the place of service or the law of the jurisdiction where proceedings are instituted.

 

Example - Agent for Service of Process

[Party B] shall at all times maintain an agent for service of [process] and any other documents in proceedings in [Jurisdiction] or any other proceedings in connection with this Agreement.] Such agent shall be [           ] currently of [               ] and any Claim Form, judgment or other notice of legal process shall be sufficiently served on [Party B] if delivered to such agent at its address for the time being. [Party B] [irrevocably] undertakes not to revoke the authority of the above agent and if, for any reason, [Party A] requests [Party B] to do so he shall promptly appoint another such agent with an address in [Jurisdiction] and advise [Party A]. If, following such a request, [Party B] fails to appoint another agent, [Party A] shall be entitled to appoint one on behalf of [Party B] at the expense of [Party B]. 

 

 

G. How to Enforce a Foreign Judgement?

 

One of the issues to be considered when selecting a jurisdiction is where any judgment may need to be enforced. Enforcement of foreign judgments under common law can be complicated.

 

Jurisdiction of Foreign Courts

 

It will be of no use for a choice of jurisdiction and governing law to a party if in practice if one cannot enforce the judgment of his chosen court.  In common law, a foreign judgment cannot be enforced in the same way as a local judgment except by the institution of fresh proceedings. There may be Foreign Judgments Reciprocal Enforcement legislation relevant to the enforcement of Commonwealth judgments. 

 

If a local judgment will need to be enforced in a foreign jurisdiction, consideration should be given as to whether such a statutory mechanism is available. If so, it may be necessary to register the judgment to facilitate enforcement of judgments in such jurisdiction. One should also consider arbitration should the jurisdiction of both parties be from jurisdictions where the New York Convention applies. 

 

In any event, if it is likely that litigation will take place in a foreign jurisdiction but that the party will wish to enforce that judgment locally, it will be advisable to include in the jurisdiction clause wordings by which each party submits to the jurisdiction of the foreign court. This will assist in the enforcement of that Court's judgment under Common Law. 

 

H. Do you need a Sovereign Immunity clause?

 

States and their emanations are usually immune from suit in national courts. However, in some circumstances, a state may be deemed to have waived this immunity, or it may do so expressly. A waiver of the sovereign immunity clause should be included when contracting with a State or state entity.

 

One should take extra precautions when contracting with a sovereign state or an entity closely associated with a state (such as a governmental department, a state-owned enterprise or a central bank). One will need to consider whether sovereign immunity is likely to arise. The basic principle is that, subject to certain express exceptions, a foreign state is immune from the jurisdiction of the courts. Sovereign immunity needs to be considered both in deciding (i) whether a state can be sued and (ii) when provisional attachment and subsequently enforcement can be taken against its assets.

 

An exception permits enforcement proceedings (but not injunctive relief) in respect of property belonging to the state which is used for commercial purposes. This exception does not, though, permit either enforcement proceedings to be taken against the property of the central bank or monetary authority or injunctive relief to be granted against a state's assets in general.

 

A state may agree in writing to waive its immunity from the execution or injunctive relief, a submission to the jurisdiction alone is not effective. A court will enforce such a judgment if, applying principles of sovereign immunity, the foreign court would have had jurisdiction. Consequently, an agreement to submit to the proceedings of the foreign jurisdiction would enable a judgment in that state to be enforced in the jurisdiction.   

 

Example - Waiver of Immunity Clause

 

[Party B] irrevocably:

1. consents generally that any state immunity law to relief being given against it in [Jurisdiction] or any other jurisdiction by way of injunction or order for specific performance or the recovery of any property whatsoever or other provisional or protective measures and to its property being subject to any process for the enforcement of a judgment or any process effected in the course or as a result of any action in rem;
   
   
2. waives and agrees not to claim any immunity from suits and proceedings (including actions in rem) in [Jurisdiction] or any other jurisdiction and from all forms of execution, enforcement or attachment to which it or its property is now or may hereafter become entitled under the laws of any jurisdiction and declares that such waiver shall be effective to the fullest extent permitted by such laws.

 

I. Do you find the above too Complicated?

 

This guide is to facilitate the understanding of governing law, jurisdiction and related clauses. It considers briefly the questions which arise in deciding which country/territory's court or courts will have jurisdiction to hear disputes arising under an agreement and which laws. It is not intended to provide a detailed analysis of the law but give general guidance on the most important matters to be taken into account.

 

Conflict of laws is an especially complex area of law that may require seeking legal advice in multiple jurisdictions.

 

DocPro has developed a Proprietary Governing Law and Jurisdiction engine that will automatically assist in selecting the governing law, jurisdiction or arbitration clause in a given contract.

 

Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your lawyer.