Cecily Zamora
A contract can be governed by two laws in the case of two jurisdictions. The governing law clause in a contract specifies the laws that will govern the contract, while a jurisdiction clause specifies the courts or arbitration tribunal that will have exclusive or non-exclusive jurisdiction to hear disputes. The jurisdiction and choice of law clauses are essential in any international contract to keep the expense and complexity of litigation down. The parties to a contract can choose the law of the jurisdiction they wish to use to resolve a dispute, but this does not have to be the case. In the absence of a jurisdiction clause, the parties must obtain the permission of the court to proceed.
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What You'll Learn
Jurisdiction clauses
A typical Governing Law and Jurisdiction clause should specify the chosen legal system and the venue for any disputes. For example, a clause might read: "This Agreement shall be governed by, and construed in accordance with, the laws of [Specified Jurisdiction], without regard to its conflict of laws principles. Any disputes arising out of or in connection with this Agreement shall be submitted to the exclusive jurisdiction of the courts of [Specified Venue]."
The phrase "this contract shall be governed by the laws of England" is commonly found in international contracts to ensure that the agreement adheres to English law. This clause clarifies that, regardless of where the parties are located or where the business activities take place, English law will be the governing law for interpreting the contract.
There are three main types of jurisdiction clause: 'exclusive', 'non-exclusive' and 'asymmetric' or 'one-sided'/'unilateral'. An exclusive jurisdiction clause specifies that only the courts of a particular jurisdiction, such as those of England and Wales, should deal with any disputes arising out of a contract. Non-exclusive clauses specify that particular courts, such as those in England, have jurisdiction while acknowledging that some other courts might also have jurisdiction. Asymmetric clauses set out how one party is restricted to suing in a particular jurisdiction, while the other party – which usually has more bargaining power – has greater choice over where they start proceedings.
Jurisdiction and choice of law clauses can be complicated when the contracting parties are domiciled in different jurisdictions. These clauses should be carefully considered and agreed upon to provide certainty and clarity and to avoid potential problems should a dispute arise. For example, when a country is divided into a state or federal system, it is important to be specific, as a clause giving jurisdiction to "the courts of the United Kingdom" could be unenforceable due to its ambiguity.
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International contracts
However, the issue of jurisdiction, choice of law, and service can be complicated when the contracting parties are domiciled in different jurisdictions. The laws of some jurisdictions, such as England and New York, are often used in international commercial contracts because there is a substantial body of sophisticated case law dealing with issues that arise in conflicts over commercial or financing contracts, leading to greater legal certainty for the parties.
In international contracts, the jurisdiction clause is essential because, while it will not reduce the risk of a dispute, it will keep the expense and complexity of litigation down. The three main types of jurisdiction clauses are 'exclusive', 'non-exclusive', and 'asymmetric'. An exclusive jurisdiction clause specifies that only the courts of a particular jurisdiction should deal with any disputes arising out of a contract. Non-exclusive clauses specify that particular courts have jurisdiction while acknowledging that some other courts might also have jurisdiction. Asymmetric clauses set out how one party is restricted to suing in a particular jurisdiction, while the other party has greater choice over where they start proceedings.
In some cases, a contract can be made in two different jurisdictions, as the High Court in the UK has held. This has important ramifications for where proceedings may be issued and affects issues of both certainty and flexibility of where proceedings take place.
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Governing law clause
A governing law clause is a clause used in legal agreements that specifies which rules and laws will apply in the event of a legal dispute. It is important to understand the difference between governing law and jurisdiction. Jurisdiction refers to the court or court system where your case will be heard. For example, a jurisdiction might be "state courts of New York", with "state laws of New York" as the governing rule.
The governing law clause in a contract specifies the laws that will govern the relevant contract, while a jurisdiction clause specifies the courts or arbitration tribunal with exclusive or non-exclusive jurisdiction to hear disputes that may arise out of the contract. These clauses are often overlooked during drafting as they tend to be included in the "boilerplate" language towards the end of the contract. However, it is important that these clauses receive as much attention as the substantive provisions of the contract. Failure to include suitable governing law and jurisdiction clauses may lead to lengthy and potentially expensive disputes over the governing law and dispute resolution procedures.
Recent statistics from the International Chamber of Commerce indicate that over 90% of the parties in ICC arbitration proceedings included a governing law clause in their contract. When choosing a suitable governing law, the following matters should be considered: the law of some jurisdictions, such as England and New York, are often used in international commercial contracts because there is a substantial body of sophisticated case law dealing with issues that arise in conflicts over commercial or financing contracts, which leads to greater legal certainty for the parties. The laws of other jurisdictions may be silent on many of these commercial issues; in some cases, they may not even recognize concepts addressed in the contract.
In the case of international contracts, the issue of jurisdiction, choice of law, and service can be complicated when the contracting parties are domiciled in different jurisdictions. These clauses should be carefully considered and agreed upon to provide certainty and clarity and to avoid potential problems should a dispute arise. For example, a contract that chooses the English courts as having jurisdiction over disputes may specify English law as the governing law. However, this does not have to be the case. The courts of some legal systems are adept at applying foreign law to disputes. Nevertheless, parties should be careful that this will often give rise to the burden of proving what the foreign law is if the parties do not agree.
- "This Agreement shall be governed by and construed in accordance with the laws of the State of New York."
- "This Agreement shall be governed by and construed in accordance with the internal law of the State of Delaware regardless of the law that might otherwise govern under applicable principles of conflicts of law thereof, except that the following matters arising out of or relating to this Agreement shall be interpreted, construed and governed by and in accordance with the Laws of the Cayman Islands, in respect of which the Parties hereto hereby irrevocably submit to the non-exclusive jurisdiction of the courts of the Cayman Islands."
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Choice of law
The governing law clause is essential as it provides certainty to the contracting parties. It allows them to know in advance what law will be applied to determine their rights and obligations under the contract, enabling them to analyse their legal position with confidence. This is particularly important in international commercial contracts, where the laws of different jurisdictions may vary significantly. For instance, some jurisdictions may have a substantial body of sophisticated case law dealing with commercial or financing contract disputes, offering greater legal certainty. In contrast, others may be silent on these issues or may not recognise certain concepts addressed in the contract.
When determining the governing law, parties should consider the legal systems and case law of the relevant jurisdictions. They should also be mindful that some national courts may not recognise or consistently apply the chosen law. Additionally, if the chosen law is that of a non-EU jurisdiction, there is no guarantee that the selected court will recognise an express choice of law clause.
While the choice of law and jurisdiction clauses are crucial, they can sometimes be overlooked during drafting as they are often included in the "`boilerplate`" language towards the end of the contract. However, failure to include these clauses or agree on a suitable governing law and jurisdiction can lead to lengthy and expensive disputes over the governing law and dispute resolution procedures. It may also result in uncertainty of outcomes and difficulty in assessing the risks and merits of any proposed litigation.
In certain situations, a contract can be made in two different jurisdictions, as held by the High Court in the case of Conductive Inkjet Technology Ltd v Uni-Pixel Displays Inc. This decision highlights the importance of agreeing on a jurisdiction clause in international contracts to maintain certainty and flexibility regarding where proceedings may be issued.
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Resolving disputes
A jurisdiction clause is essential in any contract, especially an international one, as it keeps the expense and complexity of litigation down, even though it will not reduce the risk of a dispute. It is important to carefully consider how the court system operates in different countries when negotiating jurisdiction clauses. For instance, England and Wales share the same court system, while Scotland has its own.
The parties to the contract should also be aware that some national courts will not apply the choice of law. They should also consider the risk of the courts applying the chosen law in a manner inconsistent with that of the courts of the country whose law has been chosen. The parties may also specify arbitration, which is severable from the main contract. Different jurisdictions have reached different conclusions as to what the law applicable to the arbitration clause should be. The choice of law of the arbitration agreement can have a significant impact on the outcome of the dispute.
The purpose of a governing law clause is to express the parties' choice of law to govern the contract. The parties' choice of governing law will usually be upheld by courts in countries with developed legal systems. By inserting a governing law clause, parties achieve certainty, as they know what law is likely to be applied to determine questions regarding their rights and obligations under the contract. This allows them to analyse their legal position with confidence. It is rare for commercial parties not to agree on a governing law clause.
The laws of some jurisdictions, such as England and New York, are often used in international commercial contracts because there is a substantial body of sophisticated case law dealing with issues that arise in conflicts over commercial or financing contracts, which leads to greater legal certainty for the parties. The laws of other jurisdictions may be silent on many of these commercial issues; indeed, in some cases, they may not even recognize concepts addressed in the contract.
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Frequently asked questions
A governing law clause in a contract specifies the laws that will govern the relevant contract. It is usually included in the "`boilerplate` language towards the end of the contract."
A governing law clause is important because it provides certainty to the contracting parties. Without it, there may be lengthy and potentially expensive disputes over the governing law and dispute resolution procedures to be applied to a contract.
Yes, a contract can be governed by two laws. However, this can lead to challenges in resolving disputes as the two laws may resolve issues in different ways. In such cases, the law designated in the prevailing terms applies.
If there is no governing law clause in a contract, there may be uncertainty, time, and cost spent arguing over what law should be applied at the outset of any dispute. Additionally, there may be a risk of "forum shopping," where contracting parties initiate proceedings in multiple jurisdictions to find a favorable outcome.
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