Cecily Zamora
When drafting a contract, it is essential to carefully consider the governing law and jurisdiction clauses. While most contracts are governed by the laws of the state where they were created, parties have the freedom to choose one or multiple applicable legal systems. In the case of international contracts, failing to include a jurisdiction clause can lead to increased complexity and expenses in litigation. When choosing a governing law, it is crucial to consider the type of transaction, the location of the parties, and the place where the contract will be performed. Additionally, the relative bargaining power of the parties may influence the choice of governing law. While it is possible to have two governing laws in a contract, it is important to seek legal advice to ensure that the chosen laws align with the specific circumstances of the contract.
| Characteristics | Values |
|---|---|
| Choice of governing law | Should be based on the type of transaction involved. For example, in employment contracts, employers are generally concerned about enforcing restrictive agreements like non-compete and non-solicitation. |
| Jurisdiction | Generally banded together based on a common legal culture. For example, the English common law culture includes Hong Kong, Ontario, Singapore, Australia, and the United States. |
| Choice of law provision | Determines the governing law of the relationship detailed in the contract. For example, if a contract was broken between two American companies located in California and Texas, the governing law would determine which state's local laws would be applied while seeking a resolution. |
| International contracts | Can be made in two different jurisdictions, according to the UK's High Court. |
| Governing law and jurisdiction clauses | Should be considered by parties negotiating any contract of substance, especially one with a cross-border element. |
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What You'll Learn
International contracts: one agreement, two jurisdictions
International contracts can be complex, with many factors to consider when determining the governing law and jurisdiction. Firstly, it is crucial to understand that a governing law dictates the legal requirements and formation, performance, and termination of a contract. The choice of governing law can significantly impact how contracts are enforced, so all parties should seek legal advice to ensure they make the best choice for their situation.
When drafting an international contract, one of the most important considerations is the potential for disputes and which country's laws will apply. This is known as the governing law or choice of law. The governing law is determined by jurisdiction, which refers to the geographical limits of a court's authority. It is important to note that jurisdiction is not always the same as national boundaries, as seen in the example of England and Wales sharing a court system, while Scotland has its own.
When choosing the governing law, parties should consider the type of transaction involved and their familiarity with the law. For instance, in employment contracts, employers may want to enforce non-compete or non-solicitation agreements, which may be easier in some jurisdictions than others. Additionally, parties may want to choose a jurisdiction they are connected to, such as where their business is located or where production is handled.
In some cases, international contracts may be subject to two different types of state law, depending on the subject of the contract. For example, common law, which is a traditional set of laws made by judges, and the Uniform Commercial Code, which controls contracts for the sale of goods. It is worth noting that certain jurisdictions, like New York, have specific requirements or exceptions for contracts, such as a statutory exception for contracts valued at over $250,000.
To avoid confusion and potential risks, it is essential to include a governing law clause in the contract. Without one, courts will apply their own rules to determine the applicable law, which can lead to uncertainty, inconsistency, and increased legal costs. Additionally, parties should carefully consider the jurisdiction clause, specifying which courts will have the authority to hear any disputes. This is particularly important when contracting parties are domiciled in different jurisdictions, as seen in the example of an international contract between parties located in New York and France.
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Choice of law
The choice of governing law is a crucial aspect of any contract, dictating the legal requirements and governing the rights and obligations of the parties involved. This choice has far-reaching implications on how contracts are enforced, and it is essential to carefully consider the most appropriate form of dispute resolution. While it is possible for a contract to be made in two different jurisdictions, it is generally advisable to choose one jurisdiction that the parties are connected to, such as the location of the business or where production is handled.
When selecting a governing law, it is important to first consider the type of transaction involved. For instance, in employment contracts, employers may focus on enforcing restrictive agreements, while commercial transactions may be influenced by specific state laws. The chosen governing law should facilitate the performance of the contract rather than create obstacles. Parties should also consider the familiarity with the governing law, influenced by the location of each party and the place where the contract will be executed.
In the context of international contracts, it is essential to include a jurisdiction clause to maintain clarity and reduce the complexity and expense of litigation. Without a specified governing law, courts will apply their own rules to determine the applicable law, which can lead to unintended outcomes and increased legal costs.
It is worth noting that certain legal systems have distinct rules regarding the recovery of damages, termination of contracts, and the consequences of such termination. Additionally, in the case of contracts with connections to the United States, specifying the choice of forum, such as the federal or state courts, is crucial to ensure clarity in dispute resolution.
To summarise, the choice of law provision in a contract is of utmost importance as it determines the governing law that will be applied in case of disputes between the parties. While it is possible for a contract to have two governing laws in certain situations, it is generally advisable to select one jurisdiction that is relevant to the parties involved and the nature of the contract. Consulting experienced attorneys or lawyers is highly recommended to ensure the best governing law is chosen for the specific circumstances.
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Jurisdiction clause
When drafting a jurisdiction clause, there are typically three options: both parties submit to the exclusive jurisdiction of a specific court; both parties submit to the non-exclusive jurisdiction of a particular court; or one party submits to the exclusive jurisdiction of a court, while the other submits to the non-exclusive jurisdiction. Exclusive jurisdiction clauses restrict disputes to the courts of a single jurisdiction, whereas non-exclusive jurisdiction clauses allow for more flexibility by nominating a preference without preventing parties from initiating proceedings in other jurisdictions.
The choice of jurisdiction can have significant implications. For instance, the commercial value of a judgment depends on its enforceability, and the location of the defendant's assets should be considered when selecting a forum. Additionally, exclusive jurisdiction clauses are protected by the Hague Convention on Choice of Court Agreements, which provides for the worldwide recognition and enforcement of exclusive choice-of-court agreements in civil and commercial matters.
When determining the appropriate jurisdiction clause, parties should consider factors such as the governing law, the location of performance, and practicality. It is important to note that the absence of a governing law clause can lead to uncertainty, inconsistency, increased legal costs, and unintended outcomes, as courts will apply their own rules to determine the applicable law. Therefore, it is advisable to consult experienced attorneys to ensure the chosen jurisdiction aligns with the parties' interests and the nature of the contract.
- "Any dispute arising out of the performance of this Contract shall be resolved by the parties through mutual negotiation. If no agreement is reached, a lawsuit may be filed in the people's court where the Premises are located."
- "Each party irrevocably agrees that the courts of England and Wales shall have exclusive jurisdiction to settle any dispute or claim arising out of or related to this agreement or its subject matter or formation, including non-contractual disputes."
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Common law and the Uniform Commercial Code
When dealing with contracts, it is important to understand the differences between the Uniform Commercial Code (UCC) and common law, as they are the two primary bodies of law that govern contracts. The choice of governing law is crucial as it significantly impacts how contracts are enforced.
The UCC and common law differ in their scope and application. The UCC governs contractual transactions involving the sale of goods and tangible objects, such as the purchase of a car. On the other hand, common law generally applies to contracts for services, real estate, insurance, and intangible assets. When a contract involves both the sale of goods and services, the dominant element determines which law applies. For instance, if the contract primarily involves the sale of goods, the UCC would take precedence.
Another significant distinction between the two is their interpretation of "acceptance." Common law adheres to the "Mirror Image Rule," requiring an acceptance to mirror the terms of the offer exactly for it to be legally valid. Any changes to the offer are considered a rejection and a counteroffer. Conversely, the UCC considers an offer voided only when changes are made that materially impact the contract or create a conflict in terms.
Differences also arise in the modification and discharge of contracts. Under common law, a contract can only be modified if there is additional consideration, whereas the UCC allows for modifications without this requirement. Additionally, the UCC permits the discharge of a contract due to impracticability, which is not recognised under common law.
The choice of governing law in a contract is influenced by various factors, including the type of transaction, the location of the parties, and the relative bargaining power. It is essential to consult an experienced attorney to ensure the chosen governing law aligns with the specific circumstances and objectives of the contract.
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Governing law and jurisdiction outside the EU
When it comes to choosing a governing law for a contract, it is generally advisable to select a jurisdiction that is relevant to the contract, such as the location of the business or where production is handled. While it is possible to have multiple governing laws in a contract, it is generally not advisable due to the added complexity and potential for conflict between different laws.
In the context of governing law and jurisdiction outside the EU, there are a few key considerations. Firstly, the choice of governing law can have far-reaching effects on how contracts are enforced. It is important to consult an experienced attorney to ensure the chosen governing law is appropriate for the specific situation. This is especially true when dealing with jurisdictions outside the EU, as the conflict of law rules that determine the governing law can vary from country to country, introducing uncertainty and potential costs.
Secondly, when dealing with jurisdictions outside the EU, it is crucial to consider the specific laws and regulations of the relevant country or region. For example, the UK's position post-Brexit may impact the choice of governing law and jurisdiction for contracts involving UK entities. Additionally, the Hague Convention on Choice of Court Agreements may come into play when one party is from an EU Member State (except Denmark) and the other party is from Mexico or Singapore.
Thirdly, the chosen governing law should facilitate the performance of the contract rather than impede it. This means considering the type of transaction involved and the specific legal requirements of the jurisdiction. For example, US state laws vary in how easily employers can enforce restrictive agreements, so choosing the appropriate governing law can impact the enforceability of such agreements.
Finally, it is important to consider the relative bargaining power of the parties. Typically, the party with more bargaining power may choose the law of their place of business as the governing law and jurisdiction for bringing claims. Additionally, if one party is significantly larger, it may be a gesture of good faith to choose the governing law of the smaller party.
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Frequently asked questions
A governing law is a clause in a contract that determines the jurisdiction whose law will govern any disputes between the parties involved.
Including a governing law clause in a contract reduces uncertainty and inconsistency. It also helps to avoid increased legal costs that may arise from disputes over applicable laws.
If there is no governing law clause in a contract, the court will use conflict-of-law rules to determine which state's laws apply, which may lead to unintended outcomes.
While it is generally advisable to pick a jurisdiction you are connected to, it is possible to have a contract with two different jurisdictions, especially in international contracts. However, this can be complex and may require the assistance of lawyers versed in the different legal systems.
