With the vast development in technology in recent years and the cost benefit of outsourcing and importing goods, doing business across the globe is easier and more prevalent than ever.
At the start of a business relationship it is not envisaged that there will be any dispute between the parties and it may sometimes be a difficult topic to raise when engaging with a new business contract. However, when contracting with businesses in foreign jurisdictions it is important to think ahead and ensure that you have an agreed mechanism for any dispute, including a contractual provision for jurisdiction and choice of law to provide certainty and ultimately to reduce time and cost if a dispute arises in the future.
Governing Law Clauses
A choice of law clause will enable the parties to decide which system of law will apply to the contract in the event of a dispute. This should be considered and agreed between the parties when the contract is drafted to ensure that if English law is not chosen, a lawyer from the applicable jurisdiction can provide advice on the agreement.
If proceedings are started in a court within the EU, subject to a few exceptions, a court must recognise the choice of law that has been expressly agreed between the parties. If the parties have not expressly provided for a choice of law, it will be determined by either the Rome Convention (for contracts made before 17 December 2009) or Rome I (for contracts made after 17 December 2009). Under the Rome Convention, the relevant law will be that of the country with which the contract has the closest connection. Under Rome I, it will depend on the type of contract, however as a general rule the relevant law will be that of the country where the person performing the contract is based.
If the court is outside of the EU and the parties have not provided for a choice of law, it will be necessary to contact a lawyer in that jurisdiction to advise. As a general rule, an express choice of law will be recognised by developed legal systems as long as there is some connection to the parties/transaction, the choice wasn’t made to intentionally avoid a compulsory provision of national law and there are no public policy issues.
Having to deal with arguments as to choice of law can be expensive and protracted and as such addressing these issues at the outset will avoid unnecessary complications. This is particularly important if importing, exporting or outsourcing goods and services with parties in developing countries where the cost and outcome of litigation may be substantially different to English law and the enforcement of any successful judgment very difficult.
A jurisdiction clause provides for the court that is competent to settle the contractual dispute. It may be that you want to avoid, or choose, a certain jurisdiction due to the quality of the courts, the cost and speed of litigation, convenience or the likelihood of enforcing a judgment. All of these issues should be considered before the contract is concluded, to provide a degree of certainty for the parties at the outset and prevent wasted time and costs dealing with these issues as they arise.
If there is no provision for jurisdiction in the contract, it will be determined by the rules of private international law. Within Europe, this will be determined by the Brussels regime. Subject to various exceptions, the general rule is that a defendant should be sued in its resident country. For a company, this refers to the place of its statutory seat, central administration or principal place of business.
If jurisdiction is not accounted for in the contract the position will be very uncertain, should a dispute arise. Further, if English law and jurisdiction is not applicable, you will have to consult lawyers in that jurisdiction to advise you, which will be costly and time-consuming.
You should be aware that providing for the choice of law and jurisdiction in a contract will not determine how a dispute between the parties is to be decided. As such, you should also consider including a separate dispute resolution or arbitration clause to provide certainty for the parties on how any potential future dispute will be resolved.
These issues are important for every contractual relationship throughout the supply chain and you should be careful of contracting on a company’s standard terms and conditions without checking the governing law and jurisdiction clauses.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.