The governing law provision in a contract refers to the legal rules that will apply to the contract, while a jurisdiction clause describes which courts or arbitration tribunals have primary or non-exclusive jurisdiction to hear any disputes that may be brought forward. The rules found in these clauses are sometimes overlooked during drafting since they are usually included in the “boilerplate” text at the end of the contract. However, the obligations in these clauses must be given as many studies as the contract’s substantive provisions. A failure to agree on governing law and jurisdiction clauses or include appropriate clauses may result in costly and time-consuming debates about the applicable legal regime and dispute resolution procedures for a given contract. This is clearly a negative option since it may lead to a lack of legal predictability and the potential for “forum shopping,” in which the parties to the contract commence litigation in different courts and tribunals, causing parallel litigation in several forums.
Governing law clause
According to current data from the International Chamber of Commerce, over 90% of ICC arbitration cases included a governing law clause in their agreement.
A typical governing law clause will say:
“The laws of United Arab Emirates will apply to this agreement.”
Consider the following factors while selecting a suitable governing law:
Whether a certain law is suitable for determining any future conflict depends on the choice of law.
Some jurisdictions’ laws, such as England and New York, are frequently utilized in international commercial agreements because there is a large body of sophisticated case law dealing with problems that may arise in commercial or financing contract disputes, resulting in enhanced legal certainty for the parties. Other jurisdictions’ legislation may be silent on a number of these commercial topics; in some cases, it may even fail to recognize ideas addressed in the agreement. Parties should not focus so much on applying their home jurisdiction’s law, but rather on selecting a law that is appropriate for the contract’s subject and substance.
If a dispute arises, both parties should evaluate the legal jurisdiction they have chosen for resolution.
When parties choose the legal system, they wish to apply in order to avoid complexity, they do so frequently. Some legal systems are competent at utilizing foreign law in situations where they are involved, which has certain benefits. It’s worth noting, though, that applying foreign law to the case might result in a party having to prove what the foreign law is; this may be particularly onerous if the parties aren’t able to agree. It’s important for parties to know that some national courts will not, in practice, apply the law of a different country. Parties should also consider the danger of the court applying their chosen law in an inconsistent manner with that of the other country’s courts. Arbitration is another option. Expert national courts are often used to apply the laws of various nations to international disputes, with arbitrators frequently being appointed due to their experience or knowledge of a certain country’s law.
Governing jurisdiction clause
Typical jurisdiction clauses include the following:
“Unless otherwise agreed, all disputes between the parties about or in connection with this contract will be resolved by arbitration or the respective country’s courts.”
The first point to consider is whether to pursue arbitration or litigation as a method of resolving contract disputes.
Arbitration is a far more efficient and less costly alternative to litigation than in international contracts, with the following benefits: the enforceability of awards under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards; the finality of decisions; the option to select arbitrators; and confidentiality.
When the parties believe that litigation is preferable to arbitration, there are a number of important things to think about:
Enforceability of judgments
Any decision must be enforceable against the assets of the losing party in the lawsuit in order to be effective in the litigation. Thus, unless it would be possible to enforce a judgment in other jurisdictions according to international agreements and conventions on the recognition and enforcement of judgments in civil and commercial matters, one party may want to select the country where the other party’s assets are located. When it comes to drafting a suitable jurisdiction clause, the importance of enforceability cannot be overstated: ensuring recovery is as essential as obtaining a favorable decision or award.
