Commercial Contracts: Governing Law and Jurisdiction
What small businesses need to know when entering into a contract with an outside party
When you enter into a contract, whether with someone inside or outside the UK, it’s advisable to set out:
- which country’s law will apply to it;
- which country’s courts will hear any disputes about it; and
- any procedures for dealing with disputes that the parties have agreed to use.
You should therefore include in the contract the following types of clauses:
- a governing law clause specifying which legal system will apply to the interpretation of the agreement and its effect if a dispute arises; and
- a jurisdiction clause agreeing which country’s courts will have jurisdiction to hear disputes arising from the contract.
It’s always advisable to state in a contract the law that will govern it and the courts that will have jurisdiction to hear disputes arising from it. The following guidance will help you:
- State which governing law the parties have chosen
- State which jurisdiction the parties have chosen
- State whether chosen jurisdiction is exclusive or non-exclusive
State which governing law the parties have chosen
You should always include an express governing law clause in a contract, specifying which country’s laws apply to it. This provides certainty in your contractual relationship and prevents the courts from deciding which law governs the contract.
If you don’t include a governing law clause you may find that you have to spend additional time and money sorting out any dispute about:
- the interpretation of the contract terms;
- whether the contract has been performed; or
- how the contract can be enforced.
Before you choose the governing law for the contract, you should consider the effect very carefully. If it won’t be English law, you should get advice from your lawyer as to the relevant jurisdiction. It’s best to do this before drafting an agreement because your lawyer will need to advise on, or draft the agreement.
Bear in mind that there may be mandatory laws of another country which could apply to any contractual dispute. An express choice of governing law will be recognised by most legal systems, unless:
- it’s regarded as having been chosen deliberately to avoid a mandatory provision of a national law; or
- there are other public policy reasons for not recognising it.
You should find out about any mandatory laws that might apply and take them into account when choosing the governing law.
Your choice of governing law should also take into account the jurisdiction you intend to choose. Ideally, the choice of governing law and jurisdiction should be the same to avoid additional cost and uncertainty. Otherwise it would be possible for the courts in one country to have jurisdiction to hear a dispute but apply the laws of another country.
The clause should be wide enough to cover non-contractual disputes arising out of the contract.
An example of suitable wording for a governing law clause would be:
“This contract and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes or claims) shall be governed by and construed in accordance with English law.”
State which jurisdiction the parties have chosen
As well as including a governing law clause in the contract you should also include a jurisdiction clause. This specifies in which country a dispute will be heard and avoids uncertainty over the appropriate jurisdiction for hearing any dispute arising out of the contract.
If you don’t include a jurisdiction clause you can’t be certain in which country and court any dispute will be heard. It might be a jurisdiction you know nothing about and where it’s difficult or expensive to litigate. It might also result in a decision that is unfavourable to you.
When choosing, you need to decide which jurisdiction would suit you best. Generally this will be your home court but you might choose a foreign jurisdiction if, for example, the contract concerns a foreign subsidiary.
If the choice of jurisdiction is not to be the English courts, a lawyer qualified in the relevant jurisdiction will need to advise you on, or draft, the agreement.
An example of suitable wording for a jurisdiction clause would be:
“The parties irrevocably agree that the courts of England and Wales shall have exclusive jurisdiction to settle any dispute or claim that arises out of or in connection with this deed or its subject matter or formation (including non-contractual disputes or claims).
State whether chosen jurisdiction is exclusive or non-exclusive
You’ll need to decide whether the jurisdiction clause should specify:
- exclusive jurisdiction, so that the parties can only bring proceedings in that location; or
- non-exclusive jurisdiction, meaning that the parties can bring proceedings elsewhere.
You’ll have greater certainty with an exclusive jurisdiction clause but more flexibility with a non-exclusive clause. Which suits you best may depend on whether you are more likely to be defending or bringing a claim.
European Free Trade Area (EFTA)
The current members are Iceland, Liechtenstein, Norway and Switzerland.
European Union (EU)
The current members are: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain, Sweden and the UK.
Choosing exclusive jurisdiction is intended to prevent one party from bringing proceedings against the other in the courts of any country other than the country set out in the agreement.
Governing law clause
This specifies the system of law that will be applied to determine the rights and obligations of the parties under the contract.
This type of clause specifies which country’s (or countries’) courts are to have jurisdiction to hear disputes arising from the contract.
Choosing non-exclusive jurisdiction will enable either party to bring proceedings against the other, either in the courts of the chosen country, or in the courts of any other country which has jurisdiction over the dispute under its own jurisdictional rules.
Q. The business is entering into a sales contract and a related distribution agreement with a non-UK party. Does this affect our jurisdiction clause?
A. No. However, from a practical point of view it is advisable to ensure that both contracts (and any other related agreements which form part of the same transaction) contain the same jurisdiction provisions so that, in the event that disputes arise under both agreements, they can be submitted to the same court in one country.
Q. Do agreements relating to jurisdiction have to be in writing?
A. Yes. Where the contracting parties are in a European Union or European Free Trade Area (EFTA) country, any jurisdiction clause to be agreed by the parties needs to be in writing, or evidenced in writing. In writing for these purposes include any communication by electronic means which provides a lasting record, for example by email.
Q. Is it possible to have a jurisdiction clause which specifies alternative jurisdictions?
A. Yes. For example, the clause may provide that if party A sues party B, the English courts are to have jurisdiction, but if party B sues party A then the German courts are to have jurisdiction. It is also possible to include a jurisdiction clause which states, for example, that all disputes arising under the contract shall be decided by the courts of England or Germany, in which case either party would have a choice as to whether to bring proceedings in the English or German courts.
Q. Does the country selected in the governing law clause have to be the same as the one stated in the jurisdiction clause?
A. Not necessarily, although this would be most common. Generally the country will be the same in both clauses, so that the chosen courts will not need to decide issues arising under a legal system with which they are unfamiliar.
Q. What is an agent for service of process, and do we need one?
A. If the party you are dealing with is outside England and Wales, it is usually advisable to include a provision in the contract allowing legal proceedings to be served on a person or agent within England or Wales appointed by the overseas party. The purpose of doing this is to avoid the need for you to serve proceedings outside the jurisdiction, which can be complicated and costly, and for which you may require the prior permission of an English court.
Q. We want to sue an Italian company in relation to an agency agreement we entered into with them. Where do we need to make our claim?
A. Companies are entitled to be sued in the place of their statutory seat (registered office or place of incorporation), central administration or principal place of business. You will need to take care when determining where to make a claim against a company if its central administration or principal place of business is not also in the jurisdiction where it was incorporated. To work out where its central administration and principal place of business are, you need to look at where the company’s important management, control and regulation responsibilities are. Get further information from the company about its operations, and then speak to your lawyer to make sure that you start your proceedings in the right place.
Q. We have entered into a contract under which a third party business in Spain can benefit. Can they sue us in their own courts?
A. Potentially yes, depending on whether you have covered this issue in your contract. To prevent this situation arising, you should make sure that your jurisdiction clause covers proceedings brought by a third party who has enforceable rights under the contract, otherwise you may find yourself subject to a third party claim in Spain.
Q. Can our jurisdiction clause say that the choice of the English courts is non-exclusive as far as we are concerned, but exclusive for our customer?
A. Yes, you may be able to obtain the best of both worlds by providing that the choice of the English courts is non-exclusive so far as you are concerned, but exclusive for your customer. This would mean that your customer can only institute proceedings in the courts stated in the jurisdiction clause, whereas you would not be so restricted and could start proceedings elsewhere if it suited you to do so.
This article was written by Riverview Solicitors