Contracting internationally – the importance of a jurisdiction clause

As more business is being done between parties in different countries, the need for a clear jurisdiction clause is very important.

At the start of an exciting new business prospect, the focus of contracts are usually the payment terms, and parties often have little regard to procedural clauses towards the end of a contract. It is a common assumption that a dispute will not arise, and the jurisdiction clause is accepted as drafted.

Unfortunately, disputes do arise, and debating the validity and suitability of a jurisdiction clause can create an unnecessary, early hurdle.

Usually, the party drafting the contract will include a jurisdiction clause referencing their location. However, the parties should consider what jurisdiction may be more suited to the nature of the contract for example, based on currency or the location of goods.

If an overseas party is drafting a contract, common pitfalls include incorrect reference to, for example, ‘the laws of the United Kingdom’, which is ambiguous and unclear. Scotland has its own jurisdiction, as does England and Wales.

Other obscure references in jurisdiction clauses include phrases such as: ‘jurisdiction of residence’ or ‘friendly jurisdiction’ which unhelpfully do not give clarity as to which jurisdiction governs a dispute and such vague terms can open a debate on jurisdiction, even before you can start unravelling the dispute.

It is also important to think about which court would hear a dispute and whether reference needs to be made to a particular court. For example, ‘the Courts of the Netherlands’ is not specific as it could mean a Dutch District Court but it could also mean The International Court of Justice in the Hague.

A jurisdiction clause which specifies the court and laws in a particular jurisdiction is known as an exclusive jurisdiction clause as it creates a contractual agreement not to start proceedings elsewhere. At the start of an exciting new contract considering such practicalities are low on the agenda but if you get a detailed and suitable jurisdiction clause agreed from the beginning it can save time if a dispute needs to be actioned.

A contract may have a non-exclusive jurisdiction clause which specifies a particular court and jurisdiction whilst acknowledging that other options may be available too.

A dispute resolution clause is often coupled with a jurisdiction clause which may dictate the method used in a dispute such as mediation, litigation or arbitration.

For example, specifying arbitration rather than litigation is often more practical if the parties are in different jurisdictions but any arbitration clauses must also be clear on where the arbitration is to take place.

Choose your country, law and court choices wisely to make sure you have a clear jurisdiction clause coupled with a dispute resolution mechanism where necessary to minimise hurdles should a dispute arise.