Governing law and jurisdiction clauses: minimising contractual disputes

How can you try and prevent a dispute arising regarding governing law and jurisdiction? The short answer, which will not come as a surprise, is to have clear and unambiguous governing law and jurisdiction clauses! Distinct and robust clauses are always in each parties’ best interests.

All too often, parties enter into contractual relationships, failing to appreciate the significant importance of implementing clear jurisdictional and governing law clauses. For standard T&CS in particular, specific clauses may be necessary – as there is no certainty as to where the other party may be based in the future.

Including a provision for governing law and jurisdiction allows the parties to select the jurisdiction they feel best safeguards their interests; as opposed to being dictated by the rules applied in its absence. The legal costs involved in pursuing a dispute to determine the jurisdiction and governing law of a contract are not insubstantial, and can often lead to both parties finding themselves in lengthy Court proceedings.

The Court will generally give effect to an express clause. Where there is a cross-border element, that jurisdiction will have their own rules – and there is even less certainty around this since Brexit – which may mean a foreign Court decides it can end up dealing with a dispute.

Why do you need both a governing law and jurisdictional clause?

• A governing law clause will allow the parties to agree on which governing law will be applied to identify and interpret the various rights and obligations afforded under the contract. This encompasses the large majority of contractual disputes which may arise. Not only this, it will dictate the governing law to which the assessment of damages and limitation is applied.
• A jurisdictional clause, however, determines which court or alternative dispute resolution process will deal with any dispute. For example, some parties may prefer to make use of Arbitration or Expert Determination as an alternative to the litigation process. It is therefore crucial that both are express terms within the contract.

It is also important to give thought to the particular jurisdiction in which you wish to choose for your clauses. This may be influenced by the risk factor posed by potential litigation later down the line. Business need may dictate the following:

• Does the company operate primarily from another jurisdiction?
• Will the performance of the contract take place in a particular jurisdiction?
• Will key personnel likely be required to give evidence in potential litigation and if so, which jurisdiction are they based in?

The focus on this article is to spend a little to save a lot. Taking the time to get jurisdiction and governing law clauses right the first time can very often save the time, cost and stress which inevitably comes with litigation.

The key benefit to understanding the significance of a jurisdiction clause is that, should the contractual relationship break down, each party has a clear understanding of the rights they are afforded and the likely legal avenues they may wish to explore, thus avoiding the real risk of finding yourself facing draconian regulations of an international country.

It is not too late to review your contracts and if the position is not clear, it is possible to reach an agreement or variation to specify the jurisdiction and governing law. If a dispute arises and there is no specific clause, obtaining advice early on means you can be prepared which may affect a decision as to when and where to issue Court proceedings.