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The importance of the global marketplace is under the spotlight like never before as Britain considers life without the European Union, but trading internationally poses problems as well as offering opportunities. Deciding by which country’s laws, and in which country’s courts, a dispute will be resolved is an important consideration whenever contracting internationally and doing so can avoid lengthy, costly and uncomfortable experiences in foreign jurisdictions.

The UK’s manufacturing sector has been, for over 200 years, at the heart of the global economy. From rolled steel in the late 18th century to the prestige cars to the 21st century, Britain has long looked outwards for its trade and, as recently as November 2015, the government redoubled its efforts to boost the UK’s exports with the launch of its Exporting is GREAT programme. With manufacturers continuing to look out to sea for their customers and suppliers, the importance of ensuring the contracts offer certainty in the event of a dispute is increasingly vital.

It is often assumed that the place of performance of a contract, or even the jurisdiction in which the contracting parties are based, is the exclusive determiner of where any such dispute would be heard however that is often not the case with governing law and jurisdiction clauses overriding default provisions for dispute resolution, leading UK manufacturers to suffer the expense and uncertainty of litigating abroad or under a set of foreign laws.

The choice of governing law determines the statute and case law which will be applied to a dispute. It does not indicate how a dispute is to be resolved, that being the purpose of a jurisdiction clause. The two often sit together within the boilerplate clauses of a contract and are very often overlooked as ‘standard’ and thus of little consequence compared to the substance of the contract. The reality is that scant consideration of governing law and jurisdiction clauses could have a more profound impact than any other provision of the contract.

Agreeing a governing law clause

Generally, English courts will uphold any express agreement in a contract as to choice of governing law and jurisdiction. When contracting with an entity based abroad, every effort should be made to include within the contract a governing law and jurisdiction clause so as to provide certainty in the event that a dispute should arise.

Absent an express agreement, which system of law will prevail depends upon, primarily, whether or not the Court which is to hear the dispute is based in the European Union.

What if I don’t have a governing law clause?

When it comes to dealing within the European Union, the Eternal City gives us our guidance; the Rome Convention applies to contracts formed before 17 December 2009 whilst Rome I applies to any contract formed subsequent to that date.

Rome Convention: the governing law will be the country with which the contract has its closest connection, subject to a number of presumptions.

Rome I: the governing law will be determined by a complex set of rules which apply to various types of contract, but will most often be the country in which the performer of the contract is based.

If it doesn’t appear straightforward, that is because it isn’t. The ‘default’ position in the absence of an express governing law clause is notoriously complex and has led to significant pieces of litigation involving parties who did not expressly provide for a governing law to prevail. One such piece of litigation hinged on whether a handshake in Kent constituted a submission to English law; it did not and the English company concerned found itself embroiled in litigation conducted in accordance with Japanese law.

The problems posed by the absence of a governing law clause are exacerbated when the contract is with a customer or supplier outside the EU, where no rules or conventions apply to assist determination of which system of laws should prevail. Arguments over governing law are messy, protracted and invariably expensive; all can be avoided by taking steps at the stage of forming a contract to include an express provision, even if that is for the contract to be governed by the law of a foreign jurisdiction.

It is also important to consider that certain English legislation, such as that which entitles a creditor to charge interest on unpaid invoices, does not apply even if the parties expressly provide for English law to apply, if the contract does not have a “significant connection” to England. This is just one of a number of potential pitfalls which may be encountered, and which can be avoided by ensuring legal advice is taken before entering into any contract with a foreign element.

Agreeing a jurisdiction clause

The agreement to a particular governing law, for obvious reasons, most often sits hand-in-hand with the choice of jurisdiction, that being the country in which any dispute would be resolved. Whilst parties can elect to apply a foreign governing law to disputes which are to be heard in a particular jurisdiction, and English courts are experienced in applying foreign governing law, doing so can often add significant cost and delay to proceedings. Wherever possible, therefore, the governing law and jurisdiction clauses should accord with one another.

When agreeing jurisdiction clauses, the most certainty that can be derived is from an exclusive jurisdiction clause setting out in no uncertain terms which country’s courts will hear a dispute relating to that contract.

It may be, however, that a contracting party wishes to retain some flexibility as to where it can instigate proceedings, in which case a non-exclusive jurisdiction clause would be appropriate. What is right in each circumstance is a matter on which legal advice is essential.

What if I don’t have a jurisdiction clause?

As with governing law, the absence of a jurisdiction clause can lead to complex, and expensive arguments about where a dispute should be heard, even before the mainstay of proceedings has commenced, in turn creating further unnecessary cost and delay.

The default position is that a party should be sued in the country in which it is based, although exceptions apply. For guidance in this area we turn to Belgium, and the Recast Brussels Regulation. This provides for exceptions to the general rule above, in that certain disputes must be allocated to a particular member state of the European Union, such as certain IP disputes and issues pertaining to esoteric areas of company law, as well as insurance, consumer and employment contracts. Again, it is essential to seek legal advice on the impact of omitting or including a jurisdiction clause.

What if I have been sued abroad?

In light of the rules set out above, if you believe that you have been sued in an improper jurisdiction, you can apply to court to dispute the court’s jurisdiction and argue that the court should not exercise its jurisdiction. Otherwise, the only option would be to instruct lawyers based in that jurisdiction and defend the litigation in the foreign court. This can often be an expensive and slow process which heightens the anxiety of being embroiled in litigation and it reinforces the importance of deciding upon a jurisdiction clause at the time of forming a contract.

It may be difficult to come to an agreement on a jurisdiction clause but clearly, considering the above, this is an issue that must not be overlooked. Both parties will benefit from certainty even if it does mean not having disputes resolved in their home jurisdiction, and certainty over which governing law will apply will enable contracting parties to seek advice on the implications at the time of entering into the contract, rather than it being done in a rush at such time as litigation arises.

Our litigation experts have experience of negotiating governing law and jurisdiction clauses as well as helping clients in the event of proceedings being issued abroad. It is already an essential area of contracts to consider and, should Britain vote to leave the EU, promises to become an even more complex and problematic area of law.