Governing law and jurisdiction clauses in international contracts

David Lowe: Hi I'm David Lowe, one of the partners behind ThinkHouse. I'm really pleased to be joined by Tom Price and Gordon Bell talking about governing law and jurisdiction clauses in international contracts. Tom is a partner in our Dispute Resolution Team specialising in cross-border litigation and international arbitration and Gordon is our Head of International Arbitration.

So Tom, everyone talks about governing law and jurisdiction clauses like it's just all one thing. Is that the right approach?

Tom Price: No, it's not right that they're all the same thing. Governing law and jurisdiction or dispute clauses are two distinct things. Governing law is the substantive law of the contract and dispute resolution clauses are the clauses that tell you where and how your dispute is going to be resolved. They are very different. One does not imply the other and so your contract should have both of those in there. Governing law for example English law and jurisdiction the English Courts for example.

David: So if I had a contract and I'd said it's subject to English law and then I've said nothing about the disputes clause or jurisdiction clause what happens then?

Tom: Well that is unfortunately all too common and it can be a problem. The best practice is to always have both as if you don't have the dispute resolution clause you can get into difficulties. One of the difficulties is that the forum will be chosen for you and how that happens depends on a number of factors, for example if your intended defendant is from the EU then as matters currently stand the Brussels' recast regulation will apply and that means that you have to sue your defendant in their place of domicile or alternatively in relation to a sale of goods contract in the place where the goods are to be delivered, which might not be what you want. The worst problem is that by not having a clause you have created uncertainty at the beginning of your dispute which is when jurisdiction has to be resolved and that can be added expense and uncertainty which is clearly not in anyone's interests.

David: So you end up with a dispute about a dispute.

Tom: Indeed, and in many instances those can be very substantial. As I say they have to be dealt with at the beginning before anything else can happen. They can end up being the dispute itself and parties can run out of money and energy for the main dispute so it's not a satisfactory state of affairs.

David:  So have a governing law clause. Have a jurisdictional disputes clause. Okay I've listened to that. What are the options for the jurisdiction clause?

Tom: So it's essentially a choice of two things. One option is litigation which means national courts and the other is arbitration, we'll hear more from Gordon in a moment about arbitration, but that's the essential choice and for me the factors between the two revolve around two things. One is enforcement and the other is the respective features of the two systems. With enforcement what I mean is can you actually turn your judgment or award into something which you can enforce against assets wherever they may be? So if you are going to have litigation you need to decide whether your judgment can actually be taken to where the assets are, so you need to look to see where the assets are and look to see then what the relationship is between the judgment and that place. Around the EU that's very easy. As matters currently stand you can enforce an EU judgment around all other countries without any difficulty but outside the EU it's more difficult and so that's one thing to look at.

The other is the respective features of litigation against arbitration. Litigation is public, arbitration is generally private. You don't get a choice of tribunal in litigation whereas you can in arbitration. Arbitration has its own enforcement system as well which Gordon will talk about. So those are the main factors that you want to consider when thinking about a dispute resolution clause.

David: Thanks Tom. It's probably a good time to bring Gordon in on the arbitration side. Tom mentioned arbitration as an option to resolve disputes. What do you mean by arbitration? What are the key advantages?

Gordon Bell: I suspect there is no real definition of arbitration and one that I created a number of years ago for myself really was to describe it as a private binding enforceable dispute resolution process which may be chosen by the parties as an alternative to litigation before national courts. Within that definition there are a number of key things.

Tom mentioned the private nature of arbitration. When I say private I mean private in two senses. One, the public cannot come in and watch or listen to the dispute that's being arbitrated and two, it's private in the sense that it's only the parties who have agreed to arbitrate that could be forced to arbitrate. So for example if Tom and I had a dispute and we wanted to bring you into it David, we couldn't unless the three of us agreed. It's private between Tom and me unless you, Tom and I agreed to take part in the arbitration.

When I say binding and enforceable it means you get a decision in the form of an award and, although not always the case, in the majority of cases it's binding and enforceable and enforceable through the New York Convention. Arbitration needs to be chosen by the parties - litigation is the default position if you don't choose something different. The parties choose arbitration normally in the main contract so if you have sale or supply contract, somewhere tucked away at the back would be the dispute clause. In this context it would be an arbitration agreement and that's the agreement to arbitrate and as I say in terms of the definition it's an alternative to litigation before the national court so it's taken out of the court system and it's resolved by private means by independent and impartial arbitrators.

David: I've heard it said that arbitration is litigation light. Is that the case?

Tom: It can be. I think what've we found over recent times is that arbitration is moving to a place where it is perhaps similar to litigation so the processes have certainly merged to a certain extent and I think that has caused issues in terms of cost and the time it takes to arbitrate disputes. Historically it was cheaper and quicker to arbitrate than it was to litigate but I think that's changed and an arbitration process can easily take 18 months to two and a half years which could be the same length of time for litigation.

David: So it's an alternative?

Tom: It's not an alternative dispute resolution (ADR) but it is an option rather litigation. In the past people would say ADR was everything which was alterative to litigation. To me litigation and arbitration are competitors now and any other ADR is an alternative to litigation and arbitration.

David: Got you. Because they're the end points of your dispute?

Tom: Correct, rather than mediation or negotiation or expert determination.

David: So if you've chosen arbitration do you also have to have all that wording that refers to an institute and all that kind of stuff or can you just say the parties agree to arbitrate?

Tom: You can say that the parties agree to arbitrate but that usually is a recipe for a debate as to how they arbitrate, where and when so the tradition is to include some form of rules. They can be ad hoc rules like the UNSA trial rules or they can be institutional rules like the ICC the LCIA AAACIAC. There are lots of alternatives depending on where you want the arbitration to take place or what sort of support you might want from an institutional body. So for example if it's the LCIA, which is the London Court of International Arbitration, you can choose those rules but you don't have to have it taking place in London. Similarly with the ICC which is based in Paris you can have their rules but you can have the arbitration take place anywhere in the world. The seat doesn't have to be where the physical location of the LCIA or the ICC is.

David: So if I decide to use an institution like LCIA or ICC is there special wording I need?

Tom: I would always advise where you can to use the standard wording from those sets of rules. If you want to tinker with them be careful because the standard wording has been tested through arbitrations and through court systems and generally we know that they work so if you're thinking about changing them, be careful because the changes you make may not have been tested.

David: You mentioned though that arbitration awards are relatively easy to enforce. Can you explain why that is the case?

Gordon: Yes the framework for arbitration across the world is the New York Convention on the recognition and enforcement of awards. It's a convention from 1958 that has been entered into or signed up by some 150 states around the world and if you have an award that it is rendered in one of those states then it can be enforced in any of the other 150 or so states that have also signed up to it. So I think there are 192 countries in the world so there are 42 that haven't signed up to the New York Convention, but basically you're looking at being able to enforce under the New York Convention in most states. The New York Convention does allow challenges to be made on enforcement but they tend to be in areas of public policy and due process. It's not a question of an appeal or a reopening of the case. It is to make sure that the arbitrator or the arbitrators followed the process and allowed parties to be heard and gave an award, so on enforcement you don't open up the award to see whether it was correct.

David: Okay so Tom you talked about the English Courts jurisdiction clause and at the moment if you use the EU and then there's a number of other countries around the world where we have a treaty but that's a much smaller number of countries than the New York Convention so presumably if you're operating outside the EU you might, unless you know something particular, be more likely to choose arbitration?

Tom: It's possible, certainly enforcement around the EU is very relatively easy under the Brussels re-class regulation and very limited defences and that's very straightforward. Beyond the EU there are effectively two more regimes. There's the Commonwealth, if I can loosely call it that, with a number of other countries where we have reciprocal enforcement arrangements where you can enforce a judgment both ways by registration with relatively little difficulty and limited defences. Then outside that regime you're left with essentially the rest of the world where you have common law enforcement, by which I mean you take your judgment and you then start a new action in that place where you want to enforce a so-called enforcement action. This isn't having the merits tested again, it effectively tests whether the original court had jurisdiction and a number of other points, but one important point to overlay on all of that is that there is the 2005 Hague Convention on enforcement on choice of court agreements which provides that courts which have been given exclusive jurisdiction their judgments can be enforced in other states that are a party to that convention. At the moment the 2005 convention has only been ratified by a smallish number of countries, Singapore, Mexico and the EU as a single block which actually of itself makes it a significant convention. As we exit the EU next year whatever is going to happen in relation to enforcement will depend on what deal we do, if any. If no deal was done there could be issues around enforcement within the EU because the current regime will fall away and we would be relying on the Hague Convention which we will need to sign up to again as an individual country, because at the moment our membership is through the EU. It's a less satisfactory mechanism than the current regime but it will be better than nothing.

David: Great thank you very much.