Tom Price
Partner
Head of the CIS and CEE desk
Article
11
Parties negotiating any contract of substance, especially one with a cross border element, should consider the most appropriate form of dispute resolution for any disputes arising under it. Where litigation is the chosen forum, parties should agree both a governing law and a jurisdiction clause to help interpret the contract and resolve any future disputes. Too often, such clauses are only given proper consideration after a dispute has arisen and a party finds itself litigating in a jurisdiction it would not have chosen with its rights and remedies restricted by an unfamiliar law.
We consider the basics of what you need to know.
It enables the parties to specify what substantive law will govern the rights and obligations of the parties. It will be applied to interpret the contract and its effects if a dispute arises, thereby reducing uncertainty for both parties.
If you choose a governing law - which can cover both contractual and non-contractual obligations and disputes (subject to certain exceptions) - make sure you know the consequences of that choice. Some legal systems have very different rules on, for example, the recoverability of damages and the circumstances in which you can terminate a contract and the consequences of termination.
If no governing law clause is included and a dispute arises, the court hearing the dispute is likely first to have to determine what law applies to the contract (and any non-contractual obligations) before it can resolve the dispute.
Where at least one of the parties is based in an EU Member State, the Rome I Regulation (for contracts concluded on or after 17 December 2009) and Rome II Regulation (which has applied from 11 January 2009 for non-contractual disputes - such as negligence, misrepresentation, product liability) provide a prescriptive set of rules to determine the governing law. Under Rome I, specific rules apply to different types of contract but in most cases the applicable law is that of the country where the party with characteristic performance of the contract has his/her/its habitual residence. Under Rome II the applicable law is generally the law of the country in which the damage occurs or is likely to occur. However, it may also be that of the country in which both parties have their 'habitual residence' or the country most 'closely connected' to the underlying tort. There are also specific rules for certain types of claims under Rome II.
Invariably, costs and delay can be incurred in arguing over 'habitual residence' and 'close connection' and the ultimate result may be that a very unfamiliar law governs the contract or tortious claim (and remedies) and those rules may not favour you.
Where a court outside the EU has jurisdiction, the conflict of law rules that will be applied to determine the governing law vary from country to country, again introducing an element of uncertainty and potential costs.
In some situations, even if you do choose a governing law, Rome I and II will not allow the parties to use their choice of governing law to get around certain "mandatory rules" of the country where the case is to be heard or where all the relevant elements at the time of the choice are situated.
It is possible, but rarely sensible, and will almost always lead to confusion.
It is usual for the governing law to coincide with the jurisdiction clause but there is no requirement for it. Although the English courts are experienced in applying foreign law, the foreign law must be pleaded and proved as a fact, usually through evidence of a qualified lawyer from the relevant jurisdiction. Again, this can add uncertainty, time and costs to the litigation.
It enables the parties to agree at the outset of the contract which country's courts will hear any disputes that arise under it. This means parties can avoid (generally) jurisdictions that they might consider less desirable or predictable. Failure to agree your chosen forum could mean that even a strong case is commercially not worthwhile pursuing. If the parties agree a particular court within the EU has exclusive jurisdiction this will generally prevent claims being brought in any other courts within the EU.
Although a jurisdiction clause will not always prevent a party from issuing proceedings in another court, if there is any disagreement as to venue that dispute must be resolved first.
Where there is no clause, the basic rules of the Recast Brussels Regulation (for proceedings instituted on or after 10 January 2015) or 2001 Brussels Regulation (for proceedings instituted before 10 January 2015) (together the European Regime) apply. Under the European Regime, an EU domiciled defendant must be sued in the courts of the Member State of his/her domicile (in the case of an individual), or its place of statutory seat, central administration or principal place of business (for a company), subject to certain exceptions and constraints. In contractual claims, a defendant may be sued in the place of performance of the obligation in question.
Courts outside the EU will apply their own rules to determine whether they have jurisdiction. Non EU domiciled defendants may be sued in the English court if one or more certain prescribed connections to England are established.
Member States have exclusive jurisdiction in relation to some types of dispute regardless of domicile (for example claims relating to immovable property, certain questions of company law etc). Where the Member States have such exclusive jurisdiction this will override anything the parties may have otherwise agreed in a contractual jurisdiction clause and the court nominated will decline jurisdiction if claims are issued before them in breach.
Where one party is from an EU Member State (except Denmark) and another is from Mexico or Singapore, then the rules of the Hague Convention on Choice of Court Agreements (the Hague Convention), under which exclusive jurisdiction clauses are required to be recognised and enforced, will need to be considered.
The UK's position is that when it exits the EU, the European Regime will cease to apply. Although both parties seem keen to replicate the existing system in some way, it may be that other agreements to which the UK is party (for example the Hague Convention) take on new importance. With this uncertainty, it is all the more important to understand the consequences of governing law and jurisdiction and to specify English law and jurisdiction in a contract if that is appropriate.
The inclusion of clear provisions on governing law and jurisdiction in a contract as referred to above, should ultimately assist in any dispute being determined under the law and in the courts chosen by the parties.
For more information or guidance on governing law and jurisdiction clauses, or other help on dispute resolution, contact Gordon Bell.
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