Legal 101: Jurisdiction and governing law clauses explained
When drafting a contract, businesses often focus on pricing, deliverables, and deadlines. However, the legal framework governing the contract is just as crucial. Jurisdiction and governing law clauses define how and where legal disputes will be handled, significantly affecting the enforceability of agreements. Missteps in these clauses can lead to unexpected legal battles, increased costs, and uncertainty in business dealings.
While not generally an issue where both parties are based in the same country, this is a particularly critical clause for cross-border transactions and international contracts.
In this post, we break down jurisdiction and governing law clauses, their key differences, and how businesses can draft them to mitigate risks.
What Are Jurisdiction and Governing Law Clauses?
Governing Law Clause
A governing law clause specifies which country's or state’s legal system will apply when interpreting the contract. This ensures that the rights and obligations of the parties are clear, reducing uncertainty in the event of a dispute.
For example, a contract may state:
"This Agreement shall be governed by and construed in accordance with the laws of England and Wales."
This means that even if a dispute arises in another country, English law will apply when interpreting the contract’s terms.
Jurisdiction Clause
A jurisdiction clause determines which court or tribunal will have the authority to hear and resolve disputes. This is essential because different courts may interpret and enforce contracts differently.
An example of a jurisdiction clause is:
"The courts of New York shall have exclusive jurisdiction over any disputes arising out of or in connection with this Agreement."
This ensures that any legal disputes must be brought in New York courts, preventing a party from suing in a different jurisdiction.
Why These Clauses Matter in Commercial Contracts
Legal Certainty & Predictability - Clear jurisdiction and governing law clauses reduce uncertainty and help businesses assess legal risks.
Avoiding Costly Litigation - Without these clauses, parties may spend significant time and resources fighting over where a dispute should be heard, before getting into the substance of the claim.
Managing Cross-Border Risks - In international contracts, these clauses clarify which country's laws apply and where disputes will be resolved, avoiding complex legal battles in multiple jurisdictions.
Enforceability of the Agreement - Different legal systems have varying approaches to contract interpretation, and an unfavorable jurisdiction or governing law may lead to unexpected liabilities.
Types of Jurisdiction Clauses
Exclusive Jurisdiction: One specific court or tribunal has the sole authority to handle disputes.
Non-Exclusive Jurisdiction: Allows disputes to be heard in multiple jurisdictions, providing flexibility.
Arbitration Clauses: Instead of courts, disputes are resolved through arbitration (e.g., under ICC or LCIA rules).
Hybrid Clauses: A mix of different dispute resolution methods, such as arbitration for some disputes and court litigation for others.
How to resolve a common stalemate
Often, if two parties to a contract are based in different countries, each party will press for their own country’s laws and courts to apply in the contract. If the parties aren’t open to a non-exclusive clause (allowing the dispute to be heard in either jurisdiction), the negotiations can stall and end up in a deadlock.
One common way of resolving this situation is to agree a neutral, third party jurisdiction. For example, if one party is located in the UK, and one is based in Australia, then the parties may agree for the laws and courts of New York, or Hong Kong to apply.
Best Practices for Drafting Jurisdiction and Governing Law Clauses
Be Explicit and Unambiguous - Clearly state the governing law and jurisdiction to avoid disputes over interpretation.
Assess Practical Implications - Consider factors like litigation costs, language barriers, and familiarity with the legal system.
Align with Business Interests - Choose a jurisdiction that provides legal protections favorable to your business and reduces risks.
Seek Legal Advice - Consult a legal expert to ensure the clauses align with international contract principles and business objectives.
Conclusion
Jurisdiction and governing law clauses are essential in commercial contracts, particularly international agreements, defining the legal framework for dispute resolution. Failing to address these clauses properly can result in costly litigation and uncertainty. Businesses should carefully draft and negotiate these provisions to protect their interests and ensure smooth contract enforcement.
If you need assistance drafting commercial contracts, Hemisphere Consultants can help. Contact us today for expert legal guidance tailored to your business needs.