Number 1 Takeaway: Jurisdiction and governing law clauses address different things
Jurisdiction and governing law are different. Because of the differences between jurisdiction and governing law, parties should draft them clearly and ideally in separate clauses in a contract. But what exactly are the differences between jurisdiction and governing law clauses? In this article I will examine the differences between jurisdiction and governing law clauses and principles to help draft them in a commercial contract. I will also briefly consider how European Union law may interpret a jurisdictional dispute.
Differences between jurisdiction and governing law
Essentially, a commercial contract is a way for the parties to record their legal relationship in writing. Different countries, and even different states within countries, have diverse laws, so it is important for a contract to set out unequivocally the laws that govern the parties’ relationship. As discussed in my previous article, it is therefore sensible to expressly state in a contract the set of laws that govern it. This is sometimes known as a ‘choice of law’ provision.
If a contract does not state the laws that govern how a court should interpret the legal terms, the parties may become embroiled in a dispute in relation to what laws will apply to their contractual and non-contractual obligations. This second part is significant as, in the EU, the ‘Rome Regulation on the law applicable to non-contractual obligations’ (known as Rome II) allows parties to agree in a contract the governing law applying to non-contractual obligations.
As more and more technology services cross borders and parties are based in international locations, it is more important than ever for a contract to set out unequivocally the laws that govern the parties’ relationship. In an example where one party is based in New York, the other party in London and the services are being delivered in Dublin there could be at least three different sets of laws that may apply.
An example of a short form choice of law clause is along the lines of ‘this Agreement and any dispute or claim arising out of or in connection with it or its subject matter or formation (including non-contractual disputes) shall be governed by and construed in accordance with the law of the Republic of Ireland.’
Jurisdiction and Dispute Resolution clauses
Once the parties agree the governing law provision they should consider how they will address disputes that arise under the contract. Many parties find it efficient to include a graduated dispute resolution clause that allows the representatives of both parties to try to resolve any dispute before the dispute escalates to a higher level.
There are a number of escalation paths to consider. For example, the parties could include a clause requiring them to refer to mediation or arbitration any disputes that the parties’ representatives cannot resolve within a specified time period. Arbitration can be useful in situations where, due to confidentiality reasons, a party does not wish to litigate in court. Arbitration can, however, be an expensive way of maintaining confidence and different rules apply to introducing evidence to arbitration proceedings.
If the parties instead wish to escalate any unresolved disputes directly to a court, they should expressly state in the contract what court or courts will have jurisdiction to hear the dispute. In a similar manner to not choosing a choice of law provision, if the parties have not expressly stated the court having jurisdiction it in the contract this can waste time, money and resources before the parties can begin to litigate the actual dispute.
In the example above, where one party is based in New York, the other party in London and the services are being delivered in Dublin, without a clear jurisdiction clause there could be simultaneous claims brought is separate jurisdictions. An example of a short form jurisdiction clause is along the lines of ‘each party agrees that the courts of the Republic of Ireland shall have exclusive jurisdiction to settle any dispute or claim arising out of or in connection with this Agreement or its subject matter or formation (including non-contractual disputes or claims).’
The jurisdiction clause can state that the jurisdiction is either ‘exclusive’ or ‘non-exclusive’. Jurisdictions usually have their own complicated rules governing the precise meaning of these words but generally ‘exclusive jurisdiction’ means that only the courts noted in the contact will have jurisdiction to hear a dispute. ‘Non-exclusive jurisdiction’ means that if a party wishes it may bring a claim in a court other than the one noted in the contact.
EU Approach to Jurisdiction: Brussels Regulation
In the European Union, the ‘Brussels regime’ provides rules that regulate what courts have jurisdiction in legal disputes between individuals resident in different EU member states. It consists of the revised Council Regulation No 1215/2012 (known as the ‘Brussels I Regulation‘) and the 2007 Lugano Convention that applies between Switzerland, Iceland, Norway and the EU. The Lugano Convention serves as a parallel agreement to the Brussels I Regulation as its content is substantially the same. In terms of jurisdiction, the general rule under the Brussels regime is that defendants domiciled in a EU member state must be sued in the courts of their domicile. However, in most cases, parties may contract out of the general rule by making an express choice of jurisdiction. So, for example, parties domiciled in Italy and Spain respectively could elect in the contract to refer any disputes to the courts of England & Wales.
The revised Brussels regime also renders cross-border judgments automatically enforceable across the EU. In other words, if a judge in France makes an enforceable judgment, this judgment will be automatically enforceable in any other EU member state.
There are differences between jurisdiction and governing law. In commercial contracts, parties often combine the principles of governing law and jurisdiction. Parties should draft these concepts separately and clearly. It may help avoid some common problems to follow the drafting guidelines discussed above. Despite the EU’s drive for legal harmonisation, there are still differences in legal systems in EU member states. From an EU law perspective, parties should still therefore make sure that the governing law and jurisdiction provisions are stated expressly in their contract.
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