Governing laws and jurisdiction clauses are rarely the prime focus when negotiating international agreements. Instead, they are often part of the final trade resulting in hybrid or unamended boilerplate clauses that may prove costly to resolve should problems arise. Sometimes, to get the deal through, parties leave the question of governing law and jurisdiction open, affecting the ways in which parties can achieve their objectives, manage risk and liability, as well as obtain and enforce judgments. It is, therefore, advisable to make a decision on the choice of law at an early stage before beginning to draft the contract.
The governing law agreed between parties is usually the same as the country whose courts are to have the jurisdiction. But this is not essential. Courts in England have proved themselves adept at deciding cases on contracts drafted in accordance with laws of other countries, while Singapore’s ambitious new international commercial court seeks to build on the city-state’s burgeoning reputation in arbitration to draw work away from rivals London and Hong Kong. The new court will hear and decide cases governed by the law of other jurisdictions, with enforcement based on government-to-government and court-to-court agreements.
Split governing law and jurisdiction clauses may lead to increased direct costs with lawyers, jurists and academics called upon to give expert evidence on unfamiliar laws. On the other hand, it might be beneficial for both parties for a dispute to be decided in accordance with a stated governing law, for instance Indian law, to be heard in another jurisdiction with a more streamlined and efficient court system. Not only might it prove to be more cost effective in gaining access to an efficient system such as the new Singapore court, it could also result in bringing about a perception of neutrality and greater commercial objectivity when compared with other regional centres in Asia.
There are various permutations available. The parties may agree on an exclusive jurisdiction clause stating that any dispute must be heard by the courts of a named country. Alternatively, a clause may provide for the non-exclusive jurisdiction of one country that will permit either party to commence litigation there or elsewhere or offer the defendant to be sued in his own country.
A question of being fair
Recent cases have raised concerns about asymmetrical (one-sided) clauses. Such a clause might require a party to initiate proceedings in one country, but allow the other party a free choice to litigate elsewhere. One-sided clauses have been common in banking and other transactions, where one party is in a stronger bargaining position. They appear to be valid in many jurisdictions including Singapore, Australia and England.
But these clauses have recently been held ineffective in France and Russia. In the French case, the clause required a French national to submit to the exclusive jurisdiction of the Luxembourg courts while the other contracting party, a bank, had the right to bring an action in any competent court. The French Supreme Court decided that the clause was invalid as it was only binding on one of the parties. In the Russian case, the clause required disputes to be referred to arbitration in London, but permitted one party the option to commence litigation. The Russian Supreme Court held that the clause created inequality and was therefore contrary to public policy. The court went on to interpret the clause as giving both parties equal rights, with the result that each party was able to commence litigation in Russia.
Parties should, therefore, make a careful assessment of the usage of asymmetrical jurisdiction clauses, particularly in deals that may have some nexus with countries with similar concepts as those in France or Russia. Other legal systems may also refuse to implement one-sided dispute resolution agreements with unpredictable and costly consequences.
To find out more about negotiating and drafting techniques for your international commercial contracts, sign up for ALB’s International Commercial Agreements: Agency & Distribution Seminar on Apr. 1 in Singapore!
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