Governing law: reading between the lines
You may be forgiven for thinking that the contract says what it says, so it should make little difference which governing law it is subject to. But context is all important. English courts, for example, have emphasised in a string of recent judgments that if the wording of a clause is clear, that wording will be applied literally – even if that produces a draconian result out of kilter with business practice. Many other European jurisdictions will give greater weight to commercial common sense. Countries such as France go further, subjecting the contract to general duties of good faith. This can mean the difference between being able to trigger a termination clause or not.
National laws may also import additional clauses into a contract, which is particularly common for consumer protection legislation such as the Consumer Rights Act in the UK, which requires goods sold to consumers to be of satisfactory quality and fit for purpose, amongst other things.
Local counsel can play an important role here, as they will be able to advise how the contract would be read, and what would be read into it, if their governing law were applied to the contract.
Jurisdiction: location, location, location
The choice of jurisdiction can have an even greater impact than the governing law. A contract means little unless it can be enforced effectively. At the most basic level, this means having confidence that it will be considered by a competent and independent judiciary.
What is easy to overlook is that the speed of litigation (the infamous “Italian torpedo”), availability of supporting remedies (particularly injunctions) and any automatic rights of appeal can have a major difference on the practical ability to obtain redress. At its most extreme, a perfectly good legal claim may not be worthwhile pursuing.
Other considerations may include procedural rules such as discovery – with the position in England typically being more like that in the US, with wide-ranging discovery – and the typical cost of litigating in a given jurisdiction.
Looking beyond litigation?
The main alternative to litigation is for parties to provide, upfront, for any disputes to be governed by arbitration, rather than by the courts of any particular country. There are a number of reasons why some parties choose international arbitration, including:
- the perceived neutrality of arbitral tribunals, with the parties able to nominate their own arbitrators, or process for choosing arbitrators;
- the confidentiality and privacy of the process; and
- the application of the New York Convention, which has been ratified by over 150 countries, for the enforcement of arbitral awards.
It may also be worth including a contractual tiered dispute resolution process, which may require disputes to be first escalated (potentially up to CEO-CEO level) before a claim can be issued. A clause could also provide for alternative procedures such as mediation or expert determination, with recourse ultimately to litigation or mediation if a dispute cannot be resolved.
Care should be taken, though, to ensure that any arbitration or contractual dispute resolution clause works as intended. For an arbitration clause, you will need to consider issues such as the ‘seat’ of arbitration and the rules that should govern the arbitration (international governing institutions such as the ICC (in New York) and LCIA (in London) each have their own, similar but different, set of rules and procedures). For a contractual dispute resolution clause, you need to ensure that it will be upheld by the national law you have chosen to govern the contract. You should also consider whether you really want to have to go through additional hurdles before issuing a claim, which can be counter-productive in some circumstances
Does the UK’s exit from the EU mean we should stop using English law or jurisdiction?
In short, no.
Until the transition period ends on 31 December 2020 the position remains as it had been before the UK left the EU. After that, there will be an impact on the legislative framework that governs the determination of jurisdiction and recognition of judgments between the UK and EU courts. However, the UK government is looking to replicate the current system as part of the trade deal with the EU – and if that does not happen, there are a number of other options available that give broadly similar outcomes when it comes to contractual governing law and jurisdiction clauses.
As we have previously explained, if (taking into account the other factors discussed above) English law and jurisdiction would otherwise be the favoured option, this should remain the case notwithstanding Brexit. If there are commercial or other pressures to avoid this, arbitration is essentially “Brexit-proof”, so may be the answer.
A competitive marketplace
The discussion around Brexit and litigation has brought focus to the increasingly competitive nature of national courts, looking to maintain or promote themselves as centres for international dispute resolution. Recognising the success that London’s Commercial Court has had, France, Germany, Belgium and the Netherlands have each opened or proposed new commercial courts, which would be aimed at attracting international disputes, with the proceedings taking place in English. The Paris International Commercial Court is specifically designed to be able to hear disputes subject to English law, relating to financial contracts. Similarly, Singapore and Hong Kong are popular locations for dispute resolution relating to contracts concluded in Asia.
In response, the UK is looking to introduce reforms to remain competitive. While the ability to obtain relevant documents through discovery can be an important tool in some cases, to detractors, having extensive discovery as the default option makes the UK an expensive place to litigate. Recognising this, the UK has brought in reforms to streamline disclosure. Other initiatives include a new online court (initially, at least, for lower value claims), and a proposed new court to specialise in fraud, economic crime and cyber-crime.
Top tips to stay ahead
There is no right option for governing law, jurisdiction and dispute resolution clauses, but the following considerations should help you avoid becoming unstuck further down the road:
- Make sure your contract has clear governing law and jurisdiction clauses. The drafting should not confuse the two concepts, although it is generally a good idea for the governing law and jurisdiction to be the same place. It is most important, that this clause is not changed in isolation – the entire contract needs to be considered and reviewed according to the law selected to govern it.
- Define which disputes are going to be included. If you intend for the jurisdiction and governing law clauses to also apply to related non-contractual claims (for example, under tort), say so.
- Be clear about governing law and jurisdiction from the start. Look to agree on jurisdiction and governing law even from the pre-contract stage, as this could affect whether pre-contractual documentation is binding, and the when a contract is considered to have been executed. You may be surprised!
- Check with local counsel whether there are any national rules that will be imposed on top of what the contract says. This is particularly relevant when you are contracting with consumers or employees, or in relation to real estate. Similarly in jurisdictions which adopt civil law, contracts may be shorter because there are implied terms imposed by code.
- If you are including a contractual resolution clause, check whether it is binding under the law chosen for the contract.
- If you are including an arbitration clause, you may want to take specialist advice. Factors such as the seat of arbitration and institutional rules can make a big difference in practice.