The two clauses at the end of a cross-border contract, the ones about governing law and jurisdiction, are read last and matter first. They are frequently copied from a previous document without thought, and they determine, before any dispute arises, which country’s law will interpret the contract and which country’s courts will decide any argument about it. Getting them wrong does not usually surface until the moment they are needed, at which point they cannot be changed.
They are two different questions
Governing law is the substantive law that interprets the contract: what the words mean, what is implied, what remedies exist. Jurisdiction is procedural: which country’s courts hear a dispute. They are independent. A contract can be governed by Dutch law and litigated in another country, or governed by one law and referred to arbitration. Conflating them, or specifying one and forgetting the other, is among the most common defects in cross-border drafting.
Choosing the governing law
The governing law should be one that both parties can live with and, ideally, one that treats the subject matter predictably. A neutral, well-developed commercial law is often preferable to the law of either party’s home country, because it removes the sense of home advantage and because its outcomes are foreseeable. What matters most is that the choice is deliberate: a contract silent on governing law leaves the question to conflict-of-laws rules, which can produce a surprising and unwelcome answer.
The parties choose the governing law once, in five minutes, at the end of a negotiation. A court may spend years, and the parties a fortune, on a contract that failed to choose.
Jurisdiction, and the enforcement it implies
The jurisdiction clause should be chosen with enforcement in mind, not only convenience. A judgment is only useful if it can be enforced where the defendant has assets, and within the European Union the rules on recognition and enforcement of judgments between member states make a judgment from one member state broadly enforceable in another. Choosing a European court for a dispute with a European counterparty therefore has a practical advantage that a choice of a third-country court may lack, a theme we develop in our note on enforcing a judgment across European borders.
Exclusive or non-exclusive
A jurisdiction clause can be exclusive, meaning disputes must go to the named courts, or non-exclusive, allowing a claim elsewhere. Exclusive clauses provide certainty; non-exclusive clauses provide flexibility that can be useful when a defendant’s assets are movable. The choice should be conscious, because the difference decides whether a party can be pursued in the most convenient forum or only in the agreed one.
Arbitration as the alternative
For genuinely international contracts, arbitration is often chosen instead of national courts, because an arbitral award is enforceable across most of the world under a widely adopted convention, more readily than a national court judgment is in many countries. Arbitration also offers privacy and a neutral forum. It is not free of drawbacks, cost and limited appeal among them, but for a contract spanning several jurisdictions it frequently answers the enforcement question better than any single national court.
Consistency across the structure
A group with many contracts should not have a different governing law and forum in each one by accident. Inconsistent clauses across related agreements produce the situation where a single commercial dispute has to be fought in several places under several laws at once. The clauses should be chosen as a coherent policy across the structure, which is part of the coordination we describe in our note on shareholders agreements that actually hold.
Montclare coordinates the legal architecture behind cross-border structures, working with counsel in each relevant jurisdiction to one design. Our services are set out on our services page.
This article is informational and does not constitute legal advice. The law differs by jurisdiction and the treatment of any matter depends on its facts. Each engagement is subject to scope and applicable regulation.