Pitfalls in Cross-Border Commercial Agreements – Governing Law, Jurisdiction and Dispute Resolution

24 Jul 2017

When entering into a commercial contract which involves a party in another country, it is easy to overlook the importance of the governing law, jurisdiction and dispute resolution provisions within the contract.

Put simply, the governing law of a contract dictates which country’s law applies to that contract, whereas the jurisdiction provision sets out which country’s courts shall hear the matter.  The dispute resolution provisions will specify how a dispute arising between the parties should be resolved.

If a business is entering into a written contract or considering terms of business, it should always ensure that provisions setting out the governing law, jurisdiction and method of dispute resolution are clear.  Moreover, these provisions should compliment one and other.  For example, an English-based business enters into a contract for the provision of goods with a Dubai-based business.  The written agreement is governed by English law with English courts having exclusive jurisdiction and dispute resolution being the courts.

If a dispute arises, which is determined by English courts pursuant to the agreement, that English court judgment may not be enforceable in Dubai because Dubai, like certain other countries including China, does not recognise judgments of English courts.  That is likely to cause inconvenience and expense to the English business which has obtained the judgement.

Whereas in the same example, if the agreement specified that disputes were resolved by arbitration, the English business has a much greater chance of enforcing the decision of the arbitrator in Dubai.  As a general point, in many instances an arbitral award is easier to enforce than an English court judgment, in particular when enforcement is likely to take place outside Europe.

Another instance where the issue of governing law, jurisdiction and dispute resolution arises, is where a business purchases goods using a purchase order, or by email or orally, and they have not considered how and where any dispute arising from that contract will be resolved.  For example, an English-based business orders goods from a Spanish-based business and concludes the transaction by email.  A dispute arises.  The Spanish supplier will probably wish to resolve the dispute with reference to Spanish law in the Spanish courts.  Whereas the English business may assert that English law applies and English courts have jurisdiction.  This preliminary dispute, about how to conduct the substantive dispute, is likely to prolong resolution and increase both parties’ costs.

In this example, a potential outcome is that the courts decide that the contract was formed in Spain, so the governing law is Spanish law.  But because the goods were due to be delivered to England, English courts have jurisdiction.  This outcome may be undesirable for both parties.

The above examples illustrate why, when entering into contracts whether in writing or otherwise, a business should always pay attention to governing law, jurisdiction and dispute resolution.

At Colman Coyle we have extensive experience in drafting agreements and terms of business where there is a cross-border element.  We are experienced in all forms of dispute resolution should a dispute arise.

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