Governing law and jurisdiction: why getting it right is critical for cross-border contracts

In 2010, we published an article called “Governing law and jurisdiction: Getting it right is crucial”. Several years have passed since then, during which we have seen some developments in EU law in this area. 

More importantly, however, the seismic change prompted by the UK’s vote to leave the EU in 2016 introduces new risks ahead for those principals, agents, suppliers and distributors who do not ensure that their contracts include properly drafted governing law and jurisdiction (dispute resolution) clauses.

First thing’s first – what do these terms actually mean?

Confusing the concepts of governing law and jurisdiction (and as a result, only dealing with one in the agency or distributorship agreement) is very common. Often agency or distributorship contracts provide, for example, a clause stating the governing law of the contract, but omitting any clause determining which courts will hear the dispute. Dealing with one aspect is not enough – you must deal with both in order to protect your position.

Governing law is the actual law that applies to each term of the contract (and which may imply additional terms into the contract). Each country has a different system of law, which will often have been developed over centuries. There can be considerable differences between one country’s national laws and another’s. For example, there are fundamental differences of approach between English law (which is based on a common law system) and the law of many European countries (which have civil law systems). Even where an EU Directive exists, there may be variances in how each member state of the EU has implemented the Directive into its national law. An example is the EU Directive protecting commercial agents, which has been implemented slightly differently in different EU countries.

Jurisdiction is usually the issue of which country’s courts have the right to hear any legal claim that is brought when a dispute arises regarding how the contract has been performed or terminated.  However, if you did not want a court to decide a dispute between you and the other party, you could agree in the agency or distributorship agreement to arbitration instead. Which courts (or which arbitral outcome) you choose to decide disputes could have a substantial effect on the length of any legal proceedings and the costs involved.     

A contract does not have to have “matching” governing law and jurisdiction clauses. This means, for example, that the English courts could hear a dispute and apply Italian law to determine the outcome of the dispute. However, choosing one country’s courts to determine a dispute by applying another country’s laws is not generally a good idea. It can lead to additional complications, and it is likely to make the litigation more expensive. 

Agreeing governing law and jurisdiction with the other party

When the agency or distributorship agreement is being negotiated, you and the other party should agree governing law and jurisdiction, and make sure your agreement contains clauses clearly recording your choices. 

If you operate your business from England, often the best outcome for you would be for English law to be the governing law, and for the courts of England and Wales to have jurisdiction. This is because it is usually preferable to have the home advantage, by litigating in your own country’s courts, in your own language, and with a familiar legal system. The alternative – litigating in another country’s courts, in a different language and with an unfamiliar legal system will almost certainly add to the costs and stress of the litigation process.

Jurisdiction clauses in agreements often for “exclusive” jurisdiction to be granted to a particular country’s courts, or “non-exclusive” jurisdiction. A properly drafted clause in an agency or distributorship agreement that the English courts will have exclusive jurisdiction over all disputes will generally trump any attempt by the other party to have the proceedings heard in the courts of another country. 

Non-exclusive jurisdiction clauses do not provide the same comfort, but they do allow a party to delay the choice as to where to sue the other party in the event that a dispute arises. The suing party could, in such circumstances, decide to sue in the courts of the country named in the jurisdiction clause, or the courts of another country which has jurisdiction under its laws to hear the dispute. Suing in another country can have the disadvantages referred to above. However, parties may decide to bring proceedings in the other party’s courts in order to make it easier to enforce any judgment obtained against the losing party’s assets.

Where the parties have not made an express choice – the current position within the EU

If you are based in the UK and have an agency or distributorship agreement with a party based in another member state of the EU which does not mention jurisdiction and governing law, jurisdiction and governing law will (for the time being) be determined by reference to EU law. 

On jurisdiction, the general rule is that a party must be sued in his local court. For a company, the local court will be the court where the company has its central administration or principal place of business. However, there are exceptions to this general rule. These exceptions provide that you would, as an alternative to suing the other party in their local court, be able to sue the other party under an agency or distributorship agreement in the courts of the country where the agent or distributor was performing its services under the relevant agreement. This rule is more likely to work against principals and suppliers who are sued by their agents or distributors in other EU countries, because these rules provide a way for agents and distributors to sue in their home courts. As such, for principals and suppliers not to specify that the English courts have exclusive jurisdiction is likely to be a massive own goal.

If the governing law of the contract has not been agreed, the applicable law will be the law of the country where the agent or distributor has its place of central administration or principal place of business. If it can be shown, however, that the contract is obviously more closely connected to a country other than that in which the agent or distributor is based, then the law of that other country will apply. As before, this represents a clear incentive to specify English law as the governing law in contracts made by principals and suppliers based in England and Wales.

After Brexit

It is possible that after the UK leaves the EU, English law will develop over time so that the rules applied by the English courts to decide governing law and jurisdiction where no choice has been made by the parties differ from the EU rules explained above. Such divergence will make the job of determining governing law and jurisdiction where one party is based in England and the other is based in the EU more complicated.

This uncertainty means that including properly drafted clauses in your agency and distributorship agreements which definitively choose the governing law of the contract and which courts will have jurisdiction will be even more important going forwards. 

Ultimately, if you do not agree these issues at the outset of the relationship, then you are doing yourself a disservice. The last thing which you want if legal proceedings become unavoidable is to start off those proceedings with a costly quarrel about where and under whose laws the dispute should be heard. 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
Emma Roake
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