Be aware not Delaware: what is a jurisdiction clause and a governing law clause?

According to figures released by the UK Government, UK businesses exporting accounted for £837.7 billion and imports of £865.7 billion. Many businesses aspire to trade internationally, however when entering into international contracts, directors and business owners should stop and think and be aware of jurisdiction clauses and governing law clauses.

What is a jurisdiction clause?

In simple terms a jurisdiction clause relates to which courts will hear a dispute if one was to arise.

What is a governing law clause?

The governing law clause will state which law will be applied to that dispute.

For example, the jurisdiction may state the courts of England and Wales and the governing law may be English law.

What can go wrong?

Often international contractual agreements specify the courts of England and Wales and English law because of the strong reputation of the English legal system. However, in some circumstances other courts and law may be stated, and sometimes there is no jurisdiction clause at all – this is when things can go wrong. 

It is important to be clear about the jurisdiction and governing law and for parties to agree this as part of the contractual agreement.  This provides clarity and saves there being any dispute as to the applicable jurisdiction.

As consumers, each time we download a new piece of software made by a US tech company, it’s likely that the contract with that tech company will be a contract governed by US law before a court somewhere in the US. Most of us don’t need to sue the tech company so it doesn’t become relevant.

Disputes do arise in business, and it is not unusual for a UK domiciled company to contract with a US company and for the US company to provide an online service or software in the UK, but for the contract to state that a particular US law will be the jurisdiction and further, that a particular state is the governing law.

Where this becomes problematic is that if a dispute arises, the US company may seek to commence a legal claim in the US which would require the UK company to instruct lawyers in the US, even though the directors or owners of the company may never have even set foot in the US. It then may become difficult to locate reputable lawyers, and complex and expensive to attempt to challenge jurisdiction.

Therefore, it is easier to agree to resolve any disputes here in England and Wales using English law.

As briefly mentioned above, another scenario might be where there is no jurisdiction clause and governing law clause at all. This could lead to long drawn-out litigation to determine which courts and governing law are the correct ones before the substantive dispute can even start to be resolved.

Comment

It is good practice to agree a jurisdiction clause and governing law clause when contracts are being drafted, and well drafted contracts between companies based in England and Wales should also contain these clauses.