Out-Law Guide | 27 Oct 2022 | 12:42 pm | 3 min. read
All commercial contracts contain a number of ‘boilerplate’ clauses, which are often seen as standard add-ons to the main terms and conditions of the contract.
One such boilerplate clause relates to jurisdiction and choice of law, and although these can be relatively straightforward when both parties are based in the same jurisdiction, they deserve proper consideration – particularly when the parties to the contract are based in different jurisdictions.
Jurisdiction refers to the geographical limits of a court’s authority, which is not necessarily the same as national boundaries. Jurisdiction clauses, therefore, relate to which courts will hear a dispute. Parties should carefully consider how the court system operates in different countries when negotiating jurisdiction clauses. England and Wales, for example, share the same court system, while Scotland has its own. Because of this, a clause giving jurisdiction to “the courts of the United Kingdom” could be unenforceable due to its ambiguity.
Similarly, when a country is divided into a state or federal system it is important to be specific. References to the courts of New South Wales, or Delaware, should be enforceable – but references to the courts of Australia or the United States could lead to a dispute between the parties about which courts have jurisdiction over the dispute.
There are three main types of jurisdiction clause: ‘exclusive’, ‘non-exclusive’ and ‘asymmetric’ – which is also known as ‘one-sided’ or ‘unilateral’. An exclusive jurisdiction clause specifies that only the courts of a particular jurisdiction, such as those of England and Wales, should deal with any disputes arising out of a contract.
Non-exclusive clauses specify that particular courts, such as those in England, have jurisdiction while acknowledging that some other courts might have jurisdiction too. Meanwhile, asymmetric clauses set out how one party is restricted to suing in a particular jurisdiction, while the other party – which usually has more bargaining power – has greater choice over where they start proceedings.
In addition to deciding which court has jurisdiction over a dispute, the parties should also agree which laws are going to be applied to decide the dispute. This is an important consideration, and advice should be taken to see whether the laws of a different country or state could potentially be more favourable.
Where the court with jurisdiction is applying the laws of a different country, they will need expert evidence on what the relevant law is. This can create conflict if there is differing expert evidence on what is the relevant law, and an additional layer of cost to the litigation process. As a result, most jurisdiction clauses and choice of law clauses will specify that the choice of law is that of the court which has jurisdiction over the dispute.
It is also important for parties to consider the law that is applicable to any agreement to arbitrate that may be contained in an arbitration clause. Arbitration agreements are severable from main contracts, and different jurisdictions have reached different conclusions as to what the law applicable to the arbitration clause should be. The choice of law of the arbitration agreement can have a significant impact on the outcome of dispute.
When a dispute arises and proceedings are issued, the next step is to serve the claim form on the defendant who is domiciled out of the jurisdiction. Serving out of the jurisdiction sometimes requires permission of the court that the claim is issued in, which can be a time-consuming and costly process. Even when permission of the court is not required, it is still challenging to make sure that the correct method of service is used. Failure to use the correct method of service, such as by post, or through a judicial or consular channel, could have serious consequences – particularly when limitation has expired, and it is not possible to reissue the claim form.
There are, however, alternatives to serving out of the jurisdiction. For example, if a foreign domiciled company carries on business in England and Wales, there are provisions under the Civil Procedure Rules to allow service on that place of business. Another solution is for each party to the contract to specify an address for service within the jurisdiction of the counterparty. For example, a French-based company contracting with a German party would provide an address for service in Germany and vice versa – removing the need to serve outside the jurisdiction and the associated additional time and costs.
When based in different jurisdictions, many parties to a contract agree to refer their disputes to arbitration – a contractually agreed method of dispute resolution – rather than to litigate. In an arbitration the complexities in relation to service tend not to arise. Typically, such as under the International Chamber of Commerce Arbitration Rules, an arbitration is commenced when the claimant submits a request for arbitration to the secretariat of the ICC, and the secretariat will then notify the respondent of the claim.
However, complex issues relating to jurisdiction and choice of law can still arise. As a result, careful consideration should be given to the seat of the arbitration, venue of any hearings and choice of law in an arbitration agreement. The issue of jurisdiction, choice of law and service can be complicated when the contracting parties are domiciled in different jurisdictions, and these clauses, rather than seen as standard boilerplate clauses, should be carefully considered and agreed to provide certainty and clarity, and to avoid potential problems should a dispute arise.