Hope you are not among those who fail to give appropriate attention to the actual language used in Governing Law & Jurisdiction clause; and are letting that failure to result in untoward consequences that threaten the certainty sought to be achieved by the choice of a particular jurisdiction in the Governing Law clause.
This is particularly important in an Contracts spanning geographies, where parties maybe based in different jurisdictions, as these clauses create certainty in the event of a dispute occurring between them. This write-up investigates the impact of this clause being not clearly worded or god forbid, if the contract does not contain these clauses, at all.
Where does it impact most?
Suppose your company does business in India. If you’re a small or medium business dealing 100% exclusively with locals, you may not really need a clause telling your customers which law applies. Everyone will expect it to be the law of whichever state your business is in.
Now, suppose, your company is multi-national and does business in Japan.
If your customer in Japan wants to sue over an issue with the product, would Japanese law apply or would the law from any of the other countries of your presence take over?
A well defined governing law clause will determine which laws will apply and can keep both companies from having to hire international lawyers. Just imagine, the hassle in finding a Law firm conversant in Japanese as well as English and able to make you understand Japanese Law, for which you may not have any clue. Phew!
Hence, we understand that,
A “choice of law” or “governing law” provision in a contract allows the parties to agree that a particular state’s laws will be used to interpret the agreement, even if they live in (or the agreement is signed in) a different state.
and, you understand why it is so important- It gives clarity about which Law governs the interpretation of your Contract, saves you from hiring a Lawyer at a country you have no clue of how the Law works.
Now, what is Jurisdiction?
Jurisdiction refers to where a dispute will be resolved.
Going back to the case of your litigant Customer in Japan, Suppose your oversight led to the contract being required to have Jurisdiction in Japan, it would mean that lawsuits are to be filed in Japan.
While the selection of which state is used for governing law is not often a crucial negotiating issue. But the selection of the state for jurisdiction can be very important: If there’s a dispute, that’s where everyone will have to go to resolve it.
So now, you don’t just have to hire an Internation Lawyer, but appear before a Court in Japan, adding to your cost of travelling, lodging.
In our experience, sometimes these two provisions are grouped together.
And it is generally found, while you do get to declare which state’s or country’s laws you’d like to get governed by, you can’t really just choose just anywhere to go to Court. Looking at a Contract under dispute, Courts will look at the governing law selected in your agreement and then look for some sort of connection between that location and either:
• The transaction or part of the transaction, or
• At least one of the parties.
Because, you know what, Judiciary across the Globe is overburdened and understaffed.
So, you will see that Organizations like Amazon that operate worldwide, they have a different governing law clause for each of their bases of operation, often found in their Terms of Use stating the Governing Law which would apply for a country where from the website is being accessed.
So, what you would do?
So we have established that you need to include a governing law clause in your Agreements, then here are some tips that can come in handy, so here are some practical techniques you should implement:
1.Choose wisely- Stay closer to Home
Considering that there are many options here, it is advised you pick a law that suits you best, for governing your agreements. You have the opportunity to pick something that goes in your favor, so do not miss out on that opportunity by making a decision in haste.
Hiring a lawyer, or finding a friend who has an understanding of these matters, is a smart course of action. Considering how there are many choices, the best one might not always be obvious, so asking for a second opinion is strongly advised in this case.
2. Or go somewhere familiar.
We have already stated that you can’t simply pick governing law clauses from anywhere. In order to select a viable law, it needs to be the law from the location that is related to transactions in some way. In other words, it can be the headquarters of your store, the location where the transaction took place or even the location of your Customer. But avoid randomly selecting the Governing Law and Jurisdiction.
3. Don’t leave it open for interpretation
Even though you are not obliged to select a governing law in your agreements, it is better if you do then if you just leave it open for interpretation. First, if you do not pick a law, the courts will try to determine your intention. If they find no vested interest in this arrangement, your contract will be governed by the law of the jurisdiction that has the most connection to the transaction in question.
4. Law needs to be certified
You may not know this right away but there is a possibility of a court not upholding the selected governing law clause. This can happen if the law clause is not bona fide or if the applicable law contradicts public policy in some way. So, if you purposely choose a governing law so that you can avoid the laws of another jurisdiction, it won’t apply. It needs to be both bonafide and in accordance with public policy.
Hence, Final Words(drafting notes actually)
1. Include express governing law and jurisdiction clauses in the contract; seeking to imply them by reference to other contracts or documents can prove difficult.
2. Draft the clause so that it is wide enough to cover both contractual and non-contractual disputes which may arise, for example for misrepresentation claims. Specify whether it is exclusive or non-exclusive.
3. Unless there is good reason not to do so, ensure the governing law and jurisdiction clauses are compatible with each other.
The inclusion of clear provisions on governing law and jurisdiction in a contract as referred to above, should ultimately assist in any dispute being determined under the law and in the courts chosen by the parties.
Or, else your Agreement is going to feel the Monachopsis- slightly out of place!
We are extremely grateful if you have read till here. We enjoyed writing this piece as much as you have enjoyed reading it.
This is an opinion piece and must not be construed as a Legal advice.
© 2020, Inovatree Consultants LLP. Feel free to share while retaining this Copyright Notice.
…by checking the Governing Law and Jurisdiction
