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Governing Law & Jurisdiction

What is a ‘Governing Law and Jurisdiction’ Clause?

Most agreements, particularly those of an international nature, will have a ‘Governing Law and Jurisdiction’ (L&J) clause (sometimes split into two clauses). This is a provision(s) which sets out which country/territory’s legal system is to apply to the agreement and which country/territory’s courts will hear a dispute that arises from the agreement.

Law & Jurisdiction

If both parties are resident in the UK and the transaction covered by the agreement is carried out in the UK, it is arguable that a L&J Clause is unnecessary. Though some lawyers would point out that it is safer to have one particularly if, say, one party is resident in England and one in Scotland due to the differences in laws between the two countries and their different legal systems.

Many parties believe that, in cross border agreements, if a L&J Clause is inserted which states that the governing law is English and the English courts have jurisdiction over disputes that they are secure. However, it is not quite so simple.

Even if judgement is given in your favour in an English court, its commercial worth often depends on its enforceability and the location of the defendant’s assets. Whilst an English judgment can be easily enforced against assets located in the UK and elsewhere in Europe, more difficulty may be encountered in other parts of the world. For example, there are no reciprocal enforcement treaties between the UK and numerous other countries including the USA, China and Saudi Arabia. If, say, a contract between a Chinese company and an English company provides for the jurisdiction of the English courts but the Chinese company has no assets in England, the English company has little protection as China does not enforce English court judgments.

In these circumstances the parties may be better off with an arbitration clause because arbitral awards are widely enforceable by virtue of the New York Convention.

Even then, matters are not entirely straightforward as, for example, Saudi Arabia ratified the New York Convention in 1993. Enforcement of overseas judgments in Saudi Arabia has, however, continued to prove problematic as the authority with jurisdiction to enforce them has often considered that an award is not compatible with public policy or with the principles of Shariah law.

What happens if there is no L&J Clause?

The answer is dependent upon (amongst other things) the location of the parties but will be decided by the court in accordance with a myriad of complex rules and laws. This can cause uncertainty and lead to additional costs and delay.

It is therefore probably always preferable to include a L&J clause and/or an arbitration clause but it is well worth seeking advice before deciding on its content and structure.

This should not be relied upon for legal advice. If you would like any further information or advice please email richard@clariclegal.co.uk.

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