Choice of law in international contracts – Factors to consider

Often referred to as the “midnight clause”, a choice of court clause in a cross-border commercial contract could have a severe impact on either or all of the parties should a dispute arise. Simply stated, the choice of court clause is intended to determine the forum for resolution of disputes.

During the contracting stage, the parties’ primary focus is on concluding a mutually beneficial commercial agreement whereby such parties gain benefits through positive business relationships and the closing of successful (profit-making) transactions. As such, the possibility of disputes arising is an unpopular thought and is oft forgotten or pushed aside as a less important aspect of the agreement in favour of the seemingly more important commercial aspects. However, the adage that “all good things must come to an end” unfortunately rings true for several commercial ventures and, at some point down the line, a dispute may arise. It is at this point that the choice of court, dispute resolution and choice of law clauses (if any are contained in the agreement between the parties) come into play and these clauses will determine the manner in which such disputes are resolved.

Where an agreement is silent (or even vague) on the choice of court, it is often unlikely for there to be consensus on the process to be followed between the disputing parties. Such issues would then be determined by the relevant court’s interpretation of their own rules of private international law, where differing policies in different countries can often have varied results. Whereas, if the agreement is clear and unequivocal on jurisdiction and the dispute resolution procedure, the parties will be bound to resolve their disputes in the agreed manner and forum. Any court that is tasked with presiding over the dispute would respect the provisions of the agreement between the parties.

When considering the choice of court clause of an agreement, several important factors must be considered by the parties in making such a determination. Some of these factors are as follows:

• Enforceability: the selected court should be able to exercise its powers over the parties by giving effect to any judgment or order it may hand down. Although there has been improved cross-border enforcement of foreign courts’ judgments around the world, it is still vital to ensure that the chosen court is able to enforce its judgment or order against the losing party by way of such party being inter alia domiciled or having fixed assets within the court’s jurisdiction.
• Internal political and/or public policy issues of a country within which the chosen court is situated and how those issues can affect the outcome or process of a dispute are also vital points of consideration when selecting a particular court or forum. Some of these issues can include alleged high levels of corruption within the particular government or judiciary, evidence of poor corporate governance in the country, a trend of the host country’s courts showing favour towards its own citizens over foreigners, and more. Often when there are several issues present in the home countries of the parties, it can be beneficial to agree to on a “neutral” jurisdiction for the determination of disputes. To this end, there has been an increase in parties agreeing to the courts of, for example, Frankfurt, Amsterdam, and Brussels as having jurisdiction over their cross-border agreements.
• Technical regulations or codes relating specifically to the performance of the agreement that may apply to the settlement of a contractual dispute. For example, construction contracts will often contain specific construction adjudication clauses, or engineering standards may differ between the home countries of the parties to the agreement and must therefore be taken into consideration when determining the choice of court.
• Criminal law elements relating to trade and commerce: certain forms of trade are outlawed in some countries whereas in other countries such trade is legal. For example, the sale of alcohol in some Islamic nations is a criminal offence. As such, it would be unwise to select the courts of such a country to have jurisdiction over an international supply agreement involving alcohol.
• Business relationships between the parties: generally, parties would want to maintain positive relations and this is an important consideration when drafting the dispute resolution and choice of court clauses. Naturally it is beneficial to the business relationship where any disputes are settled efficiently, fairly and without delays caused by other issues that are unrelated to the actual central dispute.
• Financial means of the parties: the costs of dispute resolution can be expensive; whereas instituting legal action in the courts will attract attorneys’ fees, arbitration can also become quite costly when considering the arbitrator or tribunal’s fees that must be paid.
• Importance of resolving the dispute efficiently and quickly: parties must consider the forum chosen and whether a trend exists in such a forum whereby judgments or orders are often delayed in being handed down. This would undoubtedly have a further negative impact on the parties and possibly on the performance of the agreement.
• Confidentiality: the moment a dispute is lodged in court, the details of that dispute enter the public domain; as such the choice of court clause might be better suited to refer to arbitration (as opposed to a specific court) if there are serious confidentiality considerations related to the agreement between the parties.
• Trust in the legal system of the chosen jurisdiction: the parties should have faith in the local legal system before agreeing to that system’s courts having jurisdiction over dispute.
• Relation to applicable law – as alluded to earlier above, courts will always apply their own private international law rules when determining the applicable law of an agreement (particularly where the agreement is unclear on the applicable law), whereas mediation and arbitration often provide significantly more leeway in determining the applicable law.

Considering the above, it is vital for contracting parties to ensure that their agreements are drafted properly, and that all factors are considered to ensure the performance and fulfilment of their agreements occur in the manner so desired. Should a dispute arise, that dispute should be dealt with effectively and in accordance with the parties’ intentions.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE)