Contracts and the Governing Law Clause

If something goes wrong with a contract, you'll need to get the issue resolved by referring to the governing law clause contained in the agreement.

The first step is always to discuss the situation with the other party. But it's equally important that the contract already contains clauses which can both clarify the relationship between the parties after a contractual disagreement but also set out the procedure for finding a resolution acceptable to both parties.

This can be achieved legally either by using mediation or dispute resolution services, or by the courts. For using mediation or dispute resolution services, having 'Mediation' or 'Dispute Resolution' clauses in the contract is always a good option.

But you always need to ensure that the contract contains a Governing Law clause so that if you do need to go to court you know which country's courts (jurisdiction) and laws will apply (applicable law). This may not always be obvious in complex contracts performed globally or online.

Jurisdiction clause

IT Law, governing law clause, governing law, choice of lawThe jurisdiction provision or clause refers disputes arising under the contract to a country, territory or place for hearing and determination. Jurisdiction clauses should be distinguished from choice of law clauses, as the law of the contract (lex contractus) may differ from the country within which disputes are heard (lex fori).

In England and Wales, a standard form of jurisdiction clause that goes as far as is possible to prevent disputes being heard in other jurisdictions, states

"The parties irrevocably submit to the exclusive jurisdiction of English Courts for the determination of disputes arising under this contract".

Such clauses are referred to as exclusive jurisdiction clauses. The parties may also agree to the non-exclusive jurisdiction of a country, which does not prevent legal proceedings being brought in foreign countries.

Anti-suit injunctions may be available to prevent off-shore legal proceedings in the event that the parties have agreed to a jurisdiction for disputes to be heard to the exclusion of all others.

Jurisdiction clauses may be expressed in a variety of ways and with different degrees of particularity. For example, an exclusive jurisdiction clause may be

"The parties irrevocably submit to the jurisdiction of English Courts."

and a non-exclusive jurisdiction clause as

"The parties submit to the [non-exclusive] jurisdiction of English Courts."

The Brussels I Regulation plays in important part in determining which courts amongst the member states of the European Union have jurisdiction.  In cases where the Regulation fixes the exclusive jurisdiction of member state's courts, jurisdiction clauses and agreements are of no effect.

The Brussels I Regulation was transposed into UK law under the The Civil Jurisdiction & Judgments Order 2001.

'Choice of law' clause

A choice of law provision or clause is a paragraph in a contract stating the system of law (with reference to a country) that will govern the interpretation and resolution of disputes arising under the contract.

Such clauses are usually simply stated,

"This contract shall be construed in accordance with English law."

Jurisdiction clauses usually appear in conjunction with jurisdiction clauses.

Contractual obligations

A well-drafted contract will have a governing law clause which determines the substantive law that will be applied to work out the rights and obligations of the parties to the contract. Generally, the English courts will uphold an express choice of law as a valid choice. However, while express choice of law in relation to contractual obligations cannot be overturned, significant challenges can be made to it under the Rome Convention or the Rome I Regulation, which can have the effect of modifying the applicable law.

The Rome I Regulation was implemented into UK law by The Law Applicable to Contractual Obligations (England and Wales and Northern Ireland) Regulations 2009

Non-contractual obligations

In tort (known as non-contractual obligations) cases, e.g. defamation, breach of data protection, product liability, etc. the courts where the harmful event occurs (or may occur), mandatory legal provisions also apply. These are governed by The Law Applicable to Non-Contractual Obligations (England and Wales and Northern Ireland) Regulations 2008.

Points to consider

  • Contracting parties can agree court jurisdiction for contractual disputes. Without express agreement in writing, courts of the EU member state in which the defendant is domiciled applies;
  • In tort (known as non-contractual obligations) cases, e.g. defamation, breach of data protection, product liability, etc. the courts where the harmful event occurs (or may occur) apply
  • For breach of a contractual obligation, defendants may be sued in the courts where the obligation was to be performed;
  • The place for performance online, unless agreed otherwise is: (a) for goods, the Member State where the goods were delivered or should have been delivered; (b) for the provision of services, the Member State where the services were provided or should have been provided;
  • Mandatory consumer protection rules allow a consumer’s courts to have jurisdiction, subject to some exclusions. But, the supplier must have directed his activities at the specific country in which the consumer was domiciled.
  • When a consumer located in one Member State accesses a company website in another Member State and accepts the offer made on the website to buy goods or services, the company will be considered to have directed its activities to the consumer’s Member State, notwithstanding that the website may only be targeting consumers in the company’s own country.

Compliance tips

  • Make sure that your contract has a governing law clause that addresses both jurisdiction of the courts and applicable law.
  • If you are selling products and services to consumers, be clear about which countries you are 'directing your activities' at.
  • Always carry out a risk analysis of countries in which you want to sell your products and services. Engage with lawyers who understand both local law and the online legal requirements.