The choice of governing law and jurisdiction is especially important in global business transactions. Contracts are entered between two parties sitting in two different parts of the world and without meeting each other face to face.
In view of that, more importance ought to be placed on the legal framework of the contract, ensuring that the provisions are up to international standards in managing issues that constantly emerge in International businesses.
As cross-border transactions are on the rise, a pertinent issue naming "choice of law" holds significant importance in private international law applicable to international commercial agreements. Contracts should necessarily have a specific reference to some private law that characterizes the commitments expected by the parties to the agreement and recommends the way of redress through the appropriate dispute resolution mechanism (such as court system or arbitration) in case of failure to perform contractual obligations.
A governing law provision in any commercial contract defines the law which will govern or regulate the contract in the event of a dispute, whereas a jurisdiction clause specifies the courts or international institutions that will have exclusive jurisdiction to try the matter or resolve disputes. These clauses are equally important as that of the commercial arrangements between the parties but are neglected amid drafting the general terms of the contract and are considered standard boilerplates at the end of the contract.
These conditions must be treated with as much importance as the substantive arrangements of the agreement. Failure of parties to agree on the governing law can lead to expensive and massive suits deciding the relevant law and jurisdiction to be applied to the agreement. Corporate Lawyers of Dubai assist numerous multi-billionaire companies to have tailor-made commercial contracts which suit the requirements of both parties.
Choice of Law Provision
The decision of governing law for the contract is one arrangement in the contract where the parties assign the law of a particular jurisdiction to oversee and regulate the disputes emerging between the parties. As such, the parties indicate or stipulate that any claim arising out of the contract will be resolved by the law of a concerned jurisdiction. This decision generally becomes binding on the parties when the parties refer the matter to arbitration.
A standard governing law clause states that "this law of this country shall govern the agreement". There are several preconditions which must be considered before choosing a particular country’s law which is detailed below:
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The Worthiness of the Law for Resolving the Dispute:
International law has authorized parties to adopt any law which might govern their contract. That said, parties must not focus on choosing their home country's law to avoid additional expenses but must evaluate the worthiness of law in different jurisdictions which will be appropriate for their commercial arrangements.
There are numerous jurisdictions which have offered importance to case laws and precedents, whereas several jurisdictions are silent on such matters and they do not even recognize certain notions of the contract.
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Jurisdiction Issues
Parties generally consider the law of a particular jurisdiction wherein they wish to resolve the dispute. However, this standard can be amended as numerous courts are willing to apply foreign law for resolving the matter if the parties have specifically agreed. Yet, parties should be careful while drafting the contract, as it will often be burdensome for parties to decide what foreign law should be applicable, should the dispute arise.
They must also be careful as certain jurisdictions do not apply the foreign choice of law and must also consider the manner in which the court will apply the foreign law. On the contrary, most international arbitration institutions readily accept the foreign choice of law and have arbitrators who can easily understand the foreign law to ease the procedure.
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Affinity to the Law
Given the vast cases, parties choose the law which they are familiar with rather than opting for a more neutral law. Also, the latter can bring unaccepted surprises which parties are not aware of considering dissimilar procedural aspects.
Jurisdiction Provision
Another most common uncertain clause is to determine the jurisdiction where the word "may" and "shall" can bring unwanted confusion. Importantly, if parties wish to have a non-exclusive jurisdiction the word "may" can be utilized, on the contrary for an exclusive jurisdiction the word "shall" should be used. An ideal jurisdiction clause states that "the parties shall/may submit their dispute emerging out of or in connection with the concerned agreement to (court /arbitration) of this country."
On a bare review of the foregoing standard jurisdiction clause, we note that the first step is to determine which institution shall be given authority to resolve the dispute, that is, either courts or an arbitration institute. Both the systems have their pros and cons, hence parties should beforehand determine what would be appropriate for the said matter.
It is most certainly believed that arbitration offers a wide variety of options and advantages over courts which are outlined below:
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Choice of arbitrators expert in such matter;
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Private proceedings;
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Binding decisions;
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Choice of governing law;
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Choice of enforcing judgments in the different territories;
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A common language of the arbitration.
UAE Law and Choice of Law
In the UAE, international parties may face issues regarding the application of foreign law to govern the contract. In many cases, courts inherit the jurisdiction and govern the contractual disputes in accordance with the UAE local laws such as Civil Transactions Law or Civil Procedure Code. In addition, the courts of UAE will not let the jurisdiction go to another court over a matter where UAE courts will have the jurisdiction. This can be witnessed in the following disputes:
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Disputes pertaining to real estate situated in UAE;
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Contract finalized in UAE;
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Happening of an event in UAE;
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Matters regarding the employment of a resident in UAE;
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Issues regarding UAE Commercial agencies;
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Property matters related to UAE.
In accordance with the above, if the UAE courts will inherit the jurisdiction, the governing law will be the law of the UAE itself. Accordingly, the court will strike down the governing law and jurisdiction clause in the agreement.
What Do We Learn?
What if there is no governing law and jurisdiction clause in a particular contract? Before the parties get an opportunity to determine the dispute on merits, the parties will have to exclusively determine the courts or law that will govern the contract, which is an expensive and cumbersome decision.
The non-presence of governing law and jurisdiction clause confuses the parties to determine if there is a dispute or not and leads to unfavourable decisions.
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About the Author
Dr. Hassan Elhais publishes analysis of UAE civil law matters, including civil disputes, contractual obligations and compensation claims. For readers researching lawyers in Dubai, his writing offers insight into the legal questions surrounding these topics. Explore his published work and practice-area information for further context.
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Dr. Hassan Elhais