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Agreement on place of jurisdiction for commercial contracts

In the case of international commercial contracts, there is usually an agreement on the place of jurisdiction and a clause on the applicable law. Both clauses are of great importance. At first glance, it seems easy to choose the applicable law and a competent court. But the devil is often in the details. Therefore, we will also highlight some traps that companies often overlook in the following.

The clauses on the applicable law

Every international trade agreement must be subject to a legal system. Different countries have different laws and their content and application by the courts can vary greatly in individual cases.

It is therefore an absolute must to state in the contract which laws should be applicable. Otherwise, there is a danger later on that a long legal dispute will only have to be fought over which law is applicable. Such battles are costly and highly unnecessary.

Especially in an international context and when one or more countries are involved, this choice of law is even more important. For example, the parties to the contract may be located in different countries. The place of performance may be another country. In these cases, therefore, there are even several legal systems which may be relevant to the Treaty. This makes it all the more important to regulate the applicable law in advance.

Agreement on jurisdiction should not be missing

Sooner or later, every company will also be confronted with disputes in the settlement of international trade contracts. That is why it is also necessary to reach an agreement as to which court is competent to decide the dispute.

In some cases, the parties have agreed on an arbitration court and included an arbitration clause in the contract. But this is not always the case. If no arbitration agreement has been reached, it depends on which courts decide the disputes.

Here too, as with the question of the applicable law, there is a risk that costly, time-consuming and superfluous negotiations will be conducted as to whether the case should be heard before the courts of country A or country B. The Court of Justice of country A or country B is in danger of being heard. There is also always the risk that several claims will be heard in parallel in several different courts and that conflicting decisions will be reached.

The parties are therefore well advised to include a clause in their contract on the international jurisdiction of the courts. This stipulates that the courts of a particular country are competent for all disputes.

As a rule, such a jurisdiction agreement is formulated in such a way that the courts “exclusively” or one “not exclusively” have jurisdiction. The interpretation of these terms in legal systems may vary, but in principle the agreement of exclusive jurisdiction means that only the agreed courts have to decide on the legal dispute. If, however, no exclusive jurisdiction of the courts is agreed, the parties may, but do not have to, bring their legal dispute before the agreed courts.

Formulation suggestions

They should not attempt to treat the applicable law and the jurisdiction of the courts in the same wording. The terms are different and so are the conditions for an effective agreement. Both aspects should therefore be agreed separately in the contract. However, both aspects can be dealt with under a common heading, e.g. “Applicable law and dispute resolution” in the contract.

Choice of applicable law

A typical agreement on the applicable law is:

“This contract is subject to German / English / French law.”

While this formulation sounds quite simple, there are some aspects to consider:

  • You don’t agree in contracts “to” Law or that of the contracting party, but names it after the state. International contracts are often also subject to a law to which neither party has a direct connection (e.g. international companies that choose Swiss law to regulate their contracts). Whether it makes sense to choose a neutral third country law as a compromise must be assessed on a case-by-case basis. One has to be sure that the chosen right is reliable and corresponds to the common interests. A foreign legal system can sometimes have unintended consequences that can even affect the validity of the contract. If a neutral right is to be chosen, it must be ensured in any case that the chosen right for the effective enforcement of claims will come into consideration.
  • It is also a common mistake to choose the law of a country that has more than one legal system, such as the USA, Great Britain or China.
  • Simple clauses are usually best. You should avoid formulations such as: “The publicly available laws of…” apply. You should also not split the applicable law (for example “Aspects X are governed by German law. Aspects Y are governed by Swiss law.”). Such formulations increase the risk that later legal disputes may be conducted simultaneously in different legal systems and divergent results may arise.

International jurisdiction of the courts

For the international jurisdiction of the courts there is also a frequently chosen jurisdiction agreement, which reads:

“The parties agree that all disputes arising from or in connection with this contract shall fall exclusively within the jurisdiction of the courts in Hamburg/Germany.”

Here, too, there are a number of aspects to consider when drafting a jurisdiction agreement:

  • A jurisdiction agreement means that both parties want to hear their disputes before a state court. Such an agreement is therefore an alternative to arbitration. In case of doubt, you should choose a jurisdiction clause or an arbitration clause, not both. However, if a party is to have the right to choose whether arbitral tribunals or state courts are competent, professional advice must always be sought so that such agreements are not invalid.
  • If you only want to agree on one court, you must make it clear that jurisdiction before that court is exclusive. If, on the other hand, you do not want exclusive competence, then this should also be sufficiently clear from your wording. Because courts in other countries can interpret quite differently what is meant by “non-exclusive jurisdiction”.
  • Be short and precise in your formulation. Do not attempt to assign different disputes to different legal systems. This often leads to problems. You should also avoid ambiguous formulations. It is therefore better to say, for example, that the courts are “competent” and not that they can “competent”.
  • Consider carefully whether the agreement on the place of jurisdiction will be legally effective. Will a court have jurisdiction simply because the parties have chosen it in their contract? Will a judgment of that court be enforceable at the place where the defendant’s property is located? It also depends on these answers whether the inclusion of an arbitration clause will be the better option.

Please note that the above clauses are only very general clauses and typical errors. We have only given these clauses as examples. Each type of contract is different in its details and therefore it is usually necessary to find individual formulations and regulations that do justice to the contract. For example, certain countries may have enacted laws prohibiting a free choice of place of jurisdiction.

Companies should best seek professional advice on the form and content of a jurisdiction agreement.

 

Lawyer Dr. Tristan Wegner

Your consultant

ABC-Straße 21
20354 Hamburg
T +49 (0) 40 / 36 96 15 0
E ow@owlaw.com
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