UK: Choice Of Law And Forum Selection In Commercial Contracts

Last Updated: 13 July 2012
Article by Ross Williams

In aviation, commercial relationships regularly have an international aspect: parties to a contract are often based in different countries, with "performance" of the contract possibly taking place in more than one country (e.g. fuelling and maintenance contracts and other contracts for the supply of goods and services). For this reason, if a dispute occurs, it will be necessary to determine (i) which law applies; and (ii) the courts of which country will have jurisdiction over that dispute (or whether the dispute is to be referred to arbitration). A general overview is provided below.

First, one should note that it is not strictly necessary that the applicable law is the same as that of the country exercising jurisdiction. Indeed, it is not unusual for the English Commercial Court to have jurisdiction over matters governed by a foreign law. However, it is normal for the parties to choose as the applicable law that which is the law of the court having jurisdiction (or the law of the state in which an arbitration is to be heard). This is obviously because the judges and arbitrators of these courts/ arbitrations will be better versed in their "home" law.

Normally, parties to a contract should agree at the outset which law is to govern the contract and which court is to have jurisdiction (or which arbitral tribunal is to be competent); and include in the contract an express clause to this effect. If the parties do not designate the applicable law, then there may be the need for extensive and expensive litigation to resolve this issue alone (the rules for determining which law applies in the absence of an express choice can be unclear or their application uncertain). Most countries will permit the parties to make an express choice of law and jurisdiction/arbitration. For example, throughout the European Union, the Rome Regulation on the Law Applicable to Contractual Obligations (EC 593/2008) ("Rome I") governs the determination of the applicable law. Article 3 of this Regulation – entitled "Freedom of Choice" – provides:

"1. A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract."

It should be noted that, while the above is of general applicability to commercial contracts, Rome I does contain a number of provisions restricting the choice of law in consumer contracts and certain other type contracts.

While their individual approaches tend to vary, the 50 States of the USA have a similar approach; and such is the case with many other countries.

When selecting the law to govern the contract, one should ensure that the chosen law is appropriate for the parties' purposes. For example, certain countries have undeveloped legal systems, resulting in significant unpredictability as to what is the law on a particular issue.

The above is of general applicability in the field of commercial law. However, it should be noted that there are certain mandatory regimes – international conventions – which govern certain specific commercial activities. These are principally related to the carriage of passengers and cargo (e.g. the Warsaw and Montreal Conventions on the International Carriage by Air, the Hague-Visby Rules on the carriage by sea and the CMR Convention on the Carriage by Road).

Another issue is the choice of jurisdiction. At the outset, one must ensure that the country chosen to have jurisdiction actually recognises the freedom of choice of law by the parties. While most countries do permit such freedom, some do not. Indeed, Article 9 of Rome I restricts the ability of the parties to evade the application of mandatory provisions of the law of the state of performance of the contractual obligations unlawfully; and a court hearing a dispute may refuse to apply the law of a foreign country if it is considered contrary to public policy.

Again, most countries will permit the parties to commercial contracts to determine which courts have jurisdiction. With regard to the European Union, the Regulation on Jurisdiction and the Recognition and Enforcement of Judgment in Civil and Commercial Matters (EC 44/2001) provides, under the heading "Prorogation of Jurisdiction":

"23.1 If the parties, one or more of whom is domiciled in a Member State, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise..."

There are certain exceptions to the above. However, it is applicable as a general proposition in commercial contracts.

Likewise, again as a general proposition, the 50 States of the USA will enforce contractual jurisdiction clauses; and such is the case with many other countries throughout the world. If one party to a contract institutes proceedings in a country other than that designated other country having jurisdiction, the country designated as having jurisdiction may issue an "anti-suit injunction" to stay the proceedings

in that other country (so as to effectively compel any proceedings to be brought before it). However, the "anti-suit" remedies available vary significantly from jurisdiction to jurisdiction and the availability of this remedy should be reviewed when considering when the country in question is suitable. In this respect, it should also be noted that the courts of many countries will not hold a jurisdiction clause to be "exclusive" to the named country unless such is clearly stated. The willingness of a court to enforce a jurisdiction clause in its favour is, of course, an important consideration when drafting the contract.

When deciding on jurisdiction, one has likewise to consider whether it is appropriate for the purpose at hand. Home advantage is not necessarily the best! One of the principal concerns is that many jurisdictions are very slow, with litigation taking many years before a final judgment is handed down. Clearly, during that time, there is scope for a party to the litigation to become insolvent, rendering the process futile. Also, unfortunately, some countries are plagued by corruption or other forms of direct or indirect influences on the judiciary (e.g. political pressure).

Again, while the above is of general applicability in commercial matters, many countries have certain limitations on the freedom of choice of jurisdiction; and the international carriage conventions mentioned above have mandatory provisions in relation to jurisdiction.

Parties may prefer to have their dispute referred to arbitration. The principal reason for choosing arbitration is that the proceedings are normally confidential. Also a downside however, is that it is generally more difficult to compel non-parties to attend as witnesses. Arbitration agreements will be enforced by those states which are parties to the New York Convention on the recognition and enforcement of Foreign Arbitral Awards (which, despite its title, obligates the contracting States to recognise and enforce arbitration agreements: Article II). Given that there are now 146 contracting States, this should ensure that, in practice, arbitration agreements are enforced.

Accordingly, when entering into a commercial contract, it is important at the negotiation stage to consider the issues of applicable law and jurisdiction at the outset. As noted above, it does not necessarily follow that "home" law and jurisdiction is an advantage, even if both parties are from the same country.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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