UK: Governing Law And Jurisdiction - Who Cares?

Last Updated: 5 June 2008
Article by Duncan Black

Most legal contracts contain standard "boiler plate" clauses buried at the end, one of which says something about choice of law and jurisdiction. Few clients attach much importance to it. The reason for this may be because contracting parties, on the threshold of a new life together, do not want to spoil the wedding day by squabbling over the terms of a pre-nup. The problem is, however, that the consequences of the wrong choice, or no choice, can be quite severe.

Governing Law

Governing law clauses establish which country's rules of interpretation and legal remedies apply. The governing law clause will be relevant in determining issues such as the validity of the original agreement and any amendments, the interpretation of clauses if there is uncertainty, whether there has been a material breach and the calculation of any damages.

Where the nationalities of the contracting parties differ or where there is some other connection with another jurisdiction, there is usually a choice to be made. Often the choice of the dominant party prevails, even when the rationale for his or her selection seems hazy. Sometimes the choice is made by the lawyers with most influence over the drafting of the agreement. There is normally great latitude in choosing the governing law, although the legislation or regulations of one country may still apply irrespective of the choice of governing law (for example financial services regulations to which a party may be subject in the conduct of its obligations under the agreement).

In English language contracts between parties of different nationalities, the choice is usually between U.S. law, or more precisely the law of a particular U.S. state, and English law. The decision will often rest on factors such as where the contract will be performed and where the assets are located.


Jurisdiction clauses determine the place where a dispute will be heard and how it will be dealt with. Nearly always, the place of jurisdiction will be the same as the place of the choice of law.

There may be strong reasons for one party to want to avoid a particular jurisdiction, and conversely reasons why the other party may welcome that jurisdiction. Some organisations will want to insulate themselves as far as possible from the jurisdiction of particular countries. Choice of jurisdiction provisions can help reduce, if not eliminate, the possibility of being successfully sued in any particular jurisdiction.

The consequences of the wrong choice, or no choice, can be quite severe.

Litigation Or Arbitration?

Once governing law and jurisdiction have been determined, there is another choice to be made: litigation or arbitration. Arbitration has been gaining in popularity for the last few years. Compared to litigation it is sometimes perceived as more flexible, quicker and confidential. It is not necessarily cheaper than litigation; the parties will have to pay the fees of the arbitral panel (one, three or even five experienced arbitrators) as well as the secretariat fees of the organisation; whereas for litigation, in most countries, judge time and courtroom use remain free of charge or available at nominal expense. The fees of the parties' advocates and legal advisers in an arbitration will be little different from those in court proceedings.

Because the process of arbitration depends upon a degree of mutual cooperation between the parties, there is the possibility of a reluctant disputant dragging things out. Even with cooperative parties it can take a surprisingly long time to agree upon and appoint an arbitral panel. To some extent one is at the mercy of the speed with which the secretariat of the selected arbitration organisation works, and in this, and other, respects the choice of arbitration organisation can be an important factor.

The quality of the decision and the procedure depends on the quality of the arbitrator. They are not uniformly good. Similarly, the litigation courts of some jurisdictions have better reputations for speed and quality than others, but experiences can vary widely within jurisdictions depending on the case, the parties and the judge.

The main benefit claimed for arbitration is that it is confidential, whereas, by and large, court proceedings are public. If there is sensitivity about business information being publicly available, or concerns about witnesses being cross-examined in the glare of the press,1 then arbitration has an advantage. In practice, in the UK, only a small proportion of disputes make it to full trial. Most cases settle on agreed terms long before then. It follows that the risk of adverse publicity may sometimes be overstated.

In some commercial arrangements, when things go wrong, quick remedial action is needed. For example assets may need to be frozen or documents seized. There is no time for agreement and selection of an arbitration panel. Where this is a possibility, it is best to select a dispute resolution clause which allows one or both parties, depending on the circumstances and bargaining power, to apply for immediate injunction relief from the courts of the selected country. After that, the parties can revert to arbitration if necessary.

Key Points

  • Don't just leave it to your lawyers to select choice of law—ask them to explain their choice and what factors, especially business considerations, they have taken into account.
  • Consider how you would want any dispute arising from your contract to be handled. Do you have a house' view about dispute handling generally?

  • How important is confidentiality compared to other factors, for example, speed of decisionmaking?
  • What are you doing to insulate yourself from the risk of being sued in a jurisdiction that is geographically inconvenient or whose laws may tend to favour the position of the other party?


If litigation is selected, there is a trap for the unwary when both parties are domiciled in EU Member States. Even if the exclusive jurisdiction of country 'A' is selected, it is possible for one of the parties to commence proceedings in country 'B'. The time taken for country 'B' to decide whether it can continue to hear the case can be used as a delaying tactic. For example a reluctant debtor may find it convenient and cost-effective to preempt and frustrate efforts by a creditor to collect money by deploying this procedural ruse.2 It cannot be done where the parties have agreed to arbitrate, however. Nor does it apply to courts outside the EU. In the case of agreements where the principal obligation is to repay money, careful thought needs to be given to this risk.


1 As famously happened in the Unilever v. Mercury Asset Management case in 2001.

2 See JP Morgan Europe Ltd v. Primacom AG and others [2005] EWHC 508.

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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