Choosing Governing Law and Jurisdiction in Cross-Border Commercial Contracts

When two parties in different countries sign a commercial contract, they are rarely thinking only about the deal in front of them. They are also, whether they realise it or not, making a choice about which country's courts will resolve a dispute and which country's law will be used to interpret their obligations. Left unaddressed, both questions are answered later — by a court, under rules the parties did not choose, and often at greater cost than if the clauses had been drafted properly at the outset.

Two Different Questions

Governing law and jurisdiction are frequently treated as a single decision, but they answer different questions.

Governing law determines which body of substantive law is used to interpret the contract — how a term is construed, what remedies are available for breach, and how the parties' obligations are defined. Jurisdiction (sometimes called a forum selection clause) determines which country's courts have the authority to hear a dispute arising from the contract.

It is possible, and sometimes deliberate, for these to point in different directions — for example, a contract governed by English law but subject to the exclusive jurisdiction of the courts of Singapore. In most cases, however, aligning the two reduces cost and complexity: a court applying its own domestic law is generally faster and more predictable than one asked to apply and interpret a foreign legal system.

Party Autonomy — and Its Limits

Most legal systems recognise a principle of party autonomy: commercial parties are generally free to select the law that will govern their contract, even where that law has no obvious connection to either party or to where the contract will be performed. Within the European Union, choice of law in contractual matters is generally addressed by the Rome I Regulation, which gives effect to a chosen governing law subject to certain safeguards.

That freedom is not unlimited. Courts can decline to apply a chosen law, in whole or in part, where doing so would conflict with the mandatory rules or public policy of the forum hearing the dispute — for instance, rules protecting consumers, employees, or matters the local legal system treats as non-negotiable regardless of contractual choice. A governing law clause should therefore be drafted with an awareness of where enforcement is likely to be sought, not only where the contract is signed.

Exclusive and Non-Exclusive Jurisdiction

Jurisdiction clauses are typically drafted as either exclusive or non-exclusive.

An exclusive jurisdiction clause commits both parties to litigate only in the named courts, and generally prevents either party from bringing proceedings elsewhere. This offers predictability but can be inconvenient if the counterparty's assets, or the evidence relevant to a dispute, are located in another country.

A non-exclusive jurisdiction clause designates a preferred forum but leaves open the possibility of proceedings in another competent court. This offers flexibility, particularly where a claimant may need to pursue enforcement in the jurisdiction where a counterparty holds assets, but it reduces certainty about where a dispute will ultimately be heard.

Arbitration as an Alternative

For many cross-border commercial agreements, particularly those involving parties in different legal systems, arbitration is used in place of litigation before national courts. An arbitration clause typically specifies the arbitral institution or rules, the seat of arbitration, the number of arbitrators, and the language of the proceedings.

One of the principal reasons arbitration is favoured in cross-border contracts is enforceability: arbitral awards are recognised and enforced in a large number of countries under the New York Convention (the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards), which is one of the most widely adopted treaties of its kind. This can make an arbitral award easier to enforce against a counterparty's assets abroad than a foreign court judgment, which may not benefit from an equivalent international enforcement framework depending on the countries involved.

Practical Drafting Considerations

A few principles are worth keeping in mind when negotiating these clauses:

• Consistency. Governing law and jurisdiction (or arbitration) clauses should be reviewed together, not drafted in isolation, so that they do not work against each other.
• Enforcement location. Consider not just where a dispute will be heard, but where a resulting judgment or award will actually need to be enforced — typically wherever the counterparty holds assets.
• Clarity of drafting. Ambiguous or contradictory dispute resolution language is a common source of costly preliminary disputes about where a case should even be heard, before the underlying commercial dispute is addressed at all.
• Local mandatory rules. Certain contract types (for example, those involving consumers, employees, or real property) may be subject to mandatory local law or jurisdiction rules that cannot be displaced by contractual choice.

Closing Note

Governing law and jurisdiction clauses are sometimes treated as routine "boilerplate" at the end of a contract. In a cross-border transaction, they are anything but — they determine, in advance, how and where a dispute will actually be resolved if the relationship breaks down. Addressing them deliberately, rather than by default, is one of the more straightforward ways to reduce risk in an international agreement.

This content is provided for general informational purposes only and does not constitute legal advice. It should not be relied upon in place of advice from qualified counsel on the specific facts of your matter.