Importance of Jurisdiction and Governing Law Clause: Hit and Miss

Introduction

The commercial landscape is becoming more complex than ever, which in turn complicates commercial contracts governing business relations. As these contracts grow in complexity, the importance of Jurisdiction and Governing Law Clauses (“Clauses”) become paramount in determining the rights and obligations of the parties to the contract in the event a dispute arises between the parties. Unfortunately, these Clauses are often overlooked resulting in parties being entangled in costly and time-consuming legal battles, and possibly in unfamiliar jurisdictions.

As a matter of practice, in contracts these Clauses are often clubbed together as a dispute resolution clause without distinguishing between the two i.e., jurisdiction and governing law. Lack of clarity in these Clauses may lead to complex questions including determination of governing law in accordance with the ‘Conflict of Law’ rules, as applicable. [1] However, explicit and unambiguous Clauses facilitate the effective resolution of disputes.

This article aims to provide clarity on the jurisdiction, and governing law Clauses, and explore the intricate nature of such Clauses in a contract, highlighting the common pitfalls and good practices to ensure that such commercial contracts are not only enforceable but also provide an effective legal framework for resolving the disputes. Before dwelling into the intricacies of such Clauses, it is crucial to understand the purpose of these Clauses in a commercial contract.

Understanding Governing Law and Jurisdiction Clauses

To start with, the governing law clause specifies the law which shall be applicable to the contract for determining the merits of the disputes. The jurisdiction clause specifies the forum which shall have the jurisdiction to hear and resolve the disputes arising out of the contract. For instance, a company based in Singapore enters into a contract with an Indian company based in Hyderabad, Telangana to provide certain services. The contract stipulates that the agreement shall be governed by the laws of India and subject to the non-exclusive jurisdiction of the courts of Singapore, with Singapore designated as both the seat and venue for arbitration.

In the event of a dispute, Indian law shall be the substantive law applied to the merits of the case, while the procedural aspects of the arbitration shall be governed by laws of Singapore. Therefore, the governing law clause specifies the substantive law applicable to the dispute, whereas the jurisdiction clause determines the procedural law and forum for resolving the dispute.

We have observed that the parties often raise the issues before different forums that may otherwise have jurisdiction. [2] This issue is prevalent in cases wherein the parties seek interim measures, prior to the initiation of arbitration or at the time of challenging the arbitral award. In such a scenario, an ambiguous clause can result in unnecessary delays in approaching the appropriate judicial forum and be detrimental especially in case urgent relief is sought by either of the party. [3]

These Clauses despite having numerous advantages, like any other clause in a contract, if drafted without giving due consideration to the consequences of each, and every word/ phrase; the same may become less effective in carrying out the intention of the parties to the agreement. These Clauses are pivotal in determining how and where disputes are resolved, and which laws will govern the interpretation of the contract. It aims at safeguarding the rights of the parties arising from their contractual relationships and overlooking these clauses may result in several pitfalls in the resolution of disputes.

Conflict between Governing Law Clause and Jurisdiction Clause

It is true that different jurisdiction(s) offer varying levels of legal protection to the parties. However, a harmony in such Clauses at the time of drafting ensures that the protection of the interest of the parties is aligned with their understanding of contractual obligations. However, it is observed that such varying protection is often overlooked, and contracts occasionally stipulate a governing law that conflicts with the choice of jurisdiction.

One of the most common issues may arise wherein a dispute is arbitrable in the choice of jurisdiction, but not under the governing law. This effectively means that while the arbitration can proceed in such jurisdiction, the governing law may not recognize such dispute to be suitable for arbitration i.e., arbitrable dispute. In such a situation, even if an arbitration award is passed, the parties will face a challenge when it comes to enforcement of such an award in the jurisdiction as provided under the governing law clause. The relevant courts in the governing law jurisdiction may refuse to enforce the award if they determine that the dispute was not arbitrable under their laws thereby rendering the entire arbitral proceedings to be unavailing.

This conflict creates legal uncertainty and unpredictability affecting the rights of the parties intended to be protected under the agreement. To avoid such conflicts, it is crucial to ensure that there is harmony in the legal rights available to the parties under both the governing law and the chosen jurisdiction. Thus, harmonizing these clauses in a contract will not only reduce the chances of conflicts but also simplify the legal process making it easier to manage potential conflicts which may arise out of such contracts.

Balancing Convenience of Parties with Legal Effectiveness

At the outset, it is critical that the parties have clarity of the governing law and jurisdiction from the very beginning, in fact, even at the time of the negotiation of a contract. Having clearly worded clauses prepare the parties to effectively strategize their approach to the dispute relying on the practices of the forum chosen. Thus, providing clarity and predictability regarding the laws and legal principles applicable for resolution of dispute allows parties to prepare effective legal strategies and mitigate the risk of unexpected legal outcomes.

On the other hand, the Arbitration and Conciliation Act, 1996, provides a statutory flexibility to the parties under the law of arbitration, so as to determine the rules applicable to the substance of dispute [4] and procedure of arbitration [5] . This is to ensure the convenience of the parties for resolution of dispute. However, while focusing on convenience it is equally important to ensure that legal strategies and risks involved with the chosen jurisdiction and governing law are not neglected. Balancing convenience with legal effectiveness is key to avoiding legal complications and opting an effective legal strategy.

For instance, a contract might state it shall be governed by the laws of India, i.e., such a contract to be interpreted in a manner it is interpreted by Indian courts, however, the contract may provide exclusive jurisdiction to the courts of Singapore. In such situation, the court of Singapore will apply Indian Laws to decide the substantive rights of the parties. However, the interpretation of Indian law by a Singaporean court may differ from how an Indian court would interpret it, leading to unpredictable outcomes.

While resolving disputes in Singapore might be convenient for the parties due to their familiarity with the jurisdiction or lower costs, it may lead to inefficient legal strategy, and caries an inherent risk of lack of protection for the parties. Thus, while convenience is an important factor in choosing the jurisdiction for dispute resolution, it should not overshadow the need for legal certainty and protection. Therefore, it is trite that at the initial stages of entering a contract, the parties with help of legal professionals must carefully assess and mitigate the associated risks which are governed by these Clauses to ensure effective dispute resolution.

Conclusion

The jurisdiction and governing law clauses, despite being a crucial cog in the wheel of a contract are often left to be discussed at the last minute, in common parlance bestowing them a crown of “sunset” & "midnight” clauses. Even at the sake of repetition, the significance of a well drafted dispute resolution clause becomes evident when parties find themselves in a conflict often leading to disputes. Well drafted Clauses have various advantages including: - (i) ease of enforceability, (ii) legal protection (iii) minimal risk thereby decreasing the potential risk of long and costly litigation amongst other.

References:

[1] Union of India vs. Vedanta Ltd., (2020) 10 SCC 1
[2] GD Goenka (P) Ltd. vs. Dinodia Educational Society, 2024 SCC OnLine Del 6701
[3] Kotak Mahindra Bank Ltd. vs. Sharma Crane Service, 2009 SCC OnLine Bom 1871
[4] Arbitration and Conciliation Act, 1996, s. 28(b)(ii)
[5] Arbitration and Conciliation Act, 1996, s. 19(2)