Why include a governing law clause?
The governing law of a construction contract not only governs the interpretation and performance of the contract, but also the consequences of any breach, including the assessment of damages and limitation. In other words, the governing law identifies and interprets the rights and obligations of the parties to the contract. Issues such as termination and suspension rights, limitations of liability and limitation periods can all be affected by the governing law.
Parties are free to choose a governing law irrespective of where the project is located or choice of forum that will apply to disputes. In cross-border projects there are many considerations to take into account in choosing the governing law, including the law governing any ancillary contracts already entered into, familiarity of the law and understanding of the mandatory provisions that may apply to the contract, as well as location of the parties and project.
Specifying the governing law of a contract gives the parties certainty. If no governing law is properly drafted in an agreement, the parties are subject to the conflict of law rules, which the parties may have little or no control over.
What is the difference between common law and civil law systems?
A common law system, like England and Wales, is based on the concept of judicial precedent. The courts take an active role in shaping the law as the decisions of the court will set a precedent that is to be followed in future cases, save for when there may be changes to the country’s legislation that may override any such judicial precedent. This has the benefit of providing certainty in respect of the parties’ position in law, as once a precedent has been set, the parties will know the likely outcome of the given scenario should it arise again.
A civil law system largely relies on the legislation of that country. The relevant court will establish the facts of a case and apply the remedies that are codified in legislation. Unlike the common law system, previous cases concerning the same or similar issues will not establish a precedent as to how the matter should be decided, and instead such cases will act as a form of guidance. The benefit is that the relevant code sets out principles, rights and remedies and a court can deviate from previous decisions if it is of the opinion it had interpreted the law incorrectly.
Another key factor to consider, in respect of the laws that may affect your contractual rights and/or obligations, is the impact of the EU Rome regulation on the law applicable to contractual obligations (known as “Rome I”). We only deal here with contractual obligations. Please get in touch with us if you require information about the European law relating to non-contractual obligations (known as “Rome II”).
When would another country’s laws be applicable and what are mandatory laws?
If a project results in a contractual dispute that ends up in front of the courts of England or of any EU Member State (aside from Denmark), absent a properly drafted governing law clause, the courts will apply Rome I as part of the process of determining which laws apply to the contract.
Parties are free to decide between them which laws will govern the contract. However, depending on the circumstances surrounding the dispute, there may be laws of other jurisdictions which nonetheless apply.
Under Rome I, the laws of another jurisdiction will apply if all the circumstances relevant to the contract are located in a jurisdiction other than the one whose law has been chosen to govern the contract. Such circumstances include: where the parties are based; where any plant, machinery or products are made or based; where any related contracts are performed or governed; and the location of the project. The choice of project location can therefore either increase or reduce the likelihood that another jurisdiction’s laws will apply to the contract.
For example, German law may be chosen to govern the contract. However, if all other circumstances including the project location are based in England, then certain English laws are likely to apply to the contract. These laws would be English statutes which cannot be derogated from by contract or are considered so important that they are overriding, such as those relating to competition, employment rights or financial transactions (known as mandatory laws). If, instead, the parties chose to locate the project in any country other than England, not “all” the circumstances of the contract would be based in England, meaning these English overriding statutes may not apply.
What is the Construction Act and when would it apply?
In the example above, if English laws were found to be applicable to a project being carried out in England, it is possible that the Housing Grants, Construction and Regeneration Act 1996 (as amended), otherwise known as the Construction Act, would become applicable to that project. This would cause the parties to be subjected to a number of statutory requirements relating to how payment mechanisms under the contract work (including a requirement for certain notices to be issued in response to a contractor’s request for payment) and a the right to refer any dispute relating to that project to adjudication.
While project location will primarily be driven by commercial factors, and the possibility of a dispute will seem remote, the impact of Rome I can have a significant impact on any dispute that does arise later on. Companies should therefore consider and take advice on any overriding statutes of another country that they may wish to avoid when deciding the project location.
Jurisdiction refers to the authority that a particular court of law or decision making body has to make rulings or legal decisions over the matter before it.
It also refers to the competence of a court to resolve a dispute. It is important for parties to understand which court or decision making body has jurisdiction over a dispute before proceedings commence otherwise it could lead to issues either obtaining or enforcing a later judgment.
How do you know which court has jurisdiction?
Most contracts will contain a clause stating which courts the parties have chosen to have jurisdiction over any future disputes that may arise between them. This usually follows the choice of governing law clause but it can appear elsewhere in contracts. To give an example, it is common to see wording in contracts to the effect that “[T]he courts of [a certain country] will have exclusive jurisdiction to settle any dispute or claim arising out of or in connection with the contract”.
Where there is an effective exclusive jurisdiction clause, the Hague Convention on Choice of Court Agreements (2005) will apply. The Convention only applies to states which have ascended, currently being the EU, Mexico, Singapore, Montenegro and the UK.
For example, if the parties agreed that the courts of Luxembourg had exclusive jurisdiction, but a party then proceeded to issue a claim in the courts of England, it would be open to the other party to contest from the outset that the courts of England do not have jurisdiction to settle the dispute or claim.
If there is no effective jurisdiction clause, the correct forum for the resolution of the dispute will be determined by the rules of private international law. In England and Wales, the rules which apply depend on when proceedings were commenced.
How does a party enforce a judgment internationally?
The Convention generally requires any judgment granted by the court (we deal with the enforcement of arbitral awards separately) specified in an exclusive jurisdiction clause to be recognised and enforced in other contracting states. However, the Convention does not provide for the enforcement of protective measures such as interim injunctions or freezing orders.
Given this is only a general requirement, we have more recently seen the drafting of the Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters which was concluded in 2019 .
The Enforcement Convention, which has not yet entered into force, is intended to promote effective access to justice for all who sign up to it and to facilitate rule-based multilateral trade and investment, and mobility, through judicial co-operation. It is designed to provide a single global framework for the free circulation and enforcement of judgments on civil or commercial matters across jurisdictions. Contracting states will be bound to recognise and enforce judgments from other contracting states, subject to certain defences including relating to public policy, fraud and insufficient notice. The next milestone for the Enforcement Convention is for it to be taken up by the international community.
Otherwise, parties looking to enforce a judgment cross-border may sometimes be able to rely on bilateral treaties. For example, the UK has recently concluded a bilateral treaty on the enforcement of judgments with Norway.
In most cases, many countries will enforce foreign judgments under their national laws, regardless of international arrangements. However, this is not always the case and where enforcement is an option there may be additional procedural hurdles, and therefore time and cost, involved.
Alternatively, if the parties choose to resolve their dispute through arbitration, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) provides a process for the enforcement of arbitral awards in over 165 countries that have signed up to it. View our arbitration section for more info.
What about Brexit?
In short, in most situations, Brexit should make no real difference to the decision as to whether or not you choose to have disputes determined by the English courts.
Although the legal regimes governing the enforcement of judgments between the UK and the EU have changed following Brexit, where the parties have agreed to an exclusive jurisdiction clause in a contract, then any judgment given by the named court will be enforceable in other countries where the Hague Convention on Choice of Court Agreements 2005 applies. All EU member states and the UK are party to this Convention and so if parties agree (post-Brexit) to an exclusive jurisdiction clause in favour of the English courts, any English court judgment arising from that contract will be enforceable in the courts of other EU Member States (subject to some relatively rare exceptions set out in the Convention).
The Convention also obliges the courts of any EU country to recognise the validity of exclusive jurisdiction clauses and refuse to hear a case brought in breach of an exclusive English jurisdiction clause.
However, in certain types of international cases, choosing arbitration as the means for determining disputes may be more appropriate than choosing a national court system because arbitral awards can be recognised and enforced in countries which have signed up to the New York Convention 1958. View our arbitration section for more info.
How do you stop proceedings in breach of a jurisdiction clause?
If you are served with proceedings that have been commenced in a jurisdiction different to that stated in your contract then there are a number of options you can take to help stop those proceedings, but these depend on the circumstances of the case.
For example, if a claim has been brought in a jurisdiction outside of England but you think the English courts have jurisdiction, then how do you prevent that claim from continuing?
In this example, if the claim has been brought in the courts of an EU Member State, then pursuant to Brussels I Recast Regulation, you can apply to the English courts to stay proceedings in the court of the EU Member State.
If the claim is commenced in a court outside of the EU, then you may seek an order in the English courts to discontinue proceedings through an injunction (often referred to as an “anti-suit injunction”). Anti-suit injunctions are also relevant if, for example, you have an arbitration agreement in your contract with a seat in London (for instance), but your counter-party commences proceedings in a court outside of the EU, in (for example) Oman.
If you have an arbitration agreement but a claim is commenced in the English courts, then the other party can apply under section 9 of the Arbitration Act 1996 for an order staying those proceedings.
What about forum non conveniens?
The common law legal doctrine of forum non conveniens allows a court which has jurisdiction to dismiss a claim if the court considers that an alternative and more appropriate and convenient forum exists to hear the claim. A party must raise the doctrine for the court to consider it and in English law the appropriate forum is one that best suits the interests of the parties and the ends of justice.
How can I help prevent problems relating to jurisdiction from happening?
Jurisdictional battles can be long and expensive. To help avoid them, it is best to make sure your contracts clearly state which jurisdiction or court can hear any disputes between the parties.
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