Having a contract with your international business partners is essential.
As an example, let’s suppose we have a Supply Agreement between an German manufacturer and a UK distributor.
Ordinarily, both parties will be required to perform what each promised under the contract. But, as is common in many commercial relationships, things can go wrong and parties can get into a dispute.
This can be even more complicated for cross-border transactions. If the UK distributor does not honour the terms of the contract, how will the German manufacturer enforce its rights since both parties live in different jurisdictions with different laws?
The answer boils down to you having a well-drafted contract that can trigger enforcement in several jurisdictions.
So, if you are undertaking overseas transactions and wondering whether your contracts are enforceable in different jurisdictions, read on! This article will address all the important clauses and issues to be aware of when drafting cross-border contracts.
The Governing Law And Jurisdiction Provisions
If you are thinking of going to court to enforce your contract, then the governing law and jurisdiction clauses are fundamental to your ability to enforce an international commercial contract.
Why are they important?
The governing law provision determines the law of the jurisdiction that will regulate the contract.
The jurisdiction provision, on the other hand, determines the jurisdiction whose courts will hear disputes between the parties.
For example, if the parties choose the laws of England and Wales as the governing law, then English contract law generally, will apply for the purpose of interpreting the terms agreed by the parties.
Likewise, if the parties choose Germany as the jurisdiction of choice, then the courts of Germany will hear any disputes arising from the contract between the parties.
How Can I Include The Governing Law and Jurisdiction Provisions In An International Commercial Contract?
These clauses are usually set out as one of the last clauses of any contract. Look out for clauses titled ‘Governing Law’ and ‘Jurisdiction’, or something similar.
These clauses are very frequently negotiated when drafting up international contracts.
This is because you and your foreign business partner might want your respective country’s laws to be included in the contract.
If both of you are unable to reach an agreement on the applicable law and jurisdiction, then you may reach a compromise by adopting a uniform international convention ratified by your respective countries. For example, the UK and Germany are member states of this international commercial framework called the Contracts for the International Sale of Goods (often known as the Vienna Convention or CISG), which could be adopted as the governing law of the contract.
This could be a compromise governing law that aligns with the commercial principles in both the UK and Germany.
What About Enforcing The Contract?
Suppose the German manufacturer gets a judgment from a German court in its favour, which can, on paper, be enforced on the assets of the UK distributor in Germany. But practically, how will the German manufacturer go about this process?
This is where it gets complicated.
In July 2019, a new Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters was adopted, which may make enforcement of foreign judgments easier. However, its effect will depend on the rate of adoption by countries around the world.
In the meantime, the enforcement of a German judgement overseas may be a complicated task, and it will depend on the bilateral treaties in place between the countries.
In the above example, the worst case scenario for the German manufacturer is that they’ll have to commence a fresh action in the UK.
The same rule will apply vice-versa if you need to enforce an English judgement in Germany.
So, as an alternative to enforcing a foreign judgment, international commercial arbitration comes into play.
What Is International Commercial Arbitration?
Arbitration is a private dispute resolution process where parties to a commercial contract agree to refer disputes to a third party, known as an arbitrator. Ultimately, the arbitrator will make an award for the determination of parties’ rights and liabilities.
An award has the same binding effect on parties as a court judgment. The former, with far-reaching impact. This makes arbitration very popular in resolving cross-border commercial disputes and often more preferable than court litigation.
In other words, the major advantage of arbitration is the enforceability of arbitration awards in numerous jurisdictions.
This is facilitated by The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘the New York Convention’) which ensures the recognition and enforcement of awards in any of its member countries. Currently, 157 countries have ratified the New York Convention.
The New York Convention allows you to enforce an arbitral award in any country that is a member state as though it was a judgment of the national court in that state.
This is quite different from court litigation, where recognition and enforcement of a foreign judgment in the court of other countries is largely dependent on the principles of reciprocity.
Does International Arbitration Cost Less Than Litigation?
International arbitration could be expensive but it’s worth it for big transactions.
You can also tailor arbitration proceedings to meet your financial needs. For instance, you may choose to appoint one instead of three arbitrators, set a timeframe for the arbitration proceedings, and so on.
What Is In An International Arbitration Clause?
Make sure your contract has an international arbitration clause that suits your needs and can be enforced in different jurisdictions. You will need to get legal advice on the following:
- The seat of the arbitration: This will be the country whose arbitration law would govern the arbitration proceedings. You should be careful not to select a jurisdiction that is not hospitable to arbitration.
- The venue of the arbitration: This is not to be confused with the seat, which has legal ramifications. The venue is literally the physical location, so it’ll come down to what’s convenient for the parties (including where you’d prefer to sneak in a holiday!).
- The language to be used in the arbitration.
- Choice of substantive law: This would govern the interpretation of the contract and disputes arising from it.
- Arbitration rules that would govern the arbitration process – for example, those of an arbitral institution such as the International Chamber of Commerce (ICC).
- The number of arbitrators:The usual practice is to appoint one or three.
What Is The Effect Of A Valid International Arbitration Clause?
If your arbitration clause is drafted properly, the other party will be prevented from commencing an action arising from the contract in any court in virtually all the countries of the world.
This could be done by submitting an application that would stop the proceeding in the court where the action is commenced. The court will then refer the matter to arbitration in compliance with the arbitration clause in the contract.
What Are The Problems With Enforcing An Arbitral Award?
Suppose that you have now won an arbitral award in your favour.
So, what next?
From a commercial perspective, an arbitral award is not worth the paper if it cannot be enforced.
Many parties in arbitration proceedings are unable to enforce awards in their favour due to the legal and strategic decisions they made, or failed to make, during the contract drafting stage.
Below are some of the issues you should consider when negotiating an international arbitration clause.
Location Of Assets
Identifying the location of the other party’s assets before you sign on the dotted line will ease the enforcement process of the award.
In fact, a clear understanding of the requirements for enforcement in the relevant locations should influence your choice of seat, governing law and jurisdiction during negotiation.
Obviously, you want proceedings to take place where the other party’s assets are situated to ensure a seamless enforcement process. This would place you in an advantageous position if the losing party defaults in complying with the award.
For instance, if the losing party refuses to pay you the money claimed in an award, you know which of its assets you will monetise to offset your claim.
To do this, you will apply to the court where the assets are located for freezing orders. This will secure the assets of the other party from being moved to another location.
It’s important to get this right before the award is made.
If it is impossible to locate the assets of the other party, you should demand some form of security upfront. This may be in the form of bank guarantee or payment into an escrow account.
Arbitration Laws Of The Seat Of Arbitration
When negotiating the seat of arbitration, you should ask yourself the following questions:
● What are the legal grounds for objecting an arbitral award in the seat of arbitration?
● What disputes cannot be settled by arbitration in the seat of arbitration?
● How do their courts treat non-nationals?
Answers to the above questions are important because variances exist in the legal requirements of different countries. Even among New York Convention member states, arbitration laws are similar but not identical in all cases.
Restrictions In The International Arbitration Clause
You should be careful not to include stringent restrictions that could undermine the enforcement process.
Examples could be the qualifications of arbitrators or setting a restricted time frame within which the arbitration would take place.
This could play to the advantage of the party against whom the award is made to frustrate the enforcement process if those stipulations were not complied with.
Incapacity of Parties In An Arbitration Proceeding
An award will be ineffective if made in an arbitration proceeding that involves a party that lacks legal capacity to participate in the proceeding.
This is more important if you are dealing with a state actor or an agency of a state actor.
You should ensure that all necessary authorisation needed to confer legal capacity has been sought and obtained. This could be challenging but it will be worth your effort in the long run.
Legal Grounds For Objecting The Enforcement Of An Arbitral Award
An award cannot be enforced on its own. Sometimes, you might need the intervention of the court to enforce it.
The last thing you want to happen is for the court to refuse to enforce the award. It’s important to keep in mind the grounds for refusal that are set out in the laws of each jurisdiction.
Need Help Drafting An International Arbitration Clause?
Drafting an international arbitration clause requires a lot of painstaking efforts and, if not properly managed, could put you in a fix.
If you need guidance in negotiating or drafting an arbitration clause in your transnational contracts, we are here to help! Get in touch with our team at [email protected] for a free, no-obligations chat about your situation.
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