Transactional lawyers can spend a lot of time negotiating liability clauses, indemnities, warranties and termination rights. However, governing law and jurisdiction often ends up being a short debate towards the end of the negotiation about “home territory”, without clear justification on either side for a particular approach. Disputes lawyers can recall countless occasions where they have seen all of the effort on liability, indemnities, warranties and termination rights defeated by a poorly-drafted governing law and jurisdiction clause. In fact, when it comes to Asia deals, we think it might just be the most overlooked boilerplate clause of all.
So how should you negotiate a governing law and jurisdiction clause in an Asia transaction? Here are our top tips.
What are the pitfalls?
Here are some points to watch out for:
- Postponing the discussion for later in the negotiation. This needs to be tackled up-front, as it may affect your whole approach to the remainder of the negotiation. It is one of the first clauses a litigator will look at in the event of a dispute, and it should be one of the first clauses to be dealt with in a negotiation.
- Always pushing for your own local law and courts. The single biggest misconception where cross-border Asia deals are concerned is to assume that to secure your home law and courts is a “win”. It’s usually not. A contract that is subject to your home law and courts might run into serious enforceability issues in many jurisdictions in Asia, where foreign judgments are not always enforced. Let’s say you’re a UK company signing a partnership deal with an Indonesian counterparty. You might assume that English law and English courts would be a big win, whereas the reality is that even if you get a favourable judgment in the English courts, that might be worth no more than the paper it is written on when you try to enforce it through the Indonesian courts. So what is the solution? The most effective dispute resolution mechanism, and increasingly the market practice, is to go with arbitration. Why? Because arbitral awards are usually enforced in countries that have signed up to the New York Convention (and that is 150 countries, including most in Asia) and arbitration (which is confidential in nature) is fast becoming the regional standard, although other options are also available and a strategic approach is needed.
- Accepting any element of a dispute resolution clause that relies on an agreement to agree. A good example is a clause that requires the parties to agree upon the venue and/or number of arbitrators. This is usually a bad idea as it is unlikely for parties to agree on anything once a dispute has arisen and it is difficult to advise on contract drafting and interpretation if the governing law has not been agreed. It’s best not to leave these kinds of decisions to be made later – avoid the risk of being held hostage.
- Getting drawn into a “my law” versus “your law” debate. Inevitably in international contract negotiations, there will be some trickier conversations about laws and jurisdictions that are perceived to be less attractive than others. Unfortunately, this is a necessary conversation which must often be dealt with in a sensitive and delicate manner. Without naming them here, there are jurisdictions whose court processes are best avoided. Equally, we have seen offence caused when an international company suggests that the laws of their local partner are unreliable (which is a particularly difficult argument to make when that international company has chosen to do business in the country in question). Try to keep the discussion constructive and “win-win” for both parties by considering the following:
- Could a neutral law (e.g. English or Singapore law) be better for both parties?
- Could a neutral forum (e.g. arbitration in Singapore or London) be better for both parties?
- What is the market practice in the region?
- Could arbitration work better for reasons of confidentiality?
What is best practice?
Just as there is no one-size-fits all commercial contract, there is no one-size-fits-all governing law and jurisdiction clause. However, there are some basic rules to follow to get you off on the right foot.
- If the parties are in the same jurisdiction: Unless it is a trickier jurisdiction (see above), the courts of that country are usually ok and the governing law of that country is usually ok. However, you should still consider whether it would be best to opt for a neutral law and/or arbitration e.g. if you prefer disputes to be confidential, or if the counterparty is a state-owned enterprise and you prefer to draw a line between it and the local courts.
- If the parties are in different jurisdictions: Neutral law is usually the best compromise. Singapore law, Hong Kong law and English law are popular choices. Do bear in mind that selecting the courts of one or other of the jurisdictions might be a bad idea when it comes to enforceability (see our second common pitfall, above).
- Specialist contracts. The two rules above apply to common commercial contracts (e.g. licences, services, franchises and joint ventures). However, there are certain specialist contracts (e.g. contracts with consumers, contracts relating to real estate and employment contracts) where special rules may apply. Contacts with consumers should normally be governed by the laws of the jurisdiction where the consumer is based and the local courts should usually have jurisdiction to resolve disputes. Clauses that require consumers to go to court overseas may be struck down as unfair (e.g. under consumer protection legislation). Employment contracts are similarly usually governed by local laws and local courts (or employment tribunals if they exist) will usually hear any related disputes. Finally, contracts involving land are usually governed by the laws of the relevant jurisdiction where the rights in land exist.
Any organisation is wise to build a contractual protocol for governing law and jurisdiction clauses. This can be done in six easy steps:
Step 1: Identify your key territories and build a matrix of positions – consider your preferred, fallback and dealbreaker positions for each territory.
Step 2: Build a clause library which covers all of your preferred and fallback positions, mapped to the matrix from Step 1.
Step 3: Building country and/or regional template contracts – for example, consider whether local laws might require a translation of the contracts in order for it to be enforceable.
Step 4: Consult with local lawyers in key territories on approach(es) and market / best practices, and get their input on your matrix and clause library.
Step 5: Capture data and review (preferably on at least a yearly basis). For example, if you’ve agreed to Singapore law and arbitration as a fallback in >50% of cases, consider whether to build it into your template so as to save time on negotiation.
Step 6: Have a plan for the unexpected with an appropriate internal sign-off process. Remember, this really could be the most important clause in the contract.
With thanks to Lakshanthi Fernando and Matthew Hunter.