Nearly every contract you will come across will have clauses that seem unimportant but can, in fact, have a big impact. The governing law clause is one such example. This article will explain what a governing law clause is, its effect, and how you can ensure it works for you.
What is a Governing Law Clause?
A governing law clause is frequently found in a contract amongst the boilerplate clauses at the end. A governing law clause may contain some or all of these 3 elements:
- Choice of law
- Choice of jurisdiction
- Dispute resolution process
We will consider these elements in the next section of this article.
You will recognise a governing law clause by its standard language, with one key disparity between contracts: the location. A typical example of a governing law clause is the following:
This Agreement is governed by the laws of New South Wales. Each Party irrevocably and
unconditionally submits to the exclusive jurisdiction of the courts operating in New South Wales and any courts entitled to hear appeals from those courts and waives any right to object to proceedings being brought in those courts.
Effect of the Governing Law Clause
Choice of Law
This clause enables the contracting parties to nominate the law that governs their contract. This decision significantly impacts the construction and interpretation of the contract. When you nominate a certain state, territory or country, the clauses in the contract will be interpreted in light of the law from that area. This may significantly change the rights and obligations of the parties.
This choice, at least in Australia, is subject to some limitations. For instance, certain pieces of law cannot be contracted out of, even if you choose a governing law outside Australia. An example of this would be the Australian Consumer Law (ACL). If you provide goods and services within Australia to Australian customers, ACL applies even if the governing clause is a foreign jurisdiction like England and Wales.
You may have seen contracts that select a foreign jurisdiction as its governing law. When negotiating a contract, you should consider if the foreign jurisdiction maximises your rights. In some cases, such as where your counterparty is a bigger company, you may not have the sufficient negotiating power to change the governing law clause. In those cases, you may need legal advice to determine your rights and obligations under the contract.
Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.
Choice of Jurisdiction
The governing law clause may specify a particular jurisdiction. This is distinct from the governing law clause in that a choice of jurisdiction determines which courts or tribunals have the power to hear a dispute. For instance, absent a choice of jurisdiction clause, a court in England could feasibly hear a dispute governed by Australian law. The effect is that the venue would be England but the English court would adjudicate the dispute according to Australian law.
The choice of jurisdiction clauses is either exclusive or non-exclusive. Exclusive choice of jurisdiction clauses obligates both parties to only bring disputes in the specified jurisdiction. For instance, a choice of jurisdiction that exclusively specifies the courts of New South Wales means that neither party can initiate a dispute in the courts of Victoria (with limited exceptions).
On the other hand, non-exclusive choice of jurisdiction clauses specifies a preference. But it does not limit either party from bringing disputes to another jurisdiction.
The key considerations for both parties in the choice of the jurisdiction include:
- each party’s location;
- the related assets governed by the contract; and
- the location of key transactions.
Dispute Resolution Processes
Governing law clauses may specify particular dispute resolution processes. Alternatively, there may be a separate clause obligating the parties to use alternative dispute resolution processes or arbitration.
Therefore, you may sometimes see mention of negotiation, mediation and other dispute resolution processes in the governing law clause or related clauses. It may specify:
- the time and place;
- rules for meeting together; and
- which language will be used.
Though this is a distinct process, it is heavily influenced by choice of law and jurisdiction and should be considered alongside the governing law clause.
Continue reading this article below the form
Foreign Jurisdiction — Key Considerations
There are particular considerations to entertain when you enter a contract governed under the laws of a foreign jurisdiction. This is especially the case where there is an exclusive choice of jurisdiction clause. For instance:
- how difficult and expensive will it be to enforce your rights in a foreign jurisdiction;
- would you need to instruct a foreign lawyer;
- are there any language barriers; and
- whether you must personally travel to a foreign jurisdiction.
So, the choice of jurisdiction can be quite a sticking point, particularly when speaking with the other contracting party with a lot of bargaining power.
Where you cannot negotiate a governing law clause in your favour, you should ensure you understand your rights and obligations under the contract. Likewise, you should maintain
open communication and avoid escalating any disputes as and when they arise.
Neutral Jurisdictions
Further to this point, you may hear the term “neutral jurisdiction”. This frequently comes up when you are negotiating a governing law clause with a party that trades overseas and has a lot of bargaining power. If you cannot agree to their choice of jurisdiction, the counterparty may offer a “neutral jurisdiction”. This is a jurisdiction that neither party is predominately based but uses a common law legal system, such as Singapore.
Despite the seeming “middle-ground” appeal, it may not be that preferable. The selection will likely remain a foreign jurisdiction, retaining all the risks noted above, including instructing a locally qualified lawyer.
Key Takeaways
The governing law clause is a small section in your contract that can have a big impact. It can change how your contract is read, how your disputes are managed, and how easy it is to claim your rights and abide by your obligations. The best position is always to have the governing law clause in your favour based on where you carry out your business.
If you are unsure how a governing law can impact you, or need help negotiating a governing law clause, contact one of our experienced contract lawyers, who can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
As part of your dispute resolution process, there may be some information about serving notice to the other party in the event of a dispute. For a foreign party, permission to serve outside the jurisdiction needs to be obtained from the court. In general, where the governing law clause expressly chooses which courts have jurisdiction, this should provide a clear ground for the courts to grant the necessary permission to serve.
Jurisdiction is a commonly used legal term which refers to the authority or power of the court to determine a dispute between parties, as well as the territory over which the legal authority of a court extends. Some courts may be limited by location, the amount of money that is the subject of the dispute or the kind of dispute being determined. All of these factors form the concept of jurisdiction.
We appreciate your feedback – your submission has been successfully received.
