By Sabari Bagchi, Daniel Friedman & Karen Shiboleth
When working on a cross-border transaction, it is easy to get lost in the nuts and bolts of the transaction itself and overlook the related but distinct issues of the governing law and jurisdiction provisions contained in the definitive deal documents. We have found that new dealmakers rarely think to negotiate the law governing the transaction and the appropriate jurisdiction in which to bring claims. However, both the governing law and jurisdiction clauses can impact which party will prevail in the event of a dispute between the parties to an international transaction.
The primary purpose of a governing law provision is to effectively communicate which jurisdiction’s law is selected to adjudicate disputes between the parties involved in a transaction, while a jurisdiction clause dictates the location where the dispute will be resolved. In establishing where a dispute will be resolved, disagreements typically arise between international parties as to the optimal jurisdiction, as concerns regarding the convenience of the parties involved (in the event of a lengthy proceeding all relevant parties will have to be present in that jurisdiction), legal costs (the party in its home jurisdiction can avoid having to hire foreign local counsel), and the potential for biased treatment by local judges or arbitrators (which may favor a powerful and well-connected local party), motivates each party to advocate for its home jurisdiction in the event of a dispute. Additionally, if the proceedings take place in a foreign jurisdiction in a native language unfamiliar to one of the parties, significant costs may be incurred by such a party relating to translation services, thus providing additional incentive to advocate for the home jurisdiction.
A convenient jurisdiction for dispute resolution is always negotiated by Shiboleth LLP on our clients’ behalf in transactions between parties residing or doing business in different countries, as we recognize the importance of securing a convenient forum for our clients. For example, in a recent two week arbitration, split between the offices of Shiboleth and another well-known NYC law firm, our clients were happy to arbitrate in New York, while the opposing side was forced to bear the cost of flying in and lodging multiple witnesses from London and Israel.
Of course, even if a party successfully negotiates a convenient jurisdiction, the contract’s governing law allows the parties to decide which region’s laws will be used to interpret the contract, regardless of where the dispute is being adjudicated. Although there is typically less disagreement between the parties when choosing a contract’s governing law, it is nevertheless important to consider whether mandatory public policy can override the governing law or other contractual details, including the governing law provision. For instance, for a contract entered into by nearly any member state of the European Union, the Rome I Regulation sets out requirements that may modify the governing law of such contract, including overriding mandatory provisions of the law of the forum selected, or rejection of provisions manifestly incompatible with the public policy of the forum. And similar to the consideration with respect to choosing a local jurisdiction, the selection of a party’s local law will avoid the additional costs associated with seeking outside legal counsel knowledgeable in the intricacies of a foreign law.
When neither party is willing to concede to the governing law or jurisdiction of the counterparty, the laws of a third jurisdiction that is home to neither party involved is typically a preferred alternative, as such a choice of law levels the playing field by providing an established body of case law that is equally unbiased to each of the parties involved, in a jurisdiction that is mutually inconvenient. For instance, financial institutions are likely to prefer that New York law govern their transactional documents, since New York has a well-established legal framework for financial transactions. While generally the governing law must have a “nexus” to the transaction, New York law contains a particular statutory provision that allows it to be selected as the governing law regardless of the contract’s relationship to New York, provided the contract is valued at $250,000 or more.
One consideration that relates to both jurisdiction and governing law is the enforceability of an award. With respect to jurisdiction, ideally the defeated counterparty will have assets in the same jurisdiction where the judgment or award is entered, making it that much easier to collect. Governing law also relates to enforcement against the assets of the counterparty, as there may be conditions that inhibit the collection of assets located in certain regions where the award is intended to be enforced. A further impediment to enforcement can occur when one party is located in a country that (1) is not a party to the New York 1958 convention or (2) otherwise will not enforce a U.S. judgment. For example, no treaty currently exists between the U.S. and China to enforce the judgements of each other’s courts. Thus, in a scenario with a Chinese counterparty whose primary assets are in China, litigation in the U.S. would inevitably prove unproductive. Given the above concerns, a party should consult with local counsel prior to entering into an international transaction to ensure that any eventual award procured against a foreign counterparty will be easily enforceable.
As you can see, there are many important factors to consider in an international transaction when selecting governing law and the jurisdiction for dispute resolution. At Shiboleth, we have vast expertise in the complexities of sophisticated cross-border transactions and the knowledge to guide our clients to make informed decisions in these often-overlooked, but critical areas.