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Governing Law Need Not be Contentious
Negotiating the Governing Law of an agreement need not be contentious, but it often is.
An automatic assumption is often made that we must be better off with the Governing Law being our own jurisdiction (a country or a state or province within a country), and correspondingly, that we must be worse off if the Governing Law is the other party’s jurisdiction.
When the other party makes those automatic assumptions as well there is a stalemate until the least stubborn party gives in.
The familiarity of our own legal system draws us to want our own jurisdiction to be the Governing Law. That is the case as well for the other party.
How do we resolve this sometimes contentious issue, without it degenerating to a contest of stubbornness, or a contest of might?
Focus on international agreements
The comments here focus on serious agreements with a foreign party. The more serious the agreement the more important it is to resolve this issue in a principled manner, instead of resolving it on the basis of stubbornness, or might.
A license of technology to a multinational party, or a research agreement or collaboration agreement with an international party are examples of serious agreements.
This is not to say that less serious agreements would not benefit from the application of the principles below, but the stakes being lower, there may not be the same need to resolving the issue optimally.
Principled resolution – without stressing the negotiation
This is a principled resolution because it is the application of legal and commercial principles that leads to what the answer will be on a specific occasion. The application of these principles means that the answer is compelling to both parties. That being so, it rarely leads to stress in the negotiation. When the other party is a multinational company, the answer is compelling for it as well.
Reluctance to agree to the other party’s jurisdiction
The reluctance to agree to the other party’s jurisdiction is not surprising. There are many legitimate reasons to be concerned about another party’s jurisdiction being the Governing Law. Amongst them:
Language. If the other jurisdiction conducts legal proceedings in a language other than our own, the level of difficulty in resolving a dispute in the other party’s jurisdiction increases substantially.
Familiarity with legal system. Our own legal system is familiar to us. It is quite legitimate to be concerned about the unknown implications of agreeing to a jurisdiction with an unfamiliar legal system. It may be prudent to seek legal advice on the agreement from a lawyer in that jurisdiction. That increases cost, takes time, but may not wholly provide comfort.
Bias and prejudice. Some jurisdictions regrettably have a reputation for bias that favours its own litigants, or worse, outright prejudice against foreign litigants. Some European countries and some US states have an anecdotal reputation for bias against foreign litigants. In contrast, Great Britain has a reputation for even handedness.
Legal fees. Some jurisdictions have a reputation for legal fees mounting up at a fast rate.
A principled approach to resolving Governing Law needs to take all these factors into account.
Does the other party have assets in our jurisdiction?
If the other party has assets in our jurisdiction, we will prefer the Governing Law to be our own jurisdiction.
But does the other party in fact have assets in our own jurisdiction? In the case of a multinational company often it will not.
There may be little point litigating in our jurisdiction if the other party has no assets in our jurisdiction. A court order has no value if it cannot be enforced. If there are no assets in our jurisdiction, we cannot enforce it in our jurisdiction.
Enforcement in the other party’s jurisdiction - Mutual Recognition Agreements
Can we enforce an order of a court made in our jurisdiction, in the other party’s jurisdiction where it has assets?
We can, when there is a mutual recognition agreement between our jurisdiction and the other’s party’s jurisdiction.
These are agreements between countries that essentially provide that a court order in one country will be recognised in the other country, and once registered in the other country, which is a relatively simple process, can be immediately enforced in the other country.
Each of Australia, New Zealand, Singapore, Malaysia, and Hong Kong have entered into numerous mutual recognition agreements with many countries.
New Zealand: Reciprocal Enforcement of Judgments Act 1934 and corresponding Orders in Council
Singapore: Reciprocal Enforcement of Commonwealth Judgments Act, 1985 (Cap 264), Reciprocal Enforcement of Foreign Judgments Act, 2001 (Cap 265), and corresponding Ministerial Orders
When there is a mutual recognition agreement between the jurisdictions of the parties, each party may still prefer its own jurisdiction. This could again lead to a stalemate.
Concerns of language, lack of familiarity with the legal system, and the fear of bias, may operate to deter agreeing to the jurisdiction of the other party’s country, even if there is be a mutual recognition agreement in place. The same may be true of the other party, which may similarly be deterred from agreeing to our jurisdiction as the Governing Law.
The United States has not entered into any mutual recognition agreement with any other country.
Enforcing in the other party’s jurisdiction – The Hague Choice of Law Convention
The Convention is an international treaty under which all member states agree to enforce the court orders made in every other member state. Few countries have become treaty members and ratified the treaty. Amongst them are the countries within the European Union, Singapore and the United Kingdom.
The United States is a treaty member but it has not ratified the treaty. This means that United States courts will not recognise court orders of other Hague Convention member states.
Enforcing in the other party’s jurisdiction – domestic general laws
A country where we may need to enforce a court order may have domestic general laws under which a foreign court order may be recognised. This differs from country to country, and in the United States, from state to state. In some jurisdictions the general law operates to allow foreign court orders to be recognised with relative ease. In some jurisdictions the general law requirements to recognise a foreign court order can seem like an obstacle course, and require court applications in that country, which can be time consuming and expensive, with unpredictability about the outcome.
New York State in the United States has a reputation for its general law facilitating the registration of foreign court orders. Many US states do not share that reputation.
The result is that we might need to consider not having our own jurisdiction as the Governing Law, even if the other party agrees to it.
The combination of the other party having no assets in our jurisdiction, the uncertainty of the ease or otherwise of registering a court order from our courts in the other party’s jurisdiction, or the certainty that it will be an obstacle course to do so, means that we may need to consider the possibility that insisting on our own jurisdiction being the Governing Law may not be in our interests.
Indeed, the other party knowing that it has no assets in our jurisdiction, knowing that there is no mutual recognition agreement in place, and knowing that its country’s processes to recognise a foreign court order are an obstacle course, may also know that it is in its interests, and against our interests, for it to agree to our jurisdiction being the Governing Law.
What’s the answer?
For a serious agreement involving international parties, none of the avenues to determine the Governing Law so far provide a universal answer.
Even if the other party is in a country with which our own country has a mutual recognition agreement, the factors of language, familiarity of the legal system, bias, prejudice and legal fees may make it unattractive to agree to the other party’s jurisdiction. The other party may feel the same way.
Another answer is available.
The New York Convention 1958 is an international treaty whose member states include all developed countries, and indeed, almost all the world’s countries. It provides that each member state will enforce as a court order in its own courts, the arbitration awards made in any other member state. The process of registering an award is generally efficient and quick.
Australia: International Arbitration Act 1974
New Zealand: Arbitration Act 1996
Singapore: International Arbitration Act (Cap 143A)
Malaysia: Arbitration Act 2005
Hong Kong: Arbitration Ordinance (Cap 605)
The United States is a member of the New York Convention, and has ratified it.
The Convention now opens up a very attractive option, and that is to agree that:
arbitration shall be the method of resolving disputes
the venue for the arbitration shall be a country that is agreed by the contracting parties, most likely a neutral third country having regard to the factors of language, familiarity of legal system, bias, prejudice and legal fees.
the Governing Law shall be the law of that neutral third country.
Which countries are candidates for the neutral third country to be the venue of an arbitration, and whose laws will be the Governing Law of the agreement?
London is the world capital of international arbitration. International trade agreements will often, if not almost always select London as the arbitration venue. This means that the law of England and Wales would be selected (not the law of Great Britain, which has three separate legal system: England and Wales, Scotland, and Northern Island). Multinational companies from all countries are drawn to this option because of confidence in the English legal system, impartiality, and expertise. Multinational companies habitually agree to this option. It is rarely contentious.
Singapore and Hong Kong, whose laws are the same as or similar to the laws of England and Wales are regarded the international arbitration centres in Asia.
London, Singapore and Hong Kong are all appealing on the factors of language (English); legal system (British based); no bias or prejudice; and legal fees which while inevitably expensive, are less likely to be outrageous.
The option of arbitration with Governing Law being the jurisdiction where the arbitration is agreed to take place is therefore an attractive one. This is so even when there is a mutual recognition agreement between the contracting parties’ countries.
Governing Law is not contentious when all the parties to an agreement are within a single jurisdiction.
In Australia, each State and Territory is a separate jurisdiction. Contract law is so harmonised amongst the State and Territories that there is little practical difference in preferring one jurisdiction over another. Disappointingly, the issue of Governing Law from time to time is nevertheless contentious. Some general (but not universal) rules might help. The Governing Law may be:
1. the jurisdiction where the obligations in the contract (or most of them) will be performed
2. the jurisdiction of the party who prepares the agreement (with conventions operating about who
normally prepares an agreement, such as a licensor customarily prepares the first draft of a license).