One-sided jurisdiction clauses

The interpretation of a contract will be uncertain if it does not contain a governing law clause (for a discussion about this topic, see China Business Law Journal volume 3 issue 10, page 73: Governing law or proper law?) Similarly, the way in which a dispute will be resolved will be uncertain if the contract does not contain a jurisdiction (or dispute resolution) clause. These two clauses usually appear together, often as part of a larger clause entitled “Governing law and jurisdiction”.

If the parties to a contract agree that disputes under the contract should be resolved by court litigation, there are two questions that are relevant: (1) which courts should have jurisdiction to hear a dispute? and (2) should those courts have exclusive jurisdiction to hear a dispute?

The first question is often determined by the governing law of the contract. For example, if a contract provides that the governing law is English law, it will usually provide that the English courts have jurisdiction to settle any dispute under the contract. It makes sense to submit disputes under a contract to the courts in the jurisdiction of the governing law, as those courts are qualified to interpret the law of that jurisdiction. Conversely, if a court in one jurisdiction is required to interpret the terms of a contract governed by foreign law and a dispute arises between the parties as to how the foreign law should be interpreted, the court will need to rely on evidence from expert witnesses to determine how the foreign law should be interpreted. This process is often complicated and unpredictable.

An exclusive jurisdiction clause, under which the parties agree that disputes may only be submitted to the relevant courts and not to the courts in any other jurisdiction, offers certainty. A non-exclusive jurisdiction clause, on the other hand, offers flexibility.

The question of whether the parties should submit to the jurisdiction of the relevant courts on an exclusive or non-exclusive basis will depend on a number of factors. These factors include the location of the parties – if the parties are located in different jurisdictions, it might make sense to preserve the possibility that proceedings can be taken in either jurisdiction – the location of assets against which a judgment can be enforced, and also the ease with which foreign judgments are recognised and enforced in each jurisdiction.

In recent years, there has been a trend towards the adoption of one-sided jurisdiction clauses. This trend is particularly evident in cross-border finance transactions. A one-sided jurisdiction clause usually provides that disputes will be submitted to the courts of the specified jurisdiction on an exclusive basis, but that one of the parties – usually the lender or creditor – has the right to submit a dispute to the courts of any other jurisdiction. It may even permit the relevant party to choose whether the dispute should be submitted to arbitration instead of litigation.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at law.asia.