The choice of jurisdiction and applicable law in international contracts
In international contracting, it is common for the parties, exercising their freedom of choice, to pre-establish both the courts competent to settle any disputes that may arise between them and the law applicable to resolving them. The following lines assume that neither party is a consumer.
Consider a services contract between two companies with some international element. If doubts were to arise should a disagreement occur over performance of the contract, the parties prefer to make clear which courts will be competent to resolve it and under which national law of those involved (or even of a third country) judgment should be given. They may also choose to submit their differences to arbitration rather than ordinary jurisdiction if they consider that solution preferable.
As we say, many combinations are possible and the basis for this choice lies in the freedom of contract enjoyed by the parties. That choice is usually set out at the end of the contract in an express submission clause headed "jurisdiction and applicable law", or similar.
Although the parties do not always pay attention to it (since negotiation will normally have focused on other aspects of the contract), this decision can have important consequences and must be carefully considered.
The choice of jurisdiction and applicable law in international contracts
For example, if the parties choose to submit their differences to arbitration, it may happen that, as the agreement nears signature, they do not sufficiently consider the consequences of that choice and provide that any dispute will be resolved before a particular arbitral institution (Geneva, Paris, etc.), with, say, three arbitrators. Before signing that clause, the parties would do well to find out in advance the costs of resorting to that particular seat of arbitration (administration costs, plus those arising from the involvement of the three arbitrators).
These are costs that can sometimes be very high and that will act as real barriers to access to justice when the time comes to bring a claim. Moreover, because the parties chose arbitration, proceedings brought before ordinary courts (for example, before the courts of the defendant's place of domicile) may encounter an objection based on submission to arbitration, preventing the court from hearing the matter.
Therefore, in relation to submission to arbitration, the main message is that the parties should carefully weigh the advantages and disadvantages before deciding whether they really believe this form of dispute resolution best suits their interests.
It is true that, once the choice has been made in the contract, it is not irreversible and the parties could always, by mutual agreement, amend the contract, modify the content of the clause or render it ineffective. However, it is doubtful that one of the contracting parties will be willing to accept such a proposal. The first thing they will probably ask is: why are you asking me to change this provision now when there are no problems in sight? And if there are, why should I make it easier for you to sue me?
How far does an express submission clause bind the parties?
But let us leave aside the particular case of arbitration and turn to what is most usual: that the parties, without departing from ordinary jurisdiction, have provided that any differences that may arise will be resolved before the courts of a particular country or city, with express waiver of the jurisdiction of any other courts. These are known as express submission clauses.
In principle, the parties' freedom is wide. Although it would be normal to find the place of one of the two contracting parties reflected, it is not uncommon for a third country to be chosen precisely to try to overcome the natural reluctance the parties may show to having disputes resolved by the national courts of the other. In this way, a "neutral space" is sought. This raises, as we shall see, other types of problems.
Are you about to sign or review an international contract?
Our team advises companies on international contracting, choice of jurisdiction and applicable law, dispute resolution and other legal aspects of cross-border transactions.
→ Are you about to sign or review an international contract?Our team advises companies on international contracting, choice of jurisdiction and applicable law, dispute resolution and other legal aspects of cross-border transactions.→ International Law
Can proceedings be brought before a court other than the one agreed?
When the time comes to bring a claim, the claimant may wonder to what extent they are bound by that clause and whether they can bring proceedings before a different court.
In reality, express submission clauses are, in principle, as binding as any other provision of the contract, since they reflect the parties' will.
Suppose a contract between a German and a Spanish company has designated the courts of the city of Lyon (France) as competent. If the German company were to bring a claim against the Spanish company for alleged breach before the courts of the locality where the latter has its domicile, the defendant company could raise an objection for lack of jurisdiction, provided the requirements established by the applicable rules are met.
However, it could also happen that the defendant does not do so because they consider it more convenient or economical to litigate at home, in what is their "natural forum". In that case, their procedural conduct could result in the matter ultimately being heard by those courts despite the previously agreed submission clause.
It is true that, in certain cases, express submission clauses may encounter problems of validity and be void or inapplicable. This occurs notably in contracts involving consumers, where protective rules limit freedom of contract and establish certain forums in favour of the weaker party.
Submission clauses and monitorio proceedings
Disputes intended to be resolved through monitorio proceedings also have particular features, that is, those in which the basis of the claim is the recovery of a monetary debt, as may happen with commercial invoices not challenged by the other party. Since there is currently no monetary limit for using this fast procedure (which allows an enforceable title to be obtained immediately if the defendant does not oppose), it may also be worth considering this route in the international context when the claimant is a company with invoices in its favour against a Spanish company. In such cases, it must be borne in mind that Article 813 of the Spanish Civil Procedure Act (LEC) establishes specific rules on territorial jurisdiction for monitorio proceedings and provides that the court of the debtor's domicile or residence will be competent, without the rules on express submission contained in the Civil Procedure Act itself being applicable. This can create doubts when the contract has provided otherwise, since the existence of an express submission clause does not automatically mean that the courts chosen will be competent to hear monitorio proceedings.
Jurisdiction and applicable law: do they have to coincide?
A different question from all of the above is under which national legal system those courts must resolve the dispute, that is, which law the judge hearing the case must apply. In principle, the ideal is for the courts of a particular country to resolve the dispute under the law they know; in other words, for jurisdiction and applicable law to coincide. But in international contracting it may well happen that the judge with competence to hear the case finds that the parties have provided that the dispute is to be resolved under the law of a third country. Indeed, this is what may occur in the example given above. To continue with the same case, it is perfectly possible for the courts of Lyon (the jurisdiction chosen by the parties) to have to resolve the dispute under German law, because the parties so agreed or because, in the absence of a choice of law, that would be the applicable legal system. In other words, it will be under German law that it must be decided whether there was in fact a breach of contract and what its consequences should be.
The main problem this raises is, clearly, the degree of knowledge those French judges may have of a foreign legal system. What is clear is that in such cases the principle of iura novit curia cannot be invoked in the same terms, under which the judge is presumed to know the national legal system they must apply, so that it is fundamentally for the parties to prove the facts and for the judge to decide in accordance with the law. The main problem this raises is, clearly, the degree of knowledge those French judges may have of a foreign legal system. What is clear is that in such cases the principle of iura novit curia cannot be invoked in the same terms, under which the judge is presumed to know the national legal system they must apply, so that it is fundamentally for the parties to prove the facts and for the judge to decide in accordance with the law.The main problem this raises is, clearly, the degree of knowledge those French judges may have of a foreign legal system. What is clear is that in such cases the principle of iura novit curia cannot be invoked in the same terms, under which the judge is presumed to know the national legal system they must apply, so that it is fundamentally for the parties to prove the facts and for the judge to decide in accordance with the law.
When the applicable law is that of a third country, its content must be properly established in accordance with the applicable procedural rules. It is true that today the various legal systems (especially within the European Union) do not differ extraordinarily in many areas, but this is nevertheless an issue that must be taken into account. For this purpose, the claim must be accompanied, as further evidence, by an opinion or report issued by a lawyer specialising in the country whose legal system must be established. This document may be challenged by the other party, for example when they consider that one of the conclusions reached in the opinion is incorrect or is based on repealed legislation. Finally, it will be for the judge to assess this evidence and reach the conclusion they consider most correct to support their judgment.
The importance of reviewing submission clauses before signing
In conclusion, it can be seen that quite a number of issues arise in an area that, very often, the parties treat as settled without being fully aware of its implications. Because they refer to future scenarios, which are normally considered unlikely when the international contract is signed, these clauses do not always receive the attention they deserve.
However, when the time comes to rely on them, they can determine where a claim may be brought, before which courts, by what procedure and under which law the dispute must be resolved. Therefore, before signing an international contract, it is advisable to give these issues the same attention as the rest of its terms.
Fernando Martínez Sanz
Advice on international contracts and disputes
Martínez Sanz Abogados advises companies and individuals on international contracting, international claims, enforcement of foreign judgments and awards, and other cross-border matters.
International Law service →
