Drafting Tip: Why Governing Law and Jurisdiction is Important
Let’s say you operate a small consulting firm. You can have a partner in Australia, a client in China, and be located in Sri Lanka thanks to the power of the Internet. Work from home is an option. Your reputation precedes you, and you believe you produce quality work. You’re busy. A friend advised you to always have a contract in place for your clients in order to ensure that you get paid, but you don’t like the way a complicated contract looks because you believe it communicates to your clients that you don’t trust them. You downloaded a straightforward piece of software from the Internet, and it’s been useful to you for a while.
Imagine further that you have managed to go a few months without receiving payment from one of your clients for a variety of reasons, events, and justifications, and that the total amount owed is “jumping up there.” You feel you need to set boundaries and stop providing services at this point in the relationship. But now you owe your client a sizeable sum of money. Let’s use $1000 as our example. You are hesitant to completely stop providing services because you are certain that you will not be paid. You feel confined. How do you behave?
This may sound familiar to you. Have you ever found yourself in this situation or do you believe that, if you’re not careful, you might find yourself there? Unfortunately, it appears that most straightforward contracts don’t have a Governing Law and Jurisdiction clause, which is bad news for our hypothetical above. Such a clause is typically found in the “Miscellaneous” provisions of more complex contracts, and it appears that many of the miscellaneous provisions are the first to be eliminated when a non-lawyer attempts to simplify a contract.
What is Governing Law?
In the previous example, I mentioned that the client is in China, a partner is in Australia, and you are in Sri Lanka. Which law is in force? Knowing the answer to this question is crucial because each of the three nations has different laws (and penalties) governing breach of contract and customer defenses, such as unfair business practices. Without a specific statement, you are left with a complex factual question that is reliant on the place of the contract’s signing, the place the work was performed, and more. Anything but what is expected could happen. The term “Governing Law,” sometimes referred to as the “Choice of Law” in contracts, designates which country’s law governs the agreement.
It can be simple, and read something like:
Governing Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the Sri Lanka, without regard to the conflict of laws principles thereof.
Governing law isn’t the only thing to be worried about, you should also make sure there is “Jurisdiction” clause.
What is Jurisdiction?
In that it indicates which country’s law governs the contract, jurisdiction is very similar to governing law. However, it indicates which courts apply rather than addressing which country’s laws apply. This has major significance. According to jurisdiction, a lawsuit involving the contract may be filed anywhere in the world. Do you really want to hire an attorney in Australia to sue your client for the money owed to you in the aforementioned hypothetical if you reside in Sri Lanka? Would you even know where to start if you didn’t want to hire a lawyer to represent you in court.
Therefore, if jurisdiction is in your favor, it can significantly cut costs and increase convenience. Likewise, having to file a lawsuit in another country (or being sued) can significantly raise costs and reduce convenience. Jurisdiction is crucial, and in most cases, you should take every precaution to prevent it from becoming an issue for you.
A jurisdiction clause will read something like the following:
Jurisdiction. Parties agree that personal jurisdiction shall exist in the Sri Lanka and that the Sri Lanka shall have subject-matter jurisdiction over any issues arising from interpretation or enforcement of this Agreement. Any lawsuits arising out of this Agreement shall be brought in Commercial High Court of Colombo.
