Choosing Governing Law and Jurisdiction for Cross-Border Contracts

Choosing the Governing Law and Jurisdiction for Cross-Border Contracts

Many Taiwanese SMEs, when entering into contracts with overseas clients or suppliers, adopt a "good enough" attitude towards clauses on "governing law" and "jurisdiction," or simply use standard templates. Unbeknownst to them, this can plant the seeds for future disputes. Once a conflict arises, they may discover that the contract's chosen governing law is unfavorable or that they must litigate in a distant foreign country. This is not only time-consuming and resource-intensive but can also lead to significant business losses. As a legal professional long involved in corporate contracts, I've seen too many cases where companies were put in a passive position due to incorrect choices in these two clauses. Today, let's discuss how to make smart choices to make your cross-border contracts safer.

Why is the Choice of Governing Law and Jurisdiction So Important?

Imagine you sign a sales contract with a Vietnamese client, specifying payment terms. The client fails to pay, and you decide to sue. If your contract designates Vietnamese law as the governing law and Vietnamese courts as the jurisdiction, you'll have to travel to Vietnam, hire a Vietnamese lawyer, conduct proceedings in Vietnamese, and navigate a legal system unfamiliar to you. The costs and risks involved are something none of us would welcome.

Why You Might Lose (Legal Pitfalls):

1. Incorrect Governing Law Choice: While Taiwan's Civil Code has provisions for the governing law of foreign-related contracts, it generally respects the parties' agreement. If your contract is silent, courts will apply conflict-of-law rules to determine the applicable law, which may not yield your desired outcome. For instance, the laws of some countries may differ from Taiwan's in how they calculate damages for breach of contract, statutes of limitations, or the strength of intellectual property protection. Choosing an unfavorable law could leave you with no recourse or less compensation than expected.
2. Incorrect Jurisdiction Choice: If your contract designates a court that is extremely inconvenient for you, like in the Vietnam example, you will face high travel expenses, legal fees, and time costs. More critically, if that country's judicial system lacks transparency or efficiency, enforcing your rights could become difficult. According to Taiwan's Code of Civil Procedure, parties can generally agree on jurisdiction. However, courts may refuse to recognize such an agreement if it is manifestly unfair.

How to Fix It:

When signing a contract, meticulously review the "governing law" and "jurisdiction" clauses. For governing law, unless there are specific considerations, prioritize Taiwanese law or the law of a country with a mature legal system and a business-friendly environment (e.g., certain US state laws, English law). For jurisdiction, choose the court that is most convenient and advantageous for you, such as Taiwanese courts or internationally recognized, fair, and efficient arbitration institutions.

Sample clause: The interpretation and performance of this Agreement shall be governed by the laws of the Republic of China. The parties agree that the Taiwan Taipei District Court shall be the court of first instance for any disputes arising from this Agreement.

Choosing a Governing Law That Favors You: Don't Let the Law Be Your Adversary

Simply put, the governing law is "the law of which country will be used to interpret and apply this contract." In Taiwan, if the contract doesn't specify, the Civil Code provides a basis for courts to determine the applicable law, but this basis might not be what you desire. For example, regarding the determination of "liquidated damages," Article 252 of Taiwan's Civil Code grants courts the power to "reduce" excessive amounts. However, some countries may have different regulations or not permit such reductions.

Why You Might Lose (Legal Pitfalls):

• No Governing Law Stipulated: As mentioned, if no governing law is stipulated, courts will apply the conflict-of-law rules in the Civil Code, potentially leading to an undesirable outcome. For instance, if a contract involves the provision of services and you hire a foreigner, failing to clearly stipulate the governing law could lead to disputes over whether Taiwan's Labor Standards Act or the foreigner's home country labor law applies, which could be disadvantageous to the company.
• Stipulating an Unfavorable Governing Law: For example, some countries offer weaker protection for "trade secrets." If your product or technology heavily relies on trade secrets, stipulating the application of that country's law could make it difficult to seek damages in case of infringement. This is a critical aspect where Taiwan's Trade Secrets Act is important but challenging to protect across borders.

How to Fix It:

Clearly stipulate the governing law in the contract. Prioritize Taiwanese law, followed by the law of a country with a mature legal system, a stable business environment, and one you are relatively familiar with. If you anticipate future disputes, you can also choose the law of a neutral third country that is relatively fair to both parties.

Sample clause: This Agreement shall be interpreted and applied in accordance with the laws of the Republic of China, excluding its provisions on the choice of law.

Choosing the Jurisdiction: Convenience or Catastrophe?

Jurisdiction refers to "in which country's court will a lawsuit be filed if a dispute arises in the future." This directly impacts your time, money, and the convenience of litigation. Many business owners might think, "Litigation is troublesome anyway, let's agree to use the other party's country's courts," unaware that this is often the beginning of a disadvantageous situation.

Why You Might Lose (Legal Pitfalls):

• Stipulating an Extremely Inconvenient Court: As mentioned, agreeing to litigate in a distant country with an immature judicial system will significantly increase your litigation costs and potentially reduce your chances of winning. This might violate the intent of the Code of Civil Procedure regarding party-agreed jurisdiction, but even if the court recognizes the agreement, enforcement can be extremely difficult.
• No Jurisdiction Stipulated: If no jurisdiction is stipulated, courts will determine it based on the statutory jurisdiction principles in the Code of Civil Procedure, such as the defendant's domicile or the place of contract performance. This could also force you to respond to a lawsuit in an inconvenient court.

How to Fix It:

Prioritize Taiwanese courts for jurisdiction, or choose a court in a country that is familiar and convenient for you. If both parties desire a more flexible dispute resolution method, consider stipulating "international arbitration." Arbitration proceedings are generally more flexible than court litigation, and arbitral awards are often easier to recognize and enforce in many countries, making it a common choice for many large cross-border transactions.

Sample clause: Any dispute, claim, or controversy arising out of or relating to this contract shall be submitted to the Arbitration Association of the Republic of China and resolved by arbitration in accordance with the Arbitration Rules of the Association in effect at the time. The place of arbitration shall be Taipei, Taiwan. The arbitral award shall be final and binding upon both parties.

Choosing International Arbitration: Considerations for Flexibility and Efficiency

International arbitration, as the name suggests, resolves cross-border disputes through non-court arbitration institutions. It offers several significant advantages, particularly suitable for complex cross-border transactions:

1. Expertise: Arbitrators are often experts in specific fields, capable of making more informed judgments on complex commercial or technical issues.
2. Confidentiality: Compared to public court proceedings, arbitration is typically confidential, helping to protect corporate trade secrets.
3. Flexibility: Parties can agree on arbitration procedures, language, location, and even the selection of arbitrators, offering greater flexibility.
4. Enforceability: Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), many countries recognize and enforce foreign arbitral awards, making them relatively easier to enforce.

How to Fix It:

If you wish to resolve disputes through arbitration, ensure it is clearly stipulated in the contract. You can specify a particular arbitration institution (e.g., ICC, SIAC, HKIAC, CIETAC, or Taiwan's Arbitration Association of the Republic of China) and agree on details like the place and language of arbitration. If not clearly stipulated, parties may still need to go to court to decide whether to arbitrate when a dispute arises, causing unnecessary trouble.

Sample clause: Any dispute arising out of this Agreement shall be submitted to the Singapore International Arbitration Centre (SIAC) and resolved by arbitration in accordance with the SIAC Arbitration Rules in effect at the time. The language of the arbitration shall be English, and the place of arbitration shall be Singapore.

Practical Considerations for Choosing Governing Law and Jurisdiction

When selecting governing law and jurisdiction, don't just look at which sounds better on paper. Consider multiple aspects:

1. Maturity and Stability of the Legal System: Choosing a country with a sound legal system, stable commercial regulations, and robust intellectual property protection provides more reliable legal safeguards. Examples include Taiwan, certain US states, the UK, and Singapore.
2. Enforceability: Even if you win a lawsuit or arbitration, it's futile if the judgment or award is difficult to enforce in the other party's country. Therefore, consider how that country recognizes and enforces foreign court judgments or arbitral awards.
3. Cost and Efficiency of Litigation/Arbitration: Evaluate the actual costs of litigation or arbitration in different locations, including legal fees, travel expenses, translation costs, etc., as well as the efficiency of the judicial or arbitration process there.
4. Commercial Practices and Culture: Sometimes, choosing a law or arbitration venue closer to the parties' commercial practices can help reduce communication barriers.
5. Risk Diversification: For larger contracts, consider stipulating the law of a neutral third country as the governing law to avoid appearing biased towards either party.

How to Fix It:

Before signing a contract, thoroughly discuss it with your legal team or external counsel. Based on the contract's nature, transaction value, parties' locations, and other factors, jointly develop the most suitable governing law and jurisdiction clauses. Do not act hastily, or you may face endless troubles.

Sample clause: The interpretation, validity, and performance of the rights and obligations of the parties under this Agreement shall be governed by the laws of the People's Republic of China. Any disputes arising from this Agreement, if not resolved through negotiation, shall be submitted to the China International Economic and Trade Arbitration Commission (CIETAC) for arbitration in accordance with its rules.

One-Sentence Checklist

• Is the governing law clearly stipulated in the contract?
• Is the stipulated governing law favorable to our side and from a mature legal system?
• Is the jurisdiction or arbitration institution clearly stipulated in the contract?
• Is the agreed-upon jurisdiction/arbitration seat convenient and highly enforceable?
• Have the potential dispute resolution costs and efficiency been considered?

A Common Myth

Myth: Stipulating "international practice" or "UCC" (Uniform Commercial Code) can solve all problems.

Reality: "International practice" is not a specific legal system; its content can be vague and difficult to use as a basis for dispute resolution. The UCC primarily applies to the sale of goods within the United States. If your contract involves services, technology licensing, or other non-goods transactions, directly stipulating the UCC may be inapplicable or cause confusion. Therefore, it's best to stipulate a specific national law or, when referencing the UCC, clearly define its scope of application.

FAQ

1. What happens if the contract doesn't specify a governing law?

If the contract is silent on governing law, courts will apply conflict-of-law rules in the Civil Code to determine which country's law applies. This determination process can be complex, and the outcome may not be what you desire. For example, for a sales contract, it might look at the place where the seller's main obligations are performed; for services, it might look at the place where the services are provided. In short, the result is full of uncertainty, and it's best to clarify this in the contract at the time of signing.

2. Is choosing US law as the governing law always better?

US law has its advantages. For instance, many state laws (like Delaware law) are very mature in corporate law and commercial transactions, with extensive case law. However, the US legal system is complex, with different states having different laws, and English legal documents and litigation procedures can also be a significant challenge for many Taiwanese companies. Therefore, before choosing US law, you need to assess which specific state's law applies and whether it truly suits your transaction and company situation.

3. In what situations should I consider stipulating international arbitration instead of court litigation?

When your transaction involves large sums, complex technical or commercial issues, requires a high degree of confidentiality, or you desire a more flexible and efficient dispute resolution process, international arbitration is a good choice. Especially if your counterparty is from a different country, the cross-border enforceability of arbitral awards is generally broader than that of court judgments.

4. What if my counterparty and I agree to litigate in their country's court, but I find it unfair?

This is indeed a difficult situation. In principle, party agreements on jurisdiction are valid. However, if such an agreement is manifestly unfair, for example, forcing you to litigate in an extremely inconvenient country and severely impairing your litigation rights, you can argue that the agreement is invalid during the proceedings. This requires sufficient reasons and evidence, and the court will ultimately make the decision. Therefore, the best approach is to avoid such unfavorable stipulations when signing the contract.

5. Must the governing law and jurisdiction always be in the same country?

Not necessarily. You can stipulate Taiwanese law as the governing law but have the jurisdiction be in Singaporean courts; or stipulate English law as the governing law but resolve disputes through a Taiwanese arbitration institution. Such combinations are common in practice. The key is to choose the most advantageous legal application and dispute resolution method based on your specific needs.

6. What should I do if the contract specifies a governing law and jurisdiction, but the other party doesn't comply?

If the other party fails to comply with the contract's stipulations on governing law or jurisdiction – for instance, insisting on their country's law when you assert Taiwanese law applies, or demanding you litigate in their country when you file a lawsuit in Taiwan – you should assert the agreed-upon governing law or jurisdiction before the court during the legal proceedings, based on the contract. If the court finds the contractual stipulation valid and clear, it will generally respect it. If the other party continues to evade, further legal measures may be necessary to enforce the contract terms.