Key Takeaways

  • A jurisdiction clause specifies which court has authority to resolve disputes arising under a contract.
  • These clauses can be exclusive, non-exclusive, or asymmetric, with significant legal and strategic implications.
  • The clause is distinct from a governing law clause, which addresses what law applies, not where disputes are resolved.
  • Enforceability of jurisdiction clauses depends on clarity, mutual agreement, and legal recognition in relevant jurisdictions.
  • Common mistakes include vague language, conflicting clauses, and failure to account for enforcement challenges abroad.

Jurisdiction Agreement

A jurisdiction agreement is a very important component to all parties to a contract or other formal agreement. You need to include a clause in your contract that states where one or both parties can sue if it becomes necessary to do so. Having a say in which jurisdiction you can use will have a plethora of benefits. The last thing you will want to deal with is having to travel a great distance to resolve a dispute, adding time, money, and inconvenience to an already frustrating situation. Including a jurisdiction agreement in your contract will prevent that from happening.

Jurisdiction Clauses

You should always include a jurisdiction clause when the parties involved want to have all disputes that occur within an agreement to be determined using a specific national court. If you want to submit to a certain court, you could find it hard to argue those courts are not an appropriate venue for any disputes.

If you do not include an effective jurisdiction clause, the venue will be decided by referring to rules held by international law. This could have a negative outcome that can result in extra costs and time spent on getting a resolution.

Jurisdiction vs. Governing Law

A jurisdiction clause is not the same as a governing law clause, though the two often appear together in commercial contracts.

  • Jurisdiction clause: Specifies which court(s) will resolve disputes.
  • Governing law clause: Specifies which country’s laws will apply to interpret and enforce the contract.

For example, a contract might be governed by the laws of New York but designate London courts as the jurisdiction for resolving disputes. It is essential to include both clauses clearly to avoid legal uncertainty.

Purpose and Function of a Jurisdiction Clause

A jurisdiction clause plays a vital role in ensuring contractual certainty and minimizing costly legal battles. It determines the specific court or courts that will resolve disputes, thereby avoiding ambiguity and forum shopping.

Well-drafted jurisdiction clauses:

  • Prevent disputes about where a claim should be heard.
  • Reduce the risk of parallel proceedings in different countries.
  • Offer predictability and help manage legal costs.

Parties frequently choose a jurisdiction based on neutrality, familiarity with the legal system, enforceability of judgments, and local presence of assets.

How Do I Decide Which Jurisdiction to Choose?

A jurisdiction clause can help determine the country that is associated with at least one party to the agreement. It could also provide for the jurisdiction that is neutral to all parties involved.

There are three general reasons for deciding on a specific venue for jurisdiction:

  1. Convenience- You could want to be sued or sue in your home country
  2. Preferred Judicial System- The civil litigation process is different in all jurisdictions. Some are more preferable than others, depending on if you are the defendant or claimant. For instance, if you are going to sue a lender, you will want your case heard in a jurisdiction that has a good judicial system and will ensure you get a fair outcome.
  3. Enforcement- Where you choose to have your claim processed will have a major effect on how well it can be enforced. The judgment’s worth will highly depend on how well it can be enforced. The location of the defendant’s assets also needs to be considered.

What Is the Difference Between Exclusive and Non-Exclusive Jurisdiction Clauses?

There are three options when you are drafting a jurisdiction clause:

  • All parties will submit to a particular court with exclusive jurisdiction
  • All parties will submit to the non-exclusive jurisdiction of a certain court
  • One party will submit to the exclusive jurisdiction of one court while the other party submits to the non-exclusive jurisdiction

The clauses of an exclusive jurisdiction include:

  • To limit the issue to one court’s jurisdiction
  • You will know where you can both sue a party and be sued by another party
  • You receive more protection since another court will not take on a dispute with an exclusive jurisdiction clause
  • The clauses of a non-exclusive jurisdiction include:
  • They provide a place for the hearing in a certain jurisdiction without prejudice to either party to move to another court if necessary
  • You will have certainty in that you will know that your dispute will be heard in a certain jurisdiction with other jurisdictions available if necessary.

There is also a hybrid clause that will benefit one party to the contract. It will often be in loan agreements. The borrower is restricted to filing a lawsuit in a specific venue with the bank retaining the right to have the lawsuit occur in their preferred jurisdiction.

A hybrid clause is negotiated if there is not a balanced power of negotiation among all the parties. It will leave one of the parties in a more favorable position.

Asymmetric or One-Way Jurisdiction Clauses

Asymmetric jurisdiction clauses (also called unilateral or one-way clauses) provide more flexibility to one party. Typically used in financing agreements, these clauses bind one party (usually the borrower) to a specific court, while the other party (usually the lender) retains the right to choose alternative forums.

Benefits:

  • Lenders gain flexibility to sue in a forum where assets may be located.
  • Maintains leverage over borrowers by increasing enforcement options.

Drawbacks:

  • May not be enforceable in all jurisdictions (e.g., some EU courts have rejected such clauses).
  • Can be challenged as unfair or imbalanced.

These clauses should be drafted with legal advice to ensure enforceability across all relevant jurisdictions.

Formalities

You always need to expressly include the jurisdiction clause to your contract. It is essential that the contract is clear on the agreements of which jurisdiction will be used. Do not allow the standard terms of the contract to be swapped, as this will result in an argument as to which party’s terms will have exclusive jurisdiction.

Sample Jurisdiction Clause Language

Here are sample clauses that demonstrate different approaches:

Exclusive Jurisdiction Example:

"The parties irrevocably agree that the courts of the State of New York shall have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement."

Non-Exclusive Jurisdiction Example:

"Each party irrevocably submits to the non-exclusive jurisdiction of the courts of California for any proceedings arising out of or in connection with this Agreement."

Asymmetric Clause Example:

"The Borrower submits to the exclusive jurisdiction of the courts of England. The Lender may initiate proceedings in England or any other jurisdiction it deems appropriate."

Enforceability and Best Practices

To ensure a jurisdiction clause is enforceable, it must be:

  • Clear and unambiguous: Avoid vague or contradictory wording.
  • Mutually agreed upon: It should be negotiated and not merely embedded in standard terms.
  • Consistent with governing law: Ensure it aligns with any governing law clause to avoid conflict.

Best practices include:

  • Avoid using both exclusive and non-exclusive language in the same clause.
  • Consider the New York Convention or Hague Choice of Court Convention if international enforcement is a concern.
  • Review whether the courts designated have a history of upholding and enforcing jurisdiction clauses.

Frequently Asked Questions

  1. What is the purpose of a jurisdiction clause?
    A jurisdiction clause specifies which court will hear disputes arising from a contract, ensuring clarity and reducing forum conflicts.
  2. Is a jurisdiction clause the same as a governing law clause?
    No. Jurisdiction clauses dictate where disputes are resolved, while governing law clauses determine which legal rules apply.
  3. Are jurisdiction clauses enforceable internationally?
    Often yes, especially if clearly written and mutually agreed upon. However, enforceability can vary by jurisdiction.
  4. What happens if there is no jurisdiction clause in a contract?
    Courts will rely on complex legal rules, often involving factors like the parties' locations and where the contract was performed, which can lead to costly jurisdictional battles.
  5. Can one party have more rights in a jurisdiction clause?
    Yes, in asymmetric clauses, one party (usually a lender) may reserve the right to sue in multiple jurisdictions, while the other is bound to one.

If you need help with jurisdiction agreements in your contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.