A jurisdiction clause is commonplace in many business contract scenarios. These clauses state that involved parties have the right to settle disputes through adjudication.

What Is a Jurisdiction Clause?

Many business contracts include lots of technical jargon and legal terminology that most business owners will find unfamiliar and confusing. It is important, however, to have an understanding of an agreement before you sign any official, legally binding documents. One of these terms is known as the "Consent to Jurisdiction and Selection" clause, also called the "jurisdiction clause."

A jurisdiction clause will appear in a business contract quite regularly. Jurisdiction clauses basically state that the parties involved in a contract have the right to settle legal disputes through adjudication.

Because sellers and buyers are often in different locations, determining the location in which disputes should be resolved is of vital importance to everybody involved. It's usually much more convenient and less expensive for one of the involved parties to get to a court date than it is for the other when a disagreement arises and needs to be settled. One party may be located in New Zealand, for example, while the other is in Delaware. In this scenario, whichever party has to travel to the other's location may face significant financial and logistical requirements to do so.

A jurisdiction clause may also grant rights of jurisdiction to the court in multiple locations. Jurisdiction is normally categorized in one of two ways:

  • Exclusively granted
  • Non-exclusively granted

In simple terms, exclusive jurisdiction means that only the courts specified in the jurisdiction clause have the authority to adjudicate a dispute. Non-exclusive jurisdiction, on the other hand, means that courts other than those specifically named in the jurisdiction clause may also have the authority to adjudicate a dispute.

A jurisdiction clause, or "consent to jurisdiction," in one state doesn't always mean that settling a dispute in that state is a requirement. However, this doesn't prevent an involved party from claiming that another party's state doesn't have jurisdiction in a dispute. If the clause includes language stating that a specific state is the exclusive location in which the dispute must be adjudicated, it's likely that state is where the adjudication will take place.

Why Jurisdiction Clauses Are Required

Jurisdiction clauses should be incorporated into a contract when the parties involved wish to have any disputes that arise concerning the agreement to be adjudicated by a specific court. When a party expressly submits to the authority of a court in a specific jurisdiction, they may find it hard to argue that the court in question is not the appropriate venue for the adjudication of such disputes.

In the absence of a jurisdiction clause, determining which court will have the authority to rule on a dispute falls to the rules pertaining to private international laws. This has a tendency to create inconvenience and uncertainty and can potentially lead to greater costs and possible delays in the proceedings to follow.

How to Decide Which Jurisdiction to Choose

Jurisdiction clauses can specify jurisdiction in countries that are associated with one involved party or more. Additionally, jurisdiction in a neutral location can be declared. Three primary reasons exist for determining which specific court will have jurisdiction in the event of a dispute:

  • Convenience
  • Judicial system preferences
  • Enforcement

In terms of convenience, it may be preferential to pursue legal action against the other party in your own country. In terms of judicial system preferences, litigation systems can vary drastically. Some may be preferable to others, depending on whether you are the defendant or the claimant in a dispute. If you think you might be the party that is most likely to pursue legal action, for example, then it may be in your best interest to have your dispute heard in jurisdictions that have more efficient judicial systems and that offer a better range of final and interim remedy options.

In terms of enforcement, it's typically easier to enforce a judgment in the state it was obtained in. Determining the commercial value of a judgment is normally a matter of considering how enforceable the judgment is in comparison to the defendant's asset's physical location.

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