02. jurisdiction and choice of law

The question

A commercial dealing connected with more than one country raises questions that a purely domestic dealing does not, and Course 1 introduced the field that addresses them, private international law. When parties in different countries fall into dispute, three questions arise before the merits can even be reached: in which country's courts may the dispute be litigated, which country's law governs its substance, and how a judgment obtained in one country may be enforced in another. This sub-unit examines the first two of these questions, jurisdiction and choice of law, reserving the third for the next sub-unit. The question is how the law determines which forum may decide and which law governs, and how commercial parties may settle these matters in advance. The answer draws on the private international law of Course 1 and shows party autonomy operating to give commercial parties control over the forum and the governing law.

The three questions of the cross-border dispute

A cross-border commercial dispute raises three distinct questions, and distinguishing them at the outset orders the whole subject. The first is the question of jurisdiction: which country's courts have the authority, and may be persuaded, to hear and decide the dispute. The second is the question of choice of law, also called the applicable or governing law: which country's substantive law the court, once seised of the dispute, will apply to determine the parties' rights and obligations. The third is the question of recognition and enforcement: how a judgment given by the court of one country may be recognised and enforced in another country, where the losing party or its assets may be found.

These three questions connect directly to the treatment of private international law in Course 1, which identified them as the central concerns of that field, and keeping them distinct is essential, for they are governed by different rules and may yield different answers. The court that has jurisdiction is not necessarily required to apply its own substantive law, since the rules of choice of law may direct it to apply the law of another country; and a judgment validly given by a court with jurisdiction may yet require a separate process to be enforced in another country. A party to a cross-border dispute, and still more a party drafting a cross-border contract, must attend to all three: where it may sue or be sued, what law will govern, and where any judgment can be enforced. This sub-unit addresses the first two questions, which the parties may largely settle in advance, and the next addresses the third.

Consider a dispute arising from a contract between parties in different countries, whose performance touched several countries. Before the dispute can be resolved, it must be determined which country's courts may hear it, which country's law governs the contract, and, eventually, where any judgment may be enforced. Each question may point to a different country, and each is governed by its own rules. The example shows the three questions of the cross-border dispute arising distinctly and requiring separate answers.

The cross-border dispute therefore raises three distinct questions, of jurisdiction, of choice of law, and of recognition and enforcement, the central concerns of private international law identified in Course 1, which must be kept separate because they are governed by different rules and may point to different countries; this sub-unit addresses the first two and the next addresses the third.

The question of jurisdiction

The first question is that of jurisdiction, the authority of a court to hear and decide a dispute, here in its private international law sense of which country's courts may entertain a cross-border dispute. A court will not decide every dispute brought before it; it must have a sufficient connection with the dispute or the parties to justify its exercise of authority, and the rules of jurisdiction determine when that connection exists. These rules vary among legal systems and among the regional regimes that govern jurisdiction within groups of states, but they rest on connecting factors of broadly recognised kinds.

The question of jurisdiction connects to the territorial nature of the state's authority examined in Course 1, for a court's authority is in principle territorial, and its jurisdiction over a foreign party or a foreign dispute requires a justifying connection. The connecting factors that ordinarily found jurisdiction include the defendant's presence or residence in the country, the making or performance of the relevant contract there, the occurrence of the relevant events there, and, of particular importance in commerce, the parties' agreement to submit to the country's courts. A court may also decline to exercise a jurisdiction it possesses, or stay its proceedings, where another forum is more appropriate, according to doctrines that vary among the systems. The result is that a cross-border dispute may be within the jurisdiction of the courts of more than one country, giving rise to the possibility that proceedings are begun in competing forums, a possibility the parties' agreement on a forum is designed to prevent. The rules of jurisdiction thus determine, by reference to connecting factors and to the parties' agreement, which courts may decide the dispute.

Suppose a dispute arises under a contract between a party in one country and a party in another. The courts of the defendant's country may have jurisdiction by reason of the defendant's residence there; the courts of the country where the contract was to be performed may have jurisdiction by reason of the performance there; and if the parties agreed to submit to the courts of a particular country, those courts may have jurisdiction by reason of the agreement. More than one country's courts may thus be available, unless the parties have agreed on a single forum. The example shows the rules of jurisdiction founding the authority of a court on connecting factors and on the parties' agreement.

The question of jurisdiction is therefore the question of which country's courts may hear a cross-border dispute, answered by rules that rest on connecting factors such as the defendant's residence, the place of performance, and the occurrence of events, and, importantly, on the parties' agreement, the territorial authority of the court requiring a justifying connection and more than one country's courts being potentially available absent an agreement on the forum.

The question of choice of law

The second question is that of choice of law, the determination of which country's substantive law governs the dispute, and it is distinct from the question of jurisdiction, for the court that has jurisdiction may be required to apply not its own law but the law of another country. The rules of choice of law, the choice-of-law rules of the forum, select the governing law by reference to connecting factors appropriate to the kind of issue, and they reflect the recognition, examined in Course 1, that a dispute connected with several countries should be governed by the law most appropriate to it rather than automatically by the law of the forum.

The question of choice of law connects to the coexistence of distinct legal systems examined in Course 1 and to the function of private international law in mediating among them. For a contract, the governing law is determined by choice-of-law rules that, in most modern systems, give primacy to the law the parties have chosen, and, in the absence of a choice, select the law most closely connected with the contract, ordinarily by reference to factors such as the place of characteristic performance or the parties' places of business. The governing law, once determined, governs the substance of the parties' rights and obligations: the formation, validity, interpretation, and performance of the contract, and the consequences of its breach, are determined by the chosen or applicable law, while certain matters, such as procedure, are governed by the law of the forum. The determination of the governing law is therefore of great practical importance, for it settles by which country's rules the dispute will be decided, and it is a matter the parties may largely control by choosing the governing law themselves.

Consider a contract connected with several countries that does not state which law governs it. If a dispute arises, the court seised of it will apply its choice-of-law rules to determine the governing law, selecting, in the absence of a choice by the parties, the law most closely connected with the contract, which may not be the law of the forum. That law will then govern the substance of the dispute. Had the parties chosen a governing law, the court would in most systems give effect to their choice. The example shows the choice-of-law rules selecting the governing law, with primacy given to the parties' choice where they have made one.

The question of choice of law is therefore the question of which country's substantive law governs the dispute, answered by the forum's choice-of-law rules, which in most modern systems give primacy to the parties' choice and otherwise select the law most closely connected with the matter, the governing law determining the substance of the parties' rights and obligations and being largely within the parties' control.

Party autonomy: jurisdiction and choice-of-law clauses

The uncertainty that the questions of jurisdiction and choice of law would otherwise create is largely dispelled, in well-drafted commercial contracts, by the parties' settling both questions in advance through two clauses, and the law's support for these clauses is a striking application of party autonomy in the cross-border setting. A jurisdiction clause, also called a choice-of-court agreement, is a term by which the parties agree which country's courts shall have jurisdiction over disputes arising from their contract, commonly conferring jurisdiction on the courts of a chosen country exclusively. A choice-of-law clause, also called a governing-law clause, is a term by which the parties agree which country's law shall govern their contract.

These clauses connect to the party autonomy examined in the orientation unit and extend it to the cross-border setting, allowing the parties to control the forum and the governing law as they control the substantive terms of their bargain. By a jurisdiction clause, the parties fix in advance where disputes will be litigated, avoiding the uncertainty and the risk of competing proceedings that the rules of jurisdiction would otherwise leave; by a choice-of-law clause, they fix in advance which law will govern, avoiding the uncertainty of the choice-of-law rules. The law of most commercial systems supports these clauses, giving effect to the parties' chosen forum and chosen law, because party autonomy and commercial certainty, the values identified in the orientation unit, are served by allowing commercial parties to settle these matters for themselves. The support for jurisdiction clauses has been strengthened internationally by the Hague Convention on Choice of Court Agreements of 2005, which, among its contracting states, requires the chosen court to hear the dispute and the courts of other contracting states to decline jurisdiction and to recognise the resulting judgment, giving exclusive jurisdiction clauses an enhanced international effect. The parties to a cross-border contract accordingly attend closely to these clauses, by which they may largely settle in advance two of the three questions the cross-border dispute raises.

Imagine parties in different countries concluding a contract who wish to avoid uncertainty about where disputes will be heard and which law will govern. They include a jurisdiction clause conferring exclusive jurisdiction on the courts of a chosen country and a choice-of-law clause selecting that country's law to govern the contract. Should a dispute arise, the chosen courts will hear it and apply the chosen law, and, among states party to the Hague Convention, other courts will decline jurisdiction and recognise the judgment. The parties have settled the forum and the governing law in advance. The example shows jurisdiction and choice-of-law clauses giving the parties control over the forum and the governing law through party autonomy.

Party autonomy therefore allows commercial parties to settle in advance the questions of jurisdiction and choice of law through a jurisdiction clause and a choice-of-law clause, which the law of most commercial systems supports, the support for jurisdiction clauses being strengthened among contracting states by the Hague Convention on Choice of Court Agreements of 2005, so that the parties may largely dispel, by their own agreement, the uncertainty that two of the three questions of the cross-border dispute would otherwise create.