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Dispute Resolution Clauses

Dispute resolution clauses are important provisions that should be included in a contract. The clauses help determine which country will have jurisdiction and the substantive law that will apply to the contract. By including these clauses in a contract parties can avoid time and cost disputing which court has jurisdiction and what the applicable substantive law to the contract is.

Parties can benefit from the principle of party autonomy that allows them to agree the jurisdiction and governing law.

Governing Law

Parties should consider the choice of governing law carefully. If the governing law is of a country that a party is not domiciled it may be costly and inconvenient to instruct lawyers that have expertise in that area.
If the parties decide not to implement a governing law provision and are parties to the Rome 1 Convention the applicable law will be determined by the specific rules that will apply to a particular contract but generally in most cases the applicable law will be the country and habitual residence of the person who has the characteristic role of performance of the contract.

Most developed legal systems will recognise an express choice of governing law provided: there is a relationship between the chosen law and the parties/transaction, the choice was not made deliberately to avoid a mandatory provision of law and there are no public policy reasons for disregarding the choice.

Jurisdiction

The parties can determine which court will hear a dispute arising under the contract.
When deciding which country has jurisdiction it is important to consider the Brussels 1 (Recast) (“the Regime”).

The Regime allows member states to determine the court that will have jurisdiction. Article 25 allows Choice of Court Agreements. Under this article parties can agree which court will have jurisdiction to settle a dispute. The agreement is considered separable from the original contract and treated as an agreement that is independent of the other terms of the contract.

Article 25 is a derogation from Article 4 of the Regime. Article 4 is the general principle that a defendant is entitled to be sued in his country of domicile. Article 25 will apply regardless of a defendant’s domicile. Previously this was not the case, under Brussels Regulation 2001 parties had to be domiciled in a member state for the article to apply. It is therefore important for parties to be aware that an exclusive jurisdiction provision for a member state will be subject to the Regime.

It is also important for parties to be aware of Article 31 of the Regime and its impact. Article 31 provides that where proceedings are designated to a member state and proceedings are commenced in the chosen court but proceedings have also commenced in another member state the member state which does not have exclusive jurisdiction must stay its proceedings until the chosen court has decided whether or not it has jurisdiction. This is significant as previously under Article 27 of the Brussels Regulation 2001 the court that failed to start proceedings first, regardless of whether it was the chosen court, had to wait until the court that first started proceedings had decided whether or not it had jurisdiction. Article 27 was previously used as a tactic to delay proceedings and often resulted in significant delays in obtaining judgement

Arbitration

One way in which parties can further protect their position and control over the procedure, substantive law and jurisdiction of a dispute is by agreeing to resolve the dispute by arbitration.
Arbitration is an alternative form of dispute resolution that is based on contract. Arbitration allows parties to agree to allow a third party tribunal to resolve the dispute on their behalf and agree to be bound by that decision.

Arbitration is excluded from the scope of Regime.

The jurisdiction of arbitrators only arises from agreement between the parties and enables the parties to obtain a significant amount of control and minimises uncertainty.

Conclusion

Overall dispute resolution clauses are helpful in eliminating uncertainty regarding disputes that may arise from an agreement. Parties should seek to include dispute resolution clause in their agreements and think carefully when determining what country they would like to govern and determine their dispute.

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ELS Legal is a legal firm based in the City of London. We are located in the historic and traditional street of Ely Place near Holborn. Established in 1290, Ely Place is today the home of many modern and forward looking legal firms.

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