Jurisdiction and applicable in contracts

Anina Groh
Anina Groh

As soon as two contractual partners are not domiciled in the same place and, in particular, not in the same country, the clauses on jurisdiction and applicable law almost inevitably lead to discussions during contract negotiations. There is no easy compromise; no one wants to have long discussions about such "technicalities". In this blog post, you will learn how you can position yourself as a company in negotiations on such clauses in order to efficiently find a good solution with your contractual partners.

The problem: (almost) no compromise and high relevance

In the vast majority of cases, the best solution for your company is to have the place of jurisdiction where your company is seated and additionally have choice of law in favor of the respective country’s law. Logically, however, your contractual partner, located in another country, also wants this solution and therefore, no easy solution in form of a compromise salution is at hand.

Even if the place of jurisdiction and applicable law may sound like mere formalities and are very abstract for non-lawyers, the relevance of these provisions in a contract should not be underestimated. Of course, you should assume that your company will not have any issues with its contractual partner and that the can stay hidden in your desk drawer and does not have to be “pulled out” anymore.

However, as soon as this is necessary - and this can already be the case with minor ambiguities or misunderstandings - it will very quickly become relevant which law and which place of jurisdiction has been agreed on. In practice, there is also the difficulty that - as soon as legal advice on the contract is required - you need to contact a lawyer with the relevant legal background. This is time-consuming (and usually more cost-intensive) if it cannot be done with your usual lawyer in Switzerland.

The options

Regarding Jurisdiction

With their choice on jurisdiction, contracting parties agree which courts at which place shall have jurisdiction over disputes arising in connection with the contract. Instead of "place jurisdiction", the terms "venue" or "court of jurisdiction" are also frequently used.

As a rule, the courts at the registered office of one of the parties are declared competent. More rarely, the place of performance of the contract or an independent, third location is agreed upon. Instead of state courts, the parties may also refer their dispute to an arbitral tribunal (so-called "arbitration clauses"), in which case the place of arbitration and the applicable rules of arbitration must be specified in the arbitration clause.

Jurisdiction clauses may declare the chosen court to have exclusive jurisdiction, or grant those respective courts alternative jurisdiction to the jurisdictions specified by law.

Generally, jurisdiction clauses are permissible. However, there are various restrictions, e.g. in the area of labor law or with regard to consumer contracts, as well as formal requirements.

It should also be noted that, despite the existence of an exclusive jurisdiction clause, certain jurisdictions provide that local courts may adjudicate disputes, e.g. regarding provisional measures at the place of the breach of contract. I.e., even if a place of jurisdiction has been agreed upon, it may be that you can be sued in court at another place.

Regarding applicable law:

By including a choice of law in their contract, the parties determine according to which underlying contract law (in Switzerland the Code of Obligations) the contract will be assessed. Usually, the parties choose the law at one of the party’s domicile. More rarely, the law of an independent third country is chosen.

Choice of law clauses are generally permissible. However, as is the case with jurisdiction clauses, there are also restrictions in certain legal systems, e.g. in the absence of a material connection.

The possibilities of compromise

Many contracting parties are not aware that there are also certain possibilities for compromise when it comes to the place of jurisdiction and applicable law.

For reasons of practicability, it is generally recommended that the place of jurisdiction and the applicable law are chosen from the same country. However, this is not mandatory, i.e. a Swiss court will in principle also review a contract under e.g. German or American law.

With regard to the place of jurisdiction, a compromise can also be found through an arbitral tribunal at a neutral location. In many cases, this is a good solution for both parties.

Another frequently chosen compromise is to choose the location of the defendant party's registered office as a place of jurisdiction. The party "who wants something from the other party" must then go to the other country.

A good option for a compromise regarding the applicable law, is the application of a neutral third country law. Often, there are topics that are regularly negotiated under a certain national law and it may be appropriate to orientate oneself on this. For example, as a result of EU research funding, many research collaborations are concluded under Belgian law.

Another compromise solution may be to limit the content of a contract, thereby making a certain jurisdiction or applicable law acceptable to one party. Typically, for example, non-disclosure agreements can be limited to a short term. This makes the risk of litigation more manageable and the jurisdiction of a foreign court more acceptable.

In which situations to remain firm and in which to give in – criteria for your decision.

The decisions on the applicable law and the place of jurisdiction should not be left to chance or to the negotiating power of the other party.

Because both aspects usually only become relevant in the event of a conflict, it is advisable to assess which conflicts may arise on in relation to the specific contract and whether your company is more likely to be the defendant or the plaintiff in such a case.

As defendant, it is particularly disadvantageous to stand before a foreign court. As plaintiff (the more active role) it is usually less disadvantageous. Furthermore, time is a relevant factor: the longer the duration of the contract, the higher the risk of disputes and the more desirable is jurisdiction of your home-country.

Additionally, you should consider the resources of your company. If you have offices abroad or already have a legal representative in a particular country, this is less of a disadvantage in proceedings abroad.

Another factor not to be underestimated is the language. Even if you have to engage a local lawyer anyway, it is much easier (and cheaper) if the proceedings are conducted in a language that the relevant people in your company know.

Practical tip 1 - Set internal rules

Based on the considerations outlined above, it is advisable to define within your company which contracts must be concluded under your domestic law and domestic jurisdiction, and for which contracts foreign law and foreign courts may be acceptable. The more contracts your company concludes, the more likely it is that such rules will be worthwhile in order to minimize the risks in the event of litigation.

For larger companies, it may also make sense to accept certain foreign jurisdictions in principle (e.g. because a branch office with a legal advisor is available, so that these resources can be accessed quickly and easily in a specific case).

Practical tip 2 - Benefits as a bargaining chip

Finally, it should be noted that every contractual clause offers room for negotiation. Thus, if there are very important other provisions in a contract, it may be perfectly reasonable to negotiate those provisions in your favor in exchange for accepting a foreign jurisdiction.


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