Key clauses in an international contract: governing law, jurisdiction and arbitration

International contracting calls for three decisions to be taken before signature, all of which shape the parties’ position in the event of a dispute: the governing law of the contract, the forum that will resolve disputes — a State court or an arbitral tribunal — and the language in which the contract is construed. These are clauses that are frequently incorporated without discussion and that nevertheless determine the outcome of a controversy. By way of a practical reference: in a share purchase involving a buyer from the European Union and a seller from a third country, over a Spanish company, it is common for the contract to be governed by Spanish law, drafted in English and to submit disputes to arbitration. The clauses and the instruments that govern them are examined below.

The law governing the contract

In international contracting, the parties may choose the law that governs their contract. Within Europe this is permitted by Regulation (EC) 593/2008 (Rome I), article 3 of which enshrines that freedom of choice. Where the parties make no choice, article 4 decides for them on fixed criteria — a sale of goods, for instance, is governed by the law of the seller’s country; the provision of services, by that of the service provider — an outcome that seldom coincides with what suits any particular party.

That freedom has limits: the overriding mandatory provisions of article 9 and public policy apply irrespective of what has been agreed. A foreign law cannot be chosen in order to circumvent mandatory rules protecting, for example, a consumer or a commercial agent. The governing law should therefore be decided expressly and recorded in the contract.

Jurisdiction

Within the European Union, Regulation (EU) 1215/2012 (Brussels I recast) allows the parties to agree on the competent court through an express choice-of-court clause, under article 25. In the absence of agreement, article 4 sets the general forum — the defendant’s domicile — and article 7 lays down special heads of jurisdiction. The main advantage is that a judgment given by the court of one Member State is recognised and enforced in the others almost automatically.

The difficulty arises outside the European Union: a Spanish judgment may prove hard to enforce in a country that does not recognise it. It is to that problem that one of the cornerstones of international trade responds.

International arbitration

Arbitration submits disputes to private arbitrators — frequently under the rules of the International Chamber of Commerce — with an agreed seat, language and number of arbitrators. Its principal advantage in cross-border transactions derives from the 1958 New York Convention, which obliges more than 170 States to recognise and enforce arbitral awards. An award is therefore enforceable in most of the world, unlike a court judgment outside the European Union. Where the counterparty is based outside the Union, arbitration is usually the safest route to secure enforcement.

Sale of goods: Incoterms and the Vienna Convention

Where the contract is one for the sale of goods, two further instruments come into play:

• Incoterms 2020 (International Chamber of Commerce): rules allocating the costs, risks and obligations of carriage and customs (EXW, FCA, FOB, CIF, DDP and so on). The applicable rule and the exact place must be stated. Incoterms do not govern the transfer of ownership or payment; they cover logistics and risk alone.
• The 1980 Vienna Convention (CISG) on contracts for the international sale of goods: it applies automatically where both parties have their place of business in Contracting States — Spain is one — unless it is expressly excluded, a possibility provided for in article 6. A conscious decision should be taken as to whether it applies or is excluded; in practice, many contracts exclude it without the parties realising that it was governing the relationship.

The language of the contract

Language carries legal consequences. A contract may be governed by Spanish law and drafted in English — as in the example above — or exist in several versions. If it is not agreed which version prevails, a divergent translation may alter the meaning of an obligation. The prevailing language version should therefore be fixed.

Payment, security and unforeseen events

Two further matters determine how robust the contract is:

• Payment. The documentary credit (letter of credit) and first-demand guarantees shift the risk of non-payment to a bank, which is particularly useful where there is no previous relationship with the counterparty.
• Unforeseen events. Force majeure relieves a party from performance in the face of unforeseeable and unavoidable events. Hardship — a supervening excessive burden — allows the contract to be renegotiated or adapted where an event seriously upsets its balance without making performance impossible. The International Chamber of Commerce publishes model clauses for both.

To these should be added retention of title (whose effectiveness varies from country to country), confidentiality, assignment and the entire agreement clause.

Our recommendation

One clear recommendation follows from the above, based on our practice in cross-border transactions: the clauses most often neglected — governing law, dispute resolution and language — are the very ones that determine each party’s position in a dispute. When reviewing or negotiating an international contract we recommend agreeing to arbitration — under the New York Convention — where the counterparty is based outside the European Union; specifying the applicable Incoterms; taking an express decision on the Vienna Convention; and fixing the prevailing language version. If you are about to contract with a foreign company or to sell outside Spain, tell us about your case: we will review the contract to ensure that each of these clauses protects your position.