When entering into international contracts, involving parties from different countries, one of the key challenges is selecting the governing law, which determines the legal framework for interpreting and enforcing the contract. Of equal importance is the choice of jurisdiction, which establishes where potential legal disputes will be resolved. Additionally, parties must decide on a dispute resolution method, with options such as arbitration, mediation, and dispute boards (read more about dispute boards here). Navigating these decisions carefully is essential to avoid legal complications and ensure smooth cross-border enforcement.
Governing Law
The governing law, also known as the applicable law, defines the legal rules that will regulate the contract’s performance, interpretation, and enforcement. In international contracts, parties often choose the law of a neutral country. However, this choice is not always straightforward.
Many legal systems allow parties to select the governing law under the principle of party autonomy, which permits them to choose the legal framework that best meets their business needs, provided the choice does not violate public policy or other mandatory laws.
However, not all legal systems fully embrace unrestricted party autonomy. For instance, under Brazilian law, specifically the Lei de Introdução às Normas do Direito Brasileiro (LINDB), parties can choose foreign law, but limitations may apply if the contract has significant ties to Brazil. In such cases, Brazilian law may govern when the contract is to be performed in Brazil or when the offeror or proponent of the commercial relationship resides in the country.
In cross-border contracts, parties must consider how the governing law interacts with public policy, mandatory provisions, and the existence of extraterritorial regulations in other jurisdictions, such as Data Protection Privacy and Anti-bribery laws. Choosing one country’s law over another can impact areas such as intellectual property, regulatory compliance, and labor rights.
Jurisdiction
Closely related to the issue of governing law is the selection of the jurisdiction where disputes will be litigated. Jurisdiction determines which court has the authority to resolve any disputes arising from such contract.
In international contracts, factors such as the location of assets of the parties, potential enforcement issues, and the convenience should all influence the choice of jurisdiction.
The choice of jurisdiction can greatly impact the costs of legal action, as different courts may have varying fees, procedural requirements, and case durations, all of which affect overall expenses.
Under Brazilian law, Article 12 of the LINDB establishes that Brazilian courts have jurisdiction when the defendant is domiciled in Brazil or when the obligation must be performed within the country. However, parties may agree on a foreign jurisdiction for the resolution of disputes, limiting the jurisdiction of Brazilian courts under Article 25 of the CPC. If a foreign jurisdiction is chosen, Brazilian courts would respect that clause if it was previously agreed in the contract and if such a provision does not violate local laws.
Arbitration as a Dispute Resolution Mechanism
Arbitration is the most popular method of resolving disputes in international contracts, offering parties more flexibility compared to court litigation. This method allows parties to select an internationally recognized arbitration institution, arbitrators with specialized expertise and different nationalities, select the location and language of arbitration, and set procedural rules for the proceeding. International arbitration is particularly attractive for its neutrality and enforceability of arbitral awards under the New York Convention.
In Brazil, arbitration is regulated by Law No. 9,307/1996, which recognizes the autonomy of the parties to submit their disputes to arbitration and allows them to choose the applicable law and arbitration institution. This law aligns with international standards, making Brazil a favorable jurisdiction for arbitration, particularly for cross-border contracts.
Moreover, arbitration provides confidentiality, which can be crucial for businesses that need to protect sensitive information. By opting for expedited arbitration procedures, parties can also avoid lengthy court proceedings, saving time and costs. However, it is essential to consider that the costs of arbitration can vary depending on the chosen arbitration institution, the value of the dispute, and the complexity of the case.
To ensure an efficient arbitration process, it is crucial to have a well-drafted arbitration clause, which must specify details such as the number of arbitrators, the applicable procedural rules, the language of the proceedings, and the location. This ensures that the arbitration process is efficient and aligns with the parties’ expectations.
Conclusion
The choice of governing law, jurisdiction, and dispute resolution mechanisms is a fundamental aspect of international contracts. A well-structured contract should balance these elements to minimize legal risks and align with the parties’ commercial goals. Understanding the specificities of different legal systems, particularly regarding cross-border contracts and the enforcement of foreign judgments or arbitral awards, is key.
Ultimately, consulting legal experts in the relevant jurisdictions is essential to ensure that the contract is both enforceable and effective.