Part 4 of ‘four points of attention when concluding (commercial) agreements’: choice of law and choice of forum

It is important (especially for international contracts) to include a choice of law in the contract so it is clear which law will govern the contract and the rights and obligations arising from it. After all, what is or is not permitted may vary from country to country. It is also important to consider in advance who is competent to rule on a dispute. Preferably, make a conscious choice in advance for the state court or a form of alternative dispute resolution. We list the pros and cons for you.

Choice of law

In general, the choice of law that parties agreed upon in the contract determines which law applies to the contract. Especially with international agreements, it is important to make a thorough assessment before making a choice of law, as what is permitted may vary from country to country. Also, laws and contractual provisions may be interpreted differently in different countries. Whereas in the Netherlands the circumstances of a case play an important role, this is not necessarily true for Anglo-Saxon legal systems. In order to have clarity about the interpretation and meaning of the contractual provisions, we strongly recommend to specifically agree on a choice of law.

Advantages and disadvantages

Because different rules apply in each country and the law is interpreted differently by judges, you need a specialist in the law of the country in question for correct advice on the meaning of the contract provisions. It is often most easy for a Dutch party to choose for Dutch law as the applicable law. If disputes or ambiguities then arise about contractual obligations, you can easily seek legal advice in your own country, where you often already know legal advisors. This becomes more complicated when (for example) you have declared French or Korean law applicable. You may, however, not always be in the position to determine that your preferred choice of law applies. In that case, it could be advisable to engage a lawyer in the relevant country to set out in more detail what risks there are.

Choice of forum

The choice of forum deals with who has jurisdiction over any dispute that arises between the parties. For this, for example, the state court – such as the District Court Rotterdam –  can be designated. Another option is to agree on alternative dispute resolution, such as arbitration at the Netherlands Arbitration Institute, or another arbitration institute of your choice. In addition, it is also possible for the parties to agree, for example, to first try to resolve the dispute through mediation before another court has jurisdiction. Another option is to agree on the Netherlands Commercial Court (NCC) as having jurisdiction.

Advantages and disadvantages

The dispute resolution methods mentioned above each have advantages and disadvantages. The advantage of arbitration is that the proceedings can take place in confidentiality and - unlike regular proceedings before the Dutch government courts - the proceedings can take place in English. Another possible advantage is that an arbitrator is not necessarily a lawyer. The arbitrator can, for example, be a specialist in the sector in which the parties operate. The disadvantage of arbitration may be that the costs are generally higher than regular court proceedings. A possible disadvantage of a regular Dutch court, is that proceedings will take place in Dutch. To tackle that disadvantage, parties can agree to designate the NCC as the competent authority in the event of a dispute. The NCC has the advantage that cases are heard in English and judgments are rendered in English. In addition, the NCC consists of judges who are experts in international commercial disputes and the majority of cases at the NCC are completed within eight weeks. The NCC is, however, (slightly) more expensive that a regular Dutch court.

What is ultimately the most appropriate choice of forum for the parties depends on the preferences of the parties and the nature of the agreement.

This blog is part of a blog series on points of attention when entering into agreements. Don't want to miss a blog? Or would you like to know more now about liability or an agreement you are planning to conclude? Please reach out to s.poutsma@ploum.nl or b.schoenmaker@ploum.nl.

Also appeared in this blog series:

1. Term and termination
2. Liability
3. Force majeure