Rules of private international law are most often considered in the dispute resolution (mostly litigation) context. But those rules are of fundamental importance to the transaction planner (the contract drafter). Particularly when considering how rules of private international law relate to jurisdiction based upon consent, whether in courts or in arbitration, the process necessarily begins with the text of an agreement - and that requires understanding rules of private international law at the contract drafting stage. The good contract drafter should prevent litigation of issues regarding the jurisdiction of the relevant court or arbitral tribunal wherever possible.
The transaction planning lawyer has a much more difficult job than does the dispute resolution lawyer. The dispute resolution lawyer knows what the issues in dispute are, can (or should be able to) find the facts relevant to those issues, and should be able to determine the law applicable to those issues. All of this provides a clearer focus for the work of the dispute resolution lawyer.
The transaction planning lawyer, on the other hand, has a much more difficult job. She must be able to predict, as well as possible, all of the possible disputes that might arise; determine, as well as possible, what law will be applicable to the issues created by those disputes; and then use words, as well as possible, that will mean the same thing to everyone who reads them in resolving any disputes. She must create a clear, exhaustive, and exclusive set of contract terms that will mean the same thing to everyone involved and make outcomes predictable enough that dispute resolution by courts and arbitral tribunals on related issues should be unnecessary.
II. The Role of the Transaction Planning Lawyer
Transaction planning places the lawyer in the middle of an existing business relationship. That has consequences. The transaction planning lawyer’s role can be summarized in one word: risk. The better the relationship the lawyer is asked to deal with, the lower the risk. The relationship lesson for the business person bringing the contract drafting assignment to the lawyer then is simple: begin by developing good relationships.
A. Identifying and Addressing Risk
The transaction planning lawyer must know how to deal with risk in the international business relationship. The first step is to identify all of the legal risks that are possible in the business relationship. At that point, three basic steps define the lawyer’s approach to risk:
1) elimination of the risk if that is possible;
2) reduction of the risk if it cannot be eliminated; and
3) reallocation of any remaining risk to the other party if it cannot be fully eliminated.
B. Sources of Protection from Risk
The transaction planning lawyer has three sources for tools to be used in addressing risk. The first is institutional protection. This requires a clear and comprehensive understanding of the legal framework in which the transaction is situated. At base, it requires an understanding of all of the default rules of law that will apply if no changes are made in the contract. This begins with rules of private international law – rules of applicable law. Those rules will lead to various sources of substantive and procedural law. Those sources may come in the form of a treaty or in the form of the domestic law of one or more possible states. The lawyer must know from where those sources arise and what they provide. To the extent that default rules in the applicable law are also mandatory rules, the lawyer must also know what the limits are on contract drafting.
The second source of tools for addressing risk is purchased protection. In a simple sale of goods transaction, this may include a letter of credit.2 In both sales and more complicated investment transactions it may include the purchase of various kinds of insurance, from either private or public sources.3 Purchased protection is particularly important for zero-sum risks that can be neither fully eliminated nor reduced through contract drafting. Some zero-sum risks will fall on one party or the other, and the availability of insurance against that risk is an important tool to have available.
The third source of tools for addressing risk is negotiated protection. This is where the transaction planning lawyer’s role becomes most important. Negotiations will determine the words of the contract and the lawyer must be able to plan and draft the words that best protect her client in the transaction.
III. Choice of Forum as Negotiated Protection from Risk
A good transaction planning lawyer will necessarily understand private international law from a dispute resolution context. She must be aware of the types of problems that arise when contract terms are not well drafted. For private international law purposes, this presents a focus on drafting the choice of forum (whether litigation or arbitration) and the choice of law clauses in the contract. The focus here is on drafting the choice of forum clause, but that provision most often is closely tied to the choice of law clause, and requires particular attention to the law governing the choice of forum clause.
A. Reverse Engineering the Choice of Forum Agreement
Drafting a good choice of forum clause requires a process of reverse engineering. Thus, the lawyer must look to the dispute resolution phase and identify how and when choice of forum issues can and do arise and how those issues are presented in challenges to a choice of forum clause.
Professor Peter Nygh famously stated that “freedom of contract is an essential part of the market economy. . . . . [n]o State can hope effectively to control international contracts.”4 But the law often limits just what parties may accomplish in a choice of forum clause, even when they might otherwise be in complete agreement on the choice of forum.
Negotiated protection in the form of a choice of forum clause necessarily begins with institutional protection. One must first understand the default rules found in the otherwise applicable law in order to properly exercise party autonomy in order to draft an effective choice of forum clause. Those default rules may well include some mandatory rules that limit the ability to exercise party autonomy by preventing drafting out of those rules. Thus, it is necessary to understand the limitations on the exercise of party autonomy and just what cannot be done by contract.
1. Arbitration Agreements as Choice of Forum
Drafting an effective arbitration clause begins with an understanding of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) - the fundamental source of institutional protection provided for arbitration agreements and awards.5 That treaty currently has more than 170 contracting parties, making it applicable in most of the trading world.6 It provides for both recognition and enforcement of the arbitration agreement,7 and for recognition and enforcement of a resulting arbitral award.8
2. Choice of Court Agreements as Choice of Forum
On the choice of court side of choice of forum equation, the 2005 Hague Convention on Choice of Court Agreements provides the opportunity for similar effectiveness of choice of court agreements.9 While that treaty currently has only 34 contracting parties,10 it is much more recently available than the New York Convention but holds the possibility of providing a level playing field for arbitration and choice of court agreements - thus providing the transaction planning lawyer with a clear choice based on the better type of forum given the specific transaction involved. It too provides for honoring the parties’ choice of court,11 as well as for recognition and enforcement of any resulting judgment.12
3. Choice of Forum Law and Planning
While the New York Convention currently provides a marked advantage for arbitration agreements in international contracts given its much wider global effect, it is likely this singular advantage will diminish markedly in the future as more states become party to the Hague Convention. While arbitration has many advantages, it is not the best choice for every international commercial contract. When the choice is more balanced in terms of contracting parties, lawyers will necessarily be required to make more nuanced choices between the two basic types of choice of forum.
B. Challenges to Jurisdiction and Choice of Forum
As transaction planning lawyers necessarily consider the dispute resolution stage and its possibilities, they find that there are five basic categories of challenges to a choice of forum clause in an international contract. Each of those categories can be governed by a different source of law, and thus requires separate attention. Those five categories on which a choice of forum clause may be challenged are :
1) the existence of the agreement (did both parties consent to a specific forum?);
2) the formal validity of the agreement;
3) the substantive validity of the agreement;13
4) the scope of the agreement; and
5) the exclusivity of the agreement.
The five categories can be grouped in several ways, one of which considers existence, effectiveness, and extent, as follows:
Existence of the agreement:
1.The existence of the agreement (party consent)
Effectiveness of the agreement:
2. The formal validity of the agreement
3. The substantive validity of the agreement
Extent of the agreement:
4. The scope of the agreement
5. The exclusivity of the agreement
1. Existence of the Choice of Forum Agreement
The existence of a choice of forum agreement is a matter for substantive contract law. This is a basic contract formation question. Every domestic legal system has a set of rules governing contract formation. Moreover, the United Nations Convention on Contracts for the International Sale of Goods (CISG) contains contract formation rules that apply when the requirements of Article 1(1) of that Convention are met.14 This means that the CISG contains its own rule of applicable law. When the CISG does not apply, the lawyer must use the relevant rules of applicable law to determine which set of domestic contract formation rules will apply.15
2. Effectiveness of the Choice of Forum Agreement
In order to determine the effectiveness of a choice of forum agreement, we must consult multiple sources of law. Formal validity and substantive validity require reference to different sets of legal rules. At base, these are rules that prevent or invalidate certain agreements even when the parties have consented to them. Formal validity is governed by treaty in each instance. Both the New York Convention, in Article II, and the Hague Convention, in Article 3, contain formal validity requirements. Each of them provides that the equivalent of a writing signed by the parties or other similar indicia of formal representation of party consent must exist so that the information demonstrating consent is accessible so as to be usable for subsequent reference.
Each of the New York and Hague Conventions also requires that the choice of forum agreement be substantively valid.16 The New York Convention has no rule on what law will determine substantive validity, so reference to external rules of applicable law is required. The Hague Convention, in Articles 5, 6, and 9, require substantive validity to be determined by the law of the state of the chosen court (even though that choice is putatively ineffective unless and until it is determined that the agreement both exists and is valid).
Various states prevent agreement to a pre-dispute binding choice of forum agreement especially when one party to a transaction is seen as being a weaker party in the negotiation relationship. Thus, in the European Union, the Brussels I (Recast) Regulation prohibits binding pre-dispute choice of court in insurance, consumer, and employment contracts.17 Other legal rules may prevent pre-dispute binding choice of court or arbitration, for example, in franchise or distributorship contracts. Such legal rules can be found in a variety of types of law.18
3. Extent of the Choice of Forum Agreement
When it comes to determining the extent of a choice of forum agreement, we necessarily revert once again to contract law. Both scope and exclusivity of a choice of forum agreement are questions of contract interpretation. As with the existence (consent/contract formation) question, this requires reference to the applicable contract law, whether that be domestic contract law or a treaty such as the CISG. Every contract law has rules for determining the intent of the parties,19 which are rules of contract interpretation.
Both the New York Convention and the Hague Convention provide a gloss on the otherwise applicable rules of contract interpretation for purposes of determining the questions of scope and exclusivity. In many jurisdictions applying the New York Convention, judicial application of the Convention and the accompanying domestic arbitration law have resulted in (1) a strong policy favoring arbitration,20 and (2) a resulting presumption in favor of interpreting any arbitration agreement to have broad scope because parties are assumed to want all issues determined in a single forum.21 The Hague Convention has a rule that deems any choice of court agreement choosing a court in a Contracting State to be an exclusive choice of court agreement unless clearly drafted otherwise.22
Conclusions
Transaction planning lawyers must have a clear understanding of rules of private international law as well as the default rules of substantive law that govern a transaction in the absence of party choice. They must also have a clear understanding of the limits on party autonomy and freedom of contract. While institutional protection can be understood by knowing the law (including knowing which law applies), it is also necessary to know just how the law limits what can be done by contract to change default rules.
The transaction planning lawyer drafting a choice of forum agreement must begin by knowing the governing law for each of the five issues on which jurisdiction may be challenged in either arbitration or litigation. Questions of agreement existence, formal validity, substantive validity, and exclusivity may well each be governed by a different source of law. The transaction planning lawyer must be familiar with each of those sources and understand just when and how they apply, and when and how they can be adjusted to the needs of an individual international transaction.
Once the available institutional protection is clearly understood by knowing what law will apply (and that law’s limits on party autonomy), the transaction planning lawyer then can engage in useful negotiated protection by choosing the words that will produce the client’s desired result. Given that those words must be chosen when the agreement is first formed, and when the parties likely are in a positive relationship, this is not an easy task and requires the ability to project all of the possible types of disputes that might arise, the limits on changing the otherwise applicable default rules, and the words that will mean the same thing to everyone who reads them in determining the outcome of each such dispute.
2 See Ronald A. Brand, International Business Transactions Fundamentals, chapter 3 (ed ed., Kluwer International 2019).
3 Public sources for such insurance in the United State include the Export-Import Bank of the United States (Exim Bank), https://exim.gov/, and the Overseas Private Investment Corporation (OPIC), https://oig.usaid.gov/OPIC.
4 Peter Nygh, Autonomy in International Contracts (1999)
5 United Nations Convention on the Recognition and Enforcement of Foreign Aribtral Awards, (“New York Convention”) available at https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/new-york-convention-e.pdf.
6 https://uncitral.un.org/en/texts/arbitration/conventions/foreign_arbitral_awards/status2.
7 New York Convention, supra note 5, art. II.
8 Id. art. III.
9 2005 Hague Convention on Choice of Court Agreements, available at https://www.hcch.net/en/instruments/specialised-sections/choice-of-court.
10 The European Union and its Member States, plus Mexico, Moldova, Montenegro, Singapore, Ukraine, and the United Kingdom. See id.
11 Id. arts. 5 & 6.
12 Id. art. 8.
13 The substantive validity category may include questions normally referred to as capacity and arbitrability.
14 United Nations Convention on Contracts for the International Sale of Goods, __ U.N.T.S., available at https://uncitral.un.org/en/texts/salegoods/conventions/sale_of_goods/cisg.
15 For a discussion of when the CISG applies to the formation of an arbitration agreement, see Boris Praštalo, CISG as the (Rules of) Law Applicable to the Arbitration Agreement: Exploration from an English Perspective (Kluwer Arbitration Blog, June 3, 2024), available at https://arbitrationblog.kluwerarbitration.com/2024/06/03/cisg-as-the-rules-of-law-applicable-to-the-arbitration-agreement-exploration-from-an-english-perspective/.
16 New York Convention, art. II(1) and (3); Hague Convention arts. 5, 6, and 9.
17 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (“Brussels I (Recast) Regulation) arts. 15, 19, and 23, available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2012:351:0001:0032:en:PDF.
18 See, UNCITRAL, Ronald A. Brand, Access to Justice, and the Future of Online Dispute Resolution, 8 Bahrain Chamber for Dispute Resolution International Arbitration Review 87-102 (2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4634182https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4634182..
19 See, e.g., CISG arts. 8 and 9.
20 See, e.g., Industrial Steel Constr., Inc. V. Lunda Constr. Co., 33 F.4th 1038 (8th Cir. 2022) (noting that the U.S. Supreme Court has long recognized that the Federal Arbitration Act (FAA) establishes “a liberal federal policy favoring arbitration agreements,” quoting Moses H. Cone Mem’l Hosp. V. Mercury Constr. Corp. 460 U.S. 1, 24 (1983)).
21 See, e.g., First Options of Chicago, Inc. V. Kaplan, 514 U.S. 938, 945 (1995) (Federal Arbitration Act interpretations “insist on clarity before concluding that the parties did not want to arbitrate a related matter”); AT&T Techs, Inc. V. Communications Workers 475 U.S. 643, 650 (1986) (“[i]n the absence of any express provision excluding a particular grievance from arbitration, we think only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail”); Moses H. Cone Mem’o Hosp. V. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983) (the Federal Arbitration Act “established that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration”); Fiona Trust & Holding Corp. V. Privalov [2007] 1 All ER (Comm) 891 (English Ct. App., aff’d [2007] UKHL 40 (H.L.) (“any jurisdiction or arbitration clause in an international commercial contract should be liberally construed”).
22Hague Convention, art. 3(b).
