Choice of applicable law and jurisdiction in a commercial contract

Choice of applicable law and jurisdiction in a commercial contract

A Practical Guide for International Business

Mainstream

The choice of applicable law and jurisdiction is not a technical formality or a matter of convenience. It is a strategic tool that determines the outcome of any future dispute.

The question is not which right is considered “neutral” or “prestige”. The main question is what combination of law and forum you will get a really enforceable decision against a particular counterparty.

The effective choice begins with three checks:

• Which right will give the most predictable interpretation of your key obligations and protect your commercial interests?
• In which court or arbitration can the decision be obtained?
• Where this decision can be implemented later.

If these three points are not brought together in a single system, the company risks finding itself with a beautiful solution on paper and zero result in fact.

When it comes to choosing law and jurisdiction

The issue of choice arises when concluding any international commercial contract, in particular:

• contract of international sale of goods;
• distribution agreement;
• agency contract;
• contract of services or performance of works;
• EPC contract;
• investment or shareholder agreement;
• license agreement;
• confidentiality or joint venture agreements;
• A contract where one of the parties is a company from the UAE or related to the Middle East region.

If the counterparty is located in another country, the assets are scattered in several jurisdictions or the transaction is long-term, the choice of law and jurisdiction ceases to be an option and becomes a critical necessity.

The mistake most companies make

Many companies start with the question: “What is the most popular law for international contracts?” or “Where is the most convenient to sue?”

That's the wrong first question.

The right question is: “What combination of law and jurisdiction will provide the maximum protection of our interests and allow us to obtain real performance in the countries where the debtor’s assets are located?”

Sometimes the best choice is English law and LCIA arbitration in London. Sometimes it is the law of the Emirate of Dubai and DIAC arbitration. Sometimes DIFC and exclusive jurisdiction of DIFC Courts. And in some cases, the law of the United Arab Emirates with the consideration of a dispute in local courts (onshore courts) and the simultaneous possibility of applying to offshore courts for interim measures.

There is no universal “right” answer. There is only a strategy that is tailored to a specific deal.

Step 1. Understand what exactly is affected by the choice of applicable law

Applicable law is not just a line in a contract. It defines:

• the validity and interpretation of the treaty;
• the scope of the rights and obligations of the parties;
• the procedure for accruing interest and penalties;
• limitation period;
• the possibility of recovering losses (including lost profits and indirect losses);
• admissibility of limitation of liability;
• consequences of force majeure and a significant change in circumstances (hardship);
• Approach to sanctions clauses and public policy;
• Distribution of litigation and arbitration costs.

For example, UAE law (based on civil law and Shariah principles) approaches the interpretation of penalties, interest and contract termination differently than English common law. The choice between them is not a matter of taste, but a commercial calculation.

Step 2. Evaluate whether a state court or international arbitration is necessary

The choice of forum is the second key element. It cannot be done on the principle of “everyone chooses arbitration”.

Arbitration is appropriate if:

• the parties are located in different countries;
• confidentiality is required;
• a decision that will be recognised and enforced abroad under the New York Convention;
• the amount of the dispute justifies the arbitration costs;
• Control over the procedure and composition of arbitrators is desirable.

A public court may be more effective if:

• The debtor’s assets are concentrated in a particular country.
• Quick interim measures are needed without additional appeals to the support court;
• the dispute is localized;
• The cost of arbitration is disproportionate to the amount of claims.

In the context of the UAE, a unique option appears: Parties may choose to use DIFC Courts (Dubai) or ADGM Courts (Abu Dhabi) in English under common law standards that are capable of adjudicating disputes without the parties being physically present in the free zone, provided that a properly drafted jurisdictional clause is in place.

Step 3. Select the right for the transaction

When choosing the right, it is necessary to take into account:

• location of the parties and their assets;
• place of performance of the main obligations;
• stability and predictability of the legal system;
• communication with other contracts in the group of transactions;
• The relationship of courts or arbitrations to certain institutions (e.g., penalty clauses, limitation of liability, good faith);
• sanctions regimes;
• the possibility of implementing a future decision.

In transactions involving companies from the UAE, the following designs are often used:

• English law + DIAC arbitration;
• DIFC + exclusive jurisdiction of DIFC Courts
• UAE law (federal) + local courts with the possibility of cassation;
• the law of England and Wales + the arbitration of the LCIA, ICC or SIAC.

Each combination has its own advantages and risks. The task is not to find a “standard”, but to build a bundle that will work for you at all stages: from negotiations to enforcement.

Step 4. Establish an effective arbitration or judicial clause

It is not enough to simply write “disputes are considered in arbitration”. A pathological caveat can destroy the entire strategy.

The arbitration clause must specify:

• Arbitration Institute (DIAC, ICC, LCIA, etc.);
• applicable rules (e.g. DIAC Arbitration Rules 2022)
• place of arbitration – this determines the procedural law and the court of support;
• number of arbitrators;
• language of the proceedings;
• The procedure for appointing arbitrators, if it differs from the standard one.

When choosing a state court, it should be noted:

• a specific court (e.g. DIFC Courts or Commercial Court of England and Wales)
• the exclusive or non-exclusive nature of the jurisdiction;
• Procedure for notifying the process.

Examples of effective reservations should be prepared not by copying from the Internet, but for a specific transaction, taking into account the nuances of law and future performance.

Step 5. Determine the place of arbitration (or court)

The place of arbitration is not the place of hearing. It is the legal “house” of arbitration that determines:

• What procedural law governs the proceedings;
• which state court has the right to intervene (appointment of arbitrators, interim measures, cancellation of the decision);
• The possibility of applying local mandatory rules.

Dubai (DIAC) has become one of the region’s leading centres, and after the abolition of DIFC-LCIA and the consolidation of arbitration under the auspices of DIAC in 2022, the system has gained even more harmony. Alternatives remain London, Paris, Singapore and Geneva. The choice of location should be linked to neutrality, convenience for the parties and, most importantly, the enforcement system.

Step 6. Check the feasibility of the future solution

Legal victory without execution is a commercial defeat.

Before signing the contract, you must answer the questions:

• Does the country where the debtor's assets are located recognise the award?
• Is the New York Convention applicable and what reservations are made by the State?
• How effectively do local courts enforce assets?
• Are there risks associated with public order?

The UAE is a party to the New York Convention, but the practice of recognizing and enforcing foreign arbitral awards has its own peculiarities. The choice of an offshore forum (DIFC Courts) can serve as a “conduit” jurisdiction for converting an arbitration award into intra-Emirati enforcement proceedings, which sometimes greatly simplifies the process.

Step 7. Consider the UAE’s peculiarities when choosing law and jurisdiction

The UAE offers a multi-layered legal system that must be used consciously:

• Onshore Courts (federal and local): Arabic language, civil law tradition, special procedure of proof, mandatory participation of local lawyers.
• DIFC Courts and ADGM Courts: English, common law, own substantive and procedural legislation, the ability to consider disputes without reference to the territory of the free zone in the presence of a relevant reservation.
• DIAC arbitration: Modern rules that combine the competence of the former institutions with the place of arbitration in Dubai.

Parties may combine these elements. For example, choose DIFC and DIAC arbitration, or the law of England and the exclusive jurisdiction of DIFC Courts. Such hybrid designs require fine tuning, but offer powerful advantages.

Step 8. Settlement of the language of the proceedings and procedure

Language is not just translation. These are cost, access to arbitrators, speed and accuracy of argumentation.

In the UAE state courts (onshore), the process is conducted in Arabic, all documents require translation. In DIFC/ADGM and most international arbitrations, English is the working language, which significantly reduces costs for international business.

The choice of language should be thought out at the start and reflected in the contractual clause. It is also worth defining: Whether the proceedings will be oral, whether expedited procedures are permissible, and what rules on disclosure apply.

Step 9. Assessing Sanctions, Currency and Regulatory Risks

Even a brilliantly drafted reservation can fail if the right or forum is subject to sanctions, currency controls or regulatory barriers.

It is necessary to check:

• Whether the forum or arbitration institution selected is subject to sanctions;
• Is it possible to pay arbitration fees and fees without violating foreign exchange legislation?
• How does the law respond to sanctions clauses in the treaty;
• Whether the choice of right will create risks of blocking payments or refusal of banks in service.

In the context of the active application of sanctions by the United States, the EU and the United Nations, the choice of law and jurisdiction should include a sanctions compliance analysis.

Step 10. Negotiate a reservation and fix it in a treaty

A strong negotiating position on law and jurisdiction is not built on abstract arguments, but on demonstrating the benefits of a particular combination for both sides.

An effective negotiating strategy may include:

• Explain why the chosen link between law and forum makes it easier to execute.
• the offer of a neutral place of arbitration;
• inclusion of a multi-level clause (negotiations → mediation → arbitration);
• securing the right to recover costs and interest;
• provision of a reservation by a bank guarantee or other mechanism.

A reservation should be formulated in such a way as to exclude any ambiguity. Ambiguity in a jurisdictional or arbitration clause is a future dispute over jurisdiction before a dispute on the merits begins.

Court or arbitral tribunal: pick

The choice is not determined by the general reputation of the arbitrator or the court. It's defined by a bunch: The right – forum – the location of assets.

How to strengthen the contract position before signing

The best choice of law and jurisdiction is made at the negotiating stage, not when a dispute has already arisen.

It is desirable to include in an international commercial contract:

• a clear and exhaustive arbitration or judicial clause;
• an indication of the applicable law separately from the reservation;
• the place of arbitration;
• language of the proceedings;
• the number of arbitrators and the mechanism for their appointment;
• the right to recover full legal costs;
• interest and penalties valid under the chosen right;
• Bank guarantee, letter of credit or retention of title;
• sanctions and anti-corruption clause;
• a condition that the jurisdictional clause remains in force if other provisions are invalid (severability).

The contract should be created for the most difficult scenario – a dispute with an evading counterparty in several jurisdictions.

Common Mistakes in Choosing Law and Jurisdiction

1. If the parties have not chosen law and forum, they will be determined by the court according to conflict of laws rules. The outcome is almost always unpredictable.
2. The Pathological Arbitration Clause “Dispute is submitted to arbitration in Dubai” without specifying the institution and rules is an invitation to a procedural war.
3. Choosing a law without analyzing the content of English law is not always better. UAE law can provide strategic advantages in local distribution and agency relationships.
4. You can not choose a forum if you do not understand how you will foreclose on the debtor's property in three years.
5. Mixing onshore and offshore jurisdictions of the UAE without professional support Self-inclusion of the DIFC Courts clause in a contract not related to DIFC, without the correct wording can be invalidated.
6. Different legal systems differently approach the beginning of the period and its duration.
7. The main contract and guarantees, sureties – all should indicate a single forum and law, or clearly regulate interaction.
8. The choice of language without the practical possibility of ensuring it The party forced to arbitrate in an unfamiliar language bears enormous costs.

Checklist: 15 questions before fixing a reservation

Before signing the contract, you must get answers to the following questions:

1. What law governs the contract and why was it chosen?
2. What are the key risks of this right for our position (interest, damages, penalties, limitation of claim)?
3. Where is the dispute heard – in arbitration or in a state court?
4. Are the specific arbitral institution (or court) and its rules specified?
5. Is the place of arbitration (seat) determined?
6. Is the language of the proceedings recorded?
7. How will the arbitrators be appointed and how many?
8. Is the jurisdiction exclusive?
9. Where are the debtor’s assets physically located?
10. Has the country ratified the New York Convention (for arbitration) or is there a treaty to recognize judgments?
11. Are there specific requirements for the form of the arbitration clause at the place of arbitration?
12. Are the chosen rights or forums subject to sanctions restrictions?
13. Is there a risk of a parallel process in another jurisdiction?
14. Is the right to reimbursement of all legal costs included?
15. What kind of strategy will we use if we get a decision?

What a strong law and jurisdiction choice strategy looks like

A strong strategy usually consists of five levels:

1. Legal analysis – Checking the relationship of the transaction with the right, the content of the contract and the risks of the chosen right.
2. Forum Strategy: Definition of arbitration or court, drawing up an impeccable clause, choice of place and language.
3. Asset & Security Strategy: Linking a clause to security mechanisms, guarantees and asset searches.
4. Enforcement Mapping: Establishing a route for the recognition and execution of future solutions in target jurisdictions.
5. Negotiation Leverage: Using a strong legal framework as leverage in negotiations is a demonstration to the counterparty that evasion is unprofitable.

Without the fifth level, the first four can only be internal analysis.

FAQ

Can you choose English law for a contract if both parties are from the UAE? In some cases, parties may choose foreign law, but it is necessary to consider the mandatory provisions of UAE law, which will apply regardless of the choice.

Does the DIAC arbitration clause work if the debtor’s assets are located outside the UAE? Yes, provided that the country of the assets’ location is a party to the New York Convention. DIAC is a full-fledged arbitration institution, whose decisions are recognized in more than 170 countries.

Which to choose: DIFC Courts or International Arbitration: Depends on the issue. DIFC Courts are convenient if you need quick judicial protection in English in the region and there is an opportunity to enforce the decision in the UAE. Arbitration is preferred when confidentiality and recognition is required in multiple jurisdictions.

Can a dispute be referred to DIFC Courts if the parties are not registered with DIFC?It is possible if the contract expressly states the exclusive jurisdiction of DIFC Courts and the dispute is related to commercial activities. However, the wording should be extremely accurate.

Do you have to specify the place of arbitration? The place of arbitration determines which court will perform the functions of support and control, and under which law the validity of the award will be assessed.

This is an arbitration or judicial clause that is formulated ambiguously, contradictoryly or refers to a non-existent institution, which gives rise to a separate dispute over jurisdiction before a case is considered on the merits.

Is it possible to combine UAE law and the jurisdiction of an English court in one treaty? Discordance between law and forum leads to a more complicated process, increased costs for foreign law experts and unpredictability of the outcome.

When the subject of the contract is closely related to the territory of the UAE (real estate, distribution, agency relations), and the imperative norms of UAE law will apply in any case. In such cases, the choice of local law reduces the risks of double regulation and conflict with public order.

Related services

• International Commercial Treaties and Contract Law of the UAE
• International Arbitration and Cross-Border Disputes
• Commercial litigation in the UAE and the region
• Recognition and enforcement of foreign court and arbitral awards
• Sanctions Compliance and International Regulation
• Strategic advice on structuring transactions

Related material

• How to make a DIAC arbitration clause without critical errors
• DIFC Courts as a tool for resolving international commercial disputes
• Recognition and Enforcement of Foreign Arbitral Awards in the UAE
• English law in contracts with Middle Eastern partners: pluses and traps
• Sanctions clauses in international commercial contracts: know-how
• Choice of place of arbitration: Dubai, London or Singapore
• Features of the UAE Contract Law: Practical aspects for foreign business

Conclusion

The choice of applicable law and jurisdiction in an international commercial contract is a commercial decision that determines whether the right will be on your side at the time of the dispute and, more importantly, whether it will turn into real money.

In the UAE’s complex, multi-layered legal system, the right combination of law, arbitration or judicial forum, and enforcement mechanism allows not only winning a case, but ensuring that a legal victory is followed by actual results.

A strong contractual position does not arise when a dispute has already begun, but when the parties knew exactly: where to consider, under what rules to be evaluated and how to execute the decision. In international commercial relations, the winner is the one who builds a contract not for a frontal signature, but for the most stringent scenario.