top of page
Search
  • Writer's pictureTolulope Awoyomi

CHOICE OF LAW AND JURISDICTION IN INTERNATIONAL FINANCIAL CONTRACTS

Updated: Feb 7, 2023


International or transnational financial contracts are contractual agreements. Thus, they are guided majorly by the rules of contract. However, the transnational element (involving parties from more than one country) makes the choice of law and jurisdiction clauses extremely pertinent.


Choice of law differs from choice of jurisdiction. Choice of law refers to the specific set of laws, rules, and regulations that are the guiding benchmark for a contract. It is the set of laws, rules, and regulations by which the actions and inactions of each party to the contract are adjudged as legal or illegal.


Choice of jurisdiction, on the other hand, is the territory that would interpret the content of the contract in accordance with the chosen law (which is stipulated in the choice of law clause). What this means is that a country can interpret the provisions of a contract using the laws of another country. For example, the U.S. may be the chosen jurisdiction while the laws of Canada are the chosen law.


Why this? In international financial transactions, the parties involved are from different countries. Hence, there are various reasons that the law which is to govern the international financial contract would differ from the jurisdiction (or the country) in whose courts the chosen law would be interpreted to resolve disputes.

Is it recommended to have different countries as the choice of law and choice of jurisdiction respectively? The answer would differ per international financial contracts. However, here are a few guiding nuggets:


Factors to consider when choosing the governing law in international financial contracts

  • What is the specific nature of the international financial contract? Does it deal with derivatives, bonds, stocks, sovereign debts, or a mixture, etc?

  • What country has a rich law pertaining to the specific nature of the international financial contract?

  • What is the quality of the legal future of the country; is there a possibility for political interference or its legislature modifying or replacing quality or favorable laws with non-quality and unfavorable laws in the future?

  • What is the advancement of the country in relation to the specific nature of the international financial contract?


Factors to consider when choosing a jurisdiction in international financial contracts

  • Perhaps the courts in that jurisdiction or country are quite sound in interpreting laws and terms of contracts, and the parties would like to glean from such wisdom if and when a dispute arises.

  • From precedence, international financial contracts of similar nature stipulate the country or jurisdiction in their choice of jurisdiction clause.

  • The courts in that jurisdiction have credibility (no corruption or prejudice), and thus are trustworthy.


When local laws take precedence over the chosen law (choice of law)

  • Issues relating to the legality and capacity of the non-corporate parties to enter into the contract, and the validity of a corporate party to enter the contract and execute their duties.

  • Issues relating to the validity of the contract itself; authorization, execution, and delivery. That is if the appropriately authorized parties signed the contract and authorized its execution, free from undue influence and duress.

  • Issues relating to insolvency and bankruptcy of a party to the contract.

  • Strict liability laws.


Choice of governing law options

Usually, in a traditional contract, there are three options commonly opted for. They are:

  • The municipal law of the country of domicile (for a non-corporate party), the country of operation, or the country in which the headquarters is situated (for a corporate party).

  • The system of law that is customarily chosen to govern international financial contracts of similar nature.

  • A neutral system of law mutually agreed upon by the parties.


For international financial transactions involving multilateral institutions, the case is quite different:

  • Public international law governs the loan arrangements between the World Bank and its member states. On the other hand, the loan agreements with state-owned corporations, although not governed by public international law, are also not subject to the applicability of their municipal laws.


All except one of the seven main international development finance institutions adopt the above World Bank Model:

  • The International Bank for Reconstruction and Development (IBRD) operates a different model. The loan agreements of the IBRD, both with member countries and state-owned enterprises, are explicitly made subject to public international law, which incorporates prevailing rules of international treaty and contract law and encourages the evolution of new customary rules.



 

REFERENCES


  • Head, J. W. (2011, May 24). Evolution of the governing law for loan agreements of the World Bank and other multilateral development banks. SSRN. Retrieved December 24, 2022, from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1846009

  • Auerback, R. M. (1993). Governing law issues in International Financial Transactions. Retrieved December 22, 2022, from https://scholar.smu.edu/cgi/viewcontent.cgi?article=2955&context=til




17 views0 comments

Comments


bottom of page