Introduction
In today’s interconnected global economy, businesses are no longer confined to geographic boundaries. The advent of advanced technology, improved logistics and international trade agreements has created a landscape where cross-border commerce is feasible and often necessary for growth. The potential for market expansion is a salient factor to be considered in entering cross-border contracts. By expanding into new markets, companies can access a wider pool of consumers, thereby increasing their sales and revenue streams.
However, cross-border contracts also present unique complexities compared to domestic agreements. These contracts involve parties from different legal systems, resulting in varying legal principles, court systems, and dispute resolution mechanisms which can lead to legal uncertainty and disputes. Additionally, parties often come from diverse language and cultural backgrounds, thereby increasing the potential for miscommunication and misunderstandings. The issue of compliance with different regulatory frameworks, trade, and tax laws, also adds another layer of complexity.
Furthermore, the involvement of multiple currencies introduces exchange rate risks such as fluctuation, huge variance in value of the currencies, etc., which can significantly impact the financial outcomes for the parties involved.
Before entering into a cross-border agreement, a company must carefully consider two core factors, they are:
- Governing law.
- Choice of dispute resolution mechanism.
Governing Law
The initial and crucial question in international commercial agreements pertains to the legal system governing the validity, scope, interpretation and performance of the contract. Governing law, or choice of law clauses are vital components in cross-border contracts.
The governing law clause dictates the jurisdiction and legal framework that will be applied to interpret and enforce the contract. This is particularly important in cross-border agreements due to the differing legal principles, court systems, and regulatory ecosystems between countries. A well-defined choice of law clause can provide predictability and clarity, minimising the risk of legal disputes and ensuring that both parties have a mutual understanding of their rights and obligations under the contract.
However, under the Nigerian legal system, where parties fail to expressly choose a governing law under a contract, and such choice cannot be inferred from a holistic reading of the contract, the courts typically employ the ‘Jurisdictional Selection’ or ‘Proper Law approach’. This method involves a balancing act to ascertain which legal system has the closest and most real connection to the contract, thus, should be deemed the governing law.
Determining the applicable law in the absence of a chosen governing law involves a nuanced balancing exercise. This process is not simply about counting factors that link the contract to a particular country or legal system. Courts consider various factors, such as the place where the contract was made, the place of performance, the domicile, nationality, or place of business of the parties, the location of the subject matter, the currency for payment, and the language of the contract. More weight is typically given to factors like the place of performance .
Choice of Dispute Resolution Mechanism
In cross-border contracts, selecting a dispute resolution mechanism is crucial for managing potential conflicts. Parties typically choose between litigation and arbitration, each offering distinct advantages. Litigation involves resolving disputes in the court system of a particular jurisdiction. However, while it provides a clear legal framework and the possibility of appeals, there may be conflicts regarding which jurisdiction to submit to, thereby adding complexity to the process.
Arbitration, on the other hand, offers a more flexible and confidential approach. It allows parties to select arbitrators with specific expertise and often results in faster resolutions. Arbitration is employed to alleviate concerns, whether real or perceived, about receiving an impartial hearing in foreign courts or potential corruption in those judicial systems. Additionally, arbitration awards are generally easier to enforce internationally due to treaties like the New York Convention .
Conclusion
With the increasing frequency with which both private individuals and corporations are entering into cross-border agreements in this era of globalisation, it is crucial to recognise the importance of how informed decision-making and expert legal guidance are indispensable to ensure the success and protection of parties involved in these agreements.
