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Governing law and jurisdiction – the key issues for any distributorship agreement - Part II

Given the way in which a distributorship agreement can come into existence (see here) it should come as no surprise that there can be confusion as to the meaning and effect of governing law and jurisdiction, even when a formal distributorship agreement is entered into.

In brief, governing law provisions set out which country’s laws will be used to interpret the distributorship agreement. In contrast, jurisdiction (or dispute resolution) provisions will set out the mechanism to be used to resolve the dispute. Usually this will be in the courts of a particular country (for example, the English courts or the courts of California). Sometimes, in the case of a distributorship agreement there will be provisions setting out how arbitration is to be used to resolve the dispute.

However, where neither is the case, the starting position for EU law (as well as well as the laws of many other countries outside the EU) is that the courts of the member state in which the distributor is performing its services as distributor will be the courts in which the dispute is determined.

Why does this matter?

It was thought for some time that the distributor’s courts would favour the distributor. Given the application of the rule of law to a very considerable degree throughout the EU, this should be a thought that has passed into history. Indeed, it is more likely that the thought was founded on prejudice when a failure by a UK supplier to recognise the concept of governing law (let alone the concept of jurisdiction) meant that the UK supplier was faced (unexpectedly) with the laws of an EU (or non-EU) country which protected the distributor in that country (see here)!

But in any event, being forced to play away from home – to engage in litigation in the courts of the distributor’s country – will mean that the UK supplier:

  1. will be in a court system with which it is unfamiliar;
  2. has to appoint lawyers in that country;
  3. could be faced with having to incur translation costs;
  4. will have to devote precious management time,

in respect of a situation which could have been avoided!!

Worst still – had the UK supplier thought through the issues of governing law and jurisdiction at the outset of its relationship with the distributor, the UK supplier could have positioned itself where (i)-(iv) above applied to the distributor (with which it finds itself in dispute) – and with the result that the distributor would be faced with the consequences of playing away from home……….