In cross-border deals, the clauses on governing law and dispute resolution are often the last to be negotiated, and in a hurry. Yet when a dispute arises, these are the clauses that determine where the case is heard, under which rules, how long it takes and whether the decision can actually be enforced where the counterparty has its assets.

Governing law

Within the European Union, the law applicable to contracts is determined by Regulation (EC) 593/2008 (Rome I). The parties are free to choose it, even for only part of the contract. Absent a choice, the Regulation provides specific rules: a sale of goods is governed by the law of the seller’s habitual residence, a services contract by that of the service provider, a distribution agreement by that of the distributor, and a franchise by that of the franchisee. Overriding mandatory provisions, the rules a country regards as non-negotiable, continue to apply in any event.

In commercial agency, for instance, the protection granted to an agent operating in an EU Member State, including the termination indemnity derived from EU law, cannot be circumvented by choosing the law of a non-EU country. In Italy, agency is governed by Articles 1742 et seq. of the Civil Code and by sector-wide collective agreements between principals’ and agents’ associations.

The Vienna Sales Convention

The 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG), in force in Italy and in most of its major trading partners, applies to sales between businesses located in different Contracting States, or where the conflict-of-laws rules lead to the law of a Contracting State. A point often missed by foreign businesses: choosing “Italian law” without further detail generally means the CISG applies, as it forms part of Italian law. Parties who want the Italian Civil Code to govern must expressly exclude the Convention.

The CISG has its own rules on contract formation, conformity of goods, notice of defects within a reasonable time, and remedies. It is not necessarily unfavourable, but it should be chosen or excluded deliberately.

Jurisdiction: where the dispute is decided

Between EU Member States, Regulation (EU) 1215/2012 (Brussels I bis) provides that defendants are generally sued in the courts of their domicile and, in contractual matters, also in the place of performance: for sales, where the goods were delivered; for services, where they were provided. The parties may agree on a forum (Article 25), which is presumed to be exclusive. Judgments given in one Member State are enforceable in the others without any declaration of enforceability.

With non-EU counterparties, the position depends on the applicable international conventions, such as the 2005 Hague Convention on Choice of Court Agreements and the 2019 Hague Judgments Convention, for the States that are party to them, and on the domestic law of the country where enforcement will be sought. Before choosing a forum, it is worth asking where the counterparty’s assets are located.

Where a contract is governed by Italian law and based on one party’s standard terms, certain clauses, including limitations of liability, jurisdiction clauses and arbitration clauses, require specific written approval (Article 1341 of the Civil Code). For choice-of-court clauses between EU Member States, the formal requirements of the Regulation apply instead.

Arbitration and mediation

International arbitration offers neutrality, confidentiality and the choice of experienced arbitrators, and awards are recognised in more than 160 countries under the 1958 New York Convention. Following the recent reform of Italian civil procedure, arbitrators seated in Italy may now grant interim measures where the parties have conferred that power on them, including by reference to institutional arbitration rules. Multi-tier clauses providing for negotiation or mediation first can encourage early settlement, provided they are clearly drafted and time-limited. For certain types of dispute, mediation is also a mandatory step before bringing proceedings in the Italian courts.

The clauses that matter, and when to seek legal advice

Beyond governing law and jurisdiction, cross-border contracts deserve attention on:

  • Incoterms and transfer of risk, aligned with payment terms and bank guarantees;
  • limitations of liability and liquidated damages, checked against the governing law;
  • exclusivity, minimum targets and termination rights in distribution and agency agreements;
  • confidentiality, intellectual property and compliance with international sanctions and export controls;
  • which language prevails where the contract exists in more than one version.

The best time to involve counsel is when the contract is drafted or standard terms are reviewed. Once a dispute has arisen, a prompt assessment of jurisdiction, governing law, interim relief and enforceability makes it possible to choose the most effective strategy. Matters governed by foreign law should be reviewed with lawyers qualified in the relevant jurisdictions.

This article is for general information only and does not constitute legal advice.