In the agreement for hiring an offshore provider, should the governing jurisdiction be my country, theirs, or both?
I am considering hiring a firm in India for a website development and am in the process of drafting the agreement. I am located in Australia.
Standard agreements include a clause stating which country and state the agreement is governed (the 'Governing Law' clause).
My preference is to have the agreement governed in Australia, the developers' preference is India. Should I make the governing jurisdictions both countries? And what is normally done in similar circumstances?
Thanks in advance - Trish
3 Answers
The governing jurisdiction determines what set of laws and case law is used to interpret the contract, and what court system you will use if you need to litigate.
Having both countries as the governing jurisdiction won't work. If there's a difference between the two countries about the way a contract clause is interpreted, which gets used? And if you have to sue each other, which country do you do it in? It really only works to pick one jurisdiction.
Here's a simple example from the US: employee non-compete agreements, which are contracts where an employee agrees not to work for their employer's competitors for some period of time. They are commonly enforced in Florida, and completely unenforceable in California. You could easily find that kind of difference between India and Australia.
Of course you both want your country to have jurisdiction. You're each more familiar with your own laws, and it's a lot easier to go to court in your own country.
Usually the golden rule applies to court jurisdiction: you're paying the gold, so you make the rules. If I were you, I'd insist on Australia and walk away if they won't agree.
International litigation is horrendous. If the Indian outsourcing firm flakes out on you, how will you enforce the contract? If you win a suit against them in Australia, how are you going to enforce it? Do they have assets in Australia that can be seized? You can't count on the fear of litigation to keep a foreign supplier in line the way you might with a domestic supplier.
I really suggest you consult with a competent international law attorney around this, because as you can tell, it can be a can of worms. You might also want to consider some kind of third-party escrow, so you pay money in advance to the escrow service, and the outsourcing firm gets paid as specific milestones are met.
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Use your own country, but in reality it won't matter. If there is a problem, and if it might stand up in court, and if you have plenty of spare cash, and if you want to lose some years off your life while litigating, then you can sue them in your country. And if you win you then need to find some way to collect your judgment, so then you have to sue them again in their country and convince a court there to give you their money. Instead, keep the project and deal simple, do good research on the company and the track record. – James 14 years ago
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@james is very correct, if there is a problem, you are SCREWED. Your client could simply ignore the jurisdiction, not respond to a suit, try to change the venue, etc. COllecting on a debt in the USA is hard enough, international is near impossible. Your best bet against these type of issue is an on-site presence for large projects where you have 5+ contractors, and fingers crossed for small ones. I learned to stay away from China, Pakistan, India, and have done really well with devs from Ukraine, Sweden, Belarus, and Poland. – Frank 14 years ago
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@james: Quite true. Unless you're a huge company with huge projects and lots of money for lawyers, it's far less risky and troublesome just to deal with business partners you can trust, even if they're more expensive. – Bob Murphy 14 years ago
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@Frank: "COllecting on a debt in the USA is hard enough" So true. A company owed me over $10,000 in unpaid invoices. It would have been an open-and-shut lawsuit; I probably would have won in court in five minutes. But even with a court judgment, you still have to collect the money somehow. The company I'd signed the contract with proved to be a shell corporation with no assets, so there was nothing to collect. "Piercing the corporate veil" to get to the guy with the money would have been expensive and might not have worked, so I just chalked it all up to experience. – Bob Murphy 14 years ago
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@Frank: "international is near impossible" I'm in the US, and one of my Canadian clients keeps finding excuses to delay payments. Their business law is similar to ours, and I could easily sue them in their local court, and have even researched attorneys. But they're over 1000 miles away, and it would be a big headache. So I'm just trying to sort it out other ways. Litigation is really a last resort. – Bob Murphy 14 years ago
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@Frank: "if there is a problem, you are SCREWED." That's really the bottom line. Even if your vendor is your best friend in the whole world who lives next door... if you've trusted a core business activity to them, and they don't deliver, and your business fails, you're SCREWED. Even if you beat the pants off them in court, you're still SCREWED. You need to multiply that risk of getting SCREWED using a local vendor by the difficulties of dealing with an unfamiliar vendor in a distant country with different laws and business mores. If you can't trust your vendor, the contract won't matter. – Bob Murphy 14 years ago
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Thanks for the comments Bob. I think as entrepenuers we all learn to avoid suits because nobody but the attorneys ever wins. I find that if the suit is less than 75k then forget it, because it will not be worth the time or effort, unless if you have a staff attorney. There are some firms that process all complaints as suits as a matter of record, but i find this approach to be unhealthy. Bottom line, if a deal sounds shady, ask for a high retainer up front. Learn quickly to cut your losses, and save your lawsuit bullets for ones that matter. – Frank 14 years ago
Several thoughts based on my experience in similar matters:
- While governing law is important, venue - i.e., where a lawsuit must be filed - is even more important tactically if a dispute arises.
- If there is a great disparity in negotiating power between the parties, the one with the greater power is likely to prevail on this issue (and many others).
- If a compromise is desired, choose a neutral country (with an appropriate legal system) for governing law and venue. In your part of the world, Singapore could be a good choice.
- An approach that will reduce the likelihood of a lawsuit being filed: If one party initiates a legal action, it must be filed in the other party's country, and that country's law will govern.
Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.
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Re #2, I prefer, "Whoever can walk away from the table first wins." So I make sure I'm always able to walk. :-) – Bob Murphy 14 years ago
Thanks everyone. Based on your collective answers, I'll make the Australia the governing jurisdiction, I'm sure the service provider will be fine with it. And I completely agree - it is highly unlikely that legal action will ever be worth the hassle or expense, plus this initial project isn't going to have enough in it for that anyway.
