Governing Law and Jurisdiction Clauses in Cross-Border Contracts: How Businesses Can Prevent Disputes from Escalating Before Signing

In cross-border transactions, businesses often focus on price, payment terms, delivery deadlines, acceptance standards, the scope of licenses, or liability for breach while overlooking the final clauses of a contract that appear to be standard provisions concerning "governing law" and "court jurisdiction."

In practice, however, once a dispute arises involving delayed payment, product defects, technology licensing, termination of an agency or distribution relationship, disclosure of trade secrets, or cross-border infringement, the governing law and jurisdiction clauses often directly affect which country's laws apply, the country in which proceedings must be initiated, litigation costs, the manner in which evidence is presented, and whether a favorable judgment can be successfully enforced.

Governing Law and Court Jurisdiction Are Not the Same

Cross-border contracts commonly contain two types of clauses: a "governing law clause" and a "jurisdiction clause." They serve different functions and cannot replace one another.

Clause Type	Primary Function	Example
Governing law clause	Determines which country's laws apply to substantive legal matters such as contract formation, validity, interpretation, and liability for breach.	The formation, validity, interpretation, and performance of this Agreement shall be governed by the laws of the Republic of China.
Jurisdiction clause	Determines the court in which the parties should generally initiate proceedings when a dispute arises.	The parties agree that the Taiwan Taipei District Court shall be the court of first instance for disputes arising from this Agreement.

In other words, stating that a contract is "governed by the laws of the Republic of China" does not mean that a dispute must be handled by a court in Taiwan. Similarly, stating that the "Taiwan Taipei District Court shall have jurisdiction" does not mean that the court will necessarily apply only the laws of the Republic of China. The two clauses should be specified separately and clearly to avoid interpretive disputes.

Governing Law Clause: Determine Which Country's Laws Govern Contractual Rights and Obligations

Under the current Act Governing the Choice of Law in Civil Matters Involving Foreign Elements, where a legal act gives rise to an obligation, its formation and effect are generally governed by the law chosen by the parties. In other words, parties to a cross-border contract can generally specify the governing law in the contract, such as the laws of the Republic of China, Japan, Singapore, or another country.

If the contract does not expressly specify a governing law, or if the express choice of law is invalid, it may become necessary to determine the "law most closely connected" to the matter. The court may then consider the characteristic performance of the contract, the domiciles of the parties, the place of performance, the place of transaction, the location of immovable property, or other connecting factors when determining which country's laws apply.

For businesses, the risk of not specifying a governing law is that, after a dispute arises, the parties may spend considerable time arguing over "which country's laws should apply," increasing litigation costs and making legal risks more difficult to predict.

Jurisdiction Clause: Determine Where the Dispute Should Be Litigated

Under the current Code of Civil Procedure, parties may agree on the court of first instance, provided that the litigation arises from a specified legal relationship and the agreement is evidenced in writing. If a cross-border contract is intended to have disputes handled by a court in Taiwan, the contract should clearly identify a specific court, such as the "Taiwan Taipei District Court" or another court connected to the transaction.

Businesses should note, however, that jurisdiction cannot be freely agreed upon in every situation. If the law provides exclusive jurisdiction for a particular type of case, such as matters involving rights in immovable property or other matters subject to statutory exclusive jurisdiction, the parties cannot exclude that jurisdiction merely through a contractual provision.

Cross-border cases may also involve questions of international jurisdiction. If the defendant, place of performance, location of assets, place of contract formation, or most of the facts underlying the dispute are located in another country, a case-specific assessment may still be required to determine whether a court in Taiwan has jurisdiction or is an appropriate forum, even if the contract contains a jurisdiction clause, and whether a foreign court will recognize the jurisdiction agreement.

Common Mistake: Simply Stating "To Be Handled by Agreement Between the Parties" Is Insufficient

Many cross-border contracts use brief or ambiguous dispute-resolution clauses, such as "the parties shall resolve disputes through amicable negotiation," "disputes shall be handled in accordance with applicable laws," or "the parties agree that disputes shall be handled by a court of competent jurisdiction." Although such language may appear flexible during commercial negotiations, it may create even greater uncertainty once a dispute arises.

Common Wording	Potential Problem	Recommended Revision
In the event of a dispute, the matter shall be handled in accordance with applicable laws.	This does not identify the applicable country's laws or designate a court or arbitral institution.	Clearly specify the governing law and court jurisdiction, or specify the arbitral institution, seat of arbitration, and language.
The parties shall first attempt to resolve the dispute through amicable negotiation.	There is no subsequent procedure if negotiations fail, which may delay debt recovery or the exercise of rights.	The negotiation mechanism may be retained, but a negotiation period and subsequent litigation or arbitration procedure should be added.
Taiwanese law shall apply.	This addresses only the governing law and does not identify the court in which proceedings should be initiated.	Separately specify the court of first instance or include an arbitration clause.
The courts at the respective locations of the parties shall have jurisdiction.	The parties may interpret this differently and may even initiate proceedings simultaneously in different countries.	Designate a single court, specify exclusive or non-exclusive jurisdiction, and assess the practicality of enforcement.

When Selecting a Taiwanese or Foreign Court, the Possibility of Enforcement Should Also Be Considered

When specifying a court in a cross-border contract, businesses should consider not only which party has greater bargaining power but also whether a future judgment can be readily enforced. If the principal assets of the debtor are located in Taiwan, selecting a Taiwanese court may facilitate subsequent provisional measures and enforcement. If the principal assets are located abroad, even a favorable judgment obtained in Taiwan may still require recognition and enforcement proceedings in another country.

Conversely, if a contract specifies jurisdiction before a foreign court and a final and binding foreign judgment is subsequently obtained, any attempt to assert its effect in Taiwan must comply with the provisions of the Taiwan Code of Civil Procedure concerning recognition of final and binding foreign judgments. These requirements include whether the foreign court had jurisdiction, whether the defendant was lawfully served or appeared in the proceeding, whether the content of the judgment or the procedure violated Taiwan's public order or good morals, and whether reciprocal recognition exists.

A jurisdiction clause therefore concerns not only "where litigation will take place" but also "whether money can actually be recovered after prevailing, whether infringement can be stopped, and whether the judgment can actually be enforced."

Governing Law and Jurisdiction Clauses Should Be Designed According to the Transaction Type

Different cross-border transactions may require different governing law and jurisdiction arrangements. Businesses should make a comprehensive assessment based on the transaction value, place of performance, location of the counterparty, location of assets, location of evidence, language costs, commercial relationship, and likelihood of future enforcement.

Transaction Type	Key Considerations
Cross-border sales or payment transactions	Consider the place of payment, place of delivery, location of the debtor's assets, and whether provisional attachment or compulsory enforcement may be required.
Agency or distribution agreements	Consider the sales territory, termination provisions, unpaid amounts, inventory handling, and disputes concerning brand use.
OEM/ODM cooperation	Address molds, design drawings, technical information, liability for defects, and the location of delivery documents together.
Patent, trademark, or technology licensing	Distinguish among licensing agreement disputes, infringement disputes, disputes concerning the validity of rights, and the effect of courts in the countries where the rights are located.
Cross-border service or consulting agreements	Consider the place of service performance, method of delivering results, acceptance standards, foreign-language documents, and preservation of electronic evidence.

Contractual Checklist for Businesses Before Signing

To prevent cross-border disputes from escalating, businesses are advised to review at least the following matters before signing a cross-border contract:

• Is the governing law clear? Does the contract clearly specify which country's laws apply? Does it cover contract formation, validity, interpretation, performance, and liability for breach?
• Is the court jurisdiction specific? Does the contract clearly designate the court of first instance? Does it use an identifiable court name?
• Is exclusive jurisdiction required? Should the contract specify that proceedings may be initiated only before a particular court, or preserve the ability to seek provisional measures, injunctive relief, or enforcement before other courts with jurisdiction?
• Should arbitration be used instead? If the counterparty and assets are located in multiple countries, should international arbitration be considered instead of litigation before a single court?
• Is the method of service practicable? Does the contract specify notification addresses, email addresses, agents for service, or other arrangements that may reduce difficulties in cross-border service?
• Are the language versions consistent? If the contract has Chinese, English, or other language versions, does it clearly specify which version prevails?
• Can evidence and data be preserved? Can orders, invoices, shipment records, acceptance records, payment records, emails, message records, and technical documents be presented in a dispute?
• Can a favorable judgment be readily enforced? The location of the principal assets, bank accounts, immovable property, accounts receivable, or business locations of the debtor should be assessed.

Cross-Border Legal Practice Recommendations

AIPT Group recommends that businesses incorporate governing law, court jurisdiction, arbitration, service, language, provisional measures, and enforcement matters into contract design during the initial stages of cross-border contract negotiations rather than seeking remedies only after a dispute arises.

Particularly where patent licensing, trademark licensing, technology transfer, OEM/ODM arrangements, contract manufacturing, agency or distribution, or cross-border payment transactions are involved, disputes often concern more than simple payment issues. They may also involve ownership of intellectual property rights, use of technical information, confidentiality obligations, infringement liability, and cross-border enforcement. Contractual provisions should therefore be tailored to the transaction model rather than copied directly from a standard template.

• Do not specify only the governing law while omitting court jurisdiction: Otherwise, the parties may still dispute the country in which proceedings should be initiated.
• Do not specify only the court while omitting the governing law: Otherwise, the court may still need to determine which country's laws apply.
• Do not use ambiguous clauses: Wording such as "handled in accordance with applicable laws" or "handled by a court of competent jurisdiction" may not reduce disputes in practice.
• Include enforceability in the pre-contract assessment: When selecting a court or arbitral seat, consider whether a future judgment or arbitral award can be enforced where the counterparty's assets are located.
• Major transactions should undergo legal risk review in advance: Cross-border contracts involving higher amounts, greater technical complexity, or longer cooperation periods should have their dispute-resolution provisions reviewed by professionals before signing.

Conclusion

Governing law and court jurisdiction clauses in cross-border contracts may appear to be standard wording at the end of a contract, but they can substantially affect the cost, speed, and outcome of future dispute resolution. Clearly specifying the applicable law, court jurisdiction, method of service, prevailing language version, and enforcement strategy before signing can help businesses reduce the risk of cross-border disputes escalating beyond control.

AIPT Group will continue to monitor developments in cross-border commerce, international contracts, intellectual property licensing, and dispute resolution involving foreign elements, helping businesses establish a more complete legal risk-management framework throughout overseas expansion, multinational cooperation, and rights protection.

Sources: National Laws and Regulations Database｜Act Governing the Choice of Law in Civil Matters Involving Foreign Elements
National Laws and Regulations Database｜Code of Civil Procedure
Judicial Yuan｜Taiwan Changhua District Court Press Release on the "Special Lecture on Civil Procedure Law"