Which law should govern my IP contract?

Many IP contracts are made between parties based in different countries or US states.  Often, one of the points for negotiation is which law should govern the contract.

Sometimes, this point is easily resolved, as in the following examples:

  1. If a Japan-based multinational is negotiating with a small English company, the parties may be happy to agree English law.  The multinational may have English lawyers on its staff, or be willing to pay for external legal advice, and may have a general level of comfort with English law.
  2. If a US-based pharmaceutical company is negotiating the terms of a clinical trial agreement with a French hospital, the company may realise that there is very little chance of the hospital agreeing anything other than French law.  There may, in any case, be advantages in having contract issues (eg indemnities) dealt with under the same system of law as that under which liabilities arise (in this case, including liability for personal injury to patients on whom the trial product is tested).

More commonly though, in IP Draughts’ experience, each party wants its own country’s law to govern the contract, and negotiation is required to resolve this issue.

Note that this posting is about which law should govern the contract.  This question is linked to, but not the same issue as, which courts or arbitration body should have jurisdiction to resolve any contractual dispute.  See this earlier post about choices in relation to arbitration.

Law and jurisdiction can be split in several ways

If disputes are to be referred to a court, then IP Draughts’ strong view is that law and jurisdiction should not be split. In other words, don’t choose (as happened in a case on which IP Draughts’ former firm provided expert testimony) English law in the Utah courts.  In IP Draughts’ view, this is a bad compromise, as it requires the judge to decide the case on the basis of a law in which he or she is not an expert.

In relation to arbitration, bear in mind that procedural issues will likely be decided according to the law of the “seat” of the arbitration, including any appeals to the courts of that jurisdiction against the arbitrator’s decision.  For legal simplicity, IP Draughts preference would be to have any arbitration conducted at the same “seat” as the location of the hearings, and to have the law of that location govern the contract.

Sometimes, though, parties want to split the law and the location of the arbitration.  IP Draughts understands that it may be possible to have the arbitration hearings at a different location from the official “seat”, so if English law is chosen but hearings are to be physically located in, say New York, it might be desirable to state that the seat of the arbitration is in London so as to keep all the substantive and procedural issues under one system of law.  This point goes beyond IP Draughts’ experience or legal knowledge, and in any event the legal position may differ according to national law; specialist legal advice should be sought before trying anything fancy along these lines.  The safest approach may be to have law, seat and hearings all in one place.

Coming back to choice of law, parties tend to like what they know.  IP Draughts is qualified in English law, which is an example of a common law system (and distinguishable from civil code systems).  He works in a large, industrialised country that may be described as being North European in its business approach (or Anglo-Saxon, depending on which way you slice it), and his clients tend to be high-tech businesses and universities.  Therefore, IP Draughts preferences, other than English law, include:

  • In Europe: Sweden, Netherlands
  • In North America: New York, Massachusetts
  • In the Far East: Australia, Singapore, Hong Kong

IP Draughts asks readers to comment on these preferences and to state their own preferences and reasons.

7 Comments

Filed under Commercial negotiation, Contract drafting

7 responses to “Which law should govern my IP contract?

  1. warero

    Reblogged this on ProduSoul and commented:
    A very good article regarding choice of law in multinational scenarios.

  2. warero

    There is great growing interest in the emerging markets and all large multinationals are setting up shop in Africa and Asia. A good number of these have long standing practice of common law. What would be your preference on choice of law in these markets?

    • For Asia, see my suggestions at the end of the blog article, particularly Singapore. For Africa, I don’t have any strong insights, but am under the impression that South Africa and Nigeria are two major commercial centres and therefore likely to be legal centres as well. I spent a very pleasant two days in Lagos a couple of years ago providing training on contract drafting to some in-house and private practice lawyers, and from the discussion with delegates was left with the impression that the common law part of Nigerian law was similar to English law.

  3. One point to consider about the law to be chosen is whether it has enough of a bearing on the transaction. As far as I know, in the US the only jurisdictions that permit contracting parties to choose its law irrespective of any connection that law (that is, the jurisdiction) may have to the underlying transaction, are New York and Delaware. Otherwise, there can be mischief in selecting, say, Virginia law (because, for example, it has enacted the Uniform Computer Information Transactions Act) when the parties and the workings of the transaction are remote to Virginia–and the presence of an affiliate, say a parent company, may or may not suffice to create one.

    There are always quirks in individual jurisdictions that the parties should be aware of, that may affect the outcome of a dispute. Massachusetts, for example, does not recognize the doctrine of third-party beneficiaries, and it has a rather capricious statute on the subject of unfair dealing. Texas has a multi-circuit court system like the US Federal one that can result in different outcomes in different parts of the state (leading many US lawyers to conclude that you can’t choose Texas law, because there’s no such thing). New York has a very parsimonious concept of the duty of good faith (the state motto on its automobile license plates should read “So I Lied”), whereas California and other Western states have a very robust one. And so on.

    • Thanks, Vance. That encourages me to choose New York law in the US! Like English law:
      1. You can choose it without a connection with the state
      2. Limited interest in good faith
      3. Recognition of third party rights

  4. I’ve seen Switzerland often used.

    As for the USA, Delaware is frequent — perhaps because of its traditional association with corporate law, although I have read that Delaware is now the second-most common site of patent litigation in the USA. There is widespread opinion to avoid California and Louisiana because of those states’ quirks, although companies domiciled in those states may disagree. New York and Massachusetts are two of the four states that have not adopted the Uniform Trade Secrets Act; some USA lawyers outside NY and Mass. feel uncomfortable about that.

    For a deal involving a Canadian company, one often hears a preference for Ontario over Quebec.

    • Chuck, Swiss law may be a reasonable choice. Usually I see it when Swiss jurisdiction is chosen, and Swiss jurisdiction wouldn’t be my first choice as it is a relatively small jurisdiction (particularly once one has chosen a particular Canton) so I would question how specialist the judges are in commercial disputes. As Switzerland is outside the EU, this creates another point of uncertainty in my mind.
      As for Delaware, I have heard different views about whether it is good for contract disputes (as distinct from corporate law disputes where it seems it has real expertise).

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