Outsourcing agreements: forum selection and applicable law clauses
Implications of forum selection and applicable law clauses are often underestimated, but they become a major issue when outsourcing agreements have to be enforced. After having discussed about liability, termination and SLAs and penalty clauses, we will review the most often issues connected with such clauses.
The first issue is to decide between selecting the competent court or an arbitration panel. The decision might depend on the value of the agreement as an arbitration proceeding is usually more expensive than a court proceeding, but also on the topic of the potential dispute. Indeed, an arbitration panel might be a better choice for outsourcing agreements whose lack of performance will require the review of technical issues. Indeed, an arbitration panel might be better prepared to review the potential dispute even if there are some courts such as the court of Milan (Italy) that have considerable technical skills. Also, an arbitration proceeding allows to have a final decision in a quite short timeframe and to select the language of the proceeding.
In respect to the above, it is interesting the measure recently implemented by the Italian Government to foster foreign investments that provides the exclusive jurisdiction of the courts of Milan, Rome and Naples on disputes involving foreign investors without stable seats in Italy. Such courts indeed have more experience on international disputes and will make the potential outcome of the case more predictable so increasing their level of certainty without risking that foreign companies are forced to face disputes before small courts which more rarely deal with such international matters. This advantage will be hopefully coupled with faster trials since the introduction of the compulsory prior mediation proceeding as part of the same measure mentioned above is expected to reduce the workload for courts.
As to the applicable law, each party usually insists on its own applicable law and in some cases companies accept a foreign governing law with the exception of disputes connected to the breach of intellectual property clauses where they remain stick to their own law. However, the main issue is whether the laws of the court having jurisdiction on disputes shall be selected. It is quite common that foreign courts have to decide on agreements governed by English law and in such cases an expert having knowledge of the foreign law will be appointed. The issue is though whether such disalignment between competent court and applicable law can lead to a higher level of uncertainty on the outcome of the dispute, but the matter has to be reviewed based on the peculiarities of the contract.
Finally, there might be laws (such as those of smaller or developing countries) whose precedents do not cover the most common breaches arising from an outsourcing agreement and in such circumstances usually the parties rely on the laws of England and Wales.
WRITTEN BY GIULIO CORAGGIO
IT, gaming, privacy and commercial lawyer at the leading law firm DLA Piper. You can contact me via email at firstname.lastname@example.org or email@example.com or via phone at +39 334 688 1147.