Governing Law vs Arbitration: How to Resolve International Contract Disputes

Presented by Amindus Consulting and Solutions

International contracts often involve parties from different countries, legal systems, and business cultures. When disputes arise, resolving them efficiently and fairly becomes critical to maintaining business relationships and minimizing losses. Two key elements in managing international contract disputes are governing law and arbitration. While they are related, they serve different purposes and offer distinct paths to resolving conflicts.

This post explores the key differences between governing law and arbitration, highlights when each method is most effective, and offers practical advice for businesses on choosing the right approach for their contracts.

Legal contract with arbitration and governing law elements

What Governing Law Means in International Contracts

Governing law refers to the legal system and set of rules that will apply to interpret and enforce the contract. It determines how the contract’s terms are understood and what legal principles will guide the resolution of disputes.

Why Governing Law Matters

• Clarifies rights and obligations: It sets the framework for what each party must do.

• Predictability: Parties know which country's laws will apply, reducing uncertainty.

• Enforceability: Courts or tribunals apply the governing law to decide disputes.

Common Governing Law Choices

• English law: Popular for commercial contracts due to its clarity and extensive case law.

• New York law: Often chosen in contracts involving US parties.

• Swiss law: Favored for neutrality and flexibility in international agreements.

When Governing Law Is Most Effective

• Contracts with clear, straightforward terms.

• Situations where parties expect disputes to be resolved in national courts.

• When parties want to rely on a well-established legal framework.

  
  

Understanding Arbitration in International Contracts

Arbitration is a private dispute resolution process where parties agree to submit their conflicts to one or more arbitrators instead of courts. The arbitrators’ decision is usually binding and enforceable internationally under treaties like the New York Convention.

Key Features of Arbitration

• Neutral forum: Parties can choose arbitrators with expertise and avoid courts in one party’s country.

• Confidentiality: Arbitration proceedings are generally private.

• Flexibility: Parties can tailor procedures, timelines, and rules.

• Enforceability: Awards are recognized in over 160 countries.

When Arbitration Works Best

• Complex commercial disputes requiring expert decision-makers.

• Contracts involving parties from countries with weak or biased judicial systems.

• Situations where confidentiality is important.

• When parties want faster resolution than traditional courts.

  
  

Key Differences Between Governing Law and Arbitration

| Aspect | Governing Law | Arbitration |

• Purpose | Defines the legal rules for contract disputes | Provides the forum and process for dispute resolution |

  
  

• Decision Maker | National courts or tribunals | Private arbitrators |

  
  

• Flexibility | Limited to the chosen legal system’s rules | Highly flexible, parties can customize |

  
  

• Confidentiality | Court proceedings are usually public | Generally confidential |

  
  

• Enforceability | Depends on national courts | Enforceable internationally via treaties |

  
  

• Cost and Time | Can be lengthy and costly due to court backlog | Often faster but can be expensive |

Advantages and Disadvantages of Governing Law

Advantages

• Legal certainty: Parties know which laws apply.

• Established procedures: Courts have formal rules and precedents.

• Public record: Court decisions create public case law.

Disadvantages

• Jurisdictional issues: Courts may lack jurisdiction or be biased.

• Lengthy process: Court cases can take years.

• Limited flexibility: Parties cannot tailor procedures.

  
  

Advantages and Disadvantages of Arbitration

Advantages

• Neutrality: Avoids home court advantage.

• Expert decision-makers: Arbitrators often have industry knowledge.

• Confidentiality: Protects sensitive business information.

• International enforceability: Easier to enforce awards globally.

Disadvantages

• Cost: Arbitration fees and arbitrator costs can be high.

• Limited appeal options: Arbitration awards are hard to challenge.

• Potential delays: Complex arbitrations can still be lengthy.

  
  

Practical Tips for Businesses Choosing Between Governing Law and Arbitration

1. Assess the nature of the contract and parties involved

   If parties come from countries with reliable courts and similar legal systems, relying on governing law and courts may suffice. For parties from diverse or less predictable jurisdictions, arbitration offers neutrality.

   
   

2. Consider the complexity and confidentiality needs

   Arbitration suits complex disputes needing expert decision-makers and confidentiality. Simple contracts with low risk may not require arbitration.

   
   

3. Evaluate enforcement concerns

   Arbitration awards are easier to enforce internationally. If enforcement in foreign jurisdictions is critical, arbitration is preferable.

   
   

4. Balance cost and time factors

   Arbitration can be faster but more expensive upfront. Courts may be cheaper but slower.

   
   

5. Specify governing law and dispute resolution clearly

   Contracts should explicitly state the governing law and whether disputes will go to arbitration or courts. Ambiguity leads to costly jurisdictional battles.

   
   

6. Use arbitration clauses with care

   Draft arbitration clauses that specify the seat, rules, number of arbitrators, and language to avoid future disputes.

   
   

Examples of When Each Method Works Best

• Governing Law with Court Resolution

A European company contracts with a local supplier in the same country. They choose the country’s law and courts for dispute resolution. This is straightforward and cost-effective.

• Arbitration with Chosen Governing Law

A US tech firm and a Chinese manufacturer sign a contract governed by New York law but agree to arbitrate disputes in Singapore under ICC rules. This balances legal certainty with neutral, expert dispute resolution.

Choosing the right dispute resolution approach in international contracts can save businesses time, money, and relationships. Understanding the distinct roles of governing law and arbitration helps companies craft contracts that protect their interests and provide clear paths to resolve conflicts.

Businesses should carefully evaluate their specific needs, the parties involved, and the nature of potential disputes before deciding. Clear contract drafting and professional legal advice remain essential to avoid costly misunderstandings.