Governing Law and Arbitration in International Contracts: Resolving the Last Two Clauses

Hello! I am Noriaki Asato, Managing Partner of Legal Agent.

In negotiations with an overseas company, governing law and dispute resolution may remain unresolved after price, delivery, warranties and intellectual property ownership have been agreed. The Japanese side asks for Japanese law and courts in Tokyo, while the counterparty requests its own law and courts. The business team wants to sign, but emails about these two clauses continue.

The question is broader than whether a party secures its home system. If payment is withheld or a breach causes loss, which procedure can the company use, and where can it recover against assets? Governing law determines contractual rights and obligations; jurisdiction and arbitration clauses determine where and how disputes are resolved. These choices should first be considered separately and then made to work together.

Choose governing law by considering its effect on the agreed terms

Article 7 of Japan’s Act on General Rules for Application of Laws provides that the formation and effect of a juridical act are governed by the law of the place chosen by the parties at the time of the act. International business contracts draw on this principle of party autonomy when selecting Japanese law, the counterparty’s law or a third jurisdiction’s law.

Naming a legal system does not finish the analysis. Liability caps, exclusions of indirect loss, termination rights and agreed damages may have different meanings or effects under different laws, even when the English wording is identical. If the counterparty requests the law of England and Wales or New York State, the principal terms should be reviewed under that law. Broad references to “UK law” or “US law” may leave the intended jurisdiction unclear.

Familiarity with Japanese law is relevant, alongside the counterparty’s location, the places of performance, regulation and negotiating context. Accepting foreign law may require time and budget for local advice. Changing only the governing-law clause can leave other provisions drafted on assumptions that no longer hold.

A choice-of-law clause cannot remove all relevant regulation. Competition, export-control and data-protection rules may apply according to their respective scope. Japanese conflict-of-laws legislation also has special rules for consumer and employment contracts. A clause designed for a business-to-business transaction should therefore not be transferred unchanged into consumer terms or an employment agreement.

Compare litigation and arbitration by starting with asset location

Choosing Japanese courts can make it easier to conduct proceedings in Japanese and access the company’s staff and evidence. If the counterparty’s assets are all overseas, however, it is necessary to check whether a Japanese judgment can be recognized and enforced where those assets are located. Local law and applicable treaties determine the conditions.

Consider a Japanese supplier pursuing an overseas distributor for unpaid invoices. The recovery route changes depending on whether the distributor has deposits or receivables in Japan or holds most assets abroad. A judgment or award against a subsidiary does not automatically permit enforcement against assets of a parent company that is not a party to the contract. Guarantees, advance payments and security may therefore need consideration alongside dispute-resolution terms.

Arbitration entrusts the dispute to arbitrators appointed on the basis of the parties’ agreement. The New York Convention provides a widely used framework for recognizing and enforcing foreign arbitral awards. UNCITRAL’s status list records Japan’s accession in 1961. Whether this framework is available matters when assets are in several countries.

An award does not guarantee recovery. Membership and reservations in the enforcement jurisdiction, arbitrability and local enforcement procedures still require review. An invalid arbitration agreement, inadequate notice and public-policy concerns are among the Convention’s grounds for refusing recognition or enforcement. Obtaining a favorable decision and recovering against assets are distinct stages.

Private proceedings should also be distinguished from confidentiality obligations restricting disclosure of documents or outcomes. Their scope, exceptions and treatment in related court proceedings depend on the applicable rules and agreement. Where technical information or commercial terms are sensitive, confidentiality provisions should be checked alongside the arbitration clause rather than assuming that arbitration alone protects secrecy.

Make four elements of the arbitration clause concrete

For institutional arbitration, start with the institution’s model clause. The Japan Commercial Arbitration Association’s model clauses, for example, identify the scope of disputes, final resolution by arbitration, rules and seat. Such a starting point helps avoid important omissions.

Review four elements:

• Institution and rules: Identify the administering institution, such as JCAA, ICC or SIAC, and its applicable rules. The institution’s name and the name of its rules are different matters.
• Seat: Specify the legal location of the arbitration. It affects the supporting arbitration law and the courts with a role in setting aside an award.
• Language: Consider staff, witnesses and business records as well as the contract. Translation scope and cost also matter.
• Number of arbitrators: Choose a sole arbitrator or three arbitrators by considering likely claim value, complexity, required expertise and cost.

Omission does not automatically invalidate an arbitration agreement. Rules or legislation may supply defaults, and ad hoc arbitration without an administering institution exists. Disputing appointment arrangements or procedure after a conflict has arisen can nevertheless add cost and delay. The consequences of leaving an issue unspecified should be understood.

Distinguish the seat from the physical hearing location. Whether an arbitration seated in Tokyo can hold hearings online or elsewhere depends on the rules and procedural decisions. The seat should not be chosen solely for meeting convenience.

Three arbitrators do not invariably produce a more accurate decision, and a sole arbitrator is not inherently biased. A large dispute requiring several kinds of expertise and a smaller claim requiring cost control may call for different arrangements. Review fees and expedited-procedure conditions against the disputes the transaction could generate.

Evaluate a neutral seat or foreign exclusive forum in context

Where both sides insist on their home courts or seat, a third-country seat is one negotiating option. The elements can be separated: Japanese governing law, a Singapore seat and English as the procedural language, for example.

A third country does not automatically provide an inexpensive or neutral process. Local procedural advice and specialist support may add expense. The assessment should include court support for arbitration, procedural predictability and the location of evidence and assets, rather than only whether the country is home to neither party.

A clause requiring a claimant to arbitrate in the other party’s country is another possible arrangement. It calls for attention to simultaneous claims and counterclaims. Saying only that disputes will be resolved “where the defendant is located” may leave uncertainty when a party moves, multiple parties are involved or parallel proceedings arise. Specify the institutions, rules and seats and check how they operate.

Exclusive jurisdiction in the counterparty’s country should not be rejected categorically. It may be reasonable where principal assets and evidence are there and litigation costs and enforcement conditions are understood. Conversely, substantial costs even for a small payment claim affect the commercial decision. Both bringing and defending likely claims should be considered.

Care is also needed when court and arbitration clauses appear together. A provision sending all disputes to final arbitration can conflict with another granting courts exclusive jurisdiction over the same disputes. If arbitration resolves the merits while courts remain available for interim protection or enforcement, distinguish those roles and align them with the relevant legal systems.

Before signing, test the clause against one realistic dispute

A plausible scenario—an unpaid invoice or defective deliverable, for example—makes the review concrete. Work through who would be sued, what would be claimed, which language and procedure would be used, and where enforcement against assets would take place.

Then compare costs with likely claim value, time to resolution, required advisers and evidence location. Arbitration is not necessarily unsuitable for a small transaction, nor are three arbitrators invariably necessary for a large one. Institutional expedited procedures, fees and local court processes should inform a workable choice.

Where several contracts are involved, check whether dispute-resolution provisions in the master agreement, individual orders and guarantees are consistent. Different proceedings in different countries can complicate resolution of a single commercial problem. Confirm which entity signs, which performs the work and which owes payment.

The overview of governing law, jurisdiction and arbitration clauses discusses the basic approach, while the master transaction agreement review addresses continuing relationships. Clauses at the end of a template can determine the burden when a problem arises, so they deserve consideration alongside the commercial terms.