Essential clauses every international business contract should have - Part 1

What can go wrong if a contract doesn’t clearly say which law applies? Almost everything. Companies risk dealing with foreign courts, unpredictable procedures, and high costs without well-defined clauses on governing law and dispute resolution. International contracts require precision. One vague sentence, and you lose control. In this article, we explain how to properly draft clauses on governing law, jurisdiction, and dispute resolution, and why they are essential to protecting your business.

Legal certainty as the basis for stable international cooperation

In international commercial contracts, well-drafted clauses on governing law and dispute resolution are not mere formalities - they are essential for reducing legal risks.

According to research by Professor John Coyle, 99% of international contracts include a governing law clause. However, even when such clauses exist, if they are vague or inconsistent, they can lead to disputes over which law should apply. This increases both the cost and the time needed to resolve the conflict.

In addition, if jurisdiction is not clearly defined, each party may insist on resolving the dispute in their national court. This makes the process more complicated and can result in parallel proceedings. It also raises costs and increases the risk of conflicting judgments.

According to the International Chamber of Commerce, 890 new dispute cases were filed in 2023, with 870 of them initiated under the ICC Arbitration Rules. This shows how likely conflicts are when contracts lack clear legal provisions.

Governing Law Clause

The Governing Law Clause defines which country’s laws will apply to the contractual relationship between the parties. This is especially important in international contracts, where each party may be subject to a different legal system.

If the applicable law is not clearly defined, it can create legal uncertainty and make dispute resolution more difficult. The choice of law also affects how the contract is interpreted and enforced, including obligations, breach consequences, and available remedies. Different jurisdictions may interpret the same clauses in very different ways, leading to unexpected outcomes.

How to choose the right law?

When selecting the governing law, consider the following factors:

1. Legal system. Common law systems (like the UK and the US) allow more freedom in drafting, while civil law systems (like France or Germany) rely more on detailed legislation. English law is one of the most common choices in B2B contracts because it is neutral, predictable, and supports contractual freedom.
2. Predictability of court decisions. Some jurisdictions offer well-developed and consistent case law, which makes them attractive for international contracts.
3. Connection to the subject matter. Sometimes it makes sense to choose the law of the country where the contract is performed or where the assets are located. This can simplify enforcement.

Practical tips

Use clear and specific wording. For example: “This Agreement shall be governed by and construed by the laws of England and Wales.”

Make sure your governing law clause aligns with any arbitration clauses. The chosen rules for resolving disputes should be compatible with the applicable law.

It’s strongly recommended to consult experts with international experience when selecting governing law. This helps avoid risks and ensures your contract is enforceable under the legal system you choose.

Dispute Resolution Clause 

The Dispute Resolution Clause defines how the parties will handle disagreements: through negotiation, mediation, arbitration, or court proceedings. This helps avoid uncertainty and lengthy legal processes.

How to choose the right method?

The choice of dispute resolution method depends on the nature of the contract, the jurisdictions involved, and other specific factors:

1. Negotiation and mediation. Suitable for the early stage of a conflict and helps preserve business relationships.
2. Arbitration. Preferred in international contracts due to confidentiality and the ability to choose a neutral jurisdiction. According to the American Arbitration Association (AAA), the average arbitration takes 11.6 months, while litigation can last up to 24 months.
3. Court litigation. It may be more appropriate when enforcement by public authorities is required or when arbitration is not allowed.

What to include in the contract?

The clause should be clear and precise to avoid disputes over its interpretation. State the chosen method of dispute resolution. For example: "All disputes arising out of this agreement shall be resolved by the rules of the International Chamber of Commerce (ICC)."

Define the dispute resolution process. For instance, you can require 30 days of mandatory negotiation before starting arbitration. Align this clause with the rest of the contract. Make sure it is consistent with the governing law and jurisdiction clauses.

Common mistakes and how to avoid them

Even when contracts include clauses on governing law, jurisdiction, and dispute resolution, companies often make mistakes that weaken or cancel out their protective value.

Vague or general wording

If a clause is written in an abstract or unclear way, it opens the door to disputes over what the parties meant. Phrases like “disputes will be resolved in a competent court” or “under applicable law” have no legal precision. If the country or legal system is not clearly defined, courts may apply conflict-of-law rules, which slows the process. Some courts may even find such clauses invalid due to legal uncertainty.

Solution: Always name the specific country, legal system, and procedure. For example: “This Agreement shall be governed by the laws of England and Wales. All disputes shall be submitted to arbitration under the ICC Rules in Paris.”

Inconsistent clauses

Problems arise when contract clauses contradict each other. For example, the governing law is English, the jurisdiction is Germany, and the dispute is to be resolved in arbitration in Singapore. This can cause conflicts between procedural and substantive law.

Solution: Make sure the Governing Law, Jurisdiction, and Dispute Resolution clauses are legally and logically aligned.

Using templates without adaptation

Many companies simply copy contract language from other documents, without adjusting it to their own country of registration, business model, or the parties’ jurisdictions. Examples of common mistakes:

• Naming an arbitration institution that doesn’t exist or doesn’t apply
• A mismatch between the contract’s language and the seat of arbitration
• Including terms that don’t work under the chosen legal system

Solution: Avoid copy-paste. Even standard-looking contracts can contain small clause errors that lead to long disputes and frozen funds.

How Key2Law Can Help You Draft Legally Secure International Contracts

Poorly drafted clauses on governing law, jurisdiction, and dispute resolution can lead to long legal battles, frozen assets, and a complete loss of control over the situation. To avoid this, businesses need more than just a contract template — they need qualified support at every stage of working with international partners. The Key2Law team helps companies build a solid legal structure for international agreements: from choosing the right jurisdiction and arbitration institution to drafting precise clauses and assisting in negotiations.

We review your contracts, identify legal risks, and offer clear, well-structured wording that protects your interests and meets international regulatory standards. If a dispute has already arisen, we step in, prepare a strategy, and represent you in arbitration or court. Our goal is to make sure your contract protects your business, not creates problems. With Key2Law, you get more than just a document — you get a fully functional regulatory tool backed by expertise and strategy.