Remaining Back-to-Back has never been more important26 December 2024

In the maritime industry, contracts and charterparties underpin each and every trade and transaction, serving as the foundation for the allocation of rights, obligations, and risk. One of the most critical, yet often underestimated, aspects of these agreements is the alignment of governing law and jurisdiction clauses—often referred to as “back-to-back” provisions. Ensuring that these clauses are consistent across interrelated agreements can mitigate disputes, streamline legal proceedings, and safeguard commercial relationships.

What Are Governing Law and Jurisdiction Clauses?

• Governing Law Clause: also known as a choice of law provision, determines which law shall apply the contract. The governing law of a contract governs issues, including but not limited to, contractual validity, interpretation, consideration, party obligation, mode of performance, and the discharge of the obligation or of the contract; and
• Jurisdiction Clause: determines which courts or arbitration forum will have authority to resolve disputes. Jurisdiction Clauses are an essential component in the effectiveness of rights and remedies in all contracts and holds great important in the event of a dispute.

These clauses are particularly critical in international transactions, where the parties often operate in different legal systems with varying commercial practices and dispute resolution mechanisms.

Why Back-to-Back Clauses Matter

When multiple contracts or charterparties are interconnected—such as in back-to-back charterparties or sale and purchase agreements—it is essential that their governing law and jurisdiction clauses align. Failure to do so can lead to inefficiencies, delays, and increased costs. Below are key reasons why back-to-back alignment is crucial:

1. Consistency in Legal Interpretation
   Misalignment in governing law can lead to differing interpretations of contractual terms. For example, under the laws of England & Wales force majeure is a creature of contract and where there is an absence of a force majeure clause in a contract, parties cannot use the defence of force majeure. However, under the laws of the People’s Republic of China, force majeure is a statutory doctrine. In the absence of any force majeure clause in a contract, the doctrine applies to the contract automatically. This discrepancy can create significant uncertainties in enforcing obligations.
2. Avoiding Parallel Proceedings
   If the jurisdiction clauses differ, parties may find themselves entangled in simultaneous legal proceedings in different forums. For instance, a cargo dispute under a charterparty governed by the laws of England & Wales may need to be arbitrated in London, while a related bill of lading dispute is litigated in a New York court. Such fragmentation may lead to inefficiencies and conflicting outcomes. To this end, misaligned clauses increase the risk of protracted legal battles, as parties may dispute which law or forum applies. This not only escalates costs but also diverts time and resources from the business. Harmonised clauses minimise this risk by providing a clear and unified framework for resolving disputes.
3. Enforceability of Awards and Judgments
   Aligned clauses streamline the enforcement of arbitral awards or court judgments. For example, an arbitral award issued in proceedings seated in London (under English law) is more likely to align with related contracts governed by the same law, reducing obstacles to enforcement.

Case Study: Misaligned Clauses in Practice

Consider a scenario involving a voyage charterparty and a related sale contract. The charterparty specifies English law and London arbitration, while the sale contract specifies French law with disputes to be determined by the Paris Commercial Court. In the event of a demurrage claim arising under both agreements, the charterer and buyer may face contradictory interpretations and fragmented dispute resolution, undermining the efficient resolution of the issue.

Best Practices for Drafting Back-to-Back Clauses

• early alignment: ensure governing law and jurisdiction are agreed upon during initial negotiations and applied consistently across all related agreements;
• clear wording: avoid vague or contradictory language that can create ambiguities;
• consultation with experts: engage legal professionals with expertise in international contracts to ensure enforceability in the relevant jurisdictions;
• adopt industry standards: utilise standardised clauses, such as those provided by BIMCO, which are widely recognized and tested in practice; and
• periodic review: reassess existing agreements to identify and rectify misaligned clauses, particularly when entering into new transactions.

Conclusion

In a world of interconnected transactions and cross-border trade, the importance of aligning governing law and jurisdiction clauses cannot be overstated. Back-to-back clauses ensure consistency, reduce risks, and enhance enforceability, providing a robust foundation for commercial success. By prioritising alignment from the outset, businesses can safeguard their interests and foster smoother operations in an increasingly complex legal landscape.