If the parties prefer litigation to arbitration, an international franchise agreement should stipulate in which state, and under which law, disputes are to be settled. Therefore a choice of forum clause and a choice of law clause should be inserted in the agreement. The natural tendency is for franchisors to choose the jurisdiction and laws of their home state. Owing to the existence of regulatory statutes and the hybrid nature of the franchise relationship the choice of law clause and choice of forum clause are two of the most important features in international franchise agreements if the parties are to resolve their disputes by litigation.

Choice of forum clauses

All choice of forum clauses may be exclusive or non-exclusive. An exclusive clause has the main advantage of certainty. The existence of any reciprocal arrangement for the enforcement of judgements is an important factor when deciding whether to have an exclusive or non-exclusive jurisdiction clause.

Choice of law clauses

As regards the choice of law clauses, most countries' national laws will permit the parties to select a governing law in a contract and will apply the governing law even if it is not the national law. However, the franchisor should take legal advice on whether the national law of each country involved in the international franchise system respects governing law clauses.

It is essential to select a law to govern a contract as, in the absence of such a clause, the parties may have to resort to litigation to determine the applicable law and both parties will be uncertain about the practical consequences of the dispute.

When considering which law and forum are to be selected, the parties must consider whether the clauses will be recognised by the chosen court or other courts.