When the jurisdiction clause becomes the hero: a story every investor in property abroad should know

I don't usually appear in court. In recent years our firm has stopped taking litigation cases: since we specialise in supporting developers and investors abroad, we decided to put our effort, learning and expertise into those fields. To my mind, litigation is a specialisation in its own right – you have to keep up both with legislation in the relevant field and rules of procedure, which change from time to time, and with the latest case law and precedents.

With that introduction out of the way, I will say that when Moshe – a developer we had supported on a project he built in Romania – came to me with a statement of claim he had received from a client who bought an apartment, I couldn't refuse to represent him in court.

Yossi and Yael had bought a two-room apartment from Moshe's company in a building he put up in one of Bucharest's neighbourhoods. The project was finished and the apartment was handed over to them about two years ago, and now they had filed a claim in the Rishon LeZion Magistrates' Court against Moshe and his brother, the company's shareholders. They claimed the apartment was delivered late and that they were entitled to compensation, and that the rent they were receiving didn't match the marketing promises, so they were also suing for the difference between what they alleged had been promised and what they actually receive.

Needless to say, Yossi and Yael bought the apartment from a Romanian company owned by Moshe and his brother, not from the two of them as private individuals. In addition, the sale agreement, signed in Romania before a notary as is customary, states explicitly that any dispute concerning the sale agreement is to be heard before the competent court in Bucharest.

I was so annoyed by the nerve of the two of them and of their lawyer, who didn't even bother to talk to us and went straight to filing the claim, that I told Moshe that although we don't usually handle claims or represent clients in court, in this case we would be glad to.

We filed a motion to dismiss the claim outright for lack of jurisdiction. We presented the signed agreement to the court and set out the jurisdiction clause. We highlighted the attempt to “pierce the corporate veil” and sue the shareholders instead of the company, as would be expected and required.

When we came to the hearing this week, the registrar didn't even need to hear our arguments. He immediately turned to the couple's lawyer and asked whether a claim had been filed in Romania at all, and why not. After some squirming by their lawyer, and explanations that the negotiations had taken place in Israel and that suing in Romania would be difficult because of the high costs involved, the judge suggested he withdraw the claim without being ordered to pay costs.

During the break, granted at the request of the couple's lawyer so he could consult his clients, he tried to strike a deal with us outside the courtroom so that we would pay the couple something. I flatly refused to pay even a single shekel.

The important lesson: the jurisdiction clause as an essential shield

This story is the perfect example of why the jurisdiction clause is considered one of the most important clauses in international purchase agreements. As we saw, this simple clause became a legal shield that saved Moshe from an expensive and complicated legal process.

A study published in the International Journal of Commercial Law found that “more than 85% of disputes in international real-estate investments are resolved through the correct application of jurisdiction clauses, without the claim ever reaching a hearing on the merits.” That is exactly what happened in Moshe's case.

The claim was struck out not because the arguments were unfounded (and had we gone into the substance of the contract and the claims, we would have shown that the arguments and claims had no basis at all), but because the court in Israel had no jurisdiction to hear it. That is how a good jurisdiction clause works – it creates an initial barrier that forces the claimant to think twice before filing.

What should an effective jurisdiction clause contain?

From my experience supporting dozens of real-estate deals abroad, an effective jurisdiction clause must include:

1. Precise identification of the competent court – it isn't enough to write “the courts of country X.” You need to state the specific city, the level of the court (district/magistrates'), and if necessary the professional panel required.

2. The language of the proceedings – a clear definition of the language in which the legal proceedings will be conducted. This is especially important in multilingual countries such as Switzerland or Belgium.

3. The governing law – sometimes you need to distinguish between where the proceedings will take place and which law will apply to the dispute. For example, a deal in Berlin can be subject to German law but be heard in a court in London.

A 2023 report by the consulting firm McKinsey & Company stresses that “investors who win legal proceedings thanks to clear jurisdiction clauses save on average 40% of the duration of the proceedings and 60% of legal costs compared with cases involving defective clauses.”

Common pitfalls to avoid

In my experience, there are common pitfalls that come up again and again:

A double or contradictory clause – cases where the agreement contains more than one jurisdiction clause, or where the jurisdiction clause contradicts other clauses in the agreement.

Imprecise reference to local jurisdiction – in federal countries such as the US or Germany, you need to distinguish between state and federal jurisdiction.

Ignoring local arbitration arrangements – in some countries there is mandatory arbitration for certain sectors, which can override a jurisdiction clause.

Real-world practice: what does it look like on the ground?

Moshe's case also teaches us about the importance of the right legal structure. The fact that Yossi and Yael tried to sue the individual shareholders instead of the Romanian company was another mistake that strengthened our position. In many countries, the separation of liability between a company and its owners is strictly upheld.

As someone who supports investors in hundreds of deals abroad, I see again and again how saving on legal advice at the purchase stage turns into double the cost when a dispute arises. Yossi and Yael's case is a perfect example – they spent money on legal proceedings that had no chance of succeeding from the start, simply because they didn't understand what the jurisdiction clause in the agreement they signed meant.

I always advise my clients to examine the jurisdiction clause not only from a legal point of view but also from a practical one. Questions such as “Can I afford legal proceedings in this country?”, “Do I have access to good legal representation there?”, “How long are the proceedings likely to take?” – these are questions that must be asked at the planning stage.

In today's global world, a well-drafted jurisdiction clause isn't just a legal matter – it is the cornerstone of protecting your investment. Moshe's story proves that when the clause is drafted correctly and the agreement is properly structured, even the most problematic case can end in a quick and efficient win.