IMPORTANCE OF 'JURISDICTION CLAUSE' IN COMMERCIAL CONTRACTS

We use jurisdiction clause or a forum clause in  contracts to facilitate the parties to a contract to elect a court or forum which shall have the right to adjudicate and decide disputes within the framework of the contract. For example, the courts of New York or of London.

Jurisdiction clause may specify or grant jurisdictional rights to the courts of more than one jurisdiction. Jurisdiction is commonly granted on an exclusive basis (meaning that no other courts except those specified should be able to adjudicate disputes) or on a non-exclusive basis, meaning that other courts may also have the right to adjudicate disputes, in addition to the specified courts.

An example of a straight forward exclusive jurisdiction clause may be in the following terms:

“…. The courts of ………. will have exclusive jurisdiction to adjudicate disputes arising under or in connection with this agreement….”

An example of non-exclusive clause is:

“…. The courts of …….will have non-exclusive jurisdiction to adjudicate any dispute arising under or in connection with this agreement….”

As regards governing clauses, there may be a complex interaction between jurisdiction clause and the rules of private international law.[1] Where there is no effective jurisdiction clause in the contract the correct forum for the determination of a dispute will be decided by the rules of private international law.[2] Absence of jurisdiction clause in a contract leads to confusion, uncertainty and inconvenience.[3]

Why we opt for jurisdiction clause:

There are three principal reasons for specifying a jurisdiction clause in a commercial contract:

1.    Convenience:

One may want to enjoy the element of certainty and surety to sue or to be sued in a country in which one resides.

2.    Preferred judicial system: 

The major legal systems in the world include, common law, civil law, customary law, religious law and mixed systems, one may choose a specific system (to be specified in the contract) depending on factors which one considers important and beneficial for him. For example, if one is most likely to sue (e.g. a purchaser or lender) then it will be his desire that his dispute be heard in a jurisdiction which has an efficient judicial system and offers a good range of interim and final remedies.

3.    Enforcement:

Presence of an effective enforcement system is an important element for opting for a specific jurisdiction. The law of the state in which a judgment, decree or order is passed determines how effective its enforcement system is. The commercial worth of a judgment depends on its enforce-ability and the location of the defendant's assets.

These factors are needed to be looked into prior to opting for a jurisdiction clause. For example, a judgment of an English Court can easily be enforced when assets are located in UK or elsewhere in Europe, whereas difficulty may arise if the assets are located in South America.[4]

It may be noted that there are no reciprocal enforcement treaties between the US and the UK (nor any other European states) and practice varies among individual American states. In these circumstances the parties may be better off with an arbitration clause because arbitral awards are widely enforceable by virtue of the New York Convention.[5]

 Options:

While drafting a 'jurisdiction clause' following are the options: 

                I.          Both parties may agree to submit to an exclusive jurisdiction of a particular forum;

              II.          Both parties may agree to submit to the non-exclusive jurisdiction of a particular forum; or

            III.          One party may opt to submit to the exclusive jurisdiction of a particular forum and the other party may opt to submit to the non-exclusive jurisdiction of a particular forum.

Benefits:

The exclusive jurisdiction clause bestows powers of settlement of dispute to a specific forum of one jurisdiction. Such type of a clause leads to a relative certainty, as one knows where one can sue and be sued. Such a clause also offers a greater protection, it is less likely that another forum may accept jurisdiction if confronted with an exclusive jurisdiction clause. 

Non-exclusive jurisdiction clauses

These types of clauses specifically provide for disputes to be heard before a particular forum of a particular jurisdiction but without prejudice to the rights of one or the other party to take the dispute to the forum of any other jurisdiction. Such type of clauses achieve certainty to the extent that one knows that disputes can be heard in a particular jurisdiction, and at the same time, before a jurisdiction elsewhere if considered necessary. Such clauses offer greater flexibility, but there is risk of parallel proceedings particularly where one of the parties is residing outside Europe.[6]

Hybrid clause

An option for Hybrid clause is usually opted in loan agreements. In such agreements the borrower is restricted to sue before a particular forum and the bank retains the right to commence proceedings in a forum of competent jurisdiction, that is, where the assets are located. Such clauses are normally negotiated between the parties. And where there exists an imbalance in the authority to negotiate, the situation may leave one party in a more favorable position than the other.[7]

Opting for exclusive or non-exclusive jurisdiction clause depends on the facts of each case. For example, a seller in a share purchase agreement may probably prefer an agreement having exclusive jurisdiction clause, because the seller is more likely to be sued, and he needs certainty in knowing where the proceedings are likely to be initiated.[8] The use of an exclusive or non-exclusive jurisdiction clause thus depends on facts of each case. For example, a buyer in a share purchase agreement will probably prefer a non-exclusive jurisdiction clause in order to be certain that it can sue in English Courts (or the courts of whatever jurisdiction is chosen) as well as the courts in any other jurisdiction in which the seller has, or may have assets.

Jurisdiction clauses should always be expressly written into the contracts.[9] It is vital that a contract clearly records the agreement of parties specifying a particular jurisdiction. The parties should not leave it to conditions specified on invoices sent after the contract has been concluded or fall into the trap of allowing the parties to follow standard terms. Such an event will lead to "battle of forums" further leading to arguments over terms of the contract.

Points to note:

Where counter-party is domiciled in the EU, provisions of Article 25 of the Brussels Regulation require consensus over the jurisdiction clause.

If one is seeking to rely on the jurisdiction clause, he should ensure that the counter-party's attention is drawn to the clause relating to choice of jurisdiction.[10]

It may also be noted that courts of England and Wales will though, give effect to the jurisdiction clause per se.     

Circumstances giving rise to disputes and issues:

·       Where the clause is included in a contract giving jurisdiction to a state, there may be other related contracts vesting jurisdiction elsewhere. In such circumstances, it may be  more convenient or appropriate to have the litigation before an appropriate forum;

·       Where, parties to the contract agree to the jurisdiction clause, and some factors arise that could not have  been foreseen at the time when the bargain was struck;

·       Where rules of jurisdiction provide that certain disputes have to be decided by certain specific forums;[11]

·       The "battle of forms," may arise where it is not clear on which terms the parties contracted; and

·       Whether or not the other party can initiate proceedings in another state.

Scope of the clause

Where one wants all conceivable disputes to be determined by a particular court, the clause may be drafted in clear terms so as to avoid arguments over whether a particular dispute falls within the scope of the clause. The English courts have now given clear guidance on this issue, and stated that the jurisdiction clause is to be widely drafted so as to cover all possibilities of disputes arising out of an agreement, including disputes to its existence, validity or termination.[12]

Reference to the court chosen

In English Law, it is perfectly legitimate to provide that a competent court in London is to have exclusive jurisdiction thereby preventing proceedings from being commenced in any other part of England or Wales.[13] However, such an agreement does run the risk of a foreign court finding that London does not qualify as a country and consequently the clause is invalid.

Exclusive or non-exclusive jurisdiction?

For example, where it is decided to refer to one’s disputes to the exclusive jurisdiction of the English courts, appropriate it would be to use the word "exclusive". Where one is opting for a non-exclusive clause, and it is intended to bring concurrent proceedings in a number of jurisdictions such intention must be enshrined in the contract. In addition, where one party wants to be in a position to bring proceedings in another unnamed jurisdiction even after the other party has brought proceedings in a named jurisdiction, the intention to do so must be spelt out in the contract.

Several courts may have exclusive jurisdiction

There is nothing to prevent contracting parties from inserting a clause which gives exclusive jurisdiction to two states concurrently, and this may be preferred when contracting parties reside in different jurisdictions and where an agreement could not be reached between the contracting parties on the preferred court. One way of sorting out this problem would be to state in the contract that if Party A sues party B, court A is to have jurisdiction and if party B sues party A, court B is to have jurisdiction.

It is important to ensure clarity in drafting the intention of the parties. 

(The writer is an advocate and is currently working with Azimuddin Law Associates).

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[1] By virtue of Brussels Regulation and Lugano Convention.

[2] Id.

[3] It may   lead to additional costs and delays in the dispute settlement process.

[4] The Hague Convention will apply solely to business-to-business contracts, aims to provide for worldwide recognition and enforcement of exclusive choice-of-court agreements relating to civil or commercial matters. Mexico acceded to the Convention in 2007, the United States signed in January 2009, the EU signed in April 2009 and Singapore signed in early 2015. The Convention entered into force in October 2015. The Hague Convention, states that exclusive jurisdiction clauses must be recognized by participating states; courts must decline jurisdiction where proceedings are started in contravention of a jurisdiction agreement; and the resulting judgment should be freely transportable. Once other states ratify it.

[5] 1958 UN Convention on Enforcement of Arbitral Awards.

[6] The Brussels Regulation provides safeguards for EU states against the risk of parallel proceedings in related disputes. If the parties are from outside the EU, the degree of risk will depend on selection of court who would be competent to hear the dispute i.e. those where the parties reside or their assets are situated. The English courts can issue anti-suit injunctions outside of Europe in cases where proceedings have been commenced in other jurisdictions which are vexatious or oppressive.

[7]  Asymmetric clauses are valid as a matter of English law but can raise particular issues of enforce-ability in some jurisdictions on the grounds that they lack mutuality or are unconscionably one-sided. So, for example, the French courts have refused to uphold an asymmetric clause and permitted the claimant to bring proceedings in France notwithstanding the terms of the clause.

[8] The risk of being sued in a foreign court of uncertain competence is not an attractive option.

[9]  Article 25 of the Brussels Regulation requires jurisdiction agreements to be either in writing or evidenced in writing; in a form which accords with practices which the parties have established between themselves; or in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned. Since the latter two points are quite difficult to prove, it is sensible to ensure that the agreement is in writing or evidenced in writing.

[10] Barclays Bank plc -v- Petromiralles 3, SL [2008] EWHC 2512 (Comm).

[11] Under the Brussels Regulation, if proceedings are brought first in the courts of State B, then the courts of State A cannot entertain the same causes of action and must stay its proceedings at least until the courts of State B have decided whether or not they have jurisdiction. This is not the case where the clause provides for the exclusive jurisdiction of a European state court as the same is the nominated court taking priority.

[12] The House of Lords decision in Premium Nafta Products Ltd and others -v- Fili Shipping Company Limited and others [2007] UKHL 40 and the Court of Appeal decision in Deutsche Bank A.G. & Ors -v- Asia Pacific Broadband Wireless Communications Inc & Anr [2008] EWCA Civ 1091 have reduced the scope in English law for semantic arguments about whether there is any difference between the use of words such as "arising out of" or "arising under" in a contract and its jurisdiction clauses. In both cases the court supported the proposition that such clauses should be given a liberal construction unless they expressly provide otherwise.

[13] Anthony Snookes -v- Iani-King (GB) Ltd: Stephen Little -v- Iani-King (GB) Ltd [2006] EWHC 289 (QB) where proceedings commenced in the Swansea District Registry were struck out as the clause restricted the parties to the London courts.

A civil law and common law perspective: Good faith and unconscionability in contracts

The real justification for the adoption of the doctrine of unconscionability is to permit courts to do openly what they had been doing covertly for years. The covert methods were in fact deficient. An installment contract might be found to be unconscionable due to an obscurely-worded provision and the circumstances peculiar to the appellant.

A US superior court while disagreeing with the District of Columbia Court of Appeals came to the conclusion that the necessary authority for finding the contract unenforceable could be supplied by applying the common law to this question. The court relied upon the Uniform Commercial Code as persuasive authority for its decision; it stated that the reasoning behind its decision was to adopt, the applicable section of the Code.

The court not only adopted the test of unenforceability stated in the Uniform Commercial Code, but it also explained the actual factors to be considered in the application of this test. The court based the finding of unconscionability on the absence of a meaningful choice on the part of one of the parties and the actual terms of the contract. Meaningful choice was construed as involving all the circumstances surrounding the making of the contract. The two essential circumstances designated by the court are the equality of bargaining positions and the comprehension, by the party charging unconscionability, of the terms of the contract. The court then concerned itself with how the test should be applied and adopted Corbin's suggestion: Where the terms are "so extreme as to appear unconscionable according to the mores and business practices of the time and place," the clause should not be enforced. On the basis of this test, the court remanded the case for a finding, as a matter of law, on the unconscionability of the installment contract.

It is evident that the courts are relevant to meet the question of unconscionability squarely and avoid a direct decision on the merits. The court in the case of Williams has helped to clarify litigation in this area, by supplying the test concerning the meaningfulness of choice. The court created a more distinct definition of the term "unconscionable." But even this test is not so narrow as to eliminate future confusion. What constitutes unequal bargaining positions still remains to be determined. In essence, however, this decision marks the first real application of Section 2-302 of the Uniform Commercial Code, and it will serve as a guide for further interpretation and clarification of that section.

Concept of Good Faith in English Law The concept of good faith is familiar in common law and seems originally to have found its way into equity through the Canon Law. After the formalization of equity in England in the 17th century, the idea of a generally applicable principle of good faith weakened. In the 18th century, Lord Mansfield, "the father of English commercial law", found good faith to be a "governing principle ... applicable to all contracts and dealings". Thus, good faith then seemed to have a safe harbour in English law, although at this time not in the field of equity, but in the law of contract. Later, at the peak of the classical period of English contract law around 1870, there was a reaction against good faith. However, several examples of the opposite can be found even from that time. Presently, the majority view is that good faith is not a generally applicable principle in English contract law.

The unity of the common law systems regarding the treatment of good faith is disintegrating. Even though most common law countries seem to deny pre-contractual good faith as a general principle, there are signs, albeit mostly minor, of the opposite in Canada, Scotland, Australia and the United States. Even if the common law systems still show a somewhat unified front towards good faith in the formation of contracts, this is not the case with the later stages of the contract. Not only the United States but also Canada and Australia seem to have accepted good faith in the performance and enforcement of a contract.

The English contract law debate has shown genuine concern for the risk of having to adopt a generally applicable duty of contractual good faith. The voices heard are so strong that they cannot be dismissed merely as desperate attempts by tradition-bound lawyers to guard the homogeneity of domestic contract law. Implanting good faith into the English common law of contract, it is argued, may impose a threat to its philosophical foundations and the entire case law that has cautiously been built upon that foundation.

Overwhelming evidence of the impact potential of good faith can be taken from a nearby example: Since the duty of good faith in performance and execution of contracts has won general acceptance in the United States, the application of good faith has exploded in such a manner that it now reaches into nearly every corner of American contract law. Furthermore, the fact that Anglo-American contract law can be described as imperialistic, ie, subjugating a major part of the legal order under its regime and thus applying contract law to matters that civil and Nordic law would handle in other fields of law, only enhances the potential impact of good faith. Arguably, the skepticism displayed towards good faith by a majority of English lawyers, consequently is not an exaggeration, it is a sign of health. If a general principle of good faith is accepted in English contract law, there probably would be no way of letting it enter the contractual environment in a controlled manner.

Unconscionability and Loyalty 

The good faith concepts in civil law protect a party from unconscionable contracts as well as the other party's lack of loyalty. In Nordic law, there is no homogeneous good faith concept such as the ones found in civil law jurisdictions. Quite the opposite, a clear distinction is made between conscionability and loyalty, and the concepts most often used are the principle of conscionability (or reasonableness or fairness) and the principle or duty of loyalty. In sharp contrast to civil law, the connection between them is not apparent on the surface. In common law, there seems to be a somewhat similar approach as in Nordic law, even if one may see them as one or at least as closely connected. Also, the implementation of the EC Directive on Unfair Contracts Terms in Consumer Contracts seems to have caused some disturbance in England. One reason for this could be that the fairness test refers to good faith as a normative threshold. In my mind, the reference to good faith does not heighten the requirements. It gives the impression that the good faith norm might give relief where there is a significant imbalance not caused by a good faith breach. However, such an interpretation might not be intended. Mixing the concepts of unfairness and good faith in this manner might be awkward to most legal traditions. While the German version of the directive and the act of implementation uses "Treu und Glauben", the French act of implementation leaves out "bonne foi", despite that the directive refers to that expression. In the Swedish and Finnish translations of the directive, "good usage" has been chosen and the Danish version uses "good belief", even if referral could have been made to "loyalty". Apparently, the combination of conscionability and good faith is confusing not only in common law.

The legislation, similar in all Nordic countries, permits court review of contract terms. In addition to legislation as to "procedural unfairness" such as fraud, duress and undue influence, there is a general clause allowing court intervention. Adjustment or annulment of a contract term is possible on simply "substantive" and "objective" grounds, whenever a significant imbalance is revealed. The court is to consider all (invoked) circumstances, including those arising after the formation of the contract. If a term, or the contract as a whole, is otherwise deemed to be unfair, a defense entirely based on either "honesty in fact" or on the absence of negligence will be in vain. The general clause is not restricted to the protection of weaker parties, even if it is rarely applied outside of consumer relations. Consequently, the test is neither "procedural" nor "subjective", and it seems correct to state that these rules are primarily addressed to the courts. One may, of course, always contend that all rules addressed to courts ricochet back to the parties, and thus give guidelines as to future conduct, but in this case, this proposes either the existence of a party-addressed, extrajudicial duty to refrain from invoking unfair contract terms or a duty to renegotiate the contract. The majority view hardly supports such a proposition.

Good faith, however, is much more than the judicial review of contract terms. As noted above, good faith translated into Nordic legal concepts also comprises the duty of loyalty. This duty, according to the academic definition used in all Nordic countries, compels the parties to a contract to have due regard to the other party's interests. The loyalty therefore is to be shown primarily to the other party, and not the contract itself. The duty of loyalty is clearly addressed to the parties and it concerns their behavior instead of the terms agreed upon. The duty of loyalty works as a basis for supplementing the contract with obligations of secondary character, restriction of abuse of rights and pre-contractual liability.

(The writer is an Advocate and is currently working  with M/s Azimuddin Law Associates Karachi)

Confronting the challenges of international business disputes

Many challenges may be posed by international business transactions in the form of disputes and litigation arising out of international sales contracts. The factors that disturb the attorneys are the following:

(a) Choice of Forum; (b) Jurisdiction; (c) Service of Process; (d) Forum Non-Conveniens; (e) Parallel Proceedings; (f) Choice of Law; (g) Discovery Rules; (h) Enforcement of Judgments; and (i) Issues involving litigation against Foreign Sovereigns.

When a conflict or dispute arises, the first thing to determine is which is the appropriate forum having jurisdiction to settle the dispute - usually the prudent parties settle this issue by incorporating a clause in the contract by authorizing a specific forum to hear the disputes. International business contracts include a forum selection clause; a typical one might read as under:

"All suits arising out of or relating to the subject matter of this contract Shall be decided solely and exclusively by the courts of the city of London" One has to be careful while distinguishing between mandatory and permissive selections. The clause quoted above is mandatory as it requires to approach the courts of London for settlement of the dispute if arises, whereas a permissive clause would allow but not require litigation in London courts. A better way is to draft a clause broadly to include disputes relating to their contractual relationship, to include not just breach of contract claims but also related tort claims. And where such choices are not made then uncertainty looms.

The forum selection clause is now generally accepted by the municipal courts. In the light of Bremen and Carnival cruise cases, which were decided by the US Supreme Court, the US courts recognize this practice generally; similarly the European Union does recognize the forum selection clause. It may however be noted that courts apply foreign law in such cases and not the domestic law and this factor poses more difficulties.

Personal Jurisdiction is a more significant issue in international cases and for its determination there is a two-part test: first whether the defendant has minimum contacts with the jurisdiction and second whether the exercise of personal jurisdiction over the defendant is reasonable according to notions of fair play and substantial justice. (See Worldwide Volkswagen Corp's case).

Plaintiffs in such cases seek to establish either specific or general personal jurisdiction over the defendant. The elements which determine general jurisdiction over the defendant include either extensive contacts or operations in that jurisdiction or in other words a place of residence; however, for a corporation the scene is different. The required element includes the place of incorporation, the place of principal operations and includes conducting extensive business activities at the disputed place. However, for establishing general jurisdiction the recent trends of the courts are only to consider business operations. (In this regard, attention is invited to the case of Goodyear Dunlop Tires Operations).

In order to determine a specific jurisdiction, Plaintiff is required to establish that the harmful conduct of the defendant had a direct connection to the jurisdiction but the disputed acts must be connected to the jurisdiction. For example, In the Asahi Metal Industry Co's case, plaintiff was injured in a motorcycle accident in California, allegedly due to a defective part manufactured in Japan. The manufacturing company had not sold the part in the US nor taken action to cause it to be sold or used in the United States, the court found that there was no specific jurisdiction. However on the basis of negotiation of a contract at a specific place, it is easy to establish specific jurisdiction. For establishing such jurisdiction the contacts of a subsidiary, affiliate or agent are also relevant factors. It may however be noted that lack of personal jurisdiction can be waived, a forum selection clause is generally treated as an implicit consent to personal jurisdiction in the chosen forum, or there may a specific expression of consent to jurisdiction. However, in civil law the said two concepts tend to be fused under the doctrine of judicial competency.

As regards service of process in international disputes, the issue is governed by an international convention namely, The Hague Service Convention and it addresses service of process. So far 65 nations have become party to the convention. The Convention is the exclusive means of serving process in foreign countries. The convention requires each party to establish a central authority to receive requests to carry out service in their territory. The convention also lays down procedural steps that reasonably assure the plaintiff that compliance with convention will greatly reduce the possibility of successful challenge to the service of process or other documents. Where service is to be made in a country that is not party to The Hague Service Convention, the parties have to proceed through a process called rogatory or in other words, through diplomatic requests.

Forum non-conveniens or an incontinent forum doctrine allows courts to decline to decide a case even where they have jurisdiction for seeking more appropriate place for resolution elsewhere. It is generally dependent on case law. The considerations in this regard are: plaintiff's residency, availability of more adequate foreign forum, private and public factors, promises of the defendant; however this consideration is not available in non common law countries.

Sometimes parallel proceedings are initiated in two countries independently; for example, one party might file for damages in one country and the other party may seek rescission, or a declaration that no breach has occurred in a foreign country. In the United States defendant can ask for lis alibi pendents, that is, proceedings pending elsewhere, a court can grant injunction which is known as anti suit injunction, but such motions are granted in very unusual circumstances, but generally there is no presumption against parallel litigation. The EU law, however, does not recognize parallel litigation rule.

The Hague Convention on Taking of Evidence Abroad in Civil or Commercial Matters (Called the Hague Evidence Convention and not to be confused with the Hague Service Convention) is the instrument to manage international discovery. The Convention has been adopted by 58 nations; the convention helps to meet needs of a dispute resolution forum to obtain evidence while not imposing upon foreign entities demands that are excessive under rules of their nations. This convention also requires nations to establish a central authority to process requests. However, countries may decline to honour discovery requests for different reasons.

Choosing an appropriate law applicable to the dispute is an important decision for a court because the outcome may be very different depending on which substantive law the court applies. Parties may agree in their contract about the choice of law. Often the choice of law and appropriate forum clauses are added to the contract to avoid uncertainty. A typical choice of law clause may read as under:

"The rights and duties of the parties arising from or relating to this contract shall be governed solely and exclusively by the laws of the city of London with regard to its conflict of law rules." In the United States, such clauses are permissible to be incorporated under UCC, in the EU applicable regulations also allow broadly unlimited party autonomy (see EC Regulation No. 593/2008, other sets of rules are also available under the auspices of ICC or UN).

Choice of law for international sales of goods transaction has been partly harmonized by the UN Convention on Contracts for the International Sales of Goods (CISG) which provides a single set of substantive rules for international sales transactions within its scope.

As is evident international contracts for sale of goods provide numerous problems for the parties to the contract and that is why the choices regarding forum and law become important. Another issue relates to proving foreign law, and the courts generally rely on the opinion of the experts in this regard.

Another related problem is that of recognition of foreign judgments. There are different rules regarding enforcement of foreign judgments and parties to the contracts must be careful about these problems. In the Commonwealth countries, for example, it may be reciprocal or can be made binding through reciprocal arrangements. However, recent notable trend is that in many areas the states are recognizing the awards and decisions of foreign tribunals and courts by making these arrangements as part of the domestic law. For example, the awards given by ICSID are being recognized as part of the domestic law in many countries. There is also the Hague Convention on Choice of Court Agreements, which requires recognition and enforcement where the parties chose the foreign court by contractual agreement.

There are special issues in litigation relating to Foreign Sovereign. The limitations include act of state doctrine. This doctrine comes into play even in those cases where sovereign may not be a party. However if possible, it is better to obtain waiver of enforcement immunity.

One has to consider alternate remedies available in this regard to avoid complex legal rules. Many different commercial arbitration options are available to parties; these include arbitration under, ICC, ICSID, UNICITRAl and others. These options are cost efficient and easy to handle

(The writer is an advocate and is currently working  with Azimuddin Law Associates Karachi)

Cross jurisdiction disputes in international arbitration

A contract leads to corporate relationships out of which typical disputes arise quite often. It is evident that with the advent of globalization the outreach of businesses has expanded and the role of multinationals stands spread. This expanded role has given rise to international disputes which quite often are concerned with jurisdiction issues.

Where disputes arise in global businesses, the organisations generally opt for arbitration and such an option gives rise to the question of cross national jurisdiction and effectiveness of arbitration as a dispute settlement process. It is now generally believed that majority of the businesses organisations choose arbitration for dispute resolution.

This write-up while putting to one side the cost implications of using international arbitration over litigation, explores the outcomes that international arbitration can offer over litigation, but it is worth remembering that there will still be certain situations resulting in time-consuming and leading to costly litigation, especially matters involving regulators or government.

Let us examine the mover and shaking forces that have led to an explosion and growth in international arbitration? Rise in cross-border disputes has been there due to expanding role of globalization in international businesses. One may find some more nuanced considerations that international arbitration gives rise to that are not just about the cost of litigation. For example, while the issue of legal privilege does not provide for common rules at the international level, the IBA does attempt to provide some structure. These rules are required to be adopted by the parties either in whole or in part as they provide procedural outlay to deal with the matters of evidence in such cases. The process discussed above shows a significant flexibility in the process that is quite opposite to the rigid framework of the court rules.

Arbitration no doubt offers cost-effectiveness and flexibility,two very important factors that have contributed in shaping the growth of the mechanism provided for dispute resolution. Privacy is another significant factor in this regard.

The fact is that international arbitration is considered by majority as an effective way to keep business practices, trade secrets, industrial processes, intellectual property, and proceedings which may lead to possible negative impacts to the businesses. One should not assume that everything in arbitration happens automatically or remains secret or is treated confidential; the existing procedures only confirm that such proceedings can remain private and confidential.

One clear indication of why international arbitration has become such a popular route to dispute is the advantages it provides over traditional methods of dispute resolution. However one may know that how hard it is to enforce a judgment against someone in another jurisdiction. So how does international arbitration fares when it comes to enforcement of agreements?

A little light on the question of enforcement has been provided by the practitioner’s handbook for international arbitration. It may be noted that parties involved in cross-border disputes can request an arbitrariness to incorporate the settlement agreement into an arbitration award known as a ‘consent award’ or ‘award on agreed terms’, or an award explicitly agreed by the parties. For example, an enforcement issue can emerge in a foreign jurisdiction on the basis of breach of contract under the procedures of the New York Convention. This convention fortunately, bears the benefit of more than 1750 precedents involving more than 65 different countries. The list of contracting states who have signed up to the convention is pretty comprehensive and includes all the major economies around the world.

The Convention does contain provision for the subject of enforcement and provides defense mechanism to attempt the enforcement challenge. See article V, which states among other things: “Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that a party was subject to an incapacity or were given improper notice of the appointment of the arbitrator, or the award deals with a difference outside the contemplation of the submissions to arbitration, or the composition of arbitral authority was not as agreed by the parties or the award has not become binding at the time of enforcement, all of which, to my mind represents reasonable grounds to challenge enforcement”.

One knows that for the process of resolution, enforcement is a significant consideration. However, Article V of the New York Convention does not necessarily mean that it is in any way easy for the subject to get an easy enforcement by challenging and defeating enforcement especially where the arbitration has been conducted properly and by agreement. The provisions in Article V are relatively narrow and actually relate to a perfectly sound mode of good governance.

It is now evident that where awards are given with the mutual consent of the parties, the problem of enforcement is very limited and usually awards are enforced automatically. The experience in this regard shows that such arbitration awards are enforced without many problems and in a very limited number of cases the parties confront enforcement problems. The difficulties generally arise where attempts are made to enforce awards relating to damages, and some problems may also arise in encountering and enforcing declaratory and specific performance awards.

What are the advantages of arbitration; these include flexibility, cost-effectiveness, privacy and enforcement through local jurisdictions under the New York Convention.1 There appears to be a broad consensus across the variety of arbitration rules that different jurisdictions provide and now there appears to be an increasingly popular choice among-st growing number of corporations to face and deal with the question of multiple jurisdictions.

The experience in this regard shows that the two most popular jurisdictions for providing international arbitration stand located in London and Paris, but Hong Kong and Singapore are also gaining momentum quite rapidly. This growth of option for dispute resolution through arbitration is gradual and the dispute resolution scene is changing rapidly.

It appears that some of the most hotly debated topics in arbitration do not necessarily represent the most divergent views in this regard. Arbitration is not considered as ‘over-regulated’, and many business have even expressed a need for further regulation of the conduct of specific actors. This is an indication that the arbitral community is apprehensive of further extensive ‘macro-regulation’ but would welcome limited corrective ‘micro-regulation.'”

It is now widely recognized that a proper scrutiny of processes and procedures is needed, but it is unlikely to result in anything outside the scope of individual jurisdictions, it all explains why London continues to top the preferred location for arbitration. It may be noted that vast majority of actors contributing towards the growth of arbitration happen to be lawyers and they are already subject to stringent regulatory controls.

As globalization continues to break down barriers of trade, the dispute resolution which traditionally had been sought inside a particular jurisdiction’s legal system is no longer capable of, or desirable for, resolving disputes for multinational corporations.

As long as the flexibility, cost-effectiveness, privacy and enforcement through local jurisdictions remain the outcome it suits businesses and trade across several jurisdictions. It is evident that these trends will continue to grow and dominate the dispute resolution scene relating to international businesses.

Customs valuation: Role of price list in determination of transaction value

 The customs value of imported goods is  determined mainly for the purposes of applying taxes  and duties. It constitutes the taxable basis for Customs duties. It is also an essential element for compiling trade statistics, monitoring quantitative restrictions, and collecting national taxes.Customs valuation is a customs procedure applied to determine  the customs value of imported goods. If the rate of duty is ad valor-em, the customs value is essential to determine the duty to be paid on an imported goods. The primary basis for valuation is the "Transaction Value" which means the price actually paid or payable for the goods when sold for export to the destined country.

In determining customs value the  price actually paid or payable should be adjusted to include all the costs and services such as royalties, license fees, commission and brokerage, cost of container and packing, tool, mold, engineering and design work, made as a condition of sale of the imported goods by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller. Since the assessment is on a CIF basis, the invoice value should be suitably adjusted to include the freight, insurance and handling charges as well.  This concept is based on the Agreement of Interpretation of Article VII of the General Agreement on Tariffs and Trade 1994.(1)The emphasis of the agreement is that the value should be based on the actual value of goods and not on notional value of goods.

However, the implementation of GATT Code has not been uniform and different countries interpret the valuation method according to their own views and whims.For example, in many cases import value is rejected on grounds unknown to the GATT Code. In many cases Customs  administrations forget that all transactions of imported goods are out come of a contractual obligation between the parties, and this obligation has a binding effect unless an element fraud and misrepresentation is detected and proved. It has also been observed that extraneous factors are at times considered for determining the customs values and among such factors is the use of price list as the basis for determining the customs value.

Articles 1 through 7 of the valuation agreement lay down the methods for determination of customs valuation.(2) In fact GATT Code establishes the fundamental rule that the customs value of imported goods is to be the 'transaction value' of goods or in other words it is the price actually paid or payable for the goods on their sale.(3)

A logical thing to understand is that the GATT code does not lay down uniform values of merchandise or uniform duties of merchandise.  Under the Valuation Code, it is logically possible that the customs value of same merchandise can often differ from one shipment to another, at the given same time and given same  place. This fact supports the  uniformity involved which in fact is the uniformity embodied in the system applied. For example, most of the imports are to be valued on the base of price agreed  between buyer and seller, and as a matter of procedure, the invoice price is to be accepted unless the same is mis-declared. It is possible that in some cases the invoice prices may vary widely; if so, the customs values may also vary widely, even though the goods involved in two transactions  may be identical.

   In the light of what has been stated above, the concept of "Transaction Value" in principle is based on business decisions on pricing as the basis of customs value. Only a minimum number of specified adjustments to the price established in the light of the agreement of the parties may possibly be permitted  to arrive at the  Transaction Value. And in this perspective  only a minimum number of grounds are available for departing from the Transaction Value in order to consider and to apply the alternative basis of valuation as provided under Articles 2 to 7 of the GATT valuation Code.

The acceptance of a price agreed between the parties to one transaction means the rejection of the concept that any two shipments of the same product coming from and going to the same place at the same time must have the same dutiable value within the framework of  Transaction Value(4), and each shipment is to be valued according to its own price, whether the prices differs due to the quantity difference, or due to difference in trade levels, or because of the terms of the sales agreements which might have been entered into at different times - or even if one importer gets a lower price simply because he drives a hard bargain or the exporter chooses to favor him. And in return for a lower price for the imported goods to a particular buyer (importer), the seller (exporter) receives any additional payment or other compensation (especially goods or services), then such additional payments or other compensations will qualify as an indirect payment (in cash or kind) and are to be added to the invoice price to arrive at Transaction Value for customs purposes. Similar calculations are required in a barter or counter trade situation if the price of the imported goods being valued is influenced by a service received or by the price paid by the importer or by the exporter in another transaction which is part of the same barter or counter-trade arrangement. In such situations it may not be possible to value these indirect factors on which the import transaction is conditioned, and then it will not be possible to establish a Transaction Value.

The question now arises about the legal status of the transaction value, that is, can the same be rejected on the basis of a  list price. Here one must remember  that agreements of sale constitute a contracts and are binding on the parties except that such contracts suffer from legal infirmities. Where a list price  is the basis for a sale contract  it may attract consideration of being a sale price otherwise it has no relevance for determination of value.  In many instances, customs authorities make no allegation of mis-declaration and despite that reject the price of the goods imported without giving adequate  reasons for rejection.   Often customs administration reject the transaction value on the basis of price list of the seller, but while doing so, customs not only ignores the GATT code's guiding principles, but also act contrary to the legal provisions in this regard. It may be noted,  by proposing that price list is a valid piece of evidence for the rejection of transaction value since their action ab initio is illegal  and a wrong notion.  The action of the customs is erroneous as it  cannot be a reason by itself to reject the transaction value.(5)

 An invoice price, one has to keep in mind, is a consequence of a legal contract, and where such  invoice price is rejected , one is rejecting the contract cause, reasons and plausible evidence.  And decisions of such a nature become challenge-able  before the W.T.O Arbitration Tribunal, and all this may lead to costs and damages.

The grounds hitherto discussed  may also be reviewed  in the light of one's domestic regulations on the subject (6). Because the laws generally provide that the price (value) in a contract of sale may be fixed by the contract and where the contract provides a fixed price the same is generally enforceable and is accepted as the valid price of goods.

(The writer is an Advocate and is currently working  with M/s Azimuddin Law Associates Karachi.)

1. The agreement consists of four parts and three annexes ie, it provides a hierarchy of methodologies, rules on customs valuation, and a committee to oversee the implementation etc.

2. The Agreement creates a strict and detailed hierarchy of valuation methodologies. Articles 1 through 7 of the Agreement define the methods for determination of customs value in a sequential order of application. Article 1 defines the primary method of valuation, which is used whenever the conditions of Article 1 are met. When the conditions of Article 1 are not met, customs value is to be determined by proceeding sequentially through the succeeding Articles to the first Article under which customs value can be determined. Except as provided in Article 4, it is only where the customs value cannot be determined under a particular Article that the provisions of the next Article are to be used. Article 4 provides that upon request of the importer, the application of Articles 5 and 6 will be reversed. However, if the importer does not request that the order be reversed, these Articles will be considered in their natural sequence. If the importer does request that the order be reversed, but customs value cannot be determined under Article 6, customs value will be determined under Article 5, where possible.

3. Transaction value is the appropriate measure of customs value. However, for the application of the new method the condition required state: (a) there are no restrictions on the disposition or use of the goods by their buyer, other than restrictions which are imposed by law, that limit the geographical area in which the goods are sold, or do not substantially affect the value of the products; (b) the sale price is not subject to some condition or consideration for which a value cannot be determined; (c) no part of the proceeds from the subsequent resale of the product accrues to the seller without adjustment to the transaction value; and, perhaps most importantly, (d) the buyer and seller are not related.

Article 15 provides, the rules for determining where persons are related for purposes of the Agreement. That persons will deemed to be related person only if: (a) they are officers or directors of one another's businesses; (b) they are legally recognized business partners; (c) they are employer and employee; (d) any person directly or indirectly owns, controls or holds five percent or more of the outstanding voting stock or shares of both persons; (e) one person directly or indirectly controls the other; (f) both persons are directly or indirectly controlled by a third person; or (g) they are members of the same family.

4. While determining the transaction value, following additions (applicable where same have been paid by the buyer and not already included in the price) are to be made: • commissions and brokerage, other than buying commissions; • the cost of containers (if not a reusable transportation device) and packing; • the value of certain specified types of goods and services supplied by the buyer free of charge or at reduced cost for use in the production or sale of the imported goods (but excluding design and engineering undertaken in the country of importation); • royalties and licence fees related to the goods imported which must be paid as a condition of the export sale; and • the value of any part of the proceeds of resale, disposal or use of the goods that accrues to the seller.

The following items are excluded, and if in the price are to be deducted 'provided that they are distinguished from the price: 

Charges for construction, erection, assembly, maintenance or technical assistance after importation; 

The cost of transport after importation; 

Duties and taxes of the country of importation.

5. Eicher Tractors case decided by the Indian Jurisdiction.

6. The provisions of section 9 of the Sale of Goods Act, 1930.