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).
[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.
[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.
[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.
