Commercial significance of Jurisdiction selection

Yulia V. Akinfieva, M.B.A,LL.M. 22 Mar 2016 2935 Views

As the world is becoming more interconnected in all realms, business and commerce have intensively grown into a global marketplace, where transactions happen across borders involving several parties and multiple countries i.e. jurisdictions. Therefore, a very practical question normally arises, which jurisdiction governs the contract?

It is important therefore to look at the significance of inclusion of ‘jurisdiction clause’ in an agreement in order to avoid future time and financial costs when choosing a jurisdiction for the resolution of a dispute. In order to better understand the effect and role of the jurisdiction selection it is important to assess the conditions that govern the use of jurisdiction agreements as a basis of jurisdiction under the common law and the Brussels I Regulation. The document aims to provide a critical analysis of the role of ‘jurisdiction clause’ in an agreement and its applicability under Brussels I Regulation as well as common law.

Commercial significance of jurisdiction selection

As businesses are becoming global, and at times involve many parties in many countries, the business transaction and contracting process becomes more sophisticated and complex, ‘the risk for a party of being forced to litigate at great distance from home, with associated costs and inconvenience, has become very real’[1]. Therefore, freedom to select jurisdiction governing the contract constitutes an important ‘means of mitigating that risk’[2]. Here, convenience entails locations of parties.

The freedom of parties to select the jurisdiction is also intended to prevent and combat the time and resources consuming ‘practice of forum shopping’[3]. Moreover, ‘the adoption by commercial parties of an exclusive jurisdiction clause reflects a conscious policy choice of a particular civil dispute resolution system for its ‘speed and efficacy’ and the ‘competence and skill of its lawyers and judges’[4] which in itself is a good method of cutting costs and reducing time spent on litigation.

Moreover, referring to the ‘convenience’ side of the matter, it can be said that the party autonomy allows for selection of the most favorable system to enjoy ‘judicial advantage’[5]. However, here the impact might be just the opposite, whereby a party ‘may have to trade off its rights’ under a given law in exchange for other commercial benefits. i.e. chooses to accept an inconvenient forum in case of dispute in order to enjoy the commercial benefits offered by the contract hoping in this case for the best.

Party autonomy is one of those principles in international contracts which are deemed to instill predictability and certainty. According to Bauerfeld, ‘the parties should be allowed to avoid the chaos of contract conflicts-of-law doctrines by inserting a choice-of-law clause into their contract. The courts should then respect the choice-in order to protect parties’ expectations’[6].

For the proper functioning of international business transactions decision makers normally perform various cost-benefit and risk analyses, and hence, by making a choice of law and considering party autonomy option, the parties can regulate and predict the future in case of disputes. Hence, when making an operational decision, corporate managers and corporate lawyers analyze the costs, convenience/inconvenience of a lawsuit, applicable laws and their potential drawbacks/benefits, costs of arbitration for example, etc. in order to minimize costs and negative impact on the business operations in case a dispute arises.

Jurisdiction Agreements as the basis of jurisdiction under Brussels I Regulation

Under Brussels I Regulation the freedom of parties to select jurisdiction governing the contract is provided for in Article 23[7].

According to Merrett, there are few important questions to consider, namely, she mentions that ‘national laws may not supplement the provisions of Article 23 to override an actual or admitted agreement’ and this becomes evident when one of the parties ‘contends that he simply did not consent to the jurisdiction agreement’[8] and the second issue is that ‘national law still has an important role to play in the operation of Article 23 because questions as to interpretation, and therefore the scope of jurisdiction agreement, remain a question of national law, namely the applicable law’[9]. Moreover, unlike treatment at Common Law, Brussels I Regulation excludes the court from considering matters such as fraud and duress.

A significant development has been witnessed with the enforcement of Brussels Regulation Recast[10] introducing amendments to the rules related to the jurisdiction agreements including an amendment that ‘disapplies the “first-in-time’ rule in the Brussels Regulation where there is an exclusive jurisdiction clause’[11], as well as enhanced arbitration exclusion, and ‘abolition of exequatur, further simplifying the recognition and enforcement of member state judgments in other member states’[12].

Article 25 of the Recast[13] covers the prorogation of the jurisdiction. Article 25 grants jurisdiction to the courts of the member state selected by the parties, regardless of their domicile unlike the case under Article 23 (1) of the Brussels I Regulation. In other words, in case two foreign companies domiciled outside of the Member States have an English jurisdiction clause in the agreement, the English court will assume jurisdiction pertinent to Article 25. However, pertinent to Article 23 (3) of the Brussels I:

Where such an agreement is concluded by parties, none of whom is domiciled in a Member State, the courts of other Member States shall have no jurisdiction over their disputes unless the court or courts chosen have declined jurisdiction[14].

A practical implication of the change under the Recast is that, in presence of an English jurisdiction clause, ‘a claimant will not need the court’s permission to serve proceedings on the defendant out of the jurisdiction’[15].

Both Brussels I and the Recast set out the requirements in Art. 23 and Art. 25 respectively, ‘governing the validity of clauses conferring jurisdiction…by making such validity subject to the existence of an ‘agreement’ between the parties, Article 17[16]imposes on the court before which the matter is brought the duty of examining, first, whether the clause conferring jurisdiction upon it was in fact the subject of consensus between the parties, which must be clearly and precisely demonstrated’[17]. In particular, reference is made to Article 25 (1) (a) of the Recast: ‘The agreement conferring jurisdiction shall be either: (a) in writing or evidenced in writing’[18]. An exemplifying case was that of Estasis Salotti v RUWA[19] where the question was whether a German court had jurisdiction pertinent to the existence of a jurisdiction clause in the claimant’s standard terms and conditions. ‘The contract was entered into writing and the terms and conditions were printed on the back but were not referred to in the contract itself’[20]. The ECJ in this case ruled that the conditions of the relevant article herein discussed was not satisfied for the following reason: ‘where a clause conferring jurisdiction is included among the general conditions of sale of one of the parties, printed on the back of a contract, the requirement of writing under the first paragraph of Article 17 of the Convention is fulfilled only if the contract is signed by both parties contains an express reference to those general conditions’[21].The decision of the case was further supported by two decisions of the English Court of Appeal, in the case of Credit Suisse Financial Products v Societe Generale d’Enterprises[22]. Therefore, as is evident from the case law and the impositions set forth in Article 25, a close attention is given to interpretation of what constitutes ‘writing’ and what forms an ‘agreement’.

Jurisdiction Agreements as the basis of jurisdiction under common law

The matter of jurisdiction selection is treated not based on the lex loci contractus or loci solutionis but rather depending on the intention of the parties, the situation of the parties and surrounding facts. As was stated in Definitely Maybe (Touring) Ltd v Marek Lieberberg Konzertageur GmbH[23] ‘little weight would be given to the place of business or residence of a party and much more weight to the place of performance’[24]. Further, Louise Merrett[25], in her work outlines four matters dealt with at common law when considering the ‘jurisdiction selection’:

1. Enforceability of the agreement (presence of offer and acceptance, duress, undue influence etc);

‘In common law, a valid contract is succinctly formed where there is an offer, namely a manifestation to enter into a valid contract by one party, and an acceptance of that offer by the other party, which indicates a commitment to be bound. In addition to a valid offer and acceptance, there must be adequate consideration or a bargained-for legal detriment’[26]. Some factors that the court might consider include: mental capacity, ‘undue pressure applied to either party to sign the contract’[27], opportunity for negotiation. An exemplifying case is Blomley v Ryan[28], in which Ryan being intoxicated entered into a contract of sale of his farm to Blomley. Blomley held the knowledge of the state Ryan was in, and contracted to purchase the property for a far undervalued price. The court ruled that the contract was non-enforceable.

2.Construction (whether a particular dispute falls within the scope of the jurisdiction agreement);

Rome I Regulation[29] Art. 12(1)(a) ‘provides that the applicable law shall govern interpretation, again this is also the case at common law’[30]

3. Formality (requirements as to language, notice, applicable law and the law of the country where the agreement has been entered into);

The factor is vividly exemplified in the speech of Lord Diplock in Amin Rasheed Shipping Corporation v. Kuwait Insurance Co[31]:‘’English conflict rules accord to the parties to a contract a wide liberty to choose the law by which their contract is to be governed. So the first step is to examine the policy in order to see whether the parties have, by its express terms, or by necessary implication from the language used, evinced a common intention as to the system of law by reference to which their mutual rights and obligations under it are to be ascertained.’[32]

4. Procedure (standard of proof)[33].

As was evident in the case of Canada Trust v Stolzenburg[34] the standard of proof to be achieved by the claimants is that of ‘good arguable case’[35]. Further the procedural approach has been exemplified in the judgment of Deutsche Bank v Asia Pacific Broadband Wireless[36].

Moreover, at common law ‘the jurisdiction agreement can only be invalidated on a ground which relates to the jurisdiction agreement itself and not merely as a consequence of the invalidity of the main agreement’[37].

Conclusion

When talking about commercial objectives of the parties to a contract, the matter of law and rules applicable becomes mandatory to assess. The basic rule of the Brussels I Regulation was ‘in matters relating to contract, in the courts for the place of performance of the obligation in question’ i.e. the rule of contract disputes stipulates that the case shall be heard in the country of delivery of goods and/or services. The proceedings could have been started in breach of jurisdiction clause, and strategic litigation techniques such as ‘Italian torpedo’ used, this, in itself gives an indication that ‘jurisdiction clause’ is to a certain extent useful to provide guidance for the parties and instill security and efficiency, but it is not a panacea from initiated procedures in an ‘out of jurisdiction court’. With this respect Recast Brussels Regulation has strengthened the effectiveness of the jurisdiction selection by introducing two major amendments: effectiveness of exclusive jurisdiction clause regardless of domicile of the parties to an agreement; and, challenges related to the validity of jurisdiction is to be determined by the Member State ‘identified as having exclusive jurisdiction’ and not the first seized court. The amendment should make exclusive jurisdiction clauses more valid and enforceable, which in turn would reduce delays and costs associated with tactical litigation.