A guide on how (not) to write jurisdictional clauses | In Principle

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A guide on how (not) to write jurisdictional clauses

In agreements with foreign counterparties, provisions on which courts have jurisdiction to resolve disputes are standard, but they are often drafted by rote, without deeper reflection. If a dispute unexpectedly occurs, this can lead to serious problems. Based on our experience, we suggest how to avoid the worst mistakes.

If you seek peace, prepare for war

When the parties sign an agreement, they often assume that serious disputes will not occur, or at least they will not reach the court stage. This is an otherwise understandable assumption, based on the trust the counterparty has inspired during the negotiations—after all, prudent businesspeople would not voluntarily sign up for trouble.

But the reality is sometimes different, and a good principle when entering into any contract is to assume that one is signing it just in case a dispute erupts and cannot be resolved amicably. This assumption should guide the agreement not only on key commercial issues, contractual penalties, or rules for termination, but also seemingly formal issues such as the choice of domestic jurisdiction (otherwise international jurisdiction) of the courts competent to resolve disputes related to the agreement.

The possible problems are as numerous as the potential solutions, so we will focus on only selected examples.

1. Choice of jurisdiction linked to arbitration

In international practice, one sometimes encounters dispute resolution clauses that, on one hand, provide for arbitration, but at the same time indicate the domestic jurisdiction of the state courts. While this is probably motivated by a desire to ensure complete and clear regulation of this issue, the effect may be quite the opposite.

The problem is that the essence of an arbitration agreement is to exclude the jurisdiction of state courts over disputes submitted to arbitration. Thus, if the parties agree that disputes will be resolved by both an arbitration tribunal and the state courts of a given country, this creates a contradiction that can perhaps be resolved by appropriate interpretation of the agreement, but this is burdened with serious litigation risks, including invalidity of the clause.

To avoid the problem, it is best to explicitly state in the agreement that disputes will be resolved either only by the state courts of the designated jurisdiction, or only in arbitration.

If the agreement provides for both arbitration and judicial jurisdiction, it should indicate that the designation of jurisdiction of the courts will apply only if the arbitration clause is declared invalid or unenforceable, or will apply only to matters that cannot be resolved in arbitration (although in a commercial context this is a narrow category).

2. Exclusive or non-exclusive jurisdiction

When framing a clause with a choice of international jurisdiction of the courts, it should be borne in mind that the chosen jurisdiction can be indicated as either:

  • Exclusive, meaning that only the courts of that country will be competent to hear cases, or
  • Non-exclusive (optional), and thus supplemental to the jurisdiction available to the parties under general rules.

While the decision on which solution is better depends on the parties’ assessment of the circumstances of the contract, there is a risk in failure to state the decision clearly, as under the various provisions that may apply to evaluation of the clause, such a situation may be interpreted differently.

Thus, pursuant to the Brussels I bis Regulation (1215/2012), which applies generally to relations within the European Union, Art. 25 introduces a presumption that the chosen jurisdiction is exclusive, unless the parties expressly stipulate otherwise. On the other hand, the Polish Civil Procedure Code does not contain such a rule, and it is rather recognised that the presumption, if any operates at all, works exactly the opposite. This reasoning is supported by Art. 1105 of the code, which separately regulates a derogation agreement, i.e. an agreement to deprive Polish courts of jurisdiction in favour of the courts of another country—in other words, an exclusive jurisdiction clause. Beyond this, it is impossible to foresee whether some presumption would operate in the procedural law of a third country whose courts have been selected, or what that presumption might be.

Thus if the parties are silent on the issue of exclusivity, there is a risk of unforeseen and potentially negative consequences.

When deciding whether jurisdiction is to be exclusive or not, it is worth bearing in mind the Hague Convention of 30 June 2005 on Choice of Court Agreements. This convention contains the basis for recognition and enforcement of judgments, among other things, in the UK, and thus has gained a great deal of practical importance after Brexit, and is currently the main instrument for circulation of court rulings between EU countries and the UK (and is also currently in force in Mexico and Singapore). This convention applies only to exclusive jurisdiction agreements, but it does not contain any interpretive rules (presumptions) in this regard, so the burden of proving that an agreement on exclusive jurisdiction has been concluded will usually rest on the party wishing to invoke this before the court.

3. Asymmetric clauses

In the practice of developed markets, especially financial markets, asymmetric jurisdiction clauses, granting the parties different rights in terms of the dispute resolution mechanism, usually giving one party the right to sue in different or more numerous courts than the other, are quite common.

Meanwhile, Polish law displays a distrust of asymmetric procedural solutions, in the case of choice of jurisdiction clauses as well as arbitration clauses. As Civil Procedure Code Art. 1105 §3 states, “The jurisdiction of Polish courts is not excluded by an agreement under which only one of the parties may bring an action before the courts of a foreign state.” This provision may apply when the choice of the parties falls on a jurisdiction outside the European Union. Otherwise, the Brussels I bis Regulation, which does not contain such a restriction, will apply.

It should be emphasised that Art. 1105 §3 is precise in referring to a clause granting only one party the right to sue before a foreign (i.e. non-Polish) court, and not any other inequality in a jurisdiction clause. Since this provision is exceptional, it should be interpreted narrowly, so that other cases of asymmetry are rather acceptable, e.g. granting one party the right to sue in a larger number of countries, or in different countries than the other. From the perspective of protecting against undesirable violation of Art. 1105 §3, it is only essential that both parties have the right to sue outside Poland.

4. Divergence between jurisdiction and governing law

More often than one would think, contracts designate the courts of a country other than the country whose substantive law governs the contract. Although such a solution is formally permissible, in light of the practicalities of litigation it should be strongly discouraged. Courts feel uncomfortable applying foreign law. They do not have direct access to the legal acts of another country and may have to order a translation of the laws into the official language of their own state, or, in the case of Polish courts, obtain it from the Ministry of Justice through an arcane procedure. Nor can one rely on the court’s knowledge of case law and legal literature unless it is offered by one of the parties, which will generally bear the burden of pleading the relevant law to the court.

All of this means that in such cases the court rulings are subject to greater risk and are less predictable. Such litigation also generates higher costs, for translations of legal acts or case law, but also due to the need to involve law firms from at least two countries, the country whose law governs and the country whose courts are hearing the case.

5. Jurisdiction vs. venue

A similar but separate issue is venue—the territorial jurisdiction of the court, i.e. the jurisdiction of a specific court within a given state, for example the ordinary court in Rome (Tribunale Ordinario di Roma) within the national jurisdiction of the Italian courts. More often, the venue is determined indirectly, by indicating the region for which the court is to be competent, for example, “the common court for the city of Rome.”

Due to their similarity, issues of jurisdiction and venue are often combined within a single contractual clause, which is permissible but requires careful consideration.

First of all, it should be borne in mind that jurisdiction and venue are usually governed by separate laws. It may happen that in the chosen jurisdiction, the internal law limits or even excludes the possibility of choosing the venue. It may also happen that, as a result of a reorganisation, the court named in the contract no longer exists. If the clause refers strictly to one particular court, in such cases the clause may be deemed invalid or unenforceable.

In many cases (except for point 6 below), the safest solution is not to specify the venue but to settle with the choice of jurisdiction. Alternatively, the choice of jurisdiction should be clearly separated in the contract from the choice of venue, for example indicating in one paragraph that the courts of the Republic of Italy have jurisdiction, and in another that the competent court will be the court for the city of Rome. The choice of the competent court can also be accompanied by appropriate stipulations, e.g. that in the event that a particular court is not deemed competent, the choice of jurisdiction itself remains in effect.

6. States with heterogeneous judicial systems

The above remarks should be accompanied by an observation regarding states with heterogeneous judicial systems, especially (but not only) federal ones.

In such cases, the risk is linked with overlooking the nature of a country’s legal system and pointing in the clause, for example, generally to the jurisdiction of the United States of America, while in reality, each US state has its own jurisdiction and court structure, and there is also a parallel structure of federal courts. The situation is similar for Australia and Canada. Occasionally, there are countries with a unitary system, where several separate judicial structures exist, such as the United Kingdom, which consists of three legal and judicial jurisdictions: England and Wales (together), Scotland, and Northern Ireland (leaving aside the differing legal status of overseas territories). Among others, Hong Kong also has a separate judiciary and law, under the “one country, two systems” policy of the People’s Republic of China.

In this regard, one can only recommend caution and appropriate reflection in the choice of jurisdiction, and in doubtful cases, consulting local lawyers regarding the conditions for effectiveness of the contractual choice of jurisdiction of their courts.

Simplicity is recommended, as long as it is thought-out

For the sake of completeness, I should add that the issues described above can often be resolved by appropriate interpretation of the contract, and the risk of divergent court rulings is sometimes limited by provisions such as Art. 45(2)–(3) of the Brussels I bis Regulation, which in principle excludes the possibility of the courts in EU member states challenging the jurisdiction of a court of another EU member state that has already issued a judgment.

Nevertheless, the risks described cannot be disregarded, especially if countries outside the European Union’s friendly legal environment for recognition and enforcement of judgments are involved. Also, these risks should be consciously contained, as the source of the problem, i.e. the way the contract is worded, remains entirely within the control of the parties.

Of course, there is no single recipe for a jurisdictional clause that will work for every transaction, as the clause should be tailored to the parameters of the particular contract. Nonetheless, it can generally be said that simple and consistent solutions are safer, e.g. a brief indication of the exclusive jurisdiction of the courts of a certain country (after ascertaining whether it has a homogeneous judicial system) to hear disputes arising out of or related to the contract, where the substantive law of the same country is the law governing the contract. Any complication of this basic solution should be justified by a real need, and well thought-out.

Maciej Zych, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners