This article will explore what jurisdiction clauses are and how Brexit may alter how they are used.
What are jurisdiction clauses and how do they work?
When there is no effective jurisdiction clause in a contract, private international law governs the correct forum of dispute resolution. In order to ensure greater certainty and control over the jurisdiction in which litigation can be commenced, it is desirable for contracts to include jurisdiction clauses.
There are 4 main types of jurisdiction clause:
- An exclusive jurisdiction clause designates a particular jurisdiction in which the parties must litigate. These clauses achieve certainty as the parties know exactly where they can sue and be sued, offering greater protection than any other jurisdiction clauses.
- A non-exclusive jurisdiction clause with an FNC waiver (forum non conveniens) usually provides for one or more jurisdictions in which one party may be sued by another. The specified jurisdiction is therefore elevated above others, but the parties may still choose to litigate elsewhere.
- A non-exclusive jurisdiction clause specifies that a dispute can be heard in a jurisdiction which the parties find attractive, but should it be necessary to litigate in a different jurisdiction, then the option to do so is available. One of the biggest risks of these clauses is the likelihood of parallel proceedings being brought.
- An asymmetric jurisdiction clause allows one party (usually a bank) to sue the other party (generally a borrower) in any jurisdiction, whilst preventing the other party (the borrower) from initiating proceedings outside of one particular jurisdiction. Whilst English and Singaporean courts have consistently held that these clauses constitute valid exclusive jurisdiction clauses, courts in France, Bulgaria and Poland have taken a different view. Nonetheless, the use of these clauses currently reflects market practice.
Electing a specific jurisdiction for proceedings is important for many reasons. A significant consideration is the extent to which a court’s decision will be enforceable. This is particularly important because although arbitral awards are widely enforceable, owing to the New York Convention 1958, there is no equivalent enforcement protection for court judgements. Other critical considerations are where the parties to the contract are located, where they have assets and what remedies are available (and how these might be advantageous to the parties). Furthermore, allocation of a jurisdiction for litigation will reduce delays, increase certainty, and prevent parallel proceedings being brought.
The way the Italian torpedo works is as follows: when a dispute arises in relation to a contract which has an exclusive jurisdiction clause, one party brings proceedings (seeking negative declaratory relief) in violation of this jurisdiction clause before proceedings are issued in the courts of the chosen EU member state. The member state where the negative declaratory relief is sought is usually one with a reputation for a slow or inefficient judicial system. The aim of this exercise is purely to frustrate the other party’s claim. This was possible under the old European rules as the court in the stipulated jurisdiction was required to wait until the first court seised had decided whether it had jurisdiction over the claim. Given the delay and expense arising from this manoeuvre, a torpedoed party would often be forced to discontinue or settle its claim.
Article 31(2) of the Recast Brussels Regulation restricts the use of the Italian torpedo by allowing an EU Member State court, which has been specified in an exclusive jurisdiction clause, to determine a dispute, even if proceedings had first been commenced (in breach of contract) before another Member State court. Under the old Brussels Regulation, the second court seised always had to stay proceedings in accordance with the related actions (or lis pendens) rules. Further, the recent decision of Commerzbank Aktiengesellschaft v Liquimar Tankers Management Inc  EWHC 161 (Comm) clarified that EU law will also protect asymmetric jurisdiction clauses in the same way because they satisfy the exclusivity requirement in Article 31(2).
The UK left the EU on 31st December 2020 and can no longer benefit from the protection offered by the Recast Brussels Regulation. In order to seek some protection, the UK applied to be a signatory to the 2007 Lugano Convention in April 2020. Joining the Lugano Convention is likely to produce the least disruptive result. Despite this, the Lugano Convention is no panacea. The Recast Brussels Regulation ensures that exclusive jurisdiction clauses always take precedence and that proceedings in violation of jurisdiction clauses are stayed, irrespective of whether they were commenced first. In contrast, the Lugano Convention provides that the court where proceedings are first initiated is permitted to determine whether they have jurisdiction. This means proceedings brought in other jurisdiction, even if compliant with a jurisdiction clause, must be stayed until the decision has been made. This decision-making process can be lengthy, and it creates an opportunity to delay the resolution of disputes. Thus, the protection offered by the Lugano Convention is nowhere near as efficient as the protection offered under the Recast Brussels Regulation and would not afford protection from the use of the ‘Italian torpedo’.
Alternative protection may be found under the 2005 Hague Convention, which the UK has already acceded to in its own right from 1stJanuary 2021. The Hague Convention contains rules that require contracting states to respect exclusive jurisdiction clauses in favour of other contracting states and enforce their judgements. However, these rules are also not as comprehensive as those under the Recast Brussels Regulation as they only apply to exclusive jurisdiction clauses. The most worrying lacuna in legal protection under the Hague Convention is that protection is only offered to clauses concluded after the ratification of the Hague Convention. This particular point is the centre of controversy as the EU argues that the UK did not ratify the Hague Convention until 1st January 2021, despite being part of it under the EU prior to this. If the EU is correct, it would mean that for UK contracts concluded before the 1st of January 2021, there would be a risk of proceedings being commenced in another court in the EU contrary to the English jurisdiction clause, and that court may decline to stay those proceedings or defer to the English courts. Further, there is a ‘real risk’ of multiple proceedings, irreconcilable judgements, and difficulties with enforcement.
So, whilst the use of asymmetric jurisdiction clauses currently reflects market practice, this may change under the new post-Brexit regime. Exclusive jurisdiction clauses are enforceable under the Hague Convention and this may be sufficient to outweigh the benefits that came with asymmetric jurisdiction clauses. As such, it is likely that there will be a rise in the drafting of exclusive jurisdiction clauses and a fall in the use of asymmetric jurisdiction clauses.
Further, arbitration may become a more popular dispute resolution option. Brexit will not significantly affect arbitration, nor will it impact the enforcement of arbitration awards as these are governed by the New York Convention 1958- of which the UK has always been a signatory in its own right. Thus, as a mode of dispute resolution, arbitration seems less susceptible to change in the aftermath of Brexit, which may perhaps make it a more attractive option than litigation going forward.