 Barry Donnelly (left) and Jonathan Pratt (right) discuss the rules that the English court will apply to a variety of jurisdiction disputes and consider the problems raised by agreements to litigate in a specific forum
The outcome of a dispute may depend on where it is litigated. This was demonstrated in a recent dispute between Dallah Real Estate and Tourism Holding Co and the government of Pakistan where the UK Supreme Court and the Paris Cour d’Appel reached opposite conclusions on essentially the same question (whether the government of Pakistan was a party to a particular arbitration agreement).
As well as influencing the outcome of disputes, failing to bring a claim in the most favourable jurisdiction may render a victory somewhat Pyrrhic. Delays in obtaining a judgment, or difficulties in enforcing it, may result in the winning party being deprived of the fruits of its success. The recoverability of costs, the types of remedy that a particular court can order, the location of witnesses and documentary evidence, rules on limitation, and even the neutrality of the court are other important considerations when determining the best place to issue proceedings.
The first part of this article provides a general overview of the rules that the English court will apply to jurisdiction disputes. As most commercial contracts contain a jurisdiction clause, the second half of the article goes on to consider particular problems that can arise in the context of agreements to litigate in a particular forum.
How does the English Court decide whether it has jurisdiction?
There are two main sets of rules. These are (1) the Brussels Regulation (the Regulation); and (2) the common law.
The starting point is that the Regulation applies to civil and commercial disputes where the defendant is domiciled in an EU member state, although the subject matter of a dispute or the existence of a jurisdiction agreement may also bring the Regulation into play. Similar rules also apply in European Free Trade Association (EFTA) states (Norway, Switzerland and Iceland) under the Lugano Convention.1 If the Regulation does not apply, the English court will determine jurisdiction disputes by reference to traditional common law rules.
The Regulation and the common law rules are fundamentally different. The main aim of the Regulation is to promote certainty and it contains a prescriptive set of rules that leave little to the discretion of the courts of individual member states. By contrast, the common law rules give the English court a wider discretion to decide upon the most appropriate forum for the dispute. This enables the court to consider the particular circumstances of each case but makes it harder to predict whether the English court will accept jurisdiction over a particular dispute.
The Brussels Regulation
The basic rule under the Regulation is that parties are to be sued in the country of their domicile. However there are a number of exceptions to this general rule. Article 5 identifies courts that have special jurisdiction over certain types of dispute where proceedings may be issued as an alternative to the domicile of the defendant. For example:
- In matters relating to a contract, the defendant may be sued in the courts of the place of performance of the obligation in question.
- Where proceedings relate to tort, the defendant may be sued in the courts of the place where the damage occurred or where the harmful event that gave rise to the damage occurred.
- In the case of a dispute involving the operation of a branch or agency of a foreign company, the defendant may be sued in the courts of the place in which the branch or agency is situated.
Article 6 provides that, where there are multiple defendants, proceedings can be brought against all of them in a country where one of them is domiciled if it is necessary to join the claims against the other defendants so as to avoid the risk of irreconcilable judgments resulting from separate trials. Irrespective of the issue of domicile, Article 22 of the Regulation confers exclusive jurisdiction over certain matters, including disputes about: immoveable property; the formation, constitution and dissolution of corporations and the validity of their decisions; the validity of entries in public registers; trade marks and patents; and actions for the enforcement of judgments.
The common law rules
Under the common law rules, a foreign non-EU domiciled defendant is subject to the jurisdiction of the English Court if process is served upon the defendant within the jurisdiction. This can be done even where the defendant is on a temporary visit to the country. If this is not possible, however, the permission of the court is required to serve the claim form out of the jurisdiction. This will require the claimant to show a ‘good arguable case’ that the claim falls within one of the jurisdictional ‘gateways’. Examples include the following (which is by no means an exhaustive list):
- a claim for a remedy against someone domiciled in the jurisdiction;
- a claim for an injunction restraining the defendant from doing an act within the jurisdiction;
- a claim in respect of a contract that was made in the jurisdiction or is governed by English law;
- a claim in respect of a breach committed within the jurisdiction of a contract wherever made;
- a claim in tort where the damage was sustained within the jurisdiction, or damage has resulted from an act committed within the jurisdiction;
- a claim relating to property within the jurisdiction.
In addition, the claimant must show that the claim has a reasonable prospect of success and that England is the forum with the most real and substantial connection to the dispute. Relevant factors include: the law governing the relevant transaction; the place of the transaction or where business is carried on by the parties; the places where the parties reside; and the availability of witnesses. Alternatively, if England is not the natural forum to hear the dispute, the claimant must show that justice requires that the case be heard in England, for example because the claimant will not obtain a fair hearing in the forum that is most connected with the dispute.
Challenging the jurisdiction of the English Court
In order to dispute the English court’s jurisdiction, a defendant must indicate their intention to do so when acknowledging service and then make an application, disputing the jurisdiction of the court, within 14 days of acknowledging service.
Where the common law applies, the defendant can ask the English court to stay its proceedings on the basis that England is not the most convenient forum to hear the dispute (known as forum non conveniens). This will involve a consideration of the same issues as are relevant to an application for permission to serve out of the jurisdiction.
The concept of forum non conveniens is not relevant where the Regulation applies and a defendant who wishes to dispute jurisdiction will need to show that the proceedings have been brought in breach of the terms of the Regulation.
Submission to the jurisdiction
Regardless of whether the court would otherwise have jurisdiction, a party may submit to the jurisdiction of the English court. At common law, a defendant submits to the jurisdiction if they take a step in the proceedings that in all the circumstances amounts to a recognition of the court’s jurisdiction. This may be done voluntarily or unintentionally and care must therefore be taken not to do anything that is inconsistent with a jurisdictional challenge.
Under the Regulation, a defendant submits to the jurisdiction of a member state by entering an appearance in proceedings without contesting jurisdiction. In England, a party enters an appearance by acknowledging service without reservation or filing a defence.
Once a party has submitted to the jurisdiction of a particular court, it may not subsequently dispute jurisdiction.
Parallel proceedings
It is normally preferable to avoid having the same issues litigated in two jurisdictions as this will increase costs and may result in different and irreconcilable judgments.
One of the primary purposes of the Regulation is to avoid parallel proceedings. Where proceedings involving the same cause of action and the same parties are brought in two different member states, priority is given to the court ‘first seised’ and the other court is required to stay its own proceedings until the court first seised has decided whether it has jurisdiction to hear the dispute (see Article 27).
This creates an incentive for a party to be the first to issue proceedings. Where proceedings could legitimately be brought in the courts of more than one member state, the party that issues first is able to select the jurisdiction that it prefers. Furthermore, a party may, for tactical reasons, issue proceedings in a state that does not have jurisdiction but which has a slow, expensive or unpredictable system for determining jurisdictional disputes. This can have the effect of delaying, or even stifling, perfectly valid claims. This tactic is sometimes known as the ‘Italian Torpedo’.
This means that, in any dispute with an international element, it is important to identify any and all member states in which proceedings may be brought. If there is a risk that proceedings will be brought in an unfavourable jurisdiction, consideration should be given to issuing proceedings as soon as possible (often even before notifying the other side of the existence of a claim). Parties who wish to bring proceedings in England but who do not have a natural claim, and would otherwise expect to be defendants in a dispute, can create a cause of action upon which to sue by applying to the English court for a negative declaration that the other side has no valid claim or right against it.
The concept of lis alibi pendens (‘proceedings pending elsewhere’) is less important under the common law. However, the existence of overseas proceedings is one of the factors that may persuade the English court to stay its own proceedings on the basis of forum non conveniens or, less commonly, to grant an anti-suit injunction restraining a party from commencing or continuing with proceedings in another jurisdiction. In the absence of a breach of a jurisdiction agreement, the English court will exercise caution before making an anti-suit injunction because this constitutes an interference with the jurisdiction of a foreign court, albeit only an indirect one. The test often applied is whether the foreign proceedings are vexatious or oppressive.
Jurisdiction agreements: the common law
When the common law applies, the English court will normally uphold the parties’ agreement to bring proceedings in a particular jurisdiction either by staying its own proceedings or by granting an anti-suit injunction in respect of foreign proceedings. Both these remedies are discretionary and the court may allow a party to continue proceedings in breach of a jurisdiction agreement, but this is unusual and generally requires exceptional circumstances that were not foreseeable at the time the jurisdiction agreement was entered into. In contrast to the situation where there is no jurisdiction agreement, the court will normally restrain the bringing or continuing of foreign proceedings brought in breach of a jurisdiction agreement without requiring the applicant to show that those proceedings are vexatious or oppressive.
Jurisdiction agreements: the Regulation
Article 23 of the Regulation requires the courts of member states to give effect to jurisdiction agreements made between parties, one or more of whom is domiciled in a member state, provided that the agreement is either (i) in writing or evidenced in a writing; (ii) in a form that accords with the practices established between the parties; or (iii) (broadly) in a form widely recognised in the relevant area of international commerce. Article 23 also provides that a jurisdiction clause will be exclusive unless the parties have agreed otherwise.
However, a jurisdiction clause cannot override exclusive jurisdiction conferred by Article 22. Furthermore, in actions relating to individual contracts of employment, consumer contracts and insurance contracts, jurisdiction agreements are only effective (in broad terms) if entered into after the dispute has arisen.
As a result of the European Court of Justice (ECJ) decisions in Erich Gasser GmbH v Misat srl [2003] and Turner v Grovit [2004], the English court is prevented from granting anti-suit injunctions in respect of proceedings brought in other member states. This means that the English court is powerless to intervene if proceedings are brought for tactical reasons in breach of an English jurisdiction clause in another member state.
This state of affairs has been much criticised because it undermines the principle that parties should be held to an agreement to litigate in a particular forum. However, under current proposals for reform, the Regulation will be amended to provide that the court chosen by the parties to resolve any dispute should always have priority, regardless of whether it was first or second seised. The courts of other member states will have no jurisdiction unless and until the chosen court declines jurisdiction. Even if implemented, this reform is unlikely to take effect before the end of 2012.
Construction of jurisdiction clauses
As a matter of European law, once the formal requirements of Article 23 have been satisfied, national law applies to the interpretation and construction of jurisdiction clauses. The English court will therefore apply the common law to this issue, irrespective of whether or not the Regulation applies in other respects. Following the decision of the House of Lords in Fiona Trust v Privalov [2007], the English court will construe jurisdiction agreements widely and generously on the basis that the parties, as rational business people, are likely to have intended any dispute arising out of the relationship into which they have entered to be decided by the same tribunal.
Non-exclusive jurisdiction clauses
Jurisdiction clauses can either be exclusive or non-exclusive. The distinction between the two types of clause is that an exclusive jurisdiction clause restricts the parties to bringing proceedings in the specified jurisdiction and nowhere else. A non-exclusive agreement entitles the parties to bring proceedings in the specified jurisdiction but, in general terms, leaves them free to bring proceedings in any other court of competent jurisdiction.
The advantage of non-exclusive clauses is that they preserve a degree of flexibility. The potential downside is that, where one of the parties is based outside the EU, there is an increased risk of parallel proceedings. This was demonstrated in the recent case of Deutsche Bank AG & anor v Highland Crusader Offshore Partners LLP & ors [2009] where Toulson LJ described parallel proceedings as an ‘inherent risk’ of using a non-exclusive jurisdiction clause.
In Highland Crusader, Deutsche Bank, which had issued proceedings in the Commercial Court, sought to obtain an anti-suit injunction restraining Highland Crusader from continuing with proceedings it had brought in Texas. The dispute turned on the meaning and effect of a non-exclusive jurisdiction agreement that gave jurisdiction to the English courts but went on to provide that:
‘… nothing in this paragraph shall limit the right of any party to take proceedings in the courts of any other country of competent jurisdiction.’
The Court of Appeal held that Highland Crusader had not acted in breach of contract by bringing proceedings in Texas. A party could not ordinarily be said to be in breach of a contract containing a non-exclusive jurisdiction clause merely by pursuing proceedings in an alternative jurisdiction. The best interpretation would usually be that, by contracting for non-exclusive jurisdiction, the parties anticipated and accepted the possibility of some parallel proceedings and, as a result, only foreign proceedings that were vexatious and oppressive for some reason independent of the mere presence of the non-exclusive jurisdiction clause would be restrained by injunction. Highland Crusader was, therefore, able to continue with the Texas proceedings notwithstanding the existence of parallel proceedings in England and the risk that the two different courts would reach inconsistent conclusions.
This problem will not arise where all the parties are domiciled in the EU because, as explained above, Article 27 of the Regulation provides that, once proceedings have been issued in the courts of one member state, the courts of all other member states are required to stay their own proceedings. In situations where the Regulation will not apply, parties who wish to preserve their right to bring proceedings in more than one state, but who wish to avoid the risk of parallel proceedings, could consider replicating Article 27 in their non-exclusive jurisdiction clause (although, as explained above, this has the disadvantage of encouraging the parties to race to issue proceedings).
Multiple jurisdiction clauses in the same transaction
It is not uncommon for parties’ relationships to be regulated by a number of different contracts, which may contain inconsistent jurisdiction clauses. In such a situation, there may be a dispute as to which jurisdiction agreement applies. This issue arose in the case of UBS AG v HSH Nordbank AG [2009].
In that case, UBS had entered into a complex set of agreements with HSH, a German bank, in connection with the issue of securities under a collateralised debt obligation transaction. Some of the agreements were governed by New York law and had non-exclusive New York jurisdiction clauses; others were governed by English law with English jurisdiction clauses.
There were defaults in respect of the underlying securities and the German bank brought proceedings in New York alleging, among other things that it had been induced to enter into the various contracts constituting the transaction by fraudulent or negligent misrepresentations on the part of UBS. UBS sought to bring an action in England for a declaration that it was not liable. The Court of Appeal held that:
- Where there are numerous jurisdiction agreements which may overlap, the parties must be presumed to be acting commercially, and not to intend that similar claims should be the subject of inconsistent jurisdiction clauses.
- In a complex transaction, governed by a number of different agreements, the court would give effect to the jurisdiction clauses in the agreements that are at the commercial centre of the transaction.
- The English jurisdiction clause on which UBS sought to rely was a ‘boiler plate’ bond issue jurisdiction clause, which was primarily intended to deal with technical banking disputes and the parties could not have intended that it would apply to HSH’s claims that the transaction as a whole had been induced by misrepresentations made by UBS. The English court did not have jurisdiction to hear the dispute and the English proceedings would be stayed in favour of the New York proceedings.
One way, therefore, for the courts to resolve the problem of apparently conflicting jurisdiction clauses is to identify the contract at the commercial centre of a dispute and to apply the jurisdiction clause contained in that contract. The justification for taking this approach is the presumption that rational business people will not have intended similar disputes to be tried in different jurisdictions.
This presumption, however, can be displaced if it is clear from the language used in the relevant jurisdiction clauses that the parties did intend that disputes between them should be tried in a multiplicity of jurisdictions. This was demonstrated in the case of Sebastian Holdings Inc v Deutsche Bank AG [2010]. In that case, Sebastian, relying on the UBS decision, sought to argue that the ‘centre of gravity’ of the dispute between the parties was New York (where it had issued proceedings). According to Sebastian, this meant that Deutsche Bank, which was seeking to recover sums due under two agreements containing English jurisdiction clauses, could not invoke the jurisdiction of the English court.
The Court of Appeal rejected this argument. Thomas LJ, who gave the only reasoned judgment, made it clear that, when interpreting jurisdiction agreements, the Court is seeking to ascertain the parties’ intentions in accordance with the normal principles of contractual interpretation. When construing an agreement, which is part of a series of agreements, the Court will take into account the overall scheme of the agreements and read sentences and phrases in the context of that overall scheme. He said that ‘it is generally to be assumed’ that parties to an arrangement set out in multiple related agreements do not normally intend a dispute to be litigated in two different tribunals. However, the job of the court is to give effect to the parties’ intentions and not to rewrite their agreements for them ‘even if this may result in a degree of fragmentation in the resolution of disputes between parties to the series of agreements’. In this case, the clear intention of the parties was that Deutsche Bank should be able to bring its claims in England even though there were ongoing related proceedings in New York.
The common theme in UBS and Sebastian Holdings, and in other similar cases, is that the court will try to identify what ‘sensible business people’ would have intended and to find a ‘commercially rational’ construction in the context of the transaction as a whole. However, as Neuberger LJ noted in Skanska Rasleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006], judges are not always the best people to decide on what is commercially reasonable or likely. The best approach is for parties to leave matters in their own hands. This, arguably is what the parties failed to do in both UBS and Sebastian Holdings. In the latter case, Thomas LJ observed that jurisdiction clauses:
‘… are rarely the subject of detailed negotiation and… in the financial markets… little attention seems to be paid to this element of risk management.’
It is important, therefore, that parties to series of agreements consider how the jurisdiction clauses within those agreements relate to one another. That is not to say that they should always all provide for disputes to be tried in the same jurisdiction. There may be good reasons for providing otherwise. For example, in financial transactions it will often make sense for agreements relating to the provision of security to require disputes to be heard in the jurisdiction where the relevant assets are located, even if disputes about other aspects of the relationship are to be tried elsewhere. However, jurisdiction clauses should not be ignored as part of the boilerplate and consideration should be given to the types of dispute that might arise and where those disputes should be resolved.
A jurisdiction clause is a separable agreement
In certain cases, parties might argue that a particular contract is invalid or void. This raises the question of whether a party, which alleges that a particular contract is invalid, can rely on the same evidence to avoid the effects of a jurisdiction clause contained within the allegedly invalid contract.
The English courts will deal with this problem by treating jurisdiction clauses as self-standing agreements that are separable from the main contract. It is only if the jurisdiction clause (as opposed to the contract which contains it) is itself under some specific attack that a question can arise whether it is right to invoke the jurisdiction clause.
The case of Deutsche Bank AG & ors v Asia Pacific Broadband Wireless Communications Inc & anor [2008] is a good example of the English court applying the concept of separability and upholding a jurisdiction clause. In that case, the claimant lenders made a credit facility of $210m available to the defendants. The defendants argued that the credit facility agreement was void because it had been signed without the requisite authority and as part of a large-scale fraud perpetrated upon the defendant companies.
The Court of Appeal found that the jurisdiction clause contained within the credit facility agreement applied, not only to the dispute about the validity of the agreement, but also to the claimants’ alternative claims (based on misrepresentation and restitution) that it had advanced just in case it was held that the credit facility agreement was indeed invalid.
Longmore LJ, who gave the only reasoned judgment in the Court of Appeal, cited examples of cases where it might be possible to challenge a jurisdiction agreement, situations where fraud or duress could be ‘alleged in relation specifically to the jurisdiction agreement’. Another possible example might be if the signatures to the agreement had been forged although ‘no authority has so far so stated’ and, even then, a mere allegation of forgery might not have the effect of rendering a jurisdiction clause inapplicable. Quoting from the judgment of Lord Hoffmann in the appeal of Fiona Trust v Privalov [2007], Longmore LJ drew a distinction between a case of ‘no authority whatever (eg an agreement signed by the office cleaner)’, where a jurisdiction clause could be challenged, and cases of ‘excess of authority’, which would not give rise to a successful challenge to a jurisdiction agreement. Longmore LJ took the view that this case fell into the former category.
the relationship between Article 22 of the regulation and exclusive jurisdiction agreements
As explained above, Article 22 of the Regulation provides for the courts of member states to have exclusive jurisdiction over certain types of dispute. Where Article 22 applies, it takes precedence over Article 23 (jurisdiction clauses). Many commercial disputes, however, will have a number of elements, and it is possible that one aspect of a dispute will fall within Article 22, while others will not. One example would be where a defendant raises, as one of a number of defences, an argument that a contract containing a jurisdiction clause was invalid because the defendant did not have capacity to enter into that contract (the capacity of a corporate entity being one of the issues covered by Article 22(2)).
This issue has recently arisen in a number of cases involving public authorities, or entities with public functions, seeking to evade the consequences of financial derivative contracts by arguing that they did not have capacity to enter into those contracts. These cases include JP Morgan Chase Bank NA v Berliner Verkehrsbetriebe (BVG) Anstalt des Offentlichen Rechts [2010], Depfa Bank Plc and Dexia Crediop SpA v Provincia di Pisa [2010], and UBS v Kommunale Wasserwerke Leipzig GmbH [2010]. In each case the defendant sought to argue that the dispute should be tried in its home courts (presumably because they expected to receive a more sympathetic hearing), and argued that Article 22 overrode the English jurisdiction clauses in the relevant contracts. In each of these three cases, the defendants’ arguments were rejected. In JP Morgan Chase v BVG, the Court of Appeal, upholding the first instance decision of Teare J, said that a court has to undertake an exercise in ‘overall classification’ and make an ‘overall judgment’ to see whether the proceedings are ‘principally concerned with the validity of a decision of a company. In this case, the ultra vires issue raised by the defendant was not the focus of the proceedings as a whole.
In Depfa Bank, in contrast to JP Morgan Chase v BVG (where the ultra vires issue had been just one of a number of defences), the defendant indicated that it had no intention of raising any defence other than a lack of capacity on its part (although it could not give an undertaking to this effect). Nevertheless, Hamblen J took a robust view. He said he was satisfied that it was likely that other issues would be raised by way of defence and held that the proceedings were not likely to be ‘principally concerned’ with the validity of the decisions of the defendant. Therefore the dispute was not covered by Article 22(2). In reaching this conclusion, Hamblen J commented that:
‘… the Court should be alive to the risk of applicants displaying only part of their hand in order to wrest jurisdiction away from the contractually chosen forum in favour of their home court’.
The approach of the English courts has been confirmed by the Court of Justice of the European Union (CJEU) (formerly known as the ECJ) in Berliner Verkehrsbetriebe (BVG), Anstalt des offentlichen Rechts v JPMorgan ChaseBank NA, Frankfurt Branch [2011] (following a reference by the German court in proceedings litigated in parallel to the English proceedings referred to above).
The CJEU held that Article 22(2) should be given a strict interpretation and that it only covered those proceedings whose principal subject matter comprises the validity of a company’s constitution, the nullity or the dissolution of a company, or the validity of the decisions of a company’s organs. Article 22 does not apply where a company pleads that a contract cannot be enforced against it because a decision of its organs which led to the conclusion of the contract is supposedly invalid. To hold otherwise would enable a company, by pleading the invalidity of its own decisions, to ensure that nearly all claims brought against it are litigated in the courts where that company has its seat, contrary to the provisions of a jurisdiction agreement in any relevant contract. Furthermore, to allow a broad interpretation of Article 22(2) would undermine one of the main purposes of the Regulation, namely that there should be highly predictable rules of jurisdiction.
By Barry Donnelly, partner, and Jonathan Pratt, professional support lawyer, litigation and dispute resolution department, Macfarlanes LLP.
E-mail: barry.donnelly@macfarlanes.com;
jonathan.pratt@macfarlanes.com.
Note- The terms of the Lugano Convention are almost identical to the Regulation and will not be mentioned separately in this article; the term ‘member state’ will be used interchangeably in this article between EU or EFTA states.
Case C-144/10 Berliner Verkehrsbetriebe (BVG), Anstalt des offentlichen Rechts v JPMorgan Chase Bank NA, Frankfurt Branch [2011] EUECJ
Depfa Bank Plc and Dexia Crediop SpA v Provincia di Pisa [2010] EWHC 1148 (Comm)
Deutsche Bank AG & ors v Asia Pacific Broadband Wireless Communications Inc & anor [2008] 2 Lloyd’s Rep 619
Deutsche Bank AG & anor v Highland Crusader Offshore Partners LLP & ors [2009] EWCA Civ 725
Case C-116/02 Erich Gasser GmbH v Misat srl [2003] ECR I-14693
Fiona Trust v Privalov [2007] UKHL 40
Fiona Trust v Privalov [2007] 2 CLC 553
JP Morgan Chase Bank NA v Berliner Verkehrsbetriebe (BVG) Anstalt des Offentlichen Rechts [2010] EWCA Civ 390 (CA)
Sebastian Holdings Inc v Deutsche Bank AG [2010] EWCA Civ 998
Skanska Rasleigh Weatherfoil Ltd v Somerfield Stores Ltd [2006] EWCA Civ 1732
Case C-159/02 Turner v Grovit [2004] ECR I-3565
UBS AG v HSH Nordbank AG [2009] EWCA Civ 585
UBS v Kommunale Wasserwerke Leipzig GmbH [2010] EWHC 2566 (Comm)
