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Unilateral jurisdiction clauses: weighing the risks

Having the benefit of a unilateral jurisdiction clause is, on the face of it, a good thing for your client.

The benefits of a unilateral jurisdiction clause

In its simplest form, such a clause requires the other party to bring proceedings in one country only – usually where your client is based – while your client has a choice of where to sue. So if your client is an English company, a typical clause will give exclusive jurisdiction to the English court in any proceedings commenced by the other party. Your client, on the other hand, will be permitted to bring proceedings in England, or in any other country which has jurisdiction under its own jurisdiction rules, so it can pick where to sue at the time the dispute arises.

As an English company, your client will usually choose to sue in England. England is likely to be the most convenient place for reasons such as location of documents and witnesses and familiarity with court processes. The contract will also, in most cases, be governed by English law and the English court is best placed to apply that law.

If, however, the defendant’s assets are in another country at the time the dispute arises and it will be difficult to enforce an English judgment there, proceedings can be commenced in another country. The unilateral clause therefore provides flexibility and prevents a problem arising because a defendant has moved its assets. So, in theory, it’s all good news for your client.

Differences in practice

Unfortunately, it’s not that simple in practice. Decisions in a number of countries, including France, Russia and China, have cast doubt on the effectiveness of at least some types of unilateral clause. So, do you go for one of these clauses or not?

You have to weigh the benefits and the risks. A good starting point, I would suggest, is: “If there were no jurisdiction clause, which country or countries would be likely to have jurisdiction under their own jurisdiction rules?”

This is because the main concern with a unilateral jurisdiction clause is that the other party will commence proceedings in a country which will not consider the clause to be valid, and will therefore take jurisdiction over the case regardless of the clause. It will only be able to do that, however, if it would otherwise have jurisdiction over the dispute.

Identifying the likely jurisdiction

So, consider where the parties are based, where the contract is to be performed, where the negotiations have taken place (or will take place) and where any tortious acts are likely to happen and damage be suffered. These are all possible connecting factors which a court might consider to justify it in taking jurisdiction. In the context of the Recast Brussels Regulation for example, jurisdiction is given to the courts of the defendant’s domicile as well as (in a breach of contract claim) the place of performance of the obligation in question and (in a tort claim) both the place where the tortious acts were committed and where the (direct) damage was suffered.

Having identified those jurisdictions (or as many as you can), check what their stance is in relation to unilateral clauses. The English courts have no problem with such clauses (see Mauritius Commercial Bank Ltd v Hestia Holdings Ltd). The same is generally true in Germany. The same cannot be said for France.

The position in France, Russia and China

It seems clear that a clause which gives the beneficiary of the clause an unlimited choice, subject only to a country’s own jurisdiction rules, will not be considered valid in France (Rothschild and Credit Suisse). The most recent decision (Apple) suggests that a unilateral clause will be upheld where it is possible to identify objectively which courts might have jurisdiction in the case of a dispute (so the clause in that case was upheld, as proceedings could only be brought where the other party had its registered office or where any loss caused by the other party was suffered). Given, however, the differing reasoning adopted by the French Supreme Court in each case, it is by no means certain that such clauses will always be effective, so caution is required. The stance the CJEU might take is also unclear, although most commentators think it unlikely it would follow the approach taken in France.

Outside of the EU, Russia and China are two significant jurisdictions known to have a problem with unilateral clauses. Although, in the case of Russia, it seems the clause may not be struck down in its entirety – the court may instead give reciprocal rights to the parties. There are other jurisdictions where the position is unclear or untested.

Dealing with potential problems

Where you have identified that there is (or may be) a problem with a unilateral clause, consider whether the same concerns are likely to arise with a unilateral option to arbitrate, that is where there is a mutually binding exclusive jurisdiction clause, save that your client has the option to commence arbitration instead. There is a suggestion, for example, that the French courts would not strike down such a clause.

If there is a potential problem with a unilateral clause in one or more of the countries which are connected with the contract, the next consideration logically is whether proceedings in that country would cause the client significant concerns. So, say the French court does not uphold the unilateral clause and proceedings therefore continue in France, would that be a major concern for the client?

Also to be weighed in the balance is the likelihood of the other party moving its assets. If this is unlikely, then exclusive jurisdiction applicable to both parties (or an arbitration clause) may be the simplest and safest solution.

Finally, give some thought to whether there are likely to be any problems enforcing a judgment (or arbitration award) where the defendant’s assets are located (either currently or where the defendant may move its assets in future). For example, consider whether the country where you would need to enforce a judgment is likely to take objection to it on the basis that it was obtained from a court or tribunal which had jurisdiction stemming from a unilateral clause. This is unlikely to be a problem where the defendant has taken part in the proceedings, but may be an issue if judgment has gone by default.

So, is it worth the risk of having a unilateral clause? It all depends: the risk is not the same in every contract, and nor are the benefits. Identifying connected countries and their likely approach to the clause is, however, the best starting point for the analysis.

Herbert Smith Freehills Anna Pertoldi

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