Any well-advised party to a commercial contract will invariably negotiate and expressly include a jurisdiction clause in their agreements. Jurisdiction clauses are not a mere formality in the negotiation process but are integral to ensuring the minimisation of uncertainty and the loss of time and costs in the event of a dispute between the parties.
Jurisdiction clauses can also be strategic tools by which parties can avoid the submission of their disputes to courts in unfavourable jurisdictions. Too often, parties consider the implications of such clauses only when they find that they are suddenly litigating a dispute in a court they would not have chosen and under a law whose principles are unfamiliar to them.
In the past, jurisdiction clauses were considered such powerful and strategic litigation tools that they were often abused. Prior to the reform of the European Union’s (EU) private law instruments, unscrupulous parties would tactically deploy the “Italian Torpedo”: they would file actions in Italy, where the courts are famously slow, in breach of a previously existing valid jurisdiction clause in their contracts. When the wronged party attempted to bring an action in the agreed-upon court, the action would mandatorily stay until the Italian courts came to a determination on jurisdiction. The resulting delay, which was often significant, was inevitably unfair to the wronged party but helped the unscrupulous party strategically buy time.
What is a Jurisdiction Clause?
While the law has moved on since the time of the Italian Torpedo, jurisdiction continues to be an all-important issue to which much consideration should be devoted during the negotiation process. Simply put, jurisdiction refers to the competence of a court to resolve a dispute.
A jurisdiction clause is a type of dispute resolution clause that allows the parties to a contract to select the particular court in which they wish to determine contractual disputes that may arise during the course of their agreement. Jurisdiction clauses also serve to prevent one party from filing an action against the other in a jurisdiction that is not set out in the contract between them.
Jurisdiction clauses must be expressly included in contracts. It is not enough to include only a governing law clause, which determines only the applicable law that will govern the contract and does not serve to identify the courts which will handle any disputes arising out of the contract.
The most obvious benefit of the inclusion of a jurisdiction clause is to eliminate uncertainty and, in some cases, to ensure that the jurisdiction in which a dispute is to be litigated is favourable to the parties involved. For example, many parties submit their disputes to the exclusive jurisdiction of England and Wales, which is known for its efficient judicial system, its expertise in civil and commercial matters and for the ability of its courts to grant interim remedies.
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Why Your Contracts Should Include Jurisdiction Clauses
The jurisdiction issue has assumed greater significance since the United Kingdom’s (UK) application to join the Lugano Convention was denied by the European Commission in 2021. The Lugano Convention allows for the automatic recognition of judgments by both the European Free Trade Association and EU countries. This means that litigants in a country that is a party to the Lugano Convention can be certain that a judgment obtained in that country's courts will be automatically recognised and enforced in the others.
The rejection of the UK’s application means that parties (particularly those with commercial operations in EU member states) must not neglect to include jurisdiction clauses in their contracts. The use of an exclusive jurisdiction clause ensures enforcement under the Hague Convention (to which the UK is a party in its own right), offsetting some of the enforcement challenges that have accompanied Brexit.
Parties may not enter into a commercial agreement with the thought of litigation or even relationship breakdown in mind. Cases involving cross-border trade may also present a challenge during the negotiation process, as each party may wish to impose the choice of their respective home courts on the other, thus stalling negotiations. In some well-documented cases where parties reached this deadlock, they sometimes chose to omit a jurisdiction clause from their contracts altogether, at their inevitable cost.
Failure to include a jurisdiction clause can introduce time-consuming and expensive difficulties during the litigation process, especially, as is invariably the case, where parties do not even consider jurisdiction until after a relationship breaks down.
In the absence of a valid and well-drafted jurisdiction clause, costly disputes (governed by complicated rules of private international law) take place as to which court should exercise jurisdiction, delaying the resolution of the dispute at hand and draining the parties’ time and resources.
Drafting a Jurisdiction Clause: factors to consider
In addition to minimising the risk of unnecessarily drawn-out litigation, choosing a jurisdiction clause can also confer considerable strategic advantages on the parties. For example, just as the clause can allow the parties to choose to litigate in a favourable court (e.g. a specialist court), by the same token, it can allow the parties to avoid the jurisdiction of certain courts (e.g. courts where the parties have no assets against which to enforce a judgment).
Careful consideration should be given to the parties choice of jurisdiction. Particularly important issues that must be considered include convenience (where are the parties and most of the potential witnesses based?), ease of enforcement (where are the defendant's assets located?), the language of the courts, procedural issues (e.g. disclosure requirements), the availability of specialist courts and the speed of the litigation process.
What are the different types of Jurisdiction Clauses?
Parties should also consider the different types of jurisdiction clauses. Exclusive jurisdiction clauses allow parties to submit to the exclusive jurisdiction of a particular court. This offers parties the greatest certainty and ensures that the parties will be sure, throughout the duration of the contract, exactly where they will litigate.
Non-exclusive jurisdiction clauses provide the flexibility that exclusive jurisdiction clauses cannot. They allow parties to agree that while a dispute may be resolved in the jurisdiction set out in the clause agreed between them, either party may later choose to refer the dispute to a jurisdiction other than the one previously agreed. Non-exclusive jurisdiction clauses are particularly useful where a dispute arises long after the contract is concluded and the parties find that there is a more appropriate jurisdiction in which to litigate.
The inclusion of a jurisdiction clause ensures that, if and when a dispute arises, parties can focus their time and resources on resolving the dispute at hand, rather than expending time, effort and money towards first determining jurisdiction. It also ensures (particularly where coupled with governing law clauses) that litigants will be sure of where and how their disputes will be resolved.
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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.