Dispute resolution clauses that give one party the right to choose where disputes will be resolved are not uncommon, particularly in finance agreements. For example, an agreement may provide that the courts of a particular country have exclusive jurisdiction, but one of the parties, such as the lender, can opt to bring proceedings in another jurisdiction, and/or refer the dispute to arbitration instead. Alternatively, an agreement may provide that both parties can refer a dispute to arbitration but the lender has the unilateral option of going to court.
The above are examples of "unilateral jurisdiction" clauses, the use of which has grown in recent years. The primary advantage of unilateral options is that they offer flexibility. However they also give rise to potentially substantial pitfalls and careful consideration should be given to the question of precisely how and when such options may be exercised. Peter Godwin, Dominic Roughton and David Gilmore provide their observations and also identify the effectiveness of the unilateral jurisdiction clause.
Potential Legal Pitfalls
In principle, unilateral options are enforceable in England. This is based on the policy consideration that parties should be free to agree the manner in which the disputes arising between them are to be resolved. However, such clauses may not be effective in all jurisdictions.
The most recent, and significant decision, is that of the French Supreme Court case of Ms X v Banque Privée Edmond de Rothschild,1 a bank customer commenced proceedings in France against a Luxembourg bank and the French financial institution through which she had opened her account. The Luxembourg bank challenged the jurisdiction of the French court, relying on the terms of the contract with the customer, which provided that:
1. any dispute between the client and the bank was subject to the exclusive jurisdiction of the courts of Luxembourg; and
2. the bank reserved the right to act before the courts of the client’s domicile or any other competent court, if it chose not to submit to the jurisdiction of the courts of Luxembourg.
The Supreme Court held that the entire clause was invalid on the grounds that the discretion given to the bank contravened the Brussels Regulation2 on jurisdiction because of its "potestative" nature. Under French law, a term is "potestative" if performance is subject to, or dependent upon, an event which one of the contracting parties has the power to bring about or prevent; such clauses are void for lack of mutuality of obligation.
This decision caused surprise and consternation as previous decisions at the appeal court level in France had not arrived at the same conclusion. Banks and other institutions which commonly use such jurisdictions clauses are being forced to rethink their dispute resolution clauses, particularly where there is a connection to France.
Different Approaches in Different Jurisdictions
Another type of unilateral option commonly encountered is one whereby the parties to an agreement have agreed to arbitrate but one of the parties, usually the lender, has the right to bring proceedings in the courts of a jurisdiction of its choice, usually where the debtor's assets are located. The reverse is also possible, whereby both parties have agreed to litigate but one party has the right to refer the dispute to arbitration instead. We set out below a snapshot of the validity of such unilateral options in certain jurisdictions of interest.
| England | Such clauses have been upheld by English courts as valid, whether as options to arbitrate or to litigate.3 |
| Japan | There is no case law directly on point. However, given the general principle of Japanese law that party autonomy is generally upheld, unilateral options could potentially be recognised as valid provided the parties' intention is clearly recorded. |
| China | A Chinese court is unlikely to uphold a unilateral option (whether to arbitrate or to litigate) on the basis that the clause may be deemed unfair and unconscionable.4 |
| India | Different regional High Courts have made conflicting decisions on this issue, and there has not yet been a Supreme Court decision to settle the point. For instance, the Delhi High Court5 found that unilateral option to arbitrate was not valid until the point at which the party exercised its option to arbitrate. This is because until then there was a lack of 'mutuality', which was a pre-requisite for a valid arbitration agreement. However, the Calcutta High Court6 held that an arbitration clause, even if unilateral, was valid because the agreed terms in the contract recorded the advance consent by one party that the dispute would be submitted to arbitration at the option of the other party alone. |
| Russia | The Supreme Arbitrazh7 court held that a dispute resolution clause providing only one of the parties with an option to initiate court litigation while restricting the other party to arbitration only violated one of the basic principles of Russian law: each party must have equal access to justice. However, rather than invalidating the entire clause, the effect of the ruling in this case was to convert the unilateral option into a bilateral option (despite the express wording to the contrary), such that either party could choose to bring the dispute before the courts. |
Comments
The consequences of the pitfalls identified above can be severe. If, for example, an option to arbitrate is deemed invalid or unenforceable at an early stage, the party holding the option might be compelled to pursue its rights through the courts instead, possibly leading to a judgment which cannot be easily enforced in the jurisdiction where the assets are located. On the other hand, if the option to arbitrate is challenged only at a later stage, for example when a party is seeking to enforce its arbitral award, that award could be considered invalid and unenforceable, thereby rendering the entire proceedings futile.
Before including any type of unilateral jurisdiction clause, parties may wish to obtain local law advice on how such a clause would be viewed in countries likely to have jurisdiction over a dispute (whether under the terms of, or absent the clause) and in countries where any judgment or award may need to be enforced. It is also advisable to consider what would happen if the clause was found to be invalid, either in whole or in part. When in doubt, "arbitration only" clauses may be a more sensible approach.
1 French Cour de Cassation (Cass Civ. 1ere, 26 September 2012).
2 Article 23 of the Brussels Regulation (Council Regulation (EC) No 44/2001).
3 NB Three Shipping Ltd v Harebell Shipping Ltd All ER (D) 152 (Oct) 2004; and Law Debenture Trust Corp v Elektrim Finance BV All ER (D) 08 (Jul) 2005.
4 Although there is very little case law on this point, we note that Article 16 of the Arbitration Law of the PRC (1994) requires that an arbitration clause should constitute a clear and unambiguous agreement by all parties to arbitrate in case disputes arise.
5 Union of India v Bharat Engineering Corporation, ILR 1977 Delhi 57.
6 New India Assurance v Central Bank of India, AIR 1985 Cal 76.
7 Sony Ericsson Mobile Communications Rus v. Russkaya Telefonnaya Kompaniya, No. VAS-1831/12.
Key contacts
Simon Chapman KC
Managing Partner, Dispute Resolution and Global Co-Head – International Arbitration, Hong Kong
Kathryn Sanger
Partner, Head of China and Japan, Dispute Resolution, Co-Head of Private Capital, Asia, Hong Kong
Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.