Unilateral Jurisdiction Clauses

Akhil Raina*

Even though they come in various shapes and sizes, the essence of unilateral jurisdiction clauses continues to remain the same. It confers a unilateral or one-sided option to only one party as to which forum would decide the dispute. It is often adopted when one party has a superior bargaining position and can therefore insist on having a choice of forum, while limiting the options available to the counterparty.[i] The spectrum of choice may spread over several national courts, or can be a toss-up between arbitration and national courts.  Learned author Gary B. Born has observed that such clauses have frequently led to arguments based upon the doctrine of unconscionability, but that a ‘decisive majority’ of recent decisions have upheld the substantive validity of asymmetric clauses.[ii]
The effectiveness of such clauses must be adjudged on the anvil of three fundamentals of dispute resolution clauses:

  1. To avoid delay ( and additional expenses) in resolution due to a debate regarding where the dispute will be heard and decided
  2. To avoid a forum which one of the parties considers unacceptable and unfavorable. For example, on the ground that the courts of the jurisdiction in question are slow or perceived to be partial to the counterparty.
  3. To help in smooth passage of the judgment by providing an enforceable instrument that will enable effective recourse against assets in the relevant jurisdiction.[iii]

The key advantage of such clauses is that, since the election is made after the nature of dispute is known; it empowers the parties to choose the forum which will best assist them. However, the differing attitudes regarding its validity in several jurisdictions mean that the theoretical flexibility is frustrated by real-world uncertainty.
Their popularity can be attributed to the fact that they allow the party in whose favor they operate, to exercise flexibility on jurisdiction. The main proponents (and eventual beneficiaries) of this provision are financial institutions like banks. This is because they carry the primary risk of commercial exposure under the contract. Contrast this with the situation in Germany where the courts have held that unilateral jurisdiction clauses in certain kinds of contracts, such as standard form contracts, are invalid.[iv]

The 2012 French Cour de Cassation judgment in the Rothschild case highlights the danger to unilateral jurisdiction clauses.[v] Here the court was asked to decide on the question of validity of a UJC which mandated that one parties must bring the dispute to a particular court, whereas the other was free to opt for “any other court of competent jurisdiction”. The Court found the clause invalid on grounds of unconscionability. Copious amounts of criticism were directed towards this decision, especially because the court gave only brief reasons for this surprising decision which appears to be based on the French Civil Code concept of “potestivité”.

Nonetheless, the case sparked off a trend with Bulgarian and Russian[vi] courts following suit. In the Sony Ericsson case, the Supreme Arbitrazh (Commercial) Court of Russian Federation held that the party that was restricted to recourse to arbitration only, should also have the right to refer the matter to the courts.[vii] This was a substantial departure from earlier cases like the Red Burn[viii] which upheld the validity of the UJC claiming that the party bearing the risk should have greater flexibility when it came to dispute resolution. Granting the power of choice to the party carrying greater risk seems to make commercial sense.[ix] This change in legal understanding has several consequences- as to whether there is a risk only to unilateral jurisdiction clause or even to unilateral jurisdiction.
It is interesting to note that which many jurisdictions like Romania and Poland are refusing to recognize their validity, English law seems to be going in the diametrically opposite direction.  The tendency of English courts to place reliance on the parties’ agreement as to the dispute resolution term is well known. The case of Law Debenture Trust Corporation plc v Elektrim Finance BV[x] confirmed the validity of a unilateral option to litigate. In this case, the Trust Deed underpinning the dispute provided for a dual dispute resolution regime which entitled each party to enforce the arbitration provision against the other, but only gave the claimant and the bondholders the right to refer disputes to the English courts (that is, a unilateral option to litigate).[xi]
In such a scenario, doubt and uncertainty continues to loop over the scope of arbitration, hindering complex disputes from getting resolved. Strong lobby-organizations like banks would look to push towards a system increasingly focused on the supremacy of party autonomy. In any case, it would be interesting to observe if the headstrong West bows to a rising tide from the rest of the world.

* VI Semester, III Year Student; B.Sc; LL.B (Hons.), National Law University, Jodhpur

[ii] G Born, International Commercial Arbitration, 3rd Edition (2009), Volume 1, p732-736.

[iii] For extensive debate on its effectiveness, see: http://uk.practicallaw.com/7-535-3743

[iv] See, for instance, Judgment of 26 January 1989, 1989 NJW 1477, 1477 (German Bundesgerichtshof)

[v] Judgment of 26 September 2012, X v Banque Privée Edmond de Rothschild Europe, Cass. Civ. (1ère) (French Cour de cassation)

[vi] CJSC Russian Telephone Company v. Sony Ericsson Mobile Communications Rus LLC (No A40-49223/11-112-401 1st Ruling: May 2012, 2nd Ruling: 19 June 2012), on the basis of violation of procedural equality

[vii] Ibid

[viii] Red Burn Capital v. ZAO Factoring Company (Case no A40-59745/09-63-478)

[x] Law Debenture Trust Corporation plc v Elektrim Finance BV and others [2005] EWHC 1412

[xi] More recently, Mauritius Commercial Bank v Hestia Holdings Limited and another [2013] EWHC 1328 (Comm)


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