In any agreement with an international element, certainty as to which courts are to have jurisdiction in the event of a dispute, is a key issue for the parties to address at the contract drafting stage. Typically the issue is dealt with by including in the agreement a clause which confers exclusive jurisdiction on the courts of a particular country. However, recent case law developments have highlighted an important loophole that can enable parties to frustrate the operation of such a clause for tactical and other reasons.

The position under EC law

Where one or more of the parties is domiciled in an EC Member State, regard must be had to EC Regulation No 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments (the Regulation). Under Article 23 of the Regulation, where the parties have agreed that the courts of a Member State are to have jurisdiction to settle disputes, then those courts have exclusive jurisdiction.

However, Article 27 of the Regulation provides that, where proceedings involving the same cause of action are brought in the courts of different Member States, it is the courts of the country in which the proceedings are first brought which must decide whether they have jurisdiction. Until those courts have decided whether they have jurisdiction, the courts of any other Member State in which proceedings have also been brought must stay their proceedings.

The wording of Articles 23 and 27 therefore creates the potential for conflict.

Recent case law

In Erich Gasser GmbH v MISAT Srl (Case C-116/02), the ECJ held that the equivalent provision to Article 27 of the Regulation (Article 21 of the Brussels Convention) prevailed over an exclusive choice of jurisdiction made by the parties. As a result, the party that sued first was entitled to have any other proceedings stayed while the court before which it had commenced proceedings determined whether it had jurisdiction, even where the proceedings issued were in breach of an exclusive jurisdiction clause. The ECJ held that this principle applied even though the courts where proceedings were first brought might take an excessively long time to determine whether they had jurisdiction.

The justification of the ECJ for its decision in Gasser was that it was important to ensure that parallel proceedings in respect of the same cause of action did not take place before the courts of different Member States with the possibility that those proceedings might give rise to conflicting decisions.

The difficulties caused by Gasser are well illustrated by a recent decision of the Commercial Court in London. In JP Morgan Europe Ltd v Primacom AG and others [2005] EWHC 508, Primacom, a German company, issued proceedings in Germany, regarding (among other things) the enforceability of the interest provisions in a loan agreement, in breach of an exclusive jurisdiction clause in favour of the English courts. JP Morgan issued separate proceedings in the English courts seeking declarations as to the validity and enforceability of the interest provisions. The judge stayed the English proceedings holding that, as the proceedings were in respect of the same cause of action as the German proceedings, he had no option but to apply Article 27. As a result, the English proceedings could not go ahead until the German courts had determined whether they had jurisdiction. This was so in spite of evidence that Primacom had commenced proceedings in Germany primarily to frustrate JP Morgan and the other banks from exercising their contractual rights.

Practical impact

Given that the courts of Member States are meant to give effect to the parties’ choice of jurisdiction under Article 23, one might expect that any attempt by a party to use Article 27 to gain an advantage could be quickly overcome. However, the reality may be very different, in particular:

(a) Delay: There may be significant delay while the courts where proceedings have been first commenced decide whether they have jurisdiction. What is relevant here is not just the time that it takes the first instance court to come to a decision but whether there is a right of appeal and, if so, the time frame for such an appeal. In Spain, for example, it can take three or more years from the issue of a claim to the completion of the appeal process.

(b) Costs: The legal costs that a party may incur in contesting jurisdiction may well be considerable and difficult to recover.

(c) Uncertainty: Whilst the courts of Member States should give effect to the choice of jurisdiction clause, there is always the possibility that the party in breach will argue that the requirements of local law mean that the relevant agreement, including the jurisdiction clause, should not be enforced (this happened in JP Morgan). Until the particular court has given its judgment, the outcome may be uncertain.

Options available

To avoid the problem arising, the obvious course of action where a dispute is looming is for a party to issue proceedings in the agreed jurisdiction before the other party has time to issue its own domestic or other proceedings. If appropriate, a stay of the proceedings can then be put in place while the parties try to resolve their dispute through negotiation.

Where a party has been caught by the problem, it can either fight on the jurisdiction issue or resign itself to losing the benefit of the exclusive jurisdiction clause and pursue the proceedings (including any counterclaims that it may have) in the courts where proceedings were first issued. Neither is likely to be an attractive option as the former will involve accepting a potentially lengthy period of delay and the latter will mean the party accepting a judicial system which, in all likelihood, it has previously rejected as unfamiliar and/or because it is perceived to favour the other party.

Where proceedings have been brought in breach of a jurisdiction clause another option which will need to be considered by the party not in breach is whether it has claims which, although arising out of the same background facts, do not involve the same cause of action and, as a result, do not fall within the mandatory stay provisions under Article 27. If such claims exist then the court with exclusive jurisdiction has discretion on whether or not to hear them. In addition, in an appropriate case, the court with exclusive jurisdiction can order interim protective measures to preserve the status quo pending resolution of the jurisdiction dispute. In JP Morgan although the English court stayed proceedings which involved the same cause of action that was before the German courts, it allowed the claimants to pursue related proceedings. It also granted an interim injunction restraining Primacom from disposing of certain assets.

The need for reform?

While it is desirable to have certainty as to which courts have jurisdiction where there are parallel proceedings in different countries, that certainty should be achieved by the parties’ choice of jurisdiction rather than the date when proceedings were first commenced. Parties involved in international trade and finance are entitled to be certain, when they enter into an agreement, where their disputes will be resolved. If the loophole created by Article 27 of the Regulation becomes widely exploited, there must be strong arguments for changing the law.

This article is an edited version of Jeremy Sharman’s article published by PLC Cross-border.

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