Thursday, November 5, 2015

Guest Post: The Hague Convention and the Need to Reconsider Arbitration Clauses

(The following guest post is contributed by Kartikey Mahajan, who is a dispute resolution lawyer with the Singapore office of Clifford Chance)


The Convention on Choice of Court Agreements was completed on June 30, 2005 (“Hague Convention”), and came into effect on 1 October 2015. Currently, Mexico and EU have acceded to it, while United States and Singapore have signed the Convention. The Convention essentially lays down uniform rules conferring jurisdiction on the court designated by the parties to a cross-border dispute in civil and commercial matters, and determines the conditions upon which a judgment rendered by the designated court of a contracting State shall be recognised and enforced in all other contracting States.

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) is the prime reason due to which arbitration has been preferred over litigation over the last six decades. Due to the New York Convention, arbitral awards are recognized and enforced amongst the member states, making it one of the most successful treaties in the world of commercial transactions with 154 countries as parties to it. The Hague Convention is touted by many as an instrument to replicate the success of New York Convention in the area of foreign court judgments. With the Hague Convention coming into force, it can be safely assumed that even if it eventually fails to emulate the success of New York Convention, it does provide a good alternative to parties who view arbitration with scepticism. However, it will take a long time to assess whether the Hague Convention can actually achieve that goal.

In this piece, I highlight the salient features of the Hague Convention to explain the options available under it to Indian parties and lawyers engaged in cross-border litigation.

A. Application and Scope of Convention

The Convention is applicable when parties agree on an exclusive choice of forum clause in international civil and commercial matters only. The Convention excludes certain specific areas from its scope, inter-alia consumer contracts, contracts of employment, various family law matters, rights in rem in immovable property, IPR claims, antitrust claims, maritime claims, and other miscellaneous group of claims ranging from liability for nuclear damage to the validity of entries in public registers.[1] Being applicable to international disputes only, the Hague Convention does not apply when the parties are resident in the same contracting State and have all the elements relevant to the dispute in the same contracting State.[2]

The Convention is not applicable to non-exclusive choice of a judicial forum i.e. when the parties do not confer jurisdiction only on a single judicial forum. Under the Convention, all choice of court agreements that match the required form are considered exclusive unless “expressly provided” i.e. declared non-exclusive by the parties.[3] Illustratively, it seems that a clause shall be deemed exclusive if it simply provides that: ‘‘Proceedings under this contract shall be brought before the courts of State A.” An example of a non-exclusive choice of court clause can be "Non-exclusive proceedings under this contract may be brought before courts of State A".

The choice of court clause needs to be in writing or by any other means of communication, which renders information accessible so as to be usable for subsequent reference.[4] These are the only requirements which need to be satisfied and ‘‘no further requirements of a formal nature may be imposed.’’ Thus, a court under the scope of the Convention cannot refuse to give effect to a choice of court agreement where it fails to comply with separate ‘‘territorial’’ form requirements that may be prevalent in another country. This can help standardize the forum selection language used in international commercial contracts.
B. The doctrine of separability of litigation

One of the prime reasons that helped arbitration grow as a preferred dispute resolution mechanism was the development of doctrine of separability which treats arbitration agreement as an agreement independent from the main contract. This ensures that arbitration agreements are not routinely contested on grounds of invalidity of the main contract. The Hague Convention provides a similar rule to choice of forum clauses in Article 3(d) that the choice of forum clause “shall be treated as an agreement independent of the other terms of the contract,” and that the “validity of the exclusive choice of court agreement cannot be contested solely on the ground that the contract is not valid'.

The recognition of an equivalent of separabaility doctrine in the litigation context will certainly help preserve the choice of court agreements from futile challenges and ensure that only the chosen court adjudicates any disputes with respect to them.

C. The Chosen Court is bound to hear the case
A court chosen by the parties under an exclusive choice of court agreement is required to hear that case when proceedings are brought before it. It ‘‘shall not decline to exercise jurisdiction on the ground that the dispute should be decided in a court of another State,’’[5] and it is barred from refusing to hear the case on grounds of forum non conveniens and lis pendens. The latter exclusion in particular is intended to prevent a race to the courthouse in which litigants sue in non-selected courts first to prevent the competent court from hearing the case later, a tactic which often significantly delays litigation.
Notwithstanding the above, the chosen court may decline to hear the case if it finds that the choice of court agreement is null and void under its own law for reasons other than form. Enforceability will therefore depend on contract law under the substantive law of the chosen court, taking into account its choice of law rules (including with respect to any choice of law provision within the agreement), with grounds for invalidity including such claims as fraud, mistake, misrepresentation, duress, or lack of capacity.[6] Moreover, the Convention does not affect domestic rules on subject matter jurisdiction, which also remain an appropriate ground on which a chosen court may refuse to hear a case.[7]
D. Other Courts are Not Permitted to Hear the Case
Where a valid choice of court agreement identifies a specific court as the forum for dispute resolution, any other court in a state that is party to the Convention must suspend or dismiss any proceedings brought before it. The Convention provides for grounds on which a court may refuse to dismiss or suspend proceedings before it. Such grounds include violation of public policy, lack of party capacity, manifest injustice, or the chosen court has declined to hear the case.[8]

E. Recognition and Enforceability in Member States
Judgments rendered by a chosen court will generally be recognized and enforced in all other member states, with no review of the merits permitted and binding effect granted to the findings of fact in cases other than default judgments.[9] This is akin to the recognition and enforcement of arbitral awards under the New York Convention.  

Conclusion
When the Hague Convention becomes effective in a significant number of States, choice of court clauses will be more easily enforced, and court judgments will be more readily recognized in other States. It will also most likely lead to uniformity in choice of court clauses across the board much like what has happened in the case of arbitration clauses.
Another interesting development along the lines is the setting up of commercial courts in countries like Singapore. India, last week, has also promulgated an ordinance to set up its own set of commercial courts. While the Hague Convention will provide the ease of enforcing judgments like NYC, the commercial courts will ensure that people with expertise will only hear those disputes. And to give arbitration a real run for its ‘money’, the Hague Convention intends to save ‘money’ by obviating the need to hire expensive arbitrators. In India, where arbitration has essentially become another tier of the dispute resolution process, the Hague Convention coupled with the possibility of resolving disputes in commercial courts presents an alternative to Indian courts and the challenges of Indian arbitration system altogether.
If India decides to ratify the Hague Convention, one hopes it can only be hoped that the Indian courts who have started on a pro-arbitration trend post-Balco in arbitrations, will similarly refrain from interfering with the enforcement of judgments of foreign courts. Although, it may take passage of some time for India to ratify the Hague Convention and adopt enabling legislation for Indian parties to start relying on it as a viable alternative to arbitration, this alternative certainly presents Indian parties engaged in cross border disputes to weigh their dispute resolution mechanism options instead of blindly choosing arbitration as the default mechanism.


[1] Article 2 of the Hague Convention.
[2] Article 1(2) of the Hague Convention.
[3] Article 3(b) of the Hague Convention.
[4] Article 3(c) of the Hague Convention.
[5] Article 5.2 of the Hague Convention.
[6] Trevor Hartley & Masato Dogauchi, Explanatory Report on the Convention of June 30, 2005, at 43 (Permanent Bureau of the Conference ed., 2007), available at http://www.hcch.net/upload/expl37e.pdf (last visited at 26 October, 2015)
[7] Article 5.3 of the Hague Convention.
[8] Article 6 of the Hague Convention.
[9] Article 8(1)- (2) of the Hague Convention.

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