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Jurisdiction Clauses - Agreeing where to Resolve Disputes

 

When negotiating agreements and licences with foreign organisations, an issue that often causes concern and uncertainty is the effect of accepting the other party’s jurisdiction and choice of law clauses. A US company or University, for example, will invariably prefer to resolve any dispute under US law in front of its local courts, while an English company would prefer to use the cheaper and somewhat closer English legal system. This can often become a last minute sticking point in negotiations that seems impossible to resolve.

 

Jurisdiction Clauses

 

People sometimes become confused between jurisdiction and choice of law clauses and agreements sometimes deal with one issue, but fail to deal with the other. A jurisdiction clause tells you which courts will hear any dispute between the parties about the terms of the agreement or its subject-matter.  Jurisdiction clauses are typically worded as follows:

 

"Each party agrees to submit to the exclusive jurisdiction of the [English] courts in relation to any claim or matter arising under this Agreement"

 

When negotiating a clause of this sort, it can be helpful to understand what the legal position would be if the clause were to be omitted altogether. In the absence of a jurisdiction clause, jurisdiction in the UK and the EU is principally governed by the Brussels Regulation which deals with commercial legal disputes and provides for the recognition and enforcement, by the courts of one state, of judgments given in the courts of another state.

 

The Brussels Regulation

 

The basic rule under the Regulation is that a defendant must be sued in the jurisdiction in which he is located. However, a person may, in another Brussels Regulation state, be sued "in matters relating to contract, in the courts for the place of performance of the obligation in question".  Essentially, the general rule for contract disputes is that the case will be heard in the country where the goods were to be delivered or where the services were to be provided.

 

For contracts concerning the transfer of registered intellectual property rights such as patents, the Regulation states that any dispute about the IPR itself (as opposed to, for example, the royalty payable for its use) must be heard by the courts of the country where those rights are registered or deposited. The Brussels Regulation is not, therefore, very helpful where a company has patents registered in several territories and licenses them as a bundle.

 

What happens if there is no clause?

 

As regards the rest of the world apart from Europe and, importantly, in the US, there are at present no multilateral international agreements on jurisdiction and enforcement of judgments to which the UK is a party.  The multilateral Hague Convention only governs the mechanics of how legal proceedings can be served.  Talks have been on-going since 1992 to develop a full treaty on jurisdiction and the enforcement of judgments, but there is little prospect of agreement being reached.

 

So, if you have no jurisdiction clause and the other party is not in a Brussels Regulation country, whether or not you can sue them in England is a matter of English law; and you may be able to persuade the court to hear the case.  Equally, and perhaps more worryingly, whether your US customer or licensee can sue you in the US, is a matter of the law of the US state where they bring the case. 

 

If you do not agree your jurisdiction in your agreement or licence, it’s not obvious where any legal proceedings may take place. This uncertainty only increases the legal costs of taking any action in relation to the agreement or licence. It may also give your opponent the chance to go “forum-shopping”; choosing a jurisdiction in which he is more likely to obtain a favourable decision, or which he knows you will find particularly inconvenient. A dispute between the Apple record company (founded by the Beatles) and Apple Computers Inc. a few years ago provides a good illustration of the problems and substantial legal costs that can be created where parties do not agree which jurisdiction and which law will govern an agreement. At the beginning of the case significant time and costs were incurred while the parties argued over where the dispute should be heard. Both the English and the Californian courts held that they had jurisdiction to hear the dispute. The judgment of Mr Justice Mann handed down in that case provides a good summary of why parties should agree provisions as to governing law and jurisdiction:

“The evidence before me showed that each of the parties was overtly adamant that it did not wish to accept the other’s jurisdiction or governing law, and could reach no agreement on any other jurisdiction and governing law. As a result, [the agreement] contains no governing law clause and no jurisdiction clause. In addition neither party wanted to give the other the advantage in terms of where the agreement was finalised. If their intention in doing so was to create obscurity and difficulty for lawyers to debate in future years, they have succeeded handsomely.”

Neutral or Alternative Jurisdictions

If you can’t agree, is picking a neutral territory a good idea? Both English law and the Brussels Regulation will usually allow an express jurisdiction clause to override all other factors that might determine jurisdiction. However, an express clause is not necessarily conclusive. The choice of forum should not be totally irrelevant to the contract and the parties, because some legal systems will allow a party to argue that its own jurisdiction is the more convenient place for the matter to be heard. In any event, choosing a jurisdiction where neither party is located, and which has a different legal system, can only add to the costs involved in resolving a dispute.

One alternative that is often agreed is a clause specifying alternative jurisdictions so that if A sues B it has to do so in the courts of the state in which B is located and if B sues A it has to do so in the courts of the state where A is located. 
 

Choice of Law

 

It does not automatically follow that if the courts of a particular country have jurisdiction, the law of that country applies to the substance of a dispute. This is also the position in an arbitration where the location of the arbitration has no bearing on which law will apply to the contract that is in dispute. The English courts are experienced at applying foreign law to disputes before them, but doing so increases the costs of litigation as expert evidence is required from lawyers qualified in the relevant jurisdiction.

Under English law and the Rome Regulation, the general rule is that a contract shall be governed by the law chosen by the parties. A typical clause is:

“This Agreement will be governed by and construed in accordance with English law.”

Where there is no choice of law clause, the governing law can be inferred from the circumstances under which the contract was formed, but the intention to choose that law must be “demonstrated with reasonable certainty”. For instance, the existence of a jurisdiction clause may imply the choice of the law of that jurisdiction as well. Equally, if the contract refers to specific provisions or statutes from a particular legal system, then that county’s law could be held to be the implied choice.

The Rome Regulation (that applies within the EU to contracts entered into on or after 17 December 2009) provides that if the applicable law has not been chosen by the parties, the contract is to be governed by the law of the country in which the person who is to effect the performance of the contract is located. 

 

Conclusion

 

People negotiating jurisdiction clauses often reach a stalemate; you insist on the English courts, they insist on their local courts. So how do you convince the other party in negotiations that the English courts should decide any dispute under English law? The following are factors you could rely on to convince the other party to agree that English jurisdiction should apply to the contract:

• the main services such as research or any manufacturing of products under the agreement will take place in the UK;
• the main funding or financial contribution under the agreement is from the party in the UK and so it would be more appropriate for the English courts to determine any claim for losses under the agreement;
• the main market for the sale of products or services produced under the agreement will be the UK or a state with a related or similar system of law (such as other states in EU);
• there are connected agreements with third parties such as licensors, subcontractors, suppliers or significant customers subject to UK law and jurisdiction;
•  the English courts are a quicker and cheaper way of resolving a dispute than in the courts of the other party and in English proceedings the successful party can recover its legal costs from the losing party;
• as a licensed distributor in the UK your activities and the patents or other intellectual property rights covering the technology being distributed are in the UK;
• as a licensor with a number of worldwide distributors/licensees appointed under the same terms it is not practical to have different courts determining those terms; or
• the agreement concerns mainly UK patents or other registered intellectual property rights and any questions of validity must be determined by the English courts.
  

 

Contact Details

If you would like further advice about any of the issues considered above please contact Paul Northwood on 01869 331753 or email him at paul.northwood@northwoodreid.com

 

Terms of Use

This article is not intended to be, and should not be taken as being, legal advice. The law often changes and it varies from jurisdiction to jurisdiction; the information in this article is generic in nature and specific legal advice should be taken before acting on any of it.

 

© Northwood Reid 2012. The use, copying and dissemination of this article are subject to our Terms of Use.