Choosing which court or tribunal will decide any disagreement under a business contract
October 2015 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
When businesses negotiate contracts they usually focus – quite rightly – on the commercial terms. At the back of the contract or in separate conditions will be the boilerplate legal terms, often including a ‘jurisdiction clause’ stating where and how any dispute will be resolved. Disputes are usually the last thing businesses consider when they do a deal. As a result, these provisions are described by lawyers as ‘midnight clauses’.
However, in the event that a dispute arises, these clauses – or indeed their absence – suddenly come to prominence. A recent English High Court judgment is a reminder of the importance of jurisdiction clauses and the commercial risks faced by parties who omit to include them.
The dispute related to Indian Premier League cricket team the Deccan Chargers, based in Hyperabad. In 2008, British sports management executive Tim Wright was appointed as CEO of the team’s owner Deccan Chargers Sporting Ventures Limited. Mr Wright instructed a London law firm to prepare his contract with DCSV. It incorporated a severance guarantee whereby Mr Wright was to be paid £10m by DCSV’s Indian parent company if he was constructively dismissed.
In early 2009, Mr Wright was indeed constructively dismissed. He therefore claimed against DCSV and its parent under the guarantee. They refused to honour it, resulting in Mr Wright commencing legal proceedings. Unfortunately for Mr Wright, whilst the guarantee was stated to be subject to English law, it did not say which court would determine any dispute. As a result, DCSV and its parent challenged the English court’s jurisdiction to hear the dispute. That led to satellite litigation as to the correct jurisdiction.
Mr Wright won that and eventually, in July 2012, obtained judgment for over £10m. He then engaged in further legal proceedings to enforce the judgment in India. This did not succeed. DCSV and its parent have now lost their franchise and appear to be insolvent. The upshot of this is that Mr Wright incurred legal costs of over £1m, yet failed to recover any cash under the guarantee.
This has been recently reported because Mr Wright has now successfully claimed professional negligence against the law firm which drafted his contract for failing to include an exclusive jurisdiction clause stating that disputes should be determined in England. The judge in the negligence claim held that the delays caused by the jurisdictional objections resulted in Mr Wright wasting legal costs and losing the chance of successfully enforcing the judgment. Mr Wright was awarded damages of over £2m against his former lawyers.
Lessons learned and practical tips
The waste of three years and £1m on litigation, which could have been resolved much more quickly and cheaply had the defendants not been entitled to challenge the English court’s jurisdiction, is a salutary reminder that it is best to specify which court will determine a dispute. In the case of an Indian company employing an English executive it would appear obvious that it is important to specify the contract’s jurisdiction. Sometimes it is not so obvious, because a contract appears to relate purely to one country. However, as it is performed, parties may move to different countries or transfer their operations or assets. Being specific is therefore almost always safer.
Businesses should consider further drafting points. If a foreign entity is party to a contract conferring jurisdiction on the English court then, if the English party wishes to sue, it will be required formally to serve the proceedings on its counterparty. Absent specific provisions, the English party will have to apply for the English court for permission to serve the counterparty abroad and then follow the process for transmitting the legal proceedings, often via the counterparty’s own judicial authorities, for service. Within the EU this is straightforward. However, outside the EU that process can take months and sometimes years to complete. It is therefore preferable to pair an English jurisdiction clause with a term whereby the foreign party appoints an agent within England to accept service of legal proceedings, meaning it is not necessary to serve them abroad.
The enforcement of any judgment ultimately obtained is also an important consideration. Again thanks to EU legislation, this is straightforward within Europe. The UK also has reciprocal enforcement treaties with many Commonwealth states. However, other important countries including the US, Russia and China have no reciprocal enforcement arrangements with the UK. Further, in Russia and several other states there is real uncertainty as to whether a domestic court will enforce an English court judgment at all. This means that, unless the party has assets overseas, the court judgment will have no real value.
The best way to mitigate this risk is to have a bank guarantee in place covering any potential obligations. However, in terms of drafting, selecting an arbitration clause rather submitting disputes to court will be a relatively straightforward way to reduce the risk. Arbitral awards are enforceable in most countries worldwide under the New York Convention 1958 and the International Chamber of Commerce, London Court of International Arbitration and other arbitral institutions are well established international alternatives to court. Accordingly, for contracts with parties outside the EU, especially in the emerging markets, arbitration should always be considered.
None of these provisions require particularly complex legal drafting. They often are not commercially sensitive. Issues typically arise simply because, as in the case of Mr Wright, questions of jurisdiction are overlooked when a deal is done in favour of the commercial terms. However, litigation is a fact of business life and every deal should include an assessment of what will happen if the relationship sours and appropriate contractual protections to mitigate those risks.
Ned Beale is a partner and Cara Gillingham is an associate at Trowers & Hamlins LLP. Mr Beale can be contacted on +44 (0)20 7423 8357 or by email: email@example.com. Ms Gillingham can be contacted on +44 (0)20 7423 8619 or by email: firstname.lastname@example.org.
© Financier Worldwide
Ned Beale and Cara Gillingham
Trowers & Hamlins LLP