Dispute resolution clauses enable the parties to a contract to specify the forum for the resolution of any disputes arising from it. They are ubiquitous in commercial agreements and come in various forms. One of those forms is the unilateral jurisdiction clause which allows one party to choose the jurisdiction in which to bring an action while restricting the other party to a specified jurisdiction.
Such clauses (also known as ‘asymmetric’ or ‘option’ clauses) are increasingly common, especially in international financing agreements under which, typically, the lender will be free to choose between several jurisdictions in which to commence proceedings and the borrower will be confined to a single jurisdiction named in the agreement.
Clearly, this freedom confers a number of benefits on the lender. In particular, it is able to improve the chances that a judgment in its favour will be enforceable against the borrower’s assets e.g. by bringing an action in the jurisdiction where those assets are located. However, the decision of the French Supreme Court in Mme X v Rothschild (2012) created a good deal of uncertainty as to the validity of this type of clause.
In the EU, the rules governing the jurisdiction of courts in civil and commercial matters are set out in the Brussels Regulation. The basic principle is that jurisdiction falls to the EU country in which the defendant is domiciled. However, Article 23 provides that if at least one party to a contract is domiciled in the EU and both parties have agreed that the courts of a certain EU country are to have jurisdiction to resolve disputes between them, the agreement must be recognised and the specified court will have jurisdiction.
In the Rothschild case, Mrs X opened an account with Edmond de Rothschild, a private bank based in Luxembourg, through an intermediary in Paris. Subsequently, she alleged that there had been a significant decline in the performance of her investments and commenced proceedings in Paris claiming damages against both Rothschild and the intermediary.
The bank argued that the Paris court could not hear Mrs X’s claim, relying on a unilateral jurisdiction clause which stated that the courts of Luxembourg had exclusive jurisdiction to resolve any disputes, but that the bank reserved the right to bring an action in the client’s domicile or in any other competent court it chose. In rejecting the bank’s argument, the Supreme Court held that the entire jurisdiction clause (and not just the unilateral element of it) was void for being ‘potestative’ i.e. that it was conditional on an event that only the bank controlled and was, therefore, incompatible with the object of Article 23.
The Supreme Court’s reasoning has been widely criticised, not least for applying the French law concept of ‘potestativité’ to a contract governed by Luxembourg law. Accordingly, in Mauritius Commercial Bank v Hestia Holdings (2013), the English High Court has since confirmed that decision in Rothschild is unlikely to be followed in England; even so, it remains persuasive authority across the EU.
The uncertainty as to the enforceability of unilateral jurisdiction clauses under the Brussels Regulation will remain until such time as the issue is dealt with conclusively by the European Court of Justice. In the meantime, it will be advisable for lenders to consider whether alternative formulations will be more appropriate, particularly with respect to contracts with a French nexus.
For more information on such clauses, or on finance or other commercial agreements in general, please contact: Karl Taylor on 01392 687730 or by email at email@example.com.