Hybrid jurisdiction clauses
This article assesses the impact of a series of French Supreme Court decisions on hybrid jurisdiction clauses: Mme X v Rothschild (2012),1 ICH v Credit Suisse (2015)2 and eBizcuss v Apple Sales International (2015)3 and considers whether, as a result of these decisions and other legal developments, such clauses will be perceived as too risky and simplified exclusive jurisdiction clauses will increasingly become the norm in finance contracts.4
For over a decade, hybrid jurisdiction clauses (also known as asymmetric or unilateral clauses) have been ubiquitous in international finance contracts in the London markets, and beyond. It is perhaps easy to understand why. By these clauses a borrower may initiate proceedings only in the chosen court. In English law governed finance documents, borrowers are usually directed to the English courts. At the same time, recognising finance parties’ exposure under such contracts, these clauses offer lenders flexibility by providing them with a choice as to whether to sue a borrower in the chosen court or, under a standard formulation, “in any other court of competent jurisdiction”.5 This structure provides comfort to finance parties that they will not be dragged before an unfamiliar or unfavourable court by a disgruntled borrower and allows finance parties to defer a decision as to forum until a dispute arises, when they may be better informed as to a borrower’s financial status and asset profile.
The English judiciary have noted their utility. Mr Justice Blair recently remarked upon the “good practical reasons” for the inclusion of such clauses in financing transactions6 and, in 2013, Mr Justice Popplewell7 quoted (with approval) Professor Fentiman’s defence of these clauses:8 “they ensure that creditors can always litigate in a debtor’s home court, or where its assets are located. They also contribute to the readiness of banks to provide finance, and reduce the cost of such finance to debtors, by minimising the risk that a debtor’s obligations will be unenforceable.” However, there remains unwelcome uncertainty across Europe as to the validity of such widely used jurisdiction clauses. It is a matter of note that, over the last three years, a senior and influential court of an EU Member State, the French Supreme Court, has found certain hybrid jurisdiction clauses in commercial contracts invalid not once, but twice. Significantly, it has done so by reference to EU laws (the Brussels Regulation9 and the Lugano Convention10 ) which bind all Member States, including the UK. French Supreme Court decisions are not binding on the English courts (or the courts of other Member States) and other Member State courts (in Luxembourg, Germany and Italy) are understood to have reached the contrary position to the French Supreme Court. Nevertheless the decisions are unsettling. The reformed (Recast) Brussels Regulation11 which takes effect from January 2015 sadly does not address this issue (although it does promote the principles of legal certainty and the importance of party autonomy in commercial contracts).
As discussed further below, in two French Supreme Court decisions the hybrid jurisdiction clauses under scrutiny were struck down in their entirety (there was no severance of the “one way” section). If a jurisdiction clause is found to be void, finance parties face unwelcome uncertainty over where they could sue and be sued. Banks may face the prospect of being sued by a borrower in an unfamiliar jurisdiction or having to pursue a borrower in the borrower’s local courts under default EU jurisdictional rules which (broadly) require a claimant to sue in the defendant’s place of domicile (although this rule is subject to a series of exceptions).12 Given the fragmented position across Europe and the continuing lack of CJEU authority, the inclusion of hybrid jurisdiction clauses in international transactions should not be a matter of routine, but merit closer analysis.
The French Supreme Court decisions
In 2012, in the case of Mme X v Rothschild, the French Supreme Court considered a hybrid clause contained in a Luxembourg law governed contract entered into between a bank and Mme X (a French national resident in Spain). The clause provided for disputes to be resolved exclusively in the Luxembourg courts, but allowed the bank to bring proceedings before any other court of competent jurisdiction. Mme X sued the bank in France, in breach of the jurisdiction clause. The French Supreme Court ruled that the jurisdiction clause was void in its entirety as it entailed obligations conditional on an event that only one party controlled, a so-called clause potestative (ie it was entirely within the control of the bank where the litigation took place), and that this was contrary to the object and purpose of Article 23 of the Brussels Regulation.13 In other words, the French Supreme Court appeared to have interpreted EU law by applying the concept of potestativité taken from the French Civil Code. There was no reference made to the CJEU.
In March 2015, in the case of ICH v Credit Suisse, the French Supreme Court considered another hybrid jurisdiction clause contained in an agreement between (among others) the Swiss bank and a French corporate borrower. The clause provided that the French borrower “acknowledges that the exclusive forum for any judicial proceedings is Zurich or at the place where the relationship with the bank’s branch is established. The bank is however entitled to bring a claim against the borrower before any other competent court.” The French claimant brought proceedings in France, which the bank claimed was a breach of the jurisdiction clause. The French Supreme Court found that this clause was void in its entirety as it was contrary to the objectives of predictability and legal certainty in Article 23 of the Lugano Convention.14
The Supreme Court, although referring to the Rothschild decision, did not adopt its earlier potestative reasoning, citing instead the perceived lack of certainty as the root of its objection to the clause. Given that the borrower in this case was a corporate, the decision also put to rest any suggestion that the Rothschild decision could be explained away on the basis that the party in question was an individual and therefore entitled to some form of protective status akin to a consumer.
In November 2015, the French Supreme Court again considered a one way jurisdiction clause in the case of eBizcuss.com v Apple Sales International. On this occasion, however, it found the jurisdiction clause to be enforceable. The clause under scrutiny was different from those considered in the Rothschild and ICH cases. Importantly, it also differed from the standard clauses generally seen in finance documentation. The clause was contained in contracts between Apple Sales International and its resellers, including a company called eBizcuss and provided that: “… the parties shall submit to the jurisdiction of the courts of the Republic of Ireland.
Apple reserves the right to institute proceedings against Reseller in the courts having jurisdiction in the place where Reseller has its seat or in any jurisdiction where a harm to Apple is occurring.” (unofficial translation).
eBizcuss commenced proceedings against various Apple entities in France. Apple challenged jurisdiction and the French Supreme Court upheld the challenge concluding that the jurisdiction clause (which required the reseller to initiate proceedings in Ireland) was valid, stating that: “the Court of Appeal validly found that this clause, which permitted the identification of the Courts that would potentially have to dispose of a dispute between the parties relating to the interpretation or performance of the contract, complied with the foreseeability principle that jurisdiction clauses must meet.” (unofficial translation).
Again, the French Supreme Court did not refer to the concept of potestativé in its decision. The French Supreme Court’s emphasis on the “foreseeability” principle is interesting, but not without complexities. Its reasoning suggests an asymmetric jurisdiction clause will not be struck down simply because it is asymmetric. Rather, such a clause will be enforceable if it is possible to identify in advance the courts that might have to resolve any dispute that might arise. Whilst the matter is not beyond doubt, it seems that to satisfy this “foreseeability principle” an asymmetric jurisdiction clause would have to set out the criteria for determining which courts should have jurisdiction when a dispute arises and that those criteria should be objective, external criteria and not within the control of one party.
There are difficulties with this reasoning. Is it really any more certain and foreseeable which courts will have jurisdiction in a clause formulated in this way than a clause that simply refers to “any court of competent jurisdiction” (a clause which, as discussed above, the French Supreme Court has found invalid on two occasions). In many financial contracts, it will be unclear where harm is sustained and it may be sustained in multiple places. There are also uncertainties as to whether the courts where any harm might be suffered would actually have jurisdiction and allow proceedings to be brought before them.
Categorisation
The French Supreme Court decisions show that language matters when considering enforceability. Accordingly, when analysing any such clauses, attention should be paid to the precise formulation of the unilateral aspect of the clause. Commonly, the unilateral aspect of the clause is permissive “notwithstanding the above; nothing shall prevent the finance parties from bringing proceedings in any other court of competent jurisdiction” and, at least under English law, may not be considered an express conferral of jurisdiction on particular courts (see discussion in Mauritius Commercial Bank). The question as to whether or not, if an option is exercised, alternative courts will conclude they have jurisdiction to hear the dispute at all will depend on the relevant regime in that jurisdiction (and is outside the scope of this article).
Following Rothschild some unilateral clauses were amended to add the words “to the extent permitted by applicable law” prior to the unilateral right in an attempt to salvage the clause, so that only the offending unilateral wording would be struck out, rather than have the jurisdiction clause struck down in its entirety. However, it remains unclear whether Member State courts would sever the clause and remove only the one way language and leave a purely exclusive clause in order to “save” the clause. This was not the approach taken by the French Supreme Court in either Rothschild or ICH (although the clauses in question did not include the words “to the extent permitted by law”).
Will the cumulative impact of the French decisions influence policy positions?
Hybrid jurisdiction clauses have regularly been enforced by the English court and it seems clear that the English courts would not adopt a similar approach to the French courts: see for example Mr Justice Popplewell’s obiter comments in Mauritius Commercial Bank Ltd v Hestia Holdings Ltd 15 and Mr Justice Blair’s judgment in Barclays Bank plc v Ente Nazionale Di Previdenza ED Assistenza Dei Medici E Degli Odontoiatri.
The Rothschild decision was controversial but, although there was debate in the London markets (and elsewhere across Europe) in 2012 as to its consequences, it did not trigger a wholesale revision in approach to these clauses in finance contracts. There was criticism that the French Supreme Court had imported a French law concept to interpret an EU Regulation. The decision of course was not binding on the English court and this is likely to go some way to explain its limited impact on financial documentation. There was a notable and understandable exception – on deals with a French nexus, finance parties sometimes (but not always) moved away from the standard hybrid clause.
In the last two years, it is possible to detect a slight shift. The ICH case signalled that Rothschild was not an aberration. The French Supreme Court’s reasoning in both the ICH case and the Apple case was arguably more compelling than its reasoning in Rothschild with its emphasis on certainty and predictability. As a consequence, perhaps it is more likely to be attractive to the CJEU.
In the light of the ICH decision, some banks have considered amending their clauses and instead include a purely exclusive clause. It is unclear whether, post Apple, finance parties will choose to amend their clauses to mirror the clause upheld in that decision, that is, to include a clause which permits the banks to bring proceedings in the chosen court, but also in the courts of the place of the borrower’s seat or any place in which the banks suffer harm. However, whilst this formulation would be an attempt to comply with the foreseeability principle identified by the French Supreme Court, it may give rise to other potential challenges. As noted above, arguably the reference to the jurisdictions in which harm is sustained is uncertain, especially where the harm sustained may be financial loss. As such it seems unlikely this decision will result in a widespread move to adopt such clauses.
Will other developments prompt a shift to simplified clauses?
Other factors may come into play in the analysis of forum selection clauses.
The wider enforcement possibilities under the Hague Convention on Choice of Court Agreements (in force between EU Member States and Mexico from October 2015) may in the long run encourage a move to the use of simplified exclusive clauses. This is because the enforcement regime under this Convention relates to judgments issued by Convention State courts pursuant to exclusive jurisdiction clauses (Article 3, Article 8). The Explanatory Report on the Convention16 suggests hybrid clauses would not fall within the definition of “exclusive” jurisdiction clauses and thus outside the scope of this regime.17 This development is currently of limited relevance given it is only in force in Mexico and the EU. If the UK leaves the EU, it may decide to sign up to the Hague Convention individually (as it will no longer be bound as a non member state). Perhaps most immediately relevant for finance parties, the Recast Brussels Regulation introduced certain reforms in relation to the heavily criticised lis pendens rules which appear only to assist parties with the benefit of an exclusive jurisdiction clause. In short, the Recast introduces a new carve out to the “first in time” rule18 allowing a Member State court specified in an exclusive jurisdiction agreement to proceed to determine a matter, notwithstanding that proceedings involving the same parties and cause of action may first have been initiated before the courts of another Member State. This reform seeks to address the impact of tactical litigation whereby a party initiates a claim in a court perceived to be slow-moving, often in breach of a jurisdiction clause, in order to paralyse proceedings before the contractually chosen Member State court because that chosen court is bound under European rules to defer to the court first seised. This strategy, known as “the Italian torpedo”, has been deployed frequently and with great effect in financial litigation in recent years. The reform is most welcome but an interesting question remains. Does this carve out apply where there is a hybrid clause?19 In other words, would a Member State court consider that the clause is exclusive for the borrower and thus the new rules engaged? Would finance parties with a hybrid jurisdiction clause remain subject to the risk of a torpedo?20 Parties keen to minimise the risks of a torpedo may wish to select an exclusive jurisdiction clause to put the matter beyond doubt.
Conclusion
As a result of these developments, financial institutions pay closer attention to the risks and benefits of using asymmetric jurisdiction clauses. As part of this rethink, parties may attempt to assess more systematically how often, and with what effect, they have exercised their option to litigate in other courts. This exercise may lead them to conclude that a provision that is rarely – if ever – used, now risks contaminating and even undermining their entire jurisdiction clause. As a result, we may see a more pronounced shift towards the inclusion of simplified jurisdiction clauses going forward.
This article was first published in the Journal of International Banking and Financial Law, January 2016.
Footnotes
1. No 11–26.022.
2. No 13–27264. ICH was the claimant in the proceedings before the Supreme Court. It is the legal successor of the company, Danne Holding Patrimoriate mentioned in the decisions of the lower courts.
3. No 14–16.898.
4. There is also uncertainty about the effectiveness of optional arbitration clauses in some jurisdictions (see for example: Russian Telecom Company v SonyEricsson (2012)) but this is outside the scope of this paper.
5. Some formulations include a provision to the effect that the finance parties may also take proceedings concurrently in multiple jurisdictions to the extent permitted by law.
6. Barclays Bank plc v Ente Nazionale Di Previdenza ED Assistenza Dei Medici E Degli Odontoiatri [2015] EWHC 2857 (Comm) at para 124.
7. Mauritius Commercial Bank Ltd v Hestia Holdings Ltd [2013] EWHC 1328 (Comm).
8. Cambridge Law Journal CLJ (2013) 72(1)24–27.
9. Regulation (EU) No 44/2001.
10. Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters signed at Lugano on 30 October 2007 by the EU, Denmark, Iceland, Norway and Switzerland.
11. Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
12. Outside the EU context, different considerations apply (banks may, for example, be able to bring proceedings in England on the basis that the documents are governed by English law but they may find that they can be sued elsewhere.)
13. The Brussels Regulation was the EU Regulation which, until January 2015, regulated the allocation of jurisdiction between Member State courts. Article 23 dealt specifically with jurisdiction clauses. The Brussels Regulation has now largely been superseded by the Recast Brussels Regulation (Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters) but the position in relation to hybrid clauses was not clarified during the Recast negotiations so the new rules on jurisdiction (at Art 25 of the Recast) are in substantially the same terms as Art 23 of the original Regulation in this regard.
14. The Lugano Convention is the Convention which regulates the allocation of jurisdiction as between Member State courts and the Swiss, Icelandic and Norwegian courts. Article 23 deals specifically with jurisdiction clauses and is in substantially the same terms as Art 23 of the original Brussels Regulation.
15. Mauritius Commercial Bank Ltd v Hestia Holdings Ltd [2013] EWHC 1328 (Comm).
16. Hartley & Dogauchi.
17. See para 108 and 109 of the Report.
18. Article 31(2).
19. The Recast Regulation gives no express guidance as to how to construe this term.
20. Potentially complex issues may also arise concerning whether or not the law of the chosen court is relevant to the construction issue. The Recast provides that the question as to whether the jurisdiction clause is “null and void as to its substantive validity” should be decided by the laws of the Member State of the court specified in the agreement (Recital 20).
