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The end of the road for "one-way" jurisdiction and arbitration clauses?

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Sarah Garvey



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19 June 2014

Following the 2008 financial crisis, there has been greater focus by commercial parties on dispute resolution provisions in transaction documents. At the drafting stage, where (and how) parties' disputes are to be determined has become a contentious issue on many deals.

Contributed by Sarah Garvey

There has also been an increase in jurisdiction battles. In this article we discuss how market practice has developed in response to two 2012 decisions on "one way" jurisdiction and arbitration clauses − one of the French Supreme Court and the other of the Moscow Arbitzah Court (the highest commercial court in Russia). The French and Russian decisions have caused many to reassess their approach to forum selection in commercial contracts. We also assess what impact a recent 2014 decision of the Luxembourg court (which conflicts with the French decision) may have on current approach.

On 26 September 2012, the French Supreme Court invalidated a "one-way" (also referred to as a "hybrid" or "asymmetric") jurisdiction clause in a loan agreement. A "one-way" or hybrid jurisdiction clause requires one party to bring proceedings only in a named court but allows the other party (usually the party with the greater exposure) to bring proceedings in the named court, or any other court of competent jurisdiction. The French Court's decision in Mme X v Rothschild was significant because it was based on a provision in a European instrument (Article 23 of the Brussels Regulation) which is applied by the courts of all 291 Member States. The French court ruled that the clause was "potestative" and, accordingly, void under Article 23.

Hybrid jurisdiction clauses are commonplace in commercial contracts. They are included in thousands of financing agreements and debt and equity market transaction documents worldwide. There are strong commercial reasons for selecting such clauses: in the finance context, they provide comfort to a creditor that it can sue a borrower in the chosen court, but also preserve flexibility for that creditor, enabling it to litigate where a borrower's assets may be at the time a dispute arises. These clauses also provide protection to a creditor, ensuring that a borrower can only ever sue the creditor in the chosen court. A decision of a senior court in a European Member State, casts doubt on their efficacy in France and beyond.

In the very same month, September 2012, a decision of the Moscow Supreme Arbitrazh Court (the SAC), was published (Russian Telephone Group v Sony Ericsson Mobile Communications). The SAC had ruled earlier that year that a London arbitration clause with a "one-way" option to litigate ran counter to public policy considerations as the clause inhibited one party's rights of access to court. The SAC allowed the claimant to continue with its proceedings in Russia, notwithstanding the fact that it did not have the benefit of the option to litigate and so, under the terms of the contract, was required to arbitrate any disputes in London. Subsequently, the SAC issued a clarification stating that it had not ruled that the clause itself was unenforceable, rather it had converted the clause into an arbitration agreement with a mutual option to litigate.

"Optional" or "one-way" arbitration clauses have been widely used in commercial contracts for many years. One variant is to include an arbitration clause with an option (for one party) to litigate. An alternative formulation is for the parties to agree to litigate, but with one party (again usually the party with greatest bargaining power) having an "option" or right to refer disputes to arbitration.

These clauses have become increasingly popular with finance parties contracting with counterparties in emerging markets. Often the preferred position of finance parties is to litigate, but arbitration may offer enforcement advantages. A counterparty's assets may be located in a jurisdiction that does not recognise, say, English or New York judgments, but which is a signatory to the New York Convention, meaning that (at least in theory) arbitral awards should be enforceable in that jurisdiction. An optional arbitration clause provides a benefitting party with maximum flexibility as to dispute resolution. On a practical note, it may mean it can defer a decision as to forum selection until a dispute arises. Such clauses are valid under English law.

While SAC decisions are not formally binding on other Russian courts, commercial parties have been concerned that Russian courts would now hear and determine claims filed by parties in breach of an agreement to arbitrate their disputes. A related concern was that Russian courts may refuse to recognise and enforce arbitral awards obtained on the basis of such an optional clause. The SAC has, however, confirmed that this ruling does not impact the enforceability of awards under the New York Convention.

Market reaction to these two decisions has been mixed. In terms of the Russian decision and use of optional arbitration clauses, commercial parties do appear to have reassessed the use of these clauses in deals with a Russian nexus. The same reasoning extends to certain other important jurisdictions where there is doubt about the efficacy of such clauses eg the PRC, the UAE and Poland. In many jurisdictions, there is simply a lack of case law or academic commentary on these clauses and so it is difficult for local counsel on any deal to comment with certainty as to the efficacy of such clauses. Over the last two years we have seen a move towards pure arbitration clauses on Russian deals or even options that apply only to parties without a Russian nexus (although these can be problematic)

The reaction to the French court's decision on hybrid jurisdiction clauses had been more circumspect. The French court's decision has been widely criticised by lawyers, including many French lawyers, and market commentators. There has also been criticism that the matter was not referred to the European Court of Justice (ECJ). In a 2013 decision in the English High Court (Mauritius Commercial Bank v Hestia Holdings), Mr Justice Popplewell provided a robust defence of asymmetric clauses under English common law, referring to the French decision as "controversial".

Importantly in January 2014, the Luxembourg District Court3 expressly upheld the use of an asymmetric clause under Article 23 of the Brussels Regulation. The court dismissed an argument (relying on the French decision) that a pledge that conferred jurisdiction on the courts of Luxembourg and gave the lenders the right to bring proceedings in ‘before any competent court' was void. The Luxembourg court noted the criticism of the French decision, that the Brussels Convention (predating legislation) expressly permitted such clauses and that the contracting parties had equivalent bargaining power, concluding the court should give effect to the parties' bargain.

Commercial parties can take some comfort from the Luxembourg decision. However, until the position under EU law is clarified by the ECJ, risks remain over the use of such clauses in an EU context, particularly where there is a French nexus.

Given this landscape, parties are increasingly assessing, on a case-bycase basis during the negotiation of their transactions, the perceived advantages of a one-way jurisdiction or optional arbitration clause, against the risk that it may be found to be void.

If you require further details please contact Sarah Garvey.


1. Croatia acceded to the EU in 2013.


2. No 127/14 and No 128/14, 29 January

3. Regrettably changes to the Brussels Regulation (the Recast) in force from January 2015 do not clarify matters.