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Jurisdiction of foreign courts in commercial contracts

November 1, 2021

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This article is written by Shreya Singh, from Gitarattan International Business School, IPU. In this article, she discusses the doings of commercial contracts in private international law.

Table of Contents

Introduction

This article intends to critically evaluate the current model position of the jurisdiction of foreign courts in commercial covenants. In particular, global business means global contracts and therefore, it is ipso facto important to sculpt a dispute resolution provision that manifests parties to mitigate the tribulation of getting into litigation in an inconvenient forum. The concepts and principles in international arbitration are very intertwined as they have to meet at a certain point in time. Therefore, incorporation of ‘foreign jurisdiction clause’ is demanded which may provide for jurisdiction in a neutral forum bringing convenience in enforcement by a way of the preferred judicial system. Jurisdiction of the courts and rules of applicable law in commercial or civil matters are at the heart of judicial cooperation and must be decided beforehand. To further that end, it will talk about various avenues available for dispute resolution while the administration of covenant in the forum of choice is decided beforehand. In furtherance, it will then be queried how the parties can choose a specific forum for adjudication of dispute if any, and how the court is obliged to give effect to it.

In line with the de jure status of the legal and judicial framework in India, the recognition and enforcement of foreign judgments and decree is not a separate process. Recognition, that is, the conclusive adjudication of rights of the parties is enunciated by the law itself as in most other alternative jurisdictions. Customarily, foreign judgments act only as res judicata and several conditionalities come into play when it comes to their recognition.

Dominion of commercial contracts in private international law

A commercial contract is the proper law of contract generally based on the principle of autonomy of the parties whereby the law by which a contract is intended to be governed is called proper law. Customarily, the question of jurisdiction is the fundamental question in all suits and legal actions. In private international law, jurisdiction means competency of the domestic courts of any country to try the suit having the foreign element.

In a covenant where each of the parties is domiciled in different countries and the laws and legal language are unalike in different realms, a model contract is needed that reflects the language that harbors and clarifies provisions that may not be acquainted therein foreign jurisdiction. Additionally, the value of litigating in a foreign jurisdiction can outdo all expectations and so is tough to quantify. Therefore, to preclude outgo, the contract itself shall dictate the selection of law, nevertheless the selection of law can even be very different from the place chosen for the resolution of a dispute.

In India, the rule of ‘lex domicile’ is used to determine the competency of the court to try the suit of a foreign element. Concerning specific provisions, Indian judicature typically takes a broad read of the interpretation of contract provisions whereby the court refers to the past precedential dictum of relevant courts and synthesizes the principles of these past cases as applicable to the facts. Wherever standard form is employed, that is supposed to supply a consistent interpretation providing some certainty. However, foreign courts don’t seem to be essentially accustomed to such universal interpretation and they could alter the operation and result of the underlying agreement and such potential alterations could eliminate this certainty and build a risk that’s troublesome to quantify.

The world expands across borders and thereupon corporations should contemplate the laws of the state and countries. Thus, it’s essential for businesses partaking in cross-border transactions to rigorously draft provisions keeping in mind foreign courts that will be decoding the terms ought to a dispute arise.

Laws governing international commercial contracts

Commercial contracts have a vast array of disputes or agreements related to general commerce and therefore one should be benefited from having a commercial dispute clause in their contract. The exception might exist whereby parties fail to select appropriate law or court and in those circumstances, the court having jurisdiction shall decide as to the relevant provisions of private international law to be applied there.

Customarily, in international commercial disagreement, it’s observant for parties to go for arbitration. International institutions like the United Nations Convention on Contracts for the International Sale of Goods (CISG), The International Institute for the Unification of Private Law (UNIDROIT), Principles of European Contract Law (PECL), and Draft Common Frame of Reference (DCFR) give rules to interpret international business contracts uniformly.

The ‘UNCITRAL Model Law’, governs the conduct of international commercial arbitration and is one of the three pillars created by the United Nations (UN) to assist countries with different legal systems and harmonize their arbitration rules. As it is not a treaty, governments are free to copy and modify it. The model rule covers all stages of arbitration from the limitation of court intervention to the recognition and enforcement of the award by balancing between the party freedom and the need to provide for default rules to fill potential gaps.

In addition to the above, the ‘United Nations Convention on Contracts for the International Sale of Goods (CISG)’, attempts to bridge the gap between the legal system of trade internationally. It is sometimes referred to as the Vienna convention. It hinges on keeping the business relationship alive for as long as possible.

Looking at a soft law instrument for international dispute resolution, the ‘UNIDROIT Principles of International Commercial Contracts’ predominantly dominated the international sphere. It provides a balanced set of rules covering contracts in general and does not confine itself with specific contracts in the international sale of goods as in CISG.

Parties are at liberty as to the choice of applying the Domestic Laws of the particular country to their international commercial contracts, provided that:

Party with vigor may insist on its national law,
Parties volitionally plump for the law of the third developed State.

Foreign jurisdiction clauses in India

The law about the enforcement of foreign jurisdiction clauses in India has been piloted under the Code of Civil Procedure,1908 (C.P.C) and the Indian Contract Act,1872 (ICA). Section 20 of CPC pellucidly brings forth as to where the suit can be initiated in case of disagreement. The Section lays out for personal jurisdiction, i.e., each suit shall be instituted in court inside the native limits of whose jurisdiction the explanation for action arises. Apropos to the foundation of exclusive and natural jurisdiction clauses, in Modi Entertainment Network v. W.S.G. Cricket Pte. Ltd (2003) the Hon’ble Supreme Court vindicated that parties can choose any courts of natural jurisdiction or a foreign court of their choice as a neutral forum and have the dispute resolved per se to the law applicable to that foreign court, notwithstanding the courts under the ambit of CPC lacking such jurisdiction. Moreover, a court may exercise its power of granting anti-injunction suit provided that:

The defendant shall be under personal jurisdiction;
Justice is denied if an injunction is not granted;
The rule of comity applies.

The Hon’ble Supreme Court in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited (2021) sustained that the parties to an arbitration agreement have the autonomy to determine not solely on the procedural law to be followed however additionally the substantive law. Therefore, two Indian parties can opt for a remote seat of arbitration. Delhi High Court bracing to uphold clause conferring jurisdiction on foreign court in BHEL Ltd v. Electricity Generation Incorporation (2017) held that where the background for jurisdictional clause citing for the specific forum had been enunciated, the court shall give effect to it. Here, scarcity of your time isn’t a legitimate ground to confer territorial jurisdiction to.

Governing laws and choice of arbitration with reference to India

“What if the arbitration of one country is chosen and the choice of law is of another country?”

In case of conflict of canon, private international law is used to determine the rules regarding the jurisdiction of the court, choice of law, rules for recognition, and enforcement of foreign judgment or decree. Wherefore three fundamental premises of private international law subsists:

Recognition and enforcement of a foreign judgment

The conception of recognition of a foreign judgment is found in Section 13 of the Code of Civil Procedure, 1908 which enunciates that a judgment shall be conclusive, not indecisive, and forthwith adjudge upon between the same parties or between parties under whom they or any of them claim to litigate under the same palm. In that, the court shall look at whether there is

Competent jurisdiction or not;
The merit of the case or not;
Any violation of international law or not;
Opposed to natural justice;
Obtained by fraud;
Any breach of Indian law.

There are several factors to be contemplated by Indian courts for recognizing a judgment, some of them other than those provided in CPC, are:

Question of nationality;
Question of date of proceedings;
The nature of order etc.

Court having jurisdiction

Reciprocating Territory

As per Section 44A of the Code, the competent court for enforcement of an overseas judgment is the District Court by the way of execution of the foreign judgment.

Non-Reciprocating Territory

The foreign judgment should be enforced by filing a lawsuit before the court of the primary instance having territorial and medium of exchange jurisdiction to pass a decree rooting on the foreign judgment.

Section 44A of CPC,1908 sets out provisions regarding the execution of decrees elapsed in an exceedingly mutual territory.

Enforcement of foreign judgment

A foreign judgment can be enforced in India by instituting:

A suit on such judgment or;
Execution proceedings.

A suit on a foreign judgment must be filed within three years from the date of judgment:

In Alcon Electronics Pvt. Ltd vs Celem S.A and another (2016), it has been dominated that the order of the English Court may be a judgment on the merit of the case. In the words of the Supreme Court of India: “the principle of comity of the nation demands us to respect the order of the English Court. Even with the interlocutory order, Indian courts have to give due weight to such order unless it falls under any of the exceptions under Section 13 CPC.”

Choice of law

“Which law should be applied to the suit in question?”

When the court concludes that it has jurisdiction to try that particular suit then the next question that arises is the ‘choice of law’. It’s the procedural stage in the litigation where there is the presence of a foreign element. The question arises that:

Under which country law the issue should be decided?
Whether the law of the forum and the foreign law should be applicable?

French jurist Charles Dumoulin pioneered the concept that “people who enter into an associate nursing agreement could stipulate the law that governs their bargain”

As business transactions and contractual obligations could cross territorial borders inside nations as well as international borders both physically and electronically, therefore the selection of law issues may arise if it’s necessary to interpret the terms of the contract or in the event of litigation over a contract dispute.

Consequently, determination of the choice of law is to be manifested interrelatedness to which it has the closest connection with the cause of action, to render equity. Customarily, it’s based on the concept of party autonomy that guides all international contracts. Here, parties are at liberty to plump for the law of their choice metaphorical to certain restrictions identified within the rules on the choice of procedural law and non-national law. As a methodology concept, party autonomy developed throughout the 12th Century, like freedom of contract in domestic law, as an essential component of the liberal model of market regulation.

The draft of the Uniform Commercial Code to an international transaction express that any or all of their rights and obligations are to be determined by the law of any nominal State is effective, whether or not the dealing bears relevance to the designated State, replacing the earlier restricted view that parties need to choose a law connected either to the parties or the dispute. The law chosen by the parties (lex contractus) would govern the interpretation of the contract, its performance and the methodology to amend it, ascertain a breach of contract, rights of set-off, issues of material validity amongst other things.

Indian Courts and English Courts tend to favour the parties’ freedom of contract. It’s not only always incumbent upon the court to apply one system of foreign law alone. As different aspects of the suit may call in varied provisions of the laws for application, for example, questions of formal validity shall be decided according to the requirement of the law.

Where it has been entered into as governing law, the question of material validity as in the contract is valid, the legal capacity of the parties, and such other issues are decided via the lens of the governing law. All matters relating to procedures fall within the lex fori or the law of the place where the proceedings are being held. Most typically the choice of law says that you should apply the substantive law or rules of law even if they do not have any connection to the parties or the specific dispute.

Choice of forum

Customarily a forum choice clause shall cowl both the proper law of the contract and also the forum for the resulting dispute and besides would possibly browse the contract to be ruled by the precise law and courts. In the instances, if the parties make a fallacy as of the appointed court to listen to the matter, the civil procedures of the appointed jurisdiction are going to be pertained to spot, the acceptable court or the clause which may visit a particular common dispute resolution method like mediation, arbitration, lex loci arbitri, hearing before a special referee or the clause would possibly visit each requiring a particular method to be meted out in a very specific location.

Conventionally parties are free to nominate the proper law whereupon all the relevant disputes will be resolved. If there is an express selection, this selection will be respected so long as it is bonafide i.e the subjective intention shall prevail. But if parties nominate a forum this is more than indicating that they intend for the forum’s law to apply.

If the parties have selected the jurisdiction for the resolution of the dispute the implication is that the courts may nevertheless apply their lex fori which includes their general choice of law principles. Thus in the ordinary course of legal events, the foreign court may identify and apply foreign law as proper law. The majority of professionally drafted contracts address both issues and contain clauses specifying the forum and the law to be applied therein.

Conclusion

In conclusion, I would say that based on the foregoing legal whereabouts it will be more suitable for the parties to devise a jurisdiction clause beforehand to save time, costs and reduce inconvenience. Forbye, given recent legal development and contemporary understanding one must ensure that clause to be conclusive and endow jurisdiction in a country which is a ‘reciprocating territory’ per se Indian law to bring up the execution of foreign decree deftly.

References

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