This article has been written by Hemnaag I pursuing the Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho) and Zigishu Singh (Associate, Lawsikho).
Table of Contents
Introduction
Startups struggle hard in their budding stages in streamlining processes, finding funds etc. Often such startups enter into investment agreements to secure funds. In cases where there have been no predefined clauses, misunderstandings between parties have led to litigation. Hence, it is often advised that clauses in agreements should be thoroughly written to ensure that there is no scope for disputes. In case there are certain disputes, it is better to have a pre-decided jurisdiction clause in the agreement between parties. There are generally no problems when businesses do not have ongoing litigations, however when a dispute arises between parties, then a pre-decided jurisdiction clause helps in resolving matters easily at the initial stages.This article will help us understand the importance of the jurisdiction clause in an investment contract.
Jurisdiction
Jurisdiction in law is the geographic area or a particular authority which is held by judicial and quasi-judicial forums such as to hear and determine the cause or an authority to resolve. So, jurisdiction refers to the inherent authority of a court to hear a case and to declare a judgment. It is derived from the Latin word ‘juris’ meaning ‘law’, ‘Dicere’ meaning ‘to speak’. Jurisdiction is the practical authority of a legal body to administer justice within a defined field of authority and responsibility. Example: Supreme Court of India has jurisdiction over the whole country. The High Court of any state has jurisdiction over the entire respective state.
Jurisdiction clause
When an agreement is executed between the parties, the jurisdiction clause of that agreement determines the forums in which any dispute arising between the parties under the agreement will be resolved. The parties to the agreement shall mutually decide on the specific court to resolve any disputes arising relating to the agreement, such jurisdiction is considered as exclusive jurisdiction.
Exclusive jurisdiction
Exclusive jurisdiction means the sole power of a court to adjudicate a case to the exclusion of all other courts. It means the court has sole power to adjudicate a case without linking jurisdictions of other courts. At the federal level, exclusive jurisdiction allows the Supreme Court to review the judgments in lower courts. Exclusive jurisdiction in a contract may arise when the disputes are to be resolved through litigation in the civil courts, and then the parties to the contract can limit their legal proceedings to a special court. Exclusive jurisdiction can be done only by mentioning the clause in contract. A typical “exclusive jurisdiction clause” in contract is worded in this manner ‘the agreement shall be subject to jurisdiction of the courts at Tamil Nadu’.
According to Section 9 of the Code of Civil Procedure, 1908 (CPC) all courts have the jurisdiction to decide any suit of any civil nature unless the jurisdiction is expressly or impliedly barred. The Indian Contract Act and the Code of Civil Procedure provide to an extent the liberty to the parties to limit the place of legal proceedings for convenience and minimize legal costs incurred by the parties. This is done by expressly including a valid ‘Exclusive Jurisdiction’ clause in the contract. It must be ensured that the place of jurisdiction mentioned in the clause has actual jurisdiction in the eyes of the law. Parties cannot grant jurisdiction, via clauses, to courts or forums which do not have the jurisdiction to try it under law.
What if there is no jurisdiction clause?
In the event where there is no jurisdiction clause mentioned in the contract, the aggrieved party shall sue the other party according to the laws laid down in Sections 15 – 20 of CPC, 1908:
- cause of action; or
- residing place of petitioner; or
- residing place of defendant; or
- Place where defendant carries on business
The better option is to mutually decide upon a jurisdiction and type of dispute resolution mechanism viz. litigation, arbitration and can execute a jurisdiction agreement or can add a jurisdiction clause to the existing agreement by drafting an addendum.
Investment contracts
During the fundraising round of the company, one of the most important contracts executed is an Investment Agreement. It is a contract between the parties ie; an Investor and the Company. In simple words, an investment agreement is an agreement between an investor and the company for which an investor gets interest for investment or shares in the company or ownership in the company as consideration. It consists of the main contractual terms and conditions surrounding the investment between the parties. An investment agreement governs a particular transaction where an investor invests money in exchange for equity in the company and it is specific to that transaction only. It does not regulate the way in which shareholders are to exercise this right with respect to the company on a continuous basis.
Key points to remember while drafting a jurisdiction clause in an investment contract
1. Convenience
In the event of a dispute in the agreement, you have to decide where you want to sue or be sued either in your country or the country of another party or if both parties are in the same country then a mutually convenient location.
2. Favourable judicial system
Preferring the judicial system depends on whether you are a claimant or defendant. For example, if you are claimant and depending on your business and transaction you would prefer an efficient judicial system that offers a good range of interim and final remedies and refer to a judicial system where the mode of business in such agreement is common.
3. Consideration
The parties should select a court which is most cost-efficient and at the same time appropriate to resolve the dispute.
4. Consistency
It is necessary to ensure that the governing law and jurisdiction clause refer to the same place and meaning, for (example) the law of India governs this agreement and courts of New Delhi have jurisdiction over the dispute.
5. Where are the parties based
According to the place of residence of the parties in the agreement, one can select the jurisdiction of the courts according to the same country.
Jurisdiction clause in investment contract
The most commonly used to a jurisdiction clause in investment contracts are:
1. Exclusive jurisdiction;
2. Non-exclusive jurisdiction;
3. Asymmetric Clause.
1. Exclusive jurisdiction
The use of exclusive jurisdiction clauses is common if the commercial contract is within the same country. The parties mutually decide to approach a specific court of a country as mentioned in the agreement instead of other courts in a different country.
Sample
The Parties mutually agreed that any dispute, settle, contrary or claim arising between the Parties connecting with this Agreement which cannot be amicably resolved by the parties within 15 days shall be exclusively and finally settled by court of Tamil Nadu by the law of India.
2. Non-exclusive jurisdiction
The non-exclusive jurisdiction clause is commonly used in cross-border commercial contracts. Any dispute within the agreement the parties can approach the particular jurisdiction as mentioned in the agreement and at the same time either party has an option to commence legal proceedings in the court of any other jurisdiction.
Sample
The Parties irrevocably agree that the court of New Delhi has non-exclusive jurisdiction to hear, settle and or determine any dispute, contrary or claim arising between the parties with this Agreement.
3. Hybrid /Asymmetric Clause
In the event one party submits to the exclusive jurisdiction of a specific court and the other party submits to the non exclusive jurisdiction of a particular court the parties in the agreement can execute a hybrid clause.
Example:
· Party X can only bring legal proceedings against Party y only in the court/country as mentioned in the agreement.
· Party Y is permitted to commence legal proceeding against party x in the courts of any court/ country which has jurisdiction over the dispute.
Sample
1.1 The Parties mutually agree that any legal proceeding against party Y regarding any claim, hear, settle and or determine any dispute shall be commenced in the court of New Delhi and laws of India shall be governed.
1.2 Notwithstanding clause 1.1 the Parties irrevocably agree that any dispute connected to this Agreement regarding party X the court of New Delhi has non-exclusive jurisdiction to hear, settle and or determine any dispute, contrary or claim arising between the parties with this Agreement.
Case laws
- ABC Laminart Pvt. Ltd. & Anr V/S Andhra Pradesh Agencies, Salem (1989 SCR (2)1),
The issue in this case was ” where can a suit arising out of a contract be filed?”The appellant, a manufacturer, entered into a contract with the respondent for supply of yarn to the respondent. The said contract mentioned clause 11 stating that “any dispute arising out of this sale shall be subject to Kaira jurisdiction”. The dispute occurred under the terms of the contract and the party filed a suit at Salem. The trial court held that because of clause 11 it had no jurisdiction to entertain.
The appellant’s contentions that clause 11 of the contract only grant the parties to the contracts to file a suit within Kaira jurisdiction and not Salem, where the respondent’s contentions are only general terms and conditions of the sale and that clause cannot take away the jurisdictions of the other courts. Under section 20 (c) of CPC, it is subject to the limitation that every suit shall be initiated in a court within the local limits of whose jurisdiction the cause of action, wholly or in part arises. The supreme court dismissed the appeal and held that the jurisdiction of other courts has not been excluded in the contract and it provided significant leeway to the party seeking to deviate from an exclusive jurisdiction clause.
- Aniket SA Investment LLC V/S Janapriya Engineers Syndicate Private Limited and Ors (Commercial Appeal No. 504/2019)
The Bombay HC held that a choice of seat is itself an expression of party’s freedom to determine (Party Autonomy) and it has a legal effect of conferring Exclusive Jurisdiction on the courts of the seat. And it states that the seat of arbitration as it was mentioned in the Arbitration Agreement must prevail over an Exclusive Jurisdiction Clause, if there is one. The court held that the choice of seat is in itself an assertion of party autonomy ( In Arbitration, the parties’ freedom to determine the seat) and then with the effect of conferment of exclusive jurisdiction on the courts of the seat and to elucidate that two concurrent courts of the seat and even if it was to have jurisdiction, additional to this, the choice of courts in the exclusive jurisdiction clause is made ” subject to” the court of the seat. The HC concluded by analysing the decision of the Hon’ble supreme court in Bgs Sgs Soma JV v/s Nhpc limited (2020) 4 SCC234 (‘bgs sgs’).
The judgment of Bombay HC provides that by conceding the significance of the “seat” of arbitration and how it is to be effective over an exclusive jurisdiction clause by recognizing the ratio imposed in bgs sgs. This judgement states that the Indian arbitration mechanism has been made in line with the international practices by reducing the confusion as to what takes the place of priority between the seat of an arbitration and the exclusive jurisdiction clause, in order to facilitate for India to become an arbitration-friendly jurisdiction.
Conclusion
Jurisdiction clause in an investment contract is mutually decided by the parties in the contract and the type of jurisdiction clause to be drafted in the contract dependence on the parties so while drafting an investment contract one must keep the discussed points into consideration and draft a jurisdiction clause in an investment contract, so that in case of dispute the clause can be favorable for both the parties.
References
1. https://www.contractscounsel.com/t/us/investment-contract.
3.https://www.barandbench.com/columns/exclusive-jurisdiction-clauses-contract-key-issues
4. https://www.investopedia.com/terms/i/investment-in-the-contract.asp.
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