LOCATION. LOCATION. LOCATION. Why the contractual jurisdiction provision in your contract might not be enforceable.

There are, apparently, a lot of things which transpire during the negotiation of a complex business transaction and the written agreement which ultimately follows it.   The parties, and even some times their lawyers, seem to focus exclusively upon the business terms in order to ensure that their clients receive a fair and remunerative deal.   Nonetheless, basic questions like jurisdiction, venue, attorneys’ fees upon default and related items sometimes get lost in the shuffle.   It has been surprising how many times we are presented with contracts for review which contain jurisdictional clauses in remote locations in Europe, Asia and elsewhere when, in fact, the parties’ dispute, and the underlying business transaction, have nothing whatsoever to do with these locations.  Under these circumstances, is the contractual choice of jurisdiction provision enforceable?  As with many things in the law, the answer is maybe.

Courts generally like to enforce the terms of the parties’ contracts as those contracts are written.   This is because courts believe that the parties should be free to negotiate the terms of their own business transactions without interference from the court system.   However, when the parties call upon the court system to adjudicate their dispute, other factors often come into consideration.   With the courts’ burgeoning case load, courts in the modern world sometimes look for reasons to “punt[1]” and send cases elsewhere.   We will briefly review the factors that courts consider when determining whether to enforce contractual choice of jurisdiction provisions.  

Consider this scenario.  Your client comes to you with a contract which it negotiated with a business partner several years ago.   Now the business partner is in breach and a lawsuit has to be filed.   The scope of the parties’ business takes place primarily in New York.  Nonetheless, at the time that the parties negotiated this contract, a subsidiary of one of the parties was doing business in England.   The contract provision which designated England as the appropriate jurisdiction was not focused upon by the parties’ business counsel involved in negotiating the agreement.   Now, suddenly, you look across the desk at your client and explain why the courts will likely want the matter to be litigated in England.

“England?”   Your client says.   The last time I was in England was on vacation fifteen  years ago.   We do not do any business in England, we do not have any employees in England, and we are not familiar with the court system there.   “How could it be that we are required to litigate this case in England?”

This is a good question.   The answer is, as stated above, courts generally look to enforce the terms of the parties’ contract as written.   However, there are several exceptions which might be applicable in the above circumstance.   The courts often analyze these provisions and whether they are enforceable by determining whether it would be “gravely difficult” or “inconvenient” to litigate a case in a foreign jurisdiction.   Courts often use language such as “unreasonable”, “unjust”, “fraud”, and “overreaching” to make a determination about whether these provisions are enforceable.   The courts likewise consider issues such as the convenience of the parties, the convenience of witnesses and the parties’ contacts with the forum.

These issues could, potentially, provide a basis for your client to attack the provision of the contract which requires jurisdiction in England.   The problem is that these questions are often fact intensive.   In other words, your client will likely have to make a factual showing as to why litigating the case in England will be either gravely difficult or inconvenient.   Sworn declarations will have to be filed and there is a possibility that there may be a need for an evidentiary hearing.   Moreover, whenever lawyers hear the words “evidentiary hearing” the knee jerk reaction is often “we need to take depositions.”   The likelihood is that the court will allow such depositions to take place.

This means that your client will likely be involved in what is essentially a “lawsuit within a lawsuit” the purpose of which is to determine where the claims on their merits will ultimately be heard.   If you are now thinking that this will be time consuming and expensive, you would be right.   All of this time and effort expended on litigating a clause in a contract which likely had no meaning at the time it was written and certainly has no meaning once the lawsuit is filed.

Why would the Defendant even want to enforce this provision if they are doing business in the United States primarily?  The answer is simple – – to make it time consuming and expensive for your client.   If they can force your client to litigate in England, even if they know that the case does not belong there, their client will achieve a victory of sorts.   This is because litigation is often a battle of allocating resources guided, primarily, by the expenditure of funds with the wealthier party often coming out ahead.  

The best scenario would be for the business lawyers to simply focus intently on the jurisdictional provision of the contract before it is signed.   This will obviate the need for a time consuming and costly battle over home court advantage.   However, faced with such a provision that is clearly not in the client’s favor, you can attack it.   You should just be prepared to spend considerable time and money doing so.

 


[1] For those of you not familiar with American slang or,  more particularly, American football references, the term “punt” simply means to hand off responsibility to someone else. See http://onlineslangdictionary.com/meaning-definition-of/punt

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