Article 9 December 2015

Arbitrate or decide on a court of your choice?

International commercial contracts are dominated by arbitration agreements. But now, with the adoption of a new convention, choice of court agreements might be able to undermine arbitration agreements' position as a sole leader in this field.

The Hague Convention on Choice of Court Agreements entered into force on 1 October 2015. The convention is designed to promote international trade and investment by providing greater legal certainty for parties involved in business-to-business contracts.

Along with the convention, choice of court agreements are expected to offer a noteworthy alternative for arbitration agreements in international contractual relationships.

Competition coming to the market

Choosing a suitable dispute resolution mechanism always constitutes a significant risk management element in international contractual relationships. Legal predictability in the event of a dispute is mostly incorporated into the chosen dispute resolution mechanism. The majority of today's international agreements lean towards arbitration agreements for well-documented reasons.

It appears, however, that competition in the field of international dispute resolution mechanisms might just get sparked.

The Hague Convention on Choice of Court Agreements was originally concluded on 30 June 2005. Presently, Mexico, as well as all the EU member states apart from Denmark, are bound by the convention, while other states are expected to follow these pioneers. After entry into force, the convention became the first potential global competitor to the renowned New York Convention on the recognition and enforcement of foreign arbitral awards.

Recognition and enforcement of foreign judgments

Choice of court agreements are nothing new to the world of dispute resolution. National courts have always been an option when choosing a suitable dispute resolution mechanism in international agreements. It is even argued that the lower expenses involved in national litigation has usually been an advantage against arbitration.

On the other hand, arbitration has been seen as more unbiased dispute resolution mechanism contrary to national courts. Be as it may, the legal uncertainty in relation to the recognition and enforcement of foreign judgments has, in any case, impaired the usability of choice of court agreements – at least until now.

Traditional risk in choice of court agreements

A recent ruling by the Finnish Supreme Court (KKO 2011:74) provides an example of the risks involved in choice of court agreements. The parties of the case had entered into a contract that contained a choice of court agreement designating specific US courts to decide on any disputes arising out of the contractual relationship. As a dispute arose, a court in California rendered a judgement after which enforcement had to be sought in Finland.

The Finnish Supreme Court concluded that since Finland and the United States had no mutual agreement on recognising and enforcing foreign judgements, the judgement was not enforceable in Finland.

Uniform rules of jurisdiction are now created

The convention will seek to solve such problems by creating uniform rules on jurisdiction as well as on the recognition and enforcement of foreign judgements in civil or commercial matters rendered on the basis of the convention. Thus, it provides not only more options in relation to dispute resolution mechanisms but also clearer and more explicit rules to businesses engaging in cross-border activities, creating a legal environment more amenable to international trade and investment.

Legal predictability and certainty is aimed

The convention is aimed to provide legal predictability and certainty in relation to choice of court agreements within the frames of international commerce, and, therefore, its scope of application is limited to international business-to-business civil and commercial matters. In order for the convention to apply, choice of court agreements are required to be 'exclusive' and documented in writing or in some corresponding form that renders the information accessible as set forth in the convention.

The main principles of the convention can be summarised in the following three rules that are applied in case the relevant contract parties have exclusively chosen a particular national court to settle their disputes:

  • The chosen court must hear a particular case brought before it;
  • All the other courts are denied to hear the particular case (lis pendens); and
  • The judgement rendered by the chosen court will be recognised and enforceable in all other member states.

The end of arbitration – likely no

Besides Mexico and the European Union, the convention has already been signed by the United States and Singapore. Moreover, the United States has played an active role in both initiating and revising the convention thus far, and, therefore, is expected to ratify the convention sooner than later. Before any further ratifications the convention will, however, have relevance only between Mexico and the EU member states (excluding Denmark) as Brussels I regulation already lays down uniform rules in this respect within the EU borders.

The ultimate success of the convention is without a doubt dependent on great economic players and it is still far from reaching, for example, the popularity levels of the New York Convention. However, the convention has already aroused interest all over the world and many states are actively considering of taking part in the convention. Therefore, the convention may eventually offer contracting parties the same certainty as the New York Convention offers parties with respect to arbitral awards.

Though it should be finally noted that the convention may very well, at the end of the day, result in recognition and enforcement of such foreign judgements that are far from conventional to many global companies.

Consequently, the question remains whether the convention will in fact make companies even more cautious towards choice of court agreements and, ultimately, more attached to arbitration agreements?

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