Examining the “one-way” jurisdiction clause: Is it really a one-way street?

A jurisdiction clause in a contract is a crucial constituent of the contractual understanding, especially in a commercial setting. After all, the clause determines the set of courts that will have the authority to adjudicate disputes arising from the contractual relationship. Jurisdiction clauses are a reflection of (i) the negotiating position of each of the contracting parties; and (ii) the industry standards regulating the underlying commercial transaction. Financing transactions are no exceptions to this..In most international financing arrangements today, lenders look to bind the borrower to a specific jurisdiction by way of a “one-way” jurisdiction clause. The lender, however, reserves its right to approach courts in any competent jurisdiction. Given the commercials driving a typical financing transaction, such clauses have come to be deemed as necessary to reduce the recovery and jurisdictional risks faced by lenders. It comes as no wonder that over the years ‘one-way’ jurisdiction clauses have found their way into standard financing agreements..However, in 2012, the French Supreme Court invalidated ‘one-way’ jurisdiction clauses[1], creating quite a furor in the finance industry. The apex court of France struck down the challenge to the jurisdiction of French courts. It held that the ‘one-way’ jurisdiction clause of the contract in question restricted only one party, and hence was in conflict with the object and purpose of Article 23 of the Brussels Regulation (which essentially provides for a presumption of exclusivity of jurisdiction in contracts). The French Supreme Court stated such clauses lacked mutuality of obligation and the performance of such clauses was solely dependent on the choice exercised by one of the contracting parties. One would think that the French court based its interpretation to protect the fundamental principles of fairness and equality which are dear to the country, but on shaky legal reasoning at best. As expected, various scholars and market participants critiqued the French Supreme Court’s view, and a couple of months hence, the English High Court calmed frayed nerves and upheld the validity of ‘one-way’ jurisdiction clauses.[2] Falling back on the principles of freedom of contract of parties, the court reasoned that the mere fact that one contracting party is entitled to bring proceedings in any other court of competent jurisdiction would not make the clause unenforceable under law. With this as the background, this article aims at discussing the enforceability of “one-way” jurisdiction clauses in the Indian context..In India, it is common practice for financing contracts to contain standard “one way” jurisdiction clauses, especially in cases where the lender is a foreign entity. From a commercial perspective, the “one-way” jurisdiction clause provides certainty and predictability in the contract by allowing the lender to bind the borrower to an agreed jurisdiction and even a judicial system. Further, it entitles the lender to initiate proceedings against a borrower in all places where the amounts owed can be recovered or where the assets of the borrower are located. Indian borrowers have also been quick to appreciate this underlying commercial rationale. They accept this clause as a fair restriction since it minimizes the risks involved in the transaction for the lender and consequently reduces the cost of the financing for the borrower. Of course from a legal standpoint, Indian law recognizes the principles of freedom of contract. To such extent one can therefore generalize that such ‘one-way’ jurisdiction clauses have attained a market standard status in India as well. Naturally, any change in law that jeopardizes the validity of such clauses would be an ‘eyebrow raising’ news in the market..Apart from a couple of notable decisions, the Indian Supreme Court has not specifically adjudged the validity of the “one-way” jurisdiction clause. In 2012, while upholding the validity of a “one-way” jurisdiction clause in a loan-cum-hypothecation agreement executed in Chennai, the Madras High Court held that the Chennai courts did not lack the jurisdiction to adjudicate the dispute between the concerned parties. The bench stated that even though the jurisdiction clause specifically bound the obligor to the courts of Mumbai, the lender had the right to initiate appropriate proceedings in any court of competent jurisdiction. The Bombay High Court has also upheld the validity of one-way jurisdiction clauses. Last year, a question arose if the courts in Mumbai had the jurisdiction to entertain suits in relation to a deed of guarantee where the parties had agreed to confer exclusive jurisdiction on the courts of New Delhi, on the condition however that the right of the lender to take proceedings in any other court of competent jurisdiction remained unhindered. The Bombay High Court held that lenders had the option to initiate proceedings in Bombay considering that (i) a material part of the cause of action had arisen in Mumbai; and (ii) the guarantor had agreed that “…in the event of any dispute, the lender shall be entitled to take out proceedings in any court of competent jurisdiction…”..No doubt Indian courts look to respect the jurisdictional choice of the parties. In ABC Laminart Pvt. Ltd. v. AP Agencies, Salem, the Supreme Court reaffirmed that,.“each of the citizens has the right to have his legal position determined by the ordinary tribunal except…when parties to a contract agree as to the jurisdiction to which disputes in respect of the contract shall be subject.” .However, the bench also added that such clauses shall be held invalid if it is found that the court chosen by the contracting parties has absolutely nothing to do with the contract or the cause of action arising as a consequence. Perhaps it is here that there can be a perceived divergence of sorts between the Indian courts’ and English courts’ understanding of “one-way” jurisdiction clauses. In England, the interpretation seems to be wider and unhindered, where the courts look to enforce the intention of the parties without any fretters. In India, however, such clauses are enforceable to the extent that the jurisdiction chosen by the lender is one where the cause of action or at least a part of the cause of action has arisen..In our view, the English courts have taken a balanced position over time, one that reflects an in-depth analysis of the law and practice, and thereby developed sound jurisprudence around the validation of jurisdiction selection by contracting parties. After all, the borrowers are free to resist and negotiate around “one-way” jurisdiction clauses. So, while banks and financial institutions may find it comforting to see that Indian courts in principle look to enforce “one-way” jurisdiction clauses, a judgment from the apex court in India directly on this point would certainly go a long way in cementing India’s legal position in this regard..Anish Mashruwala is a Partner and Vardaan Ahluwalia is an Associate at JSA, Advocates & Solicitors. The views expressed herein are their own..[1] Cass civ, 1ère, 26.9.2012, Ms. “X” v. Banque Privée Edmond de Rothschild – No 11-26.022[2] Mauritius Commercial Bank Limited v. Hestia Holdings Limited and Ors. – [2013] EWHC 1328 (Comm)