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A Game-Changer on the Question ’Forum-Selection or Arbitration Clause?’ Or Just Causing ‘Torpedoes?’

July 16, 2021

The Hague Convention on Choice of Court Agreements (The Hague Convention) enables global judgment enforcement. It has been ratified by 32 States. Among them are all EU member states, the United Kingdom, Singapore, and Mexico. Other States such as the United States and China have already signed it. As it provides for global judgment enforcement, the Convention is nothing short of groundbreaking for deal negotiations and litigation tactics. This article outlines two key conclusions in this regard.

The core rule in The Hague Convention is its Article 8 on global judgment enforcement. It states:

“A judgment given by a court of a Contracting State designated in an exclusive choice of court agreement shall be recognised and enforced in other Contracting States in accordance with this Chapter. Recognition or enforcement may be refused only on the grounds specified in this Convention.”

The triggers for this global judgment enforcement are few:

  • There must be a choice-of-court agreement.
  • The choice-of-court agreement must be exclusive. This means that it must stipulate for the jurisdiction of the courts of one State over litigation brought by either contracting party (so-called “asymetrical” clauses which allow only one party to choose among several courts are not covered).
  • The chosen courts must be in a contracting State. The origin of the parties is irrelevant.

WHEN CLOSING A DEAL, DECIDE CAREFULLY BETWEEN A CHOICE-OF-COURT AND AN ARBITRATION AGREEMENT

It is no secret that The Hague Convention has been negotiated to make litigation more attractive in times where arbitration has almost become the default mechanism for resolving international disputes (just as the recent movement for “international commercial courts” in Paris, Singapore, and Baden-Württemberg, with specialized judges offering proceedings in the English language).

A key “asset” of international commercial arbitration is the 1958 Convention on the Recognition and Enforcement of Arbitral Awards (the New York Convention, after the city where it was signed). The New York Convention allows to enforce arbitral awards in 168 States.

Therefore, The Hague Convention resembles the mechanism of The New York Convention. Just as The New York Convention, The Hague Convention contains the general rule that decision must be enforcement abroad (Article III New York Convention, Article 8 The Hague Convention, quoted above). And just like the New York Convention, The Hague Convention contains only a limited catalogue for grounds under which recognition and enforcement can be refused.

The key is protection against enforcement under The Hague Convention is more limited than under the York Convention.

New York Convention

(Arbitral Awards)

The Hague Convention

(Judgments based on Choice-of-Court Agreements)

Jurisdiction of original tribunal

Enforcement court can review arbitration agreement in full (Art. V(1) lit. a)

Enforcement court can review choice-of-court agreement “UNLESS THE CHOSEN COURT HAS DETERMINED THAT THE AGREEMENT IS VALID” (Art. 9 lit. a, emphasis added)

Procedure violated party agreement

Enforcement court can reject enforcement (Art. V(1) lit. d)

[NOT ADDRESSED in Convention]

Procedure violated due process

Enforcement court can reject enforcement (Art. V(1) lit. b)

[NOT ADDRESSED in Convention]

Public policy

Enforcement court can reject enforcement if “enforcement of the award would be contrary to public policy” (Art. V(2) lit. b)

Enforcement court can reject enforcement if “recognition or enforcement would be MANIFESTLY incompatible with the public policy of the requested State” (Art. 9 lit. e, emphasis added)

 

Therefore, during transactions, one must necessarily decide between arbitration and choice-of-court agreements with a view to enforcement.

There will be no one-size-fits-it-all solution. In particular, the answer is not as simple as “judgments are now easier in enforcement.” Tailor-made solutions are required. Important considerations will be:

  • Where shall enforcement take place (i.e., in a contracting State of The Hague Convention)?
  • Would I be likely on the receiving end of enforcement?
  • International arbitration has established practices, duration, personel and, above all, decisionmakers. Does litigation in the proposed State have the same?
  • Above all, how is the quality and procedure in the potential State courts as compared to arbitration?

WHEN IN LITIGATION, CONSIDER ‘TORPEDOES’

When a respondent is served with a notice of claim by a court from a Hague Convention State, the tactical considerations may exceed the mere defense in court.

Respondents may need to initiate parallel litigation. The reason is Article 9 of The Hague Convention. As per this provision, enforcement courts abroad will not review the initial court’s jurisdiction if:

“the chosen court has determined that the [choice-of-court] agreement is valid” (Art. 9 lit. a).

That is, The Hague Convention intends respondents to have only one shot at objecting to jurisdiction, namely before the very court whose jurisdiction under the choice-of-court agreement is concerned.

However, The Hague Convention provides for an additional defense mechanism for respondents:

  • Nothing prevents the respondent from initiating a parallel (“torpedo”) litigation in another, second State.
  • Above all, Article 6 lit. a of The Hague Convention does allow this second court to review the choice-of-court agreement. In particular, the second court is not required to stay the proceedings unless it holds this agreement valid.
  • If the second court deems the choice-of-court agreement invalid, judgments based on this choice-of-court agreement from abroad will be unenforceable in the State of the second court under Article 9 lit. f stating: “Recognition or enforcement may be refused if […] f) the judgment is inconsistent with a judgment given in the requested State in a dispute between the same parties.”

It may be put into question whether this incentive for parallel litigation was desired by The Hague Conference, or is indeed desirable. But it is what The Hague Convention presses respondents into. As often, the right tactics will depend on the particular dispute.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Frankfurt
Sabine Konrad
Maximilian Pika