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The Ouster of Forum Selection Clauses in Multinational Contracts

Abstract

Forum selection clauses have received wide traction in recent years owing to the onset of multi-national business contracts. It has become a practice of convenience for parties to include a “forum-selection clause” in their agreements to avoid a myriad of litigation before various Courts and to mutually agree on one location, mode of dispute resolution and type of litigation that is agreeable to both parties. The whole exercise intends to make dispute resolution easier for both parties, but the issue arises when the parties agree to submit to one forum but subsequently approach another. The admittance of this clause has instigated various arguments against it owing to the apparent deviation from the applicability of principles of natural justice in contractual agreements. The Indian Courts have, in keeping with the global standards, also given recognition to this clause. This article analyses the genesis of the forum-selection clause, the advantages and limitations of the clause, its extent of global enforceability and its applicability in the Indian judiciary.

Introduction

The tremendous increase in participation in international commerce has led to the popularity of multinational contracts resulting in complex legal relationships and conflict of laws. The complexity mainly arose by fact of jurisdiction as according to contracts law, the parties can bring a suit before any court where a substantial part of the contract may have taken place or has an effect on, leading to the filing of cases before different courts following different laws and leading to the duplicity of cases. To mitigate this conflict and limit litigation, the parties to contract tried to curb the complexity of contracts by adding forum selection clauses, specifying beforehand the location, scope, mode of dispute resolution, type of litigation and the nature of the clause[1], taking into account the convenience of both parties. The issue arises when parties agree to submit to one forum but subsequently sue before a different court.

Global Enforceability

The incorporation of forum selection clauses in international commercial contracts has been regularized owing to the flexibility the clause provides in terms of choice of law. It has the additional benefit of easing the minds of prospective foreign investors, which boosts economic and technical participation through cross border joint ventures.

The Bremen-Zapata case[2] was the harbinger of the validity of foreign forum selection clauses. In this case, the forum selection clause between a Houston based company and a German Company was named London. At the time of a dispute, a suit was filed in the US. The US Supreme Court, honouring the contract, held that a court should enforce a forum clause unless the objecting party can “clearly show that enforcement would be unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.”[3] The Court also reasoned that mere inconvenience for one party is not sufficient reason to supersede the contract.

Even though having a forum selection clause affords a sense of security and certainty regarding the place of litigation, there may be drastic and unexpected changes in the legal or political environment at the time of dispute that might lead to non-enforceability of the clause. In the case of McDonnell Douglas Corp. v. Islamic Republic of Iran[4], McDonnell entered into a contract with the Imperial Iranian Air Force, but before completion of the contract, the Imperial Government of Iran was overthrown by the Islamic Republic of Iran, which led to strained relations between Iran and US, and the US disallowed the Company from dealing with Iran. The Court adjudged the forum selection clause non-enforceable, citing “compelling and countervailing reason” due to the drastic change in political relations between both countries.[5]

It is imperative to note that Courts have, to date, not established any “bright line” test for the enforceability or non-enforceability of forum selection clauses. The Supreme Court of US, in the case of Atlantic Marine Construction Co. case[6], opined that the onus of showing “institutional concerns” sufficient to ignore the parties’ agreement lay on the plaintiff and that the contract between them will be honoured by Courts till such time that a compelling reason for its non-enforceability can be provided.

Applicability in the Indian Judiciary

Per the global standpoint, the judicial system of India respects the principle of forum non-conveniens. Analysts have identified an increased interest in achieving the ideal jurisdictional placement of cases as an essential aspect of judicial globalization.[7] In India, the Code of Civil Procedure allows for a suit arising out of breach of contract to be instituted within the local limits of the jurisdiction where the breach occurred. As per S. 28 of the Indian Contract Act, any contract restraining legal proceedings would be deemed void if it absolutely restrains usual legal proceedings in ordinary tribunals. The forum selection clause seems to be in contravention of both provisions to the extent that it limits the parties from approaching a court in their local jurisdiction or one of their convenience if the parties in their contract have not agreed upon the same.

The Supreme Court clarified the position of the law way back in 1971 in the judgement of Hakam Singh v. Gammon (India) Ltd.[8] , which was reiterated in the case of Shridhar Vyapar v. Gammon India[9] by the Calcutta High Court, where the legality of the clause was established. It was determined that the clause did not, in totality, restrain legal proceedings, neither did it contradict public policy. Rather it took the shape of a partial restriction based on the agreement between the parties. The Supreme Court took the stand that the limitation in terms of jurisdiction could be granted to one Court where more than one Court had the authority to hear the matter and the jurisdiction was not contrary to public policy.[10] The same interpretation is also imposed in arbitration agreements having such a clause.[11]

The exception, however, to this settled law is if either of the parties can prove extraordinary and unforeseen circumstances, which would cause great injustice[12] to one of the contracting parties if the consensually agreed-upon forum has to be respected. A contractual forum clause between a foreign entity and an Indian entity can be ousted if the same is found to be oppressive, unjust and unfair. The facts of the case can prove the parties to be on an unequal footing while formulating the contract. In such cases, the Courts may allow for the litigation to continue in the plaintiff’s home country, i.e., in this case, India.

Conclusion

The enforceability of forum selection clauses does not dim the applicability of principles of natural justice in contractual agreements. While respecting the doctrine of forum non-conveniens, Courts must not forego their duty to serve justice.

In practice, there seems to be inequality in the bargaining power between the parties when belonging to two different nations. There is an observed practise of preferential treatment to the developed country in case of such contracts as they may attempt to obtain the law most beneficial to them in the contract.

Thus, the author believes that it is imperative for Courts to use their prudence in exceptional matters by sensitizing themselves to the situation at hand and adjudicating the matter in a practical sense and not by blindly following the dictate of the contract. 


[1] James P. George, Forum Clauses at the Margin, 71 Baylor L. Rev. 268, 269 (2019), https://scholarship.law.tamu.edu/cgi/viewcontent.cgi?article=2308&context=facscholar.

[2] 407 U.S. 1 (1972).

[3] Id.

[4] 758 F.2d 341 (8th Cir. 1985).

[5] Thomas J. O’Connell, Arbitration and Forum Selection Clauses in International Business: The Supreme Court Takes an Internationalist View, 43 Fordham L. Rev. 424, 434 (1974), https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=2148&context=flr.

[6] Atlantic Marine Construction Co. v. United States District Court, 82 U.S.L.W. 4021.

[7] Hannah Buxbaum, Forum Selection in International Contract Litigation: The Role of Judicial Discretion, 12 Willamette J. Int’l L. & Dispute Resolution 185, 186 (2004), https://www.repository.law.indiana.edu/cgi/viewcontent.cgi?article=1326&context=facpub.

[8] 1971 SCR (3) 314.

[9] GA 44 of 2018.

[10] Naman Verma, Exclusive Jurisdictional Clause in Commercial Contracts, Academike (Oct. 22, 2021, 2021, 7:00 PM), https://www.lawctopus.com/academike/exclusive-jurisdictional-clause-commercial-contracts/.

[11] Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited and Ors., (2017) 7 SCC 678

[12] Control Print v. Cab Machines, (1997) 99 BOMLR 187

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