Exclusive Jurisdiction Clauses: Do they always work?

A recent High Court decision (Gulf International Bank BSC v Aldwood) has thrown up a potential problem for parties who have entered into an agreement which contains an exclusive jurisdiction clause in favour of a non-EU country, where the defendant is domiciled in England or elsewhere in the EU.

What was the Aldwood case about?

The claimant, a Saudi Arabian bank, had entered into an agreement with the defendant. The agreement contained a clause which, the defendant argued, provided for disputes to be subject to the exclusive jurisdiction of the courts of the Kingdom of Saudi Arabia. However, when a dispute arose, the defendant was domiciled in England and the bank commenced proceedings in the English courts. The defendant argued that the English courts did not have jurisdiction over the claim.

What was the issue?

The Recast Brussels Regulation contains a general rule that, in civil and commercial matters, "persons domiciled in a Member State shall…be sued in the courts of that Member State".

This general rule can be overridden in certain circumstances. One of these is where the parties have agreed that the courts of a particular EU Member State will have jurisdiction. In that case, those courts will have exclusive jurisdiction, regardless of where the defendant is domiciled (the 'exclusive jurisdiction provision').

The same rule applied under the original version of the Brussels Regulation. However, there was no provision for the situation where parties had agreed that the courts of a non-EU Member State would have exclusive jurisdiction. This gap was filled by case law: the courts decided that a "reflexive" approach should be applied to the interpretation of the exclusive jurisdiction provision, with the result that it would be applied in the same way in respect of non-EU Member States as it would for EU Member States.

When the Brussels Regulation was amended, one of the main reasons for doing so was to try to address the issue of how to deal with parallel proceedings in non-EU Member States. The Recast Brussels Regulation contains two new articles, articles 33 and 34. These articles allow a Member State court to stay proceedings in favour of a non-EU Member State court in certain circumstances. However, a stay can only be granted where non-EU proceedings have been commenced before EU-proceedings.

This raises the question of what will happen if proceedings are started in the EU first. This was the situation that arose in the Aldwood case. The question for the High Court was whether it could grant a stay of the English proceedings under articles 33 and 34 in a situation where no prior proceedings had been commenced in Saudi Arabia (a non-EU Member State).

What did the High Court decide?

The High Court ruled that the English court could not decline jurisdiction in favour of the Saudi Arabian courts nominated in the agreement.

Deputy High Court Judge John Kimbell QC accepted the claimant bank's argument that articles 33 and 34 now provide the sole basis for Member State courts to stay proceedings in favour of the courts of a non-EU Member State, and that there is no residual, national, discretionary power to stay proceedings in favour of such courts.

He held that the earlier case law under the Brussels Regulation relating to the doctrine of "reflexive effect" has been overridden by the new express provisions of articles 33 and 34 of the Recast Brussels Regulation. Accordingly, now, it is only possible to rely on articles 33 and 34.

In reaching this decision, the Judge also reiterated that exceptions to the general rule that defendants should be sued in the courts of their home Member State should be interpreted restrictively. The addition of a second discretionary power to stay would lead to uncertainty because Member State courts would vary in their application of that discretion.

As a separate matter, the court considered whether the 2005 Hague Convention on Choice of Court Agreements had any application in this case.

Where the 2005 Hague Convention applies, it gives effect to exclusive jurisdiction clauses by providing that only the nominated court can hear the case.

However, the 2005 Hague Convention will only apply where both the country which is nominated (here, Saudi Arabia) and the country where proceedings are started (here, England) are parties to it. In this case, Saudi Arabia was not a party to the 2005 Hague Convention, and so it did not apply.

Will there be an appeal?

It is not clear whether there will be an appeal. However, it is worth noting that the Judge also ruled that the relevant clause was not an exclusive jurisdiction clause. This means that, even if the Judge was wrong on the interpretation point, there is a second basis for his decision.

Osborne Clarke Comment

The introduction of the 2005 Hague Convention reflected growing international acceptance of the need to recognise exclusive jurisdiction clauses and related court judgments, in a similar way that arbitration clauses are recognised under the New York Convention.

Although the 2005 Hague Convention did not apply in this case, the High Court's decision as to the proper interpretation of the Recast Brussels Regulation seems to bring the Recast Brussel Regulation into conflict with the 2005 Hague Convention in circumstances where an exclusive jurisdiction clause nominates a non-EU state which is party to the 2005 Hague Convention. This creates a difficult situation and we anticipate further litigation on this point.

More generally, the decision in the Aldwood case underlines the difference between the rules on jurisdiction which apply where a defendant is domiciled in an EU Member State and the domestic rules which will apply if a defendant has no domicile in the EU. Because the defendant in this case was domiciled in England, the 'prior proceedings' condition of articles 33 and 34 had to be met. However, if the defendant had been domiciled outside the EU, the English court would have had a discretion to stay the English proceedings, if it considered that there was a valid exclusive jurisdiction clause in favour of Saudi Arabia.

The effect of this could be that, where a defendant is domiciled in an EU Member State and there is an exclusive jurisdiction clause in favour of a non-EU Member State, there will be a race to start proceedings in order to gain a jurisdictional advantage. Ironically, this is the precisely the kind of behaviour that the Brussels Recast Regulation had tried to stop.

Finally, in the event of a no-deal Brexit, the UK government intends to revoke the Recast Brussels Regulation as from the exit day. The impact of this is likely to be that an English court would recognise and enforce an exclusive jurisdiction clause in favour of a non-EU Member State court under its domestic common law rules. As regards EU courts recognising exclusive jurisdiction clauses in favour of the courts of England and Wales, they would be bound to do so under the 2005 Hague Convention, even if the position under the Recast Brussels Regulation was not clear because proceedings had not first been commenced in England.