Exclusive Jurisdiction Clauses in a Contract: Key issues
Sep 11, 2019, 10:35 AM IST
Nivedita Shenoy & Sharanya Shivaraman
In drafting dispute resolution clauses in commercial contracts, parties contemplate, inter alia, the most convenient and affordable forums to resolve their disputes. However, a question they are faced with is the extent of autonomy they can exercise in choosing an appropriate forum. To avoid the hassle of litigating in a forum which is inconvenient or time-consuming, parties often mutually agree to litigate their disputes before a specific court. Such clauses are drafted taking into account the common economic and geographic convenience of the parties. This article will discuss some of the key issues regarding exclusive jurisdiction clauses.
As per Section 9 of the Code of Civil Procedure 1908 ('CPC'), all Courts have jurisdiction to try all suits of civil nature unless the jurisdiction is either expressly or impliedly barred. Section 20 of the CPC further lays down that a suit may be instituted either at the place where the defendant ordinarily resides or carries on business or where any part of the cause of action arises. Section 20 makes it clear that more than one Court can have the jurisdiction to try a suit (For example: When any part of the cause of action arises in a place other than where the defendant ordinarily resides or carries on business). There may also be situations where the cause of action arises in multiple places over which different courts have jurisdiction.
Validity of exclusive jurisdiction clauses
Exclusive jurisdiction clauses enunciate a choice by parties to limit the place of institution of the suit to one forum. Section 23 of the Indian Contract Act, 1872 ('Contract Act') mandates, inter alia, that there cannot be a contract which is forbidden by or defeats any provision of law. Section 28 makes an absolute restraint on a legal recourse or ability to enforce rights under a contract, void. However, through a conjoint reading of Section 20 of the Civil Procedure Code and Sections 23 & 28 of the Contract Act, there is scope for a partial restriction by limiting parties' recourse to one forum. Exclusive jurisdiction clauses occupy this space between an absolute restraint and convenience-based forum shopping.
In Hakam Singh v. Gammon (India) Ltd [1971 SCR (3) 314], the contractual validity of choice of forum clauses was discussed. In that case, the Petitioner approached the Court of the Subordinate Judge at Varanasi for an order referring the parties to the arbitration. The contract between the parties had a stipulation that the Courts of Mumbai alone will have jurisdiction. The trial court concluded that the entire cause of action had arisen at Varanasi and the parties could not by agreement confer jurisdiction on the Courts at Bombay, which they did not otherwise possess. While dealing with this case, the Supreme Court stated that when two courts had the jurisdiction to entertain a dispute, a choice of one by agreement, would not amount to restraint of legal proceedings, or violate public policy, under Sections 28 and 23 of the Contract Act respectively. However, the parties could not, by agreement confer jurisdiction on a court that would otherwise not have jurisdiction in law to adjudicate the dispute in question. This position has been affirmed in subsequent decisions of the Supreme Court.
Enforcement of exclusive jurisdiction clauses
In A.B.C. Laminart Pvt. Ltd. & Anr vs A.P. Agencies, Salem [1989 SCR (2) 1] the contract between the parties stipulated that the Courts of Kaira will have jurisdiction to try disputes arising from the contract. The Plaintiff instituted a suit for money recovery in the Court at Salem. The Madras High Court upheld the concurrent jurisdiction vested in the Salem Court since the contract was partly performed in Salem. The division bench of the Supreme Court in Special Leave to Appeal, stated that as regards construction of the ouster clause when words like 'alone', 'only ', 'exclusive' and the like have been used there may be no difficulty in construing the ouster, unless it is found that there is no consensus ad idem. However, implied exclusion of other jurisdictions in the absence of such terms would have to be inferred from the facts and circumstances of the case and would not be automatic. The Court went on to hold that jurisdictions other than Kaira, having a connection with the contract were not excluded by the use of specific words and the general terms of the contract also do not indicate exclusion of other jurisdictions. Despite observing that the clause was valid and enforceable, the Court pierced through the clause and determined that the Salem Court had jurisdiction. Hence after ABC Laminart, courts were required to conduct a factual inquiry regarding the implied exclusion of a court's jurisdiction. It provided substantial leeway to the party seeking to deviate from an exclusive jurisdiction clause.
In Swastik Gas (M/S Swastik Gases Pvt. Ltd v. Indian Oil Corp.Ltd [(2013) 9 SCC 32], the Supreme Court provided much-needed clarity by stating that "… the absence of words like "alone", "only", "exclusive" or "exclusive jurisdiction" is neither decisive nor does it make any material difference in deciding the jurisdiction of a court. The three-judge bench held that the very existence of a jurisdiction clause in an agreement makes the intention of the parties to an agreement quite clear and it is not advisable to read such a clause in the agreement like a statute. The judgment also noted that the principle of Expressio unius est exclusio alterius (expression of one is an exclusion of the other) would be applicable to such cases. It was observed that "where the contract specifies the jurisdiction of the courts at a particular place and such courts have jurisdiction to deal with the matter, we think that an inference may be drawn that parties intended to exclude all other courts."
In Shridhar Vyapar v. Gammon India GA 44 of 2018, the Calcutta High Court was dealing with a suit for realization of dues in respect of invoices raised. The invoices contained a stipulation that the disputes shall be decided by Courts of Raipur and Nagpur respectively. The Calcutta High Court held that "parties can be bound to an agreement containing a clause conferring exclusive jurisdiction on certain courts, if by their conduct subsequent to such selection, it can be shown that the parties intended to give effect to the contract. The exception being where despite such a clause and a consensus to act by it, the cause of action arose wholly and overwhelming-ly in another jurisdiction and second, it would be oppressive to drag the parties to their chosen forum having regard to other factors." Based on these observations, the Calcutta High Court concluded that the party challenging the exclusive jurisdiction clause failed to show how the contractually selected forum would be inconvenient or oppressive. The court enforced the exclusive jurisdiction clause.
Although exclusive jurisdiction clauses may be enforced as contemplated by the Supreme Court in Swastik Gas in a vast majority of cases, it is necessary to recognize some exceptions. For instance, exclusive jurisdiction clauses are included in most adhesion contracts where there has been no negotiation of the clause and the bargaining power is unequal. Situations may also arise in which, the parties could not have reasonably foreseen that institution of proceedings in the chosen forum would cause extraordinary hardship or inconvenience. In view of this, the approach of the High Court of Calcutta in this regard appears to be a more pragmatic one.
About the Authors: Nivedita Shenoy is an Associate Partner and Sharanya Shivaraman is an Associate at AK Law Chambers, Bengaluru. Nivedita is a dispute resolution lawyer with an LL.M. in International Business Regulation, Litigation, and Arbitration from New York University School of Law.
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Code of Civil ProcedureJurisdictionContract Lawexclusive jurisdictionIndian Contract Act