International business transactions are generally the outcome of a contractual agreement. These agreements also define the choice of forum through a clause of the agreement and often such clauses in the contracts lead to disputes. One interesting dispute arose between a German Company namely, Unterweaser and an American company namely, Zapata Off-Shore Company1. The dispute related to an international towage contract. Among other things, the contract had a choice of forum clause which read as under:
“Any dispute arising must be treated before the London court of Justice”. As luck would have it, the towing ship met with an accident and the towed cargo was damaged. This accident led to the legal disputes, it revolved around a choice of forum clause. The current forces of international trade and the realities of modern commerce make it clear that forum clause controls the choice of forum and where the choice of forum is suitable and expertise are available, the choice of the parties should be enforced .
The American company tried to settle the dispute through American courts by saying that choice of forum clause was not appropriate as the same violated the public policy. The issue was vehemently contested between the parties and it went up to US Supreme Court for resolution. Before we study what the court said about the dispute, it is necessary to review the choice of forum clause and to find out the defects it had.
The clause had the following defects:
— The clause is authorising London court of justice to adjudicate the dispute between parties that means the clause is defining the choice of forum as well as jurisdiction of the tribunal.
— Since the contract was signed in USA, therefore choosing of a foreign jurisdiction and an alien forum was a defect.
— The tribunal’s title namely, ‘London court of justice’ was not correct. Apparently there is no London Court of Justice, but nobody looked the clause seriously.
— No choice of law was specified, and for the sake of an argument we suppose that the court had the jurisdiction of the subject matter, but the question will be which law becomes applicable?
— No liability limit was specified, and a valid consent was signed for to be sued in a jurisdiction where Zapata cannot be found for service or for receipt of process in that jurisdiction
— It ousted the jurisdiction of courts in the US and it extended legitimate expectation to the parties.
It would have been better if the clause would have read ‘any dispute arising must be settled before the New York courts’. However, despite decisions of the lower courts to the contrary, the US Supreme Court laid down the following principles for application and of interpretation of choice of forum clause:
— A forum clause is to be enforced unless the defending party can show that the same is ‘unreasonable’ in the circumstances of the case;
— A clause defining the forum is enforceable where the same has been made in an ‘arm’s length negotiation;
— Where a valid consent has been given by the contracting parties, the forum clause is valid;
— “May be parties prefer a neutral forum coupled with expertise” the court observed;
— In fact, the parties have legitimate expectation which is manifested in the agreement and specified in the forum clause.
Despite the said observation the court also observed that the present dispute involves a freely-negotiated commercial transaction, hence selection of forum was a reasonable effort to bring vital certainty to transaction and to provide a neutral forum, which is experienced and capable of resolving the admiralty litigation.
In order to escape from the effect of an agreed clause, the party has to show that the implementation of clause was difficult, the same was inconvenient to the parties, the purpose of the clause is to defeat the intentions of the contract, the clause is unfair, unjust or unreasonable.
One should note that the question of personal jurisdiction also arises in foreign courts, for example, a suit is filed at the defendant’s home base. The nationality of the plaintiff may be more important than the base. A place connected with the cause of action may also be considered relevant by the foreign courts. German courts for example, would take cognisance of a matter in respect of a tort claim where action complained took place in Germany. But where the action took place in another country, then the cognisance will be considered as overreaching.
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi) 1. 407 US 1,92 S.CT (1907)Zafar Azeem, "International dispute resolution," Business recorder. 2014-05-29.
Keywords: Social sciences , Social issues , Social needs , International trade , Business , Law making , Courts-US