The time has come for commercial parties to review their contracts in light of new Brussels I Regulation. This new update enhances jurisdiction agreements between commercial parties in the European Union.
Parties entering into a contract often agree a governing law and jurisdiction clause within that contract. A governing law clause enables the parties to specify the system of law that will apply to the interpretation of the contract and its effect if a dispute arises. A jurisdiction clause enables the parties to agree, at the outset of their contractual relationship, which country’s courts they wish to have jurisdiction to resolve disputes arising from the contract.
The recast form of the Brussels I Regulation on jurisdiction and the enforcement of judgments in civil and commercial matters (Regulation 1215/2012/EU) will come into force on 10th January 2015. The recast Regulation addresses one of the major problems with the existing Regulation by strengthening the protection given to jurisdiction agreements.
What was in the existing Regulation?
Under the existing Regulation, where the parties to a contract had agreed within the contract that the courts of one member state had exclusive jurisdiction to resolve disputes between them but, nonetheless, one party opted to breach that agreement by commencing proceedings in the courts of another member state, the court first seised in respect of the dispute had jurisdiction until it decided otherwise.
To help illustrate the existing Regulation, I’ll give you the following example:
- An English based company entered a supply contract with an Italian based company.
- The supply contract provided that the courts of England had exclusive jurisdiction to resolve disputes between the parties.
- The English company fulfilled its supply obligations but the Italian company failed to pay over alleged problems with the goods supplied.
- To prevent proceedings being commenced by the English company in England in accordance with the contract, the Italian company could act in breach of the jurisdiction agreement by commencing proceedings over the alleged problems in Italy.
- The Italian courts would then be the court first seised.
- The English courts would then be obliged to defer to the Italian courts until such time as the Italian courts decided they did not have jurisdiction.
- This would mean that the English company could not commence proceedings to recover the debt pending a decision by the Italian courts as to their jurisdiction.
In the above example, a decision by the Italian courts as to their jurisdiction, or lack thereof, could take some time. Commencing proceedings in the way put forward in this example in a “wrong court” is a tactic which has become known as the “Italian torpedo” because the courts in Italy are often used when this tactic is deployed due to their perceived slowness in reaching decisions. In the past, this “Italian torpedo” tactic has been deployed to cause delay and inconvenience to the other party so as to improve one’s negotiating position in respect of settling a dispute.
How does the recast Regulation make a difference?
The recast Regulation addresses this issue by giving a member state’s courts chosen by the parties in a contract precedence over all other courts regardless of when proceedings are started. Under Article 31(2) of the recast Regulation, if the parties have conferred exclusive jurisdiction on a particular court, that court may proceed to hear the case even if it was not the court first seised. “Italian torpedoes”, which up to now have undermined contractual jurisdiction agreements, should therefore become things of the past as the incentive to start proceedings elsewhere having agreed that the courts of one member state are to have exclusive jurisdiction will be removed.
In this way, the recast Regulation strengthens the protection given to jurisdiction agreements. There is now a clear incentive for commercial parties to review their contracts to ensure they have a clearly drafted governing law and jurisdiction clause when they are trading across borders within the European Union.
Commercial parties whose contracts include a foreign element (for example, where there is a foreign party or where some of the obligations relevant to the contract are to be performed in another country) should undertake such a review exercise because, if there is no effective jurisdiction clause, the correct forum for the settlement of disputes within the European Union will be determined by various European Union instruments. The basic principle underlying such instruments is that, in the absence of an agreement on jurisdiction, a defendant should be sued in their country of domicile and this remains untouched under the recast Regulation.
At Franklins Solicitors we have a history of assisting with commercial contract drafting and negotiation. If you require any legal guidance on a commercial contract issue, feel free to contact me on 01908 660966 or by e-mail at Christopher.Buck@franklins-sols.co.uk.