English Commercial Court rules on the validity of one-way jurisdiction clauses

Financial institutions and practitioners must have breathed a sigh of relief upon reading the Commercial Court’s judgment in the case of Mauritius Commercial Bank Ltd v Hestia Holdings Ltd and another [2013] EWHC 1328 (Comm) affirming that a one-way jurisdiction clause is valid under English law.

A one-way jurisdiction clause is a contractual provision which grants one of the contracting parties, often the party with the strongest bargaining position, the right to commence proceedings in an alternative jurisdiction to that stipulated in the agreement. Such a clause is very common in loan agreements and is often used by lenders to maintain flexibility and control while committing the borrower to an exclusive jurisdiction clause.

The validity of the one-way jurisdiction clause was recently threatened by the controversial French case of Mme X v Banque Privée Edmond de Rothschild, No 11-26.022. In Rothschild, the French Cour de cassation, refused to give effect to a one-way jurisdiction clause on the basis that such a clause is “potestative” and, therefore, void. “Potestativité” is a French legal concept based on provisions of the Civil Code usually applied to conditions precedent. It invalidates a condition precedent which makes the fulfilment of the agreement dependent upon an event which only one of the contracting parties has the power to make happen or to prevent from happening. Rothschild is not directly applicable to agreements governed by English law, but the status of the one-way jurisdiction clause remains unclear, especially at the European level.

The English Commercial Court decision in Mauritius is a clear move away from the French approach. In Mauritius, the claimant granted the first defendant a loan facility, which was guaranteed by the second defendant. The original agreements provided for Mauritian law and jurisdiction. The loan agreements were subsequently amended by the parties and made subject to English law and jurisdiction with a one-way jurisdiction clause for the benefit of the lender. The defendants defaulted on their loan repayments and the claimant commenced proceedings in England. The defendants argued that England was not the proper forum because contracting parties cannot simply amend the governing law of their agreement after it has become effective. The defendants argued that to modify the law governing the agreement, it would have been necessary to discharge the agreement and enter into a new one. They therefore argued that Mauritian law should govern the contract. As Mauritian law is based on French law, it may have been likely that the approach in Rothschild would have been followed. This would have prevented the claimant from relying on the one-way jurisdiction clause in the amended agreement.

The Commercial Court rejected the defendants’ argument stating that it is well-established that the governing law of a jurisdiction agreement is like any other contractual provision: it can be amended by the parties’ express choice, if they had made one. Therefore, the contract was validly amended and English law applied. The Commercial Court went on to quote with approval a recent Cambridge Law Article by Professor Fentiman that expressed the English policy position in the following terms: “Such unilaterally non-exclusive clauses are ubiquitous in the financial markets. They ensure that creditors can always litigate in a debtor's home court, or where its assets are located. They also contribute to the readiness of banks to provide finance, and reduce the cost of such finance to debtors, by minimising the risk that a debtor's obligations will be unenforceable. Such agreements are valid in English law…Indeed despite their asymmetric, optional character it is difficult to conceive how their validity could be impugned or what policy might justify doing so…”.

Although the decision will be welcomed by practitioners in the English context, it does not do away with the concern caused by the decision of the French Cour de cassation and similar decisions in Poland and Spain. It is unfortunate that there is such a divergence between EU Member States on this issue, especially in light of the fact that the predecessor to the Brussels I Regulation, the Brussels Convention recognised the validity of such clauses. It would be useful for the European Commission to clarify Europe’s position on this point.

The full text of the judgment can be found here.