In the Media

Jurisdiction should be included in agreement

PUBLISHED December 2, 2009

DEFENDANTS tend to assume that a court first seised of a dispute will do its utmost to retain jurisdiction to hear that dispute. However, the very recent case of Choil Trading SA v Addax Energy SA illustrates that the Commercial Court in London is prepared to apply autonomous European law concepts and exclude national principles of contractual construction when determining jurisdiction under European conventions.

Representatives from two Swiss oil trading companies met in Geneva in April 2008 to discuss a possible joint venture in which each would combine their respective spheres of expertise, in the US Gulf and in West Africa, to buy and sell on low sulphur fuel oil. However, no written agreement ever materialised from these discussions.

The parties began entering into trades, sale contracts (?physicals?) and futures contracts (?derivatives?), but very soon disputes arose as to whether those trades fell within the alleged joint venture and how profits and losses would be allocated.

Choil Trading issued a Claim Form in London in December 2008 against Addax Energy, represented by Hill Dickinson.

Choil claimed damages for breach of the alleged joint venture. The damages claimed related to profits: (i) from physicals performed; (ii) from physicals Choil alleged would have been performed; and (iii) from derivatives, some of which hedged against the physicals and some of which were purely speculative.

Our immediate view upon being instructed was that where the alleged cause of action was the breach of a joint venture agreement discussed between Swiss companies, to be performed in Geneva, the only proper forum for the dispute was that of Geneva.

Addax therefore filed an application before the Commercial Court challenging jurisdiction and it is this application which resulted in a decision of Mr Justice Field on 28 September 2009.

The general rule of the Lugano Convention (applicable to Switzerland as an EFTA country) and the Brussels Regulation 44/2001 (for EU countries) is that a defendant must be sued in the courts of its domicile.

One of the key exceptions to the general rule is where the parties agree that the courts or arbitrators of another country shall have jurisdiction to determine their disputes. A jurisdiction agreement, according to Article 17 of the Lugano Convention and Article 23 of the Brussels Regulation, shall be:

?(a) in writing or evidenced in writing, or

(b) in a form which accords with practices which the parties have established between themselves, or

(c) in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned.?

In this case, Choil sought to overcome the lack of a written jurisdiction agreement in the alleged joint venture agreement by asserting that Article 17(a) was nevertheless satisfied by the English jurisdiction clauses found in the physicals.

Choil also argued that it was a recognised usage in the oil trading business that contracts were governed by English law and English jurisdiction.

The judge found that it was common ground between the parties that:

?(i)The burden is on Choil to demonstrate ?clearly and precisely? that it is the subject of a consensus between the parties that the English court should have jurisdiction over it;

(ii)The concept of consensus for the purposes of Article 17 is an autonomous concept;

(iii)Choil must establish a good arguable case that it has discharged the burden on it, which generally means that it must show that it has a much better argument than does Addax that the requirements of Article 17 are satisfied (see Salotti [1976] ECR 1831 ; Bells Distilleries BV v Superior Yacht Services Limited [2007] 1 WLR 12 ).?

Choil failed to convince Mr Justice Field on all counts.

The judge clearly recognised that the contract in issue was the alleged joint venture and the jurisdiction clauses in subsequent physical contracts did not have the scope to apply to disputes, which were ?of a quite separate character?, under the JV as to the allocation of profits and losses. Furthermore he considered that Choil could not cherry pick the jurisdiction clauses of the physical contracts alone when the alleged joint venture also comprised more than 100 derivative contracts, the majority of which referred disputes to New York arbitration.

Addax adduced expert evidence that there was no recognised usage of only English jurisdiction clauses in oil trading contracts both generally and in terms of joint venture agreements and the court found that there was no evidence of such usage for oil trading joint ventures.

Of particular interest was the judge?s recognition of the autonomous nature of the European law concept of parties? consensus that a contract was subject to a particular jurisdiction.

He found that consensus was absent and that there was no question of incorporating into the alleged oral joint venture an implied term as to jurisdiction by reason of English law principles of business efficacy (ie to perfect the inadequate nature of terms agreed).

In the closing passages of Mr Justice Field?s judgment, he acknowledged Switzerland as a mature legal system fully versed in determining financial disputes and so declared that the Commercial Court had no jurisdiction to hear Choil?s claim.

It was clear in this case that the traders who discussed the potential for business co-operation for mutual gain never directed their attention to what law or jurisdiction would govern any dispute. Thus one party?s subsequent attempts to find alternative constructions for any agreement failed to overcome that hurdle of party consensus.

Rarely are thoughts of dispute resolution in the minds of traders, which is why their in-house or external lawyers should be involved in finalising agreements. If not, the parties may find themselves bound by the default rules of international conventions on law and jurisdiction.