15 September, 2015
Agreements to litigate before a particular national court (choice of court agreements)1 may not always be respected – potentially leading to parallel litigation – and resulting court judgments can be difficult, time-consuming and costly to enforce overseas.
The Hague Convention on Choice of Court Agreements (the "Hague Convention"), which will come into force on 1 October 2015, is looking to change this. It seeks to make cross-border litigation a more viable option by attempting to replicate the benefits that the New York Convention provides to international arbitration.
This newsletter looks at what the entry into force of this Convention is likely to mean for international dispute resolution and for Japanese investors in the short and longer term.
Purpose and operation of the Hague Convention
One of the key factors in international arbitration's success as an international dispute resolution mechanism is the New York Convention2 – a treaty which requires the Courts of signatory states to respect arbitration agreements and provides an effective regime for enforcing arbitral awards in most jurisdictions.
The purpose of the Hague Convention is to reproduce these benefits for international litigation. Importantly, it seeks to:
(i) ensure that where international parties insert a choice of court agreement into their contract this choice is effective; and
(ii) provide a harmonised approach to the recognition and enforcement of judgments resulting from such an agreement.
It will achieve this through three principal mechanisms:
Where the Courts of a Contracting State to the Hague Convention have been designated in an exclusive choice of court agreement, the Courts must not decline jurisdiction on the ground that the dispute should be decided in the Court of another state (Article 5).
The Courts of a Contracting State must respect choice of court agreements by staying or dismissing proceedings brought before them where the Courts of another Contracting State have been designated in a valid choice of court agreement (Article 6).3
Contracting States must recognise and enforce judgments of the Court of another Contracting State designated in an exclusive choice of court agreement (Article 8). Similar to the New York Convention, the obligations to recognise and enforcement judgments are subject to a limited (although slightly broader) list of exceptions.
Scope of the Hague Convention
The Hague Convention's scope is limited to exclusive choice of court agreements4 in international civil and commercial matters. This will include most types of commercial agreement, although there are some exceptions set out in Article 2 (for example, insolvency, anti-trust and property rights are excluded from its scope).
As things stand, however, the wider application of the Hague Convention will likely be limited (at least in the shorter term) by the breadth of its signatories. A foreign judgement will only be enforced or recognised in a Contracting State where the courts of another Contracting State have been designated in an exclusive choice of court agreement or where judgment is obtained from another Contracting State Court. Outside of this, the Contracting State's ordinary domestic position on jurisdiction and enforcement of foreign judgments will be followed.
At present, there will be 28 Contracting States (all EU states (except Denmark) and Mexico) when the Hague Convention comes into force. Two further states have signed the Convention – the USA in 2009 and Singapore more recently in March 2015 – but have not yet ratified it. It is understood that Singapore will ratify the Convention once in force. Other states, including Australia, Canada and New Zealand, are understood to be considering whether to sign.
Singapore's decision to sign up to the Hague Convention is an interesting regional development and comes very soon after the creation of its new Singapore International Commercial Court ("SICC").
Is the Hague Convention likely to change the international dispute resolution outlook?
One question raised by the entry into force of the Hague Convention is whether cross-border litigation may replace international arbitration as the "go-to" method for resolving cross-border disputes.
This appears unlikely, particularly in the short term. One of the factors behind the New York Convention's success in arbitration matters is its far-reaching application as a result of the number of signatories (156 at present). The Hague Convention's entry into force in October is expected to prompt new states to sign and ratify the treaty; however, it is uncertain how extensive state support will be, and how widespread its use will become.
Commercial parties are also likely to remain attracted by the private and (in most cases) confidential nature of international arbitration proceedings and awards, and the greater control over the process and appointment of decision makers that arbitration usually provides.
However, the Hague Convention will, in the right circumstances, provide parties with a potential alternative to international arbitration when choosing how to resolve cross-border disputes arising under commercial contracts they enter into. This greater autonomy is to be welcomed and parties should give serious consideration when negotiating contracts as to what will be the most efficient and effective dispute resolution mechanism for potential disputes that may arise.
What does the Hague Convention mean for Japanese investors?
At present, it is unclear whether Japan – who was involved in the drafting – will choose to sign and ratify the Hague Convention.
However, even if Japan does not become a signatory, the Hague Convention may still be relevant to Japanese companies that operate and are involved in dispute resolution internationally. Although it seems likely that international arbitration will continue to be the preferred international dispute resolution mechanism for Japanese companies, the potential application of the Hague Convention should be considered when deciding on appropriate dispute resolution mechanisms. This is particularly so where bargaining power or circumstance might be such that it is not possible to insist on international arbitration.
Conclusion
The entry into force of the Hague Convention is an exciting development in the international dispute resolution sphere. However, whether it will be a wide-spread success and lead to a resurgence in the use of litigation to settle complex, high value cross-border disputes remains to be seen. Much will depend on the uptake of the Hague Convention, and whether commercial parties will continue to prefer their international disputes to be resolved by private tribunals.
1 Also known as "jurisdiction clauses" or "forum selection clauses".
2 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).
3 This is subject to a limited list of exceptions set out in Article 6, including where the chosen court has decided not to hear the case.
4 A signatory can choose to extend this to non-exclusive choice of court agreements (Article 22).
For further information, please contact:
Peter Godwin, Partner, Herbert Smith Freehills
peter.godwin@hsf.com
