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  • Piyush Rathi

Validity of Choice of Law and Forum Selection Clause by Parties to a Contract

Abstract

Over the years, the Indian courts have adjudicated an array of cases relating to the issue of forum selection by the parties to a contract as well as the validity of their choice of law governing the agreement. This piece while touching upon the notions of proper law and jurisdiction of Indian courts, discusses the validity of choice of law and forum selection by parties to a contract and attempts to employ vital judicial precedents as well as commentaries to argue and subsequently, answer the question: If the parties agree to the application of a foreign law (either with or without a foreign jurisdiction agreement as well), in what circumstances (if any) will the Indian court apply that foreign law? And If the parties agree to the jurisdiction of a foreign court but one of them subsequently sues in India, in what circumstances (if any) will the Indian court decline jurisdiction?


Introduction

When a dispute arises between the parties to a contract, the parties approach a forum which possesses the jurisdiction to adjudicate and resolve the conflict employing the governing law of the contract. The question of jurisdiction of such a forum can arise in a case when the party agrees to submit to one court called the exclusive jurisdiction as court of choice and subsequently sues in a different court. Further, the dispute can also arise when the parties to the contract by choice agree to a law that will govern their contract. In such cases the question arises will Indian courts allow parties to choose the foreign law (either with or without a foreign jurisdiction agreement)? Both of which are the concern of this paper.


If the parties agree to the application of foreign law (either with or without a foreign jurisdiction agreement as well), in what circumstances (if any) will the Indian court apply that foreign law?

A question of such jurisdiction and choice of law was raised in the case of Rhodia Ltd. v. Neon Laboratories Ltd[1] in which an Indian Company and English Company agreed to submit to English Courts using English Law in case of disputes through their distribution agreement. On appeal the High court of Bombay was raised with the following issues:

(i) Whether contracts with foreign choice of law clause are valid under Indian law, and whether foreign law can be relied upon to assess whether an Indian court has jurisdiction in the matter?

(ii) Whether an Indian court has jurisdiction to entertain a suit arising out of an agreement specifying a foreign court as having exclusive jurisdiction if the cause of action has arisen in India?


While addressing these issues the court used the principle laid down by the Supreme Court in the case of National Thermal Power Corporation v. Singer Company[2] which said that “the express intention of the parties is generally decisive in determining the proper law of contract”.


The apex court further laid down that “the proper law is the law which the parties have expressly or impliedly chosen, or which is imputed to them by reason of its closest and most intimate connection with the contract. It must, however, be clarified that the expression ‘proper law’ refers to the substantive principles of the domestic law of the chosen system and not to its conflict of laws rules.”[3]


In addition to this, Dicey, Morris & Collins on the Conflict of Laws formulate the following rule on proper law of contract as Rule 180, “The term ‘proper law of contract’ means the system of law by which the parties intended the contract to be governed, or, where their intention is neither expressed nor to be inferred from the circumstances, the system of law with which the transaction has its closest and most real connection.”[4] The only limitation to this principle is that the intention of the parties must be expressed bona fide and it should not be opposed to public policy as per the “proper law” of the agreement.


Further, the intention of parties to choose the proper law is bona fide and not opposed to public policy as per “proper law” of the agreement has to be presented with proper evidence in front of the court. This is in accordance with the decision of the apex court in Hari Shankar Jain v Indira Gandhi[5] where the court stated that a foreign law ought to be pleaded like any other fact and must be proved by evidence of experts in that law being matters of evidence requiring proof as questions of fact, if a party wants to rely on the same. If the answer after consideration of the evidence comes in affirmative then the agreement would be governed by the proper law of the contract.


Now, the question arises, whether the parties can completely circumvent the restriction under Indian Law for the performance of the contract? In my opinion, the express intention of the parties and the limitation that intention of the parties must be expressed bona fide and it should not be opposed to public policy as per the “proper law” of the agreement is to decisively determine the “proper law of the contract.” However, the contract can still be hit by Section 23 of the Indian Contract Act (henceforth, the Act). Section 23 renders certain considerations and objects as unlawful and includes such agreement to be void whose object or consideration is such that though it is not directly forbidden by the law but if permitted would defeat the provisions of any law.


From the above observation, it can be submitted that the application of the principle of proper law is when the question of law which the parties intended to apply arises and not when the nationality of parties in question arises. Therefore, in my opinion, two Indian parties can choose a foreign law to govern their contract.


If the parties agree to the jurisdiction of a foreign court but one of them subsequently sues in India, in what circumstances (if any) will the Indian court decline jurisdiction?

On the issue of exclusion of jurisdiction of Indian courts, the court (in Rhodia supra) held that purport and interpretation of the exclusive jurisdiction clause have to be seen in accordance with the “proper law” of the agreement. If in accordance with proper law (i.e. English Law in the present case) of the agreement, the English court will have exclusive jurisdiction over the subject matter then the competent Indian court will have no jurisdiction. The same has to be presented as evidence in the court as per the Hari Shankar case discussed above.


The court to reach the judgment relied on British India Steam Navigation v. Shanmughavilas Cashew[6] the apex court was raised with the question of the jurisdiction where clause 3 of Bill of Lading signed between an Indian Industry and England company agreed to subject themselves to the court of England in case a dispute arises. The court while referring to Rule 34 of Dicey & Morris in the Conflict of Laws 11th Ed.[7] which deals with jurisdiction clause observes that parties to a contract in international trade or commerce can, in advance, agree upon a forum to have jurisdiction. It was further said that the chosen court may be a court in the country of one or both of the parties or it may be a neutral forum.


While considering Section 28 of the Indian Contract Act, 1872 which lays down the rules regarding agreements in restraint of legal proceedings, the court stated, “If there is no express choice of the proper law of the contract, the law of the country of the chosen court will usually, but not invariably, be proper. The question of jurisdiction in the case ought not to be determined by the High Court based on the provisions of Section 28 of the Indian Contract Act in the absence of a specific provision making it applicable to transactions in international trade.”[8]


Further in the case of Man Roland Druckimachinen Ag v Multicolour Offset Ltd.[9] where the agreement was entered into, by the appellant who carries on the business of manufacturing in Germany and respondents who have their registered office in Mumbai, for purchase of printing machine and agreed that the applicable law in the event of any dispute would be German Law. It was also agreed that disputes between the parties should be resolved either by proceedings brought in German Courts alternatively through arbitration conducted in accordance with the International Chamber of Commerce Rules. The apex court, in this case, held that when the parties have agreed on a particular forum, the Courts will enforce such agreement. This is not because of a lack or ouster of its own jurisdiction by reason of consensual conferment of jurisdiction on another Court, but because the Court will not be a party to a breach of an agreement. Such an agreement is not contrary to public policy nor does it contravene Section 28 or Section 23 of the Contract Act.


However, the court has expanded the scope to quashing the exclusive jurisdiction clause consensually signed by the parties if the plaintiff can discharge a heavy burden to show that grave injustice would be done if the jurisdiction of the Indian courts would be ousted which would depend on the facts and circumstance of the case as was held by the court in Control Print v Cab Machines[10] decided by Bombay High court.


It is to be noted that it is only when parties are involved in international trade that the courts have allowed the complete exclusion of its jurisdiction. However, the same would not be the case when two Indian parties are involved as an agreement to completely oust the jurisdiction of the Indian court will be hit by section 28 of the Indian Contracts act.


Conclusion

Discernably, the Indian courts have been displaying a trend of respecting the principle of autonomy of parties to choose the law governing their contract as well as the forum. When it comes to parties choosing the proper law, the courts have restricted its jurisdiction to whether the parties have chosen a law expressly or impliedly in the terms of the agreement and that the intention of parties to choose the proper law is bona fide and not opposed to public policy as per “proper law” of the agreement. Further, from the above observations of the court, it can be safely said that two parties can choose proper laws of a different country. However, if the object or the consideration of the contract is unlawful then the contract can be hit by section 23 of the Act.


Further, it is only when transactions in international trade is concerned the courts have allowed the exclusion of the jurisdiction of Indian courts thereby contract not getting hit by section 28 or public policy. The court will restrict its analysis to, whether the purport and interpretation of the exclusive jurisdiction clauses in the agreement would render the subject matter of the suit to a particular court in accordance with proper law of the agreement, and then the competent Indian court will have no jurisdiction. However, as observed earlier the courts have expanded its scope to see if by ousting its (Indian Courts) jurisdiction grave injustice would be done to the party or not.

 

1. 2002 AIR Bom 502.

2. 1993 AIR SC 998.

3. Ibid.

4. Lawrence Collins et al., Dicey, Morris & Collins on the Conflict of Laws 932 (11th ed. 1987).

5. AIR 2001 SC 3689.

6. (1990) 3 SCC 481.

7. Supra 4.

8. Supra 6.

9. [2004] Supp (1) SCR 396.

10. 1997 (99(3)) BOMLR 187.


This blog is a part of the RSRR Rolling Blog Series. By Piyush Rathi, 4th year student of National Academy of Legal Studies and Research.

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