Legal Opinion – Choose wisely
Which city court’s jurisdiction should be chosen when parties coming from two city’s clash? Shourav Lahiri, a partner in the international law firm Pinsent Masons LLP, answers
In the recent case of Rajasthan State Electricity Board (RSEB) vs. Universal Petrol Chemicals Ltd (UPC) the Supreme Court of India reaffirmed the position that where the residency of parties could result in the courts of two cities having jurisdiction over disputes, parties could choose to confer jurisdiction on one court to the exclusion of the other. Let us consider the significance of this principle for those entering into similar contracts in the construction industry.
The RSEB entered into two purchase orders with UPC for the purchase of transformer oil. RSEB was resident in Jaipur; UPC in Calcutta (Kolkata). UPC provided bank guarantees to secure their performance. Both the purchase orders and the bank guarantees had (a) an arbitration clause and (b) were stated to be subject to the jurisdiction of only the courts of Rajasthan at Jaipur.
Issues arose as to the performance of UPC and RSEB sought to call on the bank guarantees. UPC moved its ‘home court’ in Calcutta for interim relief. There was of course an arbitration clause in the purchase orders and the bank guarantees.
But an existence of an arbitration clause does not prevent a party from going to court for interim relief (i.e. for protection before arbitration has commenced, or, sometimes, for protection during an arbitration in relation to matters which are outside the jurisdiction of the arbitrators). The applicable Act in this case was the Arbitration and Conciliation Act 1940, which has now been superseded by the 1996 Act, but this principle of access to the courts remains the same.
There is also a principle of law that the court where any of the parties is resident has jurisdiction in relation to any disputes involving that party. In usual circumstances, therefore, both the courts of Calcutta and Jaipur would have jurisdiction in relation to disputes between UPC and RSEB.
But there was a difference in this contract; the parties had agreed to confer jurisdiction on only one court – that of Jaipur, where RSEB was based.
It is not known whether this was so because UPC did not have much of a bargaining power during contract negotiations given the stature of its contracting party, or whether UPC hadn’t noticed the clause or, having noticed it, didn’t give it much thought at the time of contract. Whatever the reason, the result was that the Supreme Court held (after many lower courts had given conflicting judgments in this case over a period of seven years), that UPC’s application to the High Court of Calcutta was a mistake.
In making its decision, the Supreme Court referred to a number of its own previous decisions, in which it held that an agreement between the parties to vest jurisdiction in one particular court of competent jurisdiction would be valid and binding.
These cases relied upon the principle laid down in Hakam Singh v M/s. Gammon (India) Ltd 1971, that such an agreement would not be contrary to public policy nor would it contravene the provisions of s.28 of the Contract Act 1872 (which makes void any agreements preventing access to courts, but has an exception that allows reference to arbitration as final and binding).
The lessons to be learnt from this case? First, everyone should look at their contracts when it is being drafted and negotiated and read their dispute resolution clauses. Dispute resolution clauses are often termed ‘midnight’ clauses, because they are the clauses that no one cares about when the contract is being signed, and are usually hastily agreed at the last moment.
Secondly, make sure that the ‘midnight clause’ does not turn into a nightmare. Think about the practical implications of the clause. In the present case, applying to the Calcutta High Court compared to the Jaipur High Court would probably not have given any material advantage to UPC in terms of the merits of their application – but it was probably a whole lot easier to go to the ‘home court’.
Finally, don’t forget that though there might be an arbitration clause in the contract. There is still relief that you can seek (or can be sought against you) in the courts. The courts play a supervisory role in arbitrations and while arbitrators are given a lot of authority, some orders – such as injunctions against the calling of bank guarantees – can only be ordered by the court.
The author wishes to thank Ms Laura Wilson of Pinsent Masons LLP for her assistance with this article. The author can be reached at firstname.lastname@example.org. Pinsent Masons LLP has been named the Global Construction Law Firm of the Year in 2009 for the second consecutive year by Who’s Who Legal.