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Whose Court Is It Anyway? Assessing the Choice of Courts in Contracts - International Law Office

International Law Office

Litigation - India

Whose Court Is It Anyway? Assessing the Choice of Courts in Contracts

June 16 2009

Facts
Supreme Court Decision


Facts

In Rajasthan State Electricity Board v Universal Petrol Chemicals Limited ((2009) 3 SCC 107) the appellant and the respondent entered into two purchase agreements (dated September 23 1985 and December 2 1987) to buy transformer oil at an agreed rate, with the specific requirement of filing bank guarantees and performance guarantees.

The contracts contained specific arbitration clauses. The second contract included a forum selection clause referring all disputes, differences or questions to the Jaipur courts. In addition, the bank guarantee contained a similar forum selection clause referring disputes to the Jaipur courts. In due course the appellant alleged the non-performance of the contracts and took steps to invoke the bank guarantee. The respondent filed a petition under Section 20 of the Arbitration and Conciliation Act 1940 before the Calcutta High Court, along with an application for interim relief under Section 41 of the act. The petition was dismissed by a single judge of the Calcutta High Court on the grounds of jurisdiction, as determined by the forum selection clause in the contract, and the earlier granted interim order was vacated. On appeal, the petition was remanded back to the single judge for fresh consideration and was again dismissed. The respondent then filed an appeal with the division bench of the Calcutta High Court. The division bench held that the contractual forum selection clause was invalid in light of the specific prohibition contained in Section 31(4) of the act, and thereby upheld the territorial jurisdiction of the Calcutta High Court. The appellant filed a civil appeal to the Supreme Court by special leave.

Supreme Court Decision

The Supreme Court had to consider whether the ouster clause in the agreement was applicable in ascertaining the competent court (ie, Jaipur or Calcutta) for making an application for reference under Section 20 of the act.

The court held that where there may be two or more courts of competent jurisdiction, if the parties to the contract agree to vest jurisdiction in one such court to try any dispute which might arise, such agreement would be valid and binding on the parties.

The Supreme Court held that while the Calcutta courts would indeed have territorial jurisdiction to decide the disputes, in light of the contractual ouster clause specifically conferring exclusive jurisdiction upon the Jaipur courts, only the Jaipur courts would qualify in terms of jurisdiction to entertain any disputes between the parties. While passing the order, the court observed that an analysis of the provisions of Sections 31(3) and (4) of the act would clearly indicate that any reference, including an application under Section 20 of the act, ought to be filed in a court competent to entertain the proceeding and with jurisdiction to decide the issue. However, the court observed that such jurisdiction could be restricted by agreements entered into by and between the parties.

The court followed the ratio that it had laid down in a number of earlier cases. While upholding the legality of such ouster clauses, the court relied on the principle of law laid down in Hakem Chand v Gammon (India) Ltd ((1971) 1 SCC 286), and subsequently affirmed in Angile Insulations v Davy Ashmore India Ltd ((1995) 4 SCC 153), that where there are two or more courts competent to hear a suit, if the parties to the contract agree to vest jurisdiction in one such court to try any dispute which might arise, such agreement would be valid and binding, and further would not be contrary to either public policy or the provisions of Section 28 of the Contract Act 1872.

The court also relied on ABC Laminart (P) Ltd v AP Agencies ((1989) 2 SCC 163) and the more recent Hanil Era Textiles Ltd v Puromatic Filters (P) Ltd ((2004) 4 SCC 671), wherein it was held that when the ouster clause was clear, unambiguous and specific, accepted notions of contract would bind the parties, and that unless the absence of ad idem could be shown, other courts should avoid exercising jurisdiction. In that case the Supreme Court observed that even without words such as 'alone', 'only' and 'exclusive' in contractual ouster clauses, the maxim 'expressio unius est exclusio alterius' ('expression of one is the exclusion of another') may apply in appropriate cases where a certain jurisdiction is specified in a contract.

The declaration of law laid down in Hakem Chand and ABC Laminart (P) Ltd still applies and the binding force and authority of this declaration have not been altered by any other decisions. In the case at hand, the Supreme Court reaffirmed the principle of law laid down in its earlier decisions that where there may be two or more courts of competent jurisdiction, if the parties to the contract agree to vest jurisdiction in one such court to try any dispute which might arise, such agreement is valid and binding, and does not contravene Section 28 of the Contract Act.

For further information on this topic please contact Manu Nair, Kirat Singh Nagra or Saanjh Purohit at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500) or by fax (+ 91 11 2692 4900) or by email (manu.nair@amarchand.com or kirat.nagra@amarchand.com or saanjh.purohit@amarchand.com).


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