The Hague Convention on Choice of Court Agreements: creating room for choice in international cases.

• Author: Lipe, Guy S.

1. INTRODUCTION II. ARBITRATION'S "MONOPOLY" III. THE CHOICE OF COURT CONVENTION A. Background of the Choice of Court Convention B. The Basic Rules of the Choice of Court Convention C. Relevant Inquiries to Determine Whether the Choice of Court Convention Will Govern a Particular Agreement or Dispute D. Drafting Considerations--When Does the Choice of Court Convention Provide a Basis for Use of an Exclusive Choice of Court Agreement as an Alternative to an Arbitration Clause in an International Commercial Agreement? IV. CONCLUSION I. INTRODUCTION

   In U.S. domestic business disputes, the virtues of arbitration versus litigation have long been debated. (1) In contrast, the traditional consensus in international business has been that arbitration is a better mechanism for settling disputes. (2) Arbitration's popularity in the international context stems from its "monopoly" in international transactions and is driven by its two perceived virtues: neutrality and worldwide enforceability. (3) This article will focus on a new treaty that may, over time, increasingly give international arbitration a run for its money, break the monopoly, and offer corporate counsel a wider variety of choices to resolve transnational disputes.

   That treaty is the Hague Convention on Choice of Court Agreements (the "Convention" or "Choice of Court Convention"). (4) Mexico acceded to the treaty in 2007, and the European Union and the United States both signed the treaty in 2009, though they have yet to ratify it. (5) When either the European Union or the United States ratifies the Choice of Court Convention, it will enter into force. (6) Currently, the United States has no treaty at all on enforcement of U.S. judgments abroad. (7) Thus, until the Choice of Court Convention enters into force, U.S. parties looking to take advantage of worldwide enforcement must submit to arbitration under the New York Convention on the Enforcement of Foreign Arbitral Awards (the "Convention" or "New York Convention"). (8) However, once the Choice of Court Convention enters into effect, U.S. parties to transnational contracts will have another realistic and attractive choice of dispute settlement: litigation in a chosen court. (9) The practicalities of litigating in a neutral third country will, on many occasions, require litigating outside the United States before the courts of a treaty signatory. (10) But at that point, arbitration's enforceability advantage may have realistic competition.

2. ARBITRATION'S "MONOPOLY"

   In a tendentiously titled article, Jan Paulsson, one of the deans of the international arbitration bar, pointedly declared that for international disputes any debate about the merits of arbitration versus litigation was meaningless in an international context:

   International arbitration is no more a "type" of arbitration than a sea elephant is a type of elephant.... Here is the difference: [in the domestic context,] arbitration is an alternative to courts, but international arbitration is a monopoly--and that makes it a different creature. (11) In Professor Paulsson's view, the key characteristic driving the monopoly of international arbitration is the "unique criterion [of] neutrality." (12) The neutrality of arbitration is certainly relevant where the disputing parties worry about being hometowned by the other's court system. (13) But that is probably as far as neutrality takes us. The English High Court, for example, is likely just as neutral as arbitrators in a dispute between a Kazakh and an Argentine party. (14)

   Other prominent commentators echo Professor Paulsson's view of neutrality's importance but focus on another characteristic of arbitration--enforceability. (15) Recent empirical studies support the assertion that international disputes are settled more frequently through arbitration than litigation. (16) Indeed, one recent study suggests that the global enforcement of arbitration awards is the principal driver of arbitration's popularity in international dispute resolution. (17)

   In sum, there are two principal virtues of arbitration: First, neutrality is important, albeit in a narrow, "not their hometown" and "equality of arms by choosing my arbitrator" sense. (18) Second, and above all, arbitration's crowning virtue is enforceability. (19) An arbitral award rendered in any one of the 144 jurisdictions that are parties to the New York Convention is easily enforceable, subject to non-enforcement only within a narrowly defined set of grave process errors and international public policy grounds. (20)

   By contrast, parties seeking to export U.S. court judgments face an uphill battle. Because the United States is not a party to any treaty on the enforcement of court judgments, U.S. judgments abroad are subject to unreliable enforcement that varies from jurisdiction to jurisdiction. (21)

   The Choice of Court Convention may change that. (22)

3. THE CHOICE OF COURT CONVENTION

   1. Background of the Choice of Court Convention

      In 1992, the United States requested negotiations for a convention on jurisdiction and the recognition and enforcement of foreign court judgments. (23) After considerable effort, a preliminary draft of a jurisdiction and judgment-enforcement convention was completed in 1999, (24) which was further revised at a diplomatic conference in 2001. (25) Progress in the negotiations stalled, and it became apparent that no final agreement would be reached on the broad jurisdiction and judgment-enforcement issues. (26) As a result, the negotiation efforts were redirected at a convention with a more narrow focus: enforcement of choice of court agreements and of the judgments rendered by courts contractually chosen by the parties to resolve their disputes. (27) The negotiations thus shifted to the drafting of a convention that is the "litigation counterpart" of the New York Convention on the Enforcement of Foreign Arbitral Awards. (28) The result of those negotiations is the Choice of Court Convention. (29)

   2. The Basic Rules of the Choice of Court Convention

      The Choice of Court Convention applies in "international cases" (30) and addresses three facets of choice of court agreements in those cases: (1) the mandatory exercise of jurisdiction by a court chosen in exclusive choice of court agreements, (31) (2) the mandatory withdrawal of jurisdiction of a court not chosen in an exclusive choice of court agreement, (32) and (3) the mandatory enforcement of judgments rendered by a court chosen in an exclusive choice of court agreement. (33)

      The basic rules of the Choice of Court Convention are:

      (1) The court chosen by the parties in an exclusive choice of court agreement will exercise its jurisdiction over the parties' dispute and will not decline to exercise that jurisdiction. (34)

      (2) A court not chosen by the parties in such an agreement must decline to exercise jurisdiction over the dispute. (35)

      (3) A judgment resulting from the exercise of jurisdiction by a chosen court must be recognized and enforced in other contracting states. (36)

      These rules seem simple on their face, but a number of inquiries are relevant in determining whether they will govern a particular agreement or a particular dispute arising under the agreement. Each of these inquiries is addressed below.

   3. Relevant Inquiries to Determine Whether the Choice of Court Convention Will Govern a Particular Agreement or Dispute

      1. Does the Choice of Court Convention Apply to the Agreement and to Disputes Arising Under the Agreement?

         Under Article 31 of the Choice of Court Convention, the Convention will enter into force when two contracting states have acceded to it. (37) As noted above, Mexico is the only country to have acceded to the Convention thus far, (38) and therefore the Convention is not yet in force. (39) However, even after the Convention enters into force under Article 31, contract drafters aiming to take advantage of its provisions will need to make additional inquiries to determine (1) whether the Convention applies to the particular agreement being disputed, (40) and (2) whether the Convention will apply to particular disputes that may arise under the agreement. (41)

         By its own terms, the Choice of Court Convention "shall apply to exclusive choice of court agreements concluded after its entry into force for the State of the chosen court." (42) Thus, both for purposes of determining whether the Convention mandates the exercise of jurisdiction by the chosen court and whether it mandates that a non-chosen court must decline jurisdiction, (43) it is necessary to determine whether the choice of court agreement was entered into after the country of the chosen court acceded to the Choice of Court Convention. (44) If not, the Convention's jurisdictional provisions will not apply, and any court will apply its own laws in determining whether to exercise or decline jurisdiction. (45) In short, if the country of the chosen court has not acceded to the Convention by the time the agreement is executed, the parties will not receive any benefits from the Convention. (46)

         In addition, the Convention's protections do not apply to proceedings instituted in a country before the Convention has entered into force there. (47) As a result, even if the chosen court's country acceded to the Convention before the choice of court agreement was executed, the Convention will not apply to proceedings filed in countries that have not acceded to the Convention. (48) That rule applies both to proceedings asserting claims under the agreement--notwithstanding the exclusive choice of court agreement--and to proceedings seeking to enforce a judgment of a chosen court. (49)

         Three hypotheticals illustrate the importance of these determinations:

         First, assume that a lawyer is drafting an agreement between a U.S. party and a French party, and both parties agree to an exclusive choice of court clause providing that disputes will be resolved in the courts of New York. If France has acceded to...