Can litigation become a viable alternative to arbitration in international commercial disputes?

Can litigation become a viable alternative to arbitration in international commercial disputes?

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The Hague choice of court convention entered into force within the EU in June 2015. The currently topical question is, can litigation now become a viable option to arbitration in international commercial dispute resolution? The attached text is a summary of an article by Merilampi attorneys Jussi Ikonen and Antti Karanko on the subject. It was published in its entirety in the publication Liikejuridiikka No. 1/2016.

The Hague Convention on Choice of Court Agreements (“Hague Convention”) entered into force within the EU (excluding Denmark) on 11 June 2015. Previously, it had only been ratified by Mexico. The Hague Convention sets out to ensure the enforceability of choice of court agreements in civil and commercial matters and eases the recognition and enforcement of foreign court judgments.

Many are now asking whether the Hague Convention will increase the popularity of cross-border litigation in the same way as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (“The New York Convention”) increased the popularity of international arbitration. Currently, however, the Hague Convention can only be relevant if one of the contracting parties is resident in Mexico or if a party seeks enforcement of a judgment from or in Mexico. Cross-border commercial litigation may eventually become a viable alternative to international commercial arbitration if a greater number of substantial economies accede to the Hague Convention.

Originally, the Hague Convention set out to attain the same importance in the field of litigation as the New York Convention had had in the field of arbitration. Arbitration has become the most popular means of resolving international commercial disputes to a large extent because of the parties' ability to widely enforce arbitration awards under the New York Convention. Now, the Hague Convention attempts to offer a global and predictable regime for enforcement of exclusive jurisdiction clauses as well as the court judgments that arise from them. However, even if court judgments become enforceable in foreign countries that have ratified the Hague Convention, arbitration will continue to offer many clear benefits over litigation. The discussion on the benefits of arbitration compared to litigation can be found in our full article.

The three key principles of the Hague Convention are the following:

  1. The designated court of a signatory state specified in a contract shall hear the case when proceedings are brought before it;
  2. Courts in other contracting states shall refuse to hear a case if they have not been designated as the chosen forum in a valid choice of court agreement; and
  3. The judgment of the chosen court will be recognized and enforced by the courts of other member states that have signed and ratified the Convention.

There are certain limited exceptions to the aforementioned key principles. They shall be construed uniformly in all contracting states. What is perhaps most important, the Hague Convention prohibits the review of the merits of the foreign court judgment upon enforcement.

It is important to note that the choice of court agreement (or the choice of court clause that has been incorporated into the commercial agreement) is not valid under the Hague Convention unless it is exclusive. In other words, the choice of court agreement must provide clearly that no other form of dispute resolution is available for the contracting parties except the opportunity to refer the claim or dispute to a particular court or a group of courts in a particular contracting state.

Even though Hague Convention applies to commercial matters, certain types of disputes have been excluded from its application. These include, for example, matters concerning insolvency, competition and carriage of passengers or goods.

The United States and Singapore have already signed the Hague Convention, but, to date, neither has ratified it. However, Singapore is expected to ratify the Hague Convention within the near future. Other important countries in regard to international trade currently discussing whether to sign the Hague Convention include Argentina, Australia, Canada, New Zealand, Russia and Turkey. The Hague Convention may well have potential to achieve for litigation what the New York Convention achieved for arbitration and popularity of the Hague Convention may increase rapidly in years to come if it turns out that there is a demand for it on the market.

In our opinion the future success of the Hague Convention depends on whether a “critical mass” is reached, for example if the Hague Convention is ratified by major countries. Even if the Hague Convention is not ratified globally, it is likely that it will have a significant effect on the harmonization of national laws. It should be noted that a similar regime as the Hague Convention (with significantly clearer forum selection rules) is already in force within the EU on the basis of the Brussels I regulation. Hence, if both contracting parties are from EU states, they do not appear to have any benefit from the Hague Convention.

As a conclusion, the practical impact of the Hague Convention is currently quite small. Two developments are necessary in order for the Hague Convention to become of major significance: Firstly, a more significant number of major countries will need to accede to the Hague Convention. Secondly, exclusive choice of court agreements will need to become more popular in international commercial agreements. In our opinion, the latter is unlikely to happen because arbitration has several crucial advantages over litigation and the general mindset of most lawyers and businessmen already appears to be geared towards arbitration. Cross-border litigation should provide some clear and significant inherent benefit over arbitration in order for that attitude to change. In our opinion, it doesn’t.

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