Extent of Exclusive Jurisdiction Clause – Does it govern Insolvency Proceedings?

[By Priyashi Chhajer]

The author is a third year student of National Law University, Jodhpur and can be reached at priyashichhajer98@gmail.com

Introduction

The National Company Law Appellate Tribunal (“NCLAT”) dealt with an important issue regarding scope, interpretation of exclusive jurisdiction clauses in a contract and its applicability on the insolvency proceeding initiated under Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”) in the  recent case of Excel Metal Processor Limited v. Benteler Trading International GMBH and Anr.[iThrough this blog post, the author seeks to examine whether exclusive jurisdiction clauses govern the insolvency proceedings under the Code.

Facts of the Case

A German Company, Benteler Trading International GMBH (“Operational Creditor”) alleged default in payment up-to the amount of US $1,258,219.42 including interest @ 15% per annum by another company, Excel Metal Processors Private Limited (“Corporate Debtor”). The Operational Creditor filed an application under Section 9 of the IBC to National Company Law Tribunal (“NCLT”), Mumbai Bench. NCLT accepted the application by releasing an order dated 25 June, 2016. Corporate Debtor contended the jurisdiction of NCLT by referring to the agreement entered by the parties whereby they mutually agreed that “any suit or case is maintainable only in the Courts at Germany” and claimed that Courts in India do not have the appropriate jurisdiction to entertain the matter, and thus the matter should be presented only before the appropriate authorities in Germany.

Reasoning provided by the Tribunal

The matter was thus referred to NCLAT which upheld the order of NCLT and stated that both the tribunals exercise valid jurisdiction to address and adjudicate the matter. The rationale for this is because insolvency proceedings are immune from exclusive jurisdiction clause. The tribunal relied on its earlier decision in Binani Industries Limited v. Bank of Baroda [ii] where it was held that the insolvency proceedings do not come within the boundaries of suit, litigation or a money claim for any litigation.

The NCLAT derives the power to adjudicate from Section 408 of the Companies Act, 2013. As per Section 60(1) of the IBC, NCLT was permitted to take cognizance of the matter on the basis of territorial jurisdiction. Moreover, as the registered office of company debtor was in Mumbai, the NCLT held valid authority to adjudicate the matter under Section 9 of IBC.

Validity and extent of exclusive jurisdiction clause

Exclusive jurisdictional clauses are not opposed to the Section 28 of the Contract Act which bars the complete restraint on legal proceedings by rendering such contracts void. This general rule however comes with an exception, i.e. the parties can by mutual agreement confer and limit the jurisdiction on a particular court, when two or more courts have jurisdiction. Therefore this clause is not against public policy and the court does not look much into the matter, if the competency of the court is proved.[iii]

However, there is a deviation to this general rule when it comes to cross border transactions, where the parties, by a stipulation in the agreement confer jurisdiction exclusively on foreign courts. As stated in Modi Entertainment Network & Anr. v. W.S.G. Cricket Pte. Ltd, courts in such cases have power to look not just into the competency of the court to which such jurisdiction is conferred exclusively, but also the principle of comity is taken into account, i.e. examination that which forum is more convenient to the parties. Secondly, the courts also take into consideration whether the exclusion of other jurisdiction is rendering a party remedy-less or if it is vexatious and oppressive.[iv] It has to be proved by the claiming party that the other party has a legal remedy in the foreign forum subsequent to which, Indian courts may not interfere further in the matter.

However if the statute provides for compulsory jurisdiction, the contracting party cannot divest the same by stipulating exclusive jurisdiction clause. Countries like UK [v], Australia and other jurisdictions [vi] by various judgments substantiate the same position. Therefore, it can be concluded that the jurisdiction of NCLT is not barred as the same is mandated by statutory provision which imposes compulsory jurisdiction on such forums.

Construction and interpretation of exclusive jurisdiction clause

The interpretation of this clause is based on the maxim “Expressio unius est exclusion alterius” which provides that if an agreement determines the particular place and court of jurisdiction, an inference is drawn pertaining to the intention of the parties to exclude all other similar jurisdictions.

The courts generally rely on literal interpretation to such stipulations provided in the contract as they are mutually agreed upon and also depict the intent of the parties. Such an interpretation helps uphold party autonomy as basis of the contract. The contract which sets the law must also govern it. However, when it comes to exclusive jurisdiction clauses, the courts of various jurisdictions such as England[vii], Australia[viii] and the United States of America[ix] have accorded liberal and broader interpretation to it. There is a presumption of “one stop” adjudication. This approach was followed in the case of Fiona Trust v. Privalov where the UK House of Lords stated that when the questions regarding exclusive jurisdiction clause arise, there is a presumption that the parties intend to cover all the disputes arising out of the contract to be governed by this clause. In case if they want to confer jurisdiction to a separate court for particular kinds of disputes, they have to mention the same explicitly in an agreement. Thus it can be concluded that the jurisdiction clause should be construed liberally unless otherwise stated by the parties.[x]

Insolvency proceedings are not governed by jurisdiction clause

In the Excel Metal Case, the corporate debtor claimed that insolvency proceedings should not be continued by NCLT in India, as Indian courts do not have jurisdiction to adjudicate by virtue of exclusive jurisdiction clause in an agreement which bars “any suit or case” to be presented before court except that of Germany. The term “suit” is not defined in the Code. It is an institution of litigation for enforcement of civil rights or substantive rights against state or an individual, and the term case means any proceeding which is judicial in its nature.[xi] Proceedings are wherein the controversy between the parties is determined so as to enforce rights, or to redress wrongs.[xii] The term “case” also encompasses special proceedings before judicial tribunals and quasi-judicial tribunals and boards. Therefore the Corporate Debtor based on such interpretation was right in contending that since insolvency proceedings are special proceedings, they should be governed by exclusive jurisdiction clause.

Insolvency proceedings fall under freestanding statutory regime

The exclusive jurisdiction clause does not cover insolvency proceedings as it is something not related to the dispute arising out of contract. The case of AWB (Geneva) SA v. North America Steamships Ltd supported the same position, in which the Court said that the party by referring the dispute to the Canadian Court under Companies’ Creditors Arrangement Act (“CCAA”) has not violated the jurisdiction clause of contract as the party here is not seeking the judicial determination of rights and obligation which exists in contract, rather it is an application made to the court to assert the free standing statutory regime under CCAA.

The court of Singapore in the case of Larsen Oil and Gas Pte Ltd. v Petro Prod Ltd.  incisively reasoned that the object of insolvency regime is to reimburse the creditor’s losses caused by the former contract, and this purpose of regime will not be fulfilled or will be compromised if the pre-insolvency contract between the parties is allowed to restrict the choice of avenues approaching which the creditor can enforce its rights.[xiii] Similarly the court in the case of Re Duet Real Estate Partners LLP, notwithstanding the existence of contract, moved on with the insolvency proceedings and considered evidences and said that company’s defence of relying on contract was merely a tactic to delay the winding up order and nothing more. Thus, the court did not consider the dispute clause and carried on with the proceedings. [xiv]

Another case which dealt with similar issue was Black Diamond v. Fomento De Construcciones Y contratas[xv] where the insolvency proceedings were held to be freestanding proceedings, which cannot be governed by contractual terms and are out of the ambit of exclusive jurisdiction clause.

However it is also established that a deviation from the choice of forum cannot be made when the debt which is disputed is on the bona fide grounds. This approach strikes a balance between barring debtors to take disingenuous defences and thereby causing delay in winding up procedure and giving effect to the choice of forum and arbitration clauses when there is a bona fide dispute. The burden is on the debtor to show that his claims are genuine and not mala fide.

Conclusion

The NCLAT in this case were correct in excluding the insolvency proceedings from the scope of jurisdiction clause, however the court did not provide sufficient reasoning for taking such approach. Court should interpret jurisdiction clause wisely as giving too wide interpretation may lead to uncertainty and absurdity sometimes resulting into the compromise of party’s autonomy which is of prime importance. The tribunal did not refer to any of the above mentioned judgments nor did they interpret the exclusive jurisdiction clause in the light of public policy or object of insolvency proceedings.

References

[i]Excel Metal Processor Limited v. Benteler Trading International GMBH and Anr , Company Appeal (AT) (Insolvency) No. 782 of 2019, available at https://nclat.nic.in/Useradmin/upload/10988855095d5e7f178fb64.pdf.

[ii]Binani Industries Limited vs. Bank of Baroda and Anr. – Company Appeal (AT) (Insolvency) No.82 of 2018 etc, available at https://nclat.nic.in/Useradmin/upload/744324065bebc1bd0ef4a.pdf.

[iii]Donohue vs. Armco Inc and others [2002 (1) All.ER 749], available at https://publications.parliament.uk/pa/ld200102/ldjudgmt/jd011213/dono-1.htm.

[iv] Modi Entertainment Network &Anr. V. W.S.G. Cricket Pte. Ltd, Appeal (civil)  422 of 2003 (SC: 21.01.2003), available at https://indiankanoon.org/doc/1857811/.

[v]The Hollandia (1982), available at https://www.oxbridgenotes.co.uk/revision_notes/bcl-law-oxbridge-conflict-of-laws-bcl/samples/the-hollandia.

[vi]Lord Collins (ed), Dicey Morris & Collins, The Conflict of Laws (Sweet & Maxwell, 15th ed, 2012) Vol 1 at [12-118].

[vii].Fiona Trust & Holding Corporation v Privalov [2007] 4 All ER 951 at [5]-[8], [13] per Lord Hoffmann, available at https://www.casemine.com/judgement/uk/5b46f1fe2c94e0775e7ef924.

[viii].Global Partners Fund Ltd v Babcock and Brown Ltd (In Liq) (2010) available at https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?referer=&httpsredir=1&article=3014&context=sol_research

[ix]Ashall Homes Ltd v ROK Entertainment Group, 992 A 2d 1239, 1252-53 (Del, 2010), available at https://caselaw.findlaw.com/de-court-of-chancery/1519969.html

[x] Supra note vii.

[xi]Black’s Law Dictionary 4th Ed. Rev, available at

http://heimatundrecht.de/sites/default/files/dokumente/Black%27sLaw4th.pdf.

[xii]Ex parte Chesser, 93 Fla. 590, 112, available at https://casetext.com/case/ex-parte-chesser.

[xiii]Larsen Oil and Gas Pte Ltd v Petroprod Ltd [2011] SGCA 21, available at

https://blogs.law.nyu.edu/transnational/2011/05/singapore-apex-court-lays-down-clear-framework-for-non-arbitrability-of-insolvency-related-claims/.

[xiv]Re Duet Real Estate Partners 1 LP, 7 June 2011, available at

http://www.mondaq.com/caymanislands/x/315388/Contract+Law/Order+of+Precedence

[xv]Black Diamond Offshore Ltd v Fomento De Construcciones Y Contratas SA [2015] EWHC 1035 (Ch) (09 March 2015), available at https://uk.practicallaw.thomsonreuters.com/D-032-8581?transitionType=Default&contextData=(sc.Default)&firstPage=true

Leave a Reply

Your email address will not be published. Required fields are marked *

*
*