EuroChem And Zephyrus: Recent Cases Test Limits Of Exclusive Jurisdiction Clauses

Two recent High Court decisions illustrate the approach of the English courts to the construction of clauses arguably conferring exclusive jurisdiction for disputes on foreign courts. The High Court concluded that it should override the exclusive jurisdiction clause in Zephyrus but it would not have been prepared to do so in EuroChem. In each case, the High Court ultimately concluded that it had jurisdiction in relation to the parties' dispute.

Background

Jurisdictional issues arise before the English courts on a frequent basis in the context of disputes connected to Russia and featuring a mix of domestic, Russian, and other foreign counterparties. This trend reflects the interconnected nature of the global financial system and insurance / reinsurance markets and perhaps, more broadly, the esteem in which English law and the English courts are held internationally as parties seek to bring their disputes within the English courts' remit.

Two recent High Court decisions illustrate the approach of the English courts to the construction of exclusive jurisdiction clauses in favour of foreign courts, including when the courts will be prepared to override the parties' agreement to confer exclusive jurisdiction on such courts. The decisions are notable for raising novel issues (in EuroChem) and giving rise to unusual results (in Zephyrus), discussed below.

What is an exclusive jurisdiction clause?

An exclusive jurisdiction clause is a clause which imposes a positive obligation on the parties to a contract to bring proceedings relating the contract in the courts the parties have selected. The English courts will generally uphold exclusive jurisdiction clauses, and are also generally prepared to grant anti-suit injunctions to restrain proceedings brought by a party in a non-chosen court in breach of them.

LLC EuroChem v Societe Generale

The underlying dispute in LLC EuroChem v Societe Generale [2024] EWHC 1084 (Comm) concerned the non-payment by European banks (SocGen and ING) of certain on-demand and performance bonds to EuroChem (a Russian entity), procured by an Italian engineering group, Tecnimont ("T"), in support of the construction of an ammonia plant in Russia. T suspended performance due to the impact of geopolitical sanctions against Russia and EuroChem purported to terminate the construction contracts and seek payment under the bonds. The contractual framework was complex, with the construction contracts subject to either English or Russian governing law and dispute resolution by London-seated ICC arbitration. The bonds contained English governing law and exclusive jurisdiction clauses. A separate facility agreement, requiring T to indemnify ING for payments under the bonds, was governed by Italian law and contained, it was argued, an exclusive Italian jurisdiction clause.

The disputed "exclusive" jurisdiction clause

The facility agreement provided that the Court of Milan had exclusive competence for any dispute arising out of the agreement, but that ING alone was entitled to bring proceedings against T before any other "Foro competente" (translated as "competent Court"). T ran separate but overlapping arguments to the effect that the clause was an exclusive Italian jurisdiction clause on the bases that "Foro competente": (i) had a special technical meaning under Italian law, referring only to competent Italian courts; and (ii) as a matter of contractual construction, the parties objectively intended a Milan/domestic Italian court asymmetric jurisdiction clause (i.e. exclusive Italian jurisdiction).

EuroChem brought a claim against the defendant banks in the English courts in respect of the non-payment of the bonds. T joined that claim as an interested party, to support the banks' position as to the legality of making the relevant payments (referring to itself as a "no cause of action defendant"). ING sought to have its indemnity claim against T under the facility agreement determined as part of the English proceedings.

The High Court dismissed an application by T to challenge the jurisdiction of the English courts in relation to the indemnity claim brought by ING against T. The court found that T had submitted to the jurisdiction of the English courts by joining as an interested party in the main dispute. Noting the novelty of the issue before it relating to T's role in the proceedings, the court found that T had submitted "willingly" to the court's general jurisdiction (i.e. in relation to the main claim and such claims as the court considered ought to be heard simultaneously), on the bases that T: (i) was involved in the arbitral proceedings in the jurisdiction and the only reason it had not been sued in the main claim was because EuroChem did not seek a remedy from T; (ii) T's joinder application expressly referenced the connection between ING's potential liability and T's indemnity; (iii) T had regarded its entry into the main proceedings as necessary to resolve "all the matters in dispute"; and (iv) T had played an active role in the main proceedings, without qualification or reservation (until the present application).

Although it was not required to decide the points (as T had "willingly" submitted to jurisdiction), the court stated that it would have found that:

(a) per ING's expert evidence on Italian law, the correct interpretation of the jurisdiction clause in the facility agreement under Italian law was that it was not an exclusive Italian jurisdiction clause as "Foro competente"  meant competent Italian or international courts. However, if it had been an exclusive Italian jurisdiction clause, the court stated there were not sufficiently "strong reasons" in this case to override the clause; and

(b) given the non-exclusivity, the English court was the forum conveniens  for the indemnity dispute, as it was desirable to avoid a fragmentation of the proceedings and the risk of inconsistent judgments, as well as the additional cost and delay associated with having related Italian proceedings on foot.

Zephyrus Capital v Fidelis Underwriting

In EuroChem, had the court construed the jurisdiction clause in issue as an exclusive Italian jurisdiction clause, it would have upheld it. By contrast, the recent decision in Zephyrus Capital v Fidelis Underwriting [2024] EWHC 734 (Comm) is a rare instance of the English courts holding that the parties' exclusive jurisdiction clause in favour of an overseas court should be overridden.

The underlying dispute in Zephyrus  was extremely complex, involving market-wide insurance litigation by the non-Russian owners, lessors, financiers and managers of aircraft and engines leased to Russian airlines and originally worth some US$13.5 billion (since reduced by settlements). The aircraft were insured for "hull all risks" and "war risks" by Russian insurers, with London or international market reinsurance covering most of the insured risk on the same terms and containing cut through clauses (i.e. giving the policyholder the right, in certain circumstances, to claim directly from the reinsurer). The relevant insurance and reinsurance contracts purportedly contained Russian governing law and exclusive jurisdiction clauses. The English courts were asked to determine whether the exclusive Russian jurisdiction clauses should be enforced, or whether there were "strong reasons" for not doing so. In this case, the key question was whether the Claimants would be prejudiced by having to sue in the foreign court because they would, for political or other reasons, be unlikely to get a fair trial (applying factors set out in The Eleftheria).

The High Court held that the Claimants had established strong reasons for the court not to enforce the exclusive Russian jurisdiction clauses by imposing a stay of the English proceedings. In coming to that result, the court acknowledged countervailing factors such as international comity, the importance of giving effect to exclusive jurisdiction clauses in general, and the extent to which the matters relied on may have been foreseeable to the parties when they agreed the relevant clauses. The court explained that foreseeability would only be a relevant factor in the exercise of its discretion to the extent that the parties could foresee the risk of an unfair trial in respect of the kind of dispute likely to arise under their contract. The court stated that the Defendants had significantly overstated the foreseeability of an unfair trial: despite certain problems with the Russian legal system pre-dating the insurance/reinsurance contracts, the Claimants could not have realistically foreseen the full-scale invasion by Russia of Ukraine, the resulting severe geopolitical sanctions and Russian countermeasures, and other consequences.

The court's reasons for exercising its discretion not to enforce the exclusive Russian jurisdiction clauses were as follows.

1. Principally, that the Claimants were very unlikely to obtain a fair trial in Russia (this being a sufficiently strong reason on its own), as:

(a) there was substantial Russian State exposure or interest, via the involvement of the Russian National Reinsurance Company and certain claims against the civil aviation sector or the State itself;

(b) the Russian courts would be unlikely to be able to objectively determine issues such as whether the alleged losses were caused by war, invasion or other war perils and whether the Russian countermeasures were valid under Russian law;

(c) the Russian courts would likely apply provisions other than the governing law of the leases to determine questions such as whether the terminations were valid and whether the Claimants had the right to recover the aircraft; and

(d) the Claimants were from "Unfriendly Foreign States" designated by Russia.

2. Additionally, a multiplicity of proceedings and the consequent risk of inconsistent findings would be undesirable. The court noted that it made sense for the English courts to retain jurisdiction and determine the claims together, including because many of the Defendants had already submitted to the English courts' jurisdiction and the issues concerned could have an influence on the wider aviation insurance / reinsurance market.

3. Furthermore, there was a personal risk to individuals attending trial in Russia. In seeking to enforce the exclusive jurisdiction clause, the Defendants had relied on the fact that the events constituting the basis of the claims took place in Russia, the law applicable to the contracts in dispute was Russian law, and it was likely that evidence from Russian experts or witnesses would be required to determine the dispute. However, while the court agreed that there would be a need for expert evidence, this was undermined by the potential risk faced by experts and client representatives attending trial in Russia, adding further support to the view that strong reasons existed to refuse the stay.

Conclusion

In different ways, these two decisions demonstrate that the English courts will be prepared to find a way to take conduct of international disputes where they consider it appropriate. In EuroChem, this result was reached by concluding that the party challenging the English court's jurisdiction had in fact already submitted to it and by construing the jurisdiction clause at issue as non-exclusive. Zephyrus  represents a rare example of the English courts overriding a decision by the parties to confer exclusive jurisdiction on a foreign court, albeit against the relatively extreme backdrop of the war between Russia and Ukraine. While the bar is high for the English courts not to respect an exclusive jurisdiction clause in favour of the courts of another jurisdiction, in exceptional circumstances, they will be prepared to do so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.