Thursday, April 14, 2011

The Complexity of Jurisdiction

The below article was featured in

An issue which is often overlooked when drafting a contract is the clause about jurisdiction.

“Jurisdiction” refers to the entity which will hear any dispute between the two parties. Dispute resolution is normally performed by the courts or via an arbitration panel. However, it is not uncommon to read legally inaccurate contractual provisions, which state something such as: “The Oman Courts will settle any dispute via arbitration.” Sentences such as these can lead to confusion as regards what the parties’ intention actually was; one party will argue that it is clear that the Oman Courts have jurisdiction to hear the dispute, whereas the other party might argue that the Oman Courts cannot hear the dispute, as the Oman Courts are only empowered by the clause to decide who will act as arbitrator. The confusion arises because resolution via the courts is something different to resolution via arbitration.

Strictly speaking, when the parties agree in a contract that the Courts of a certain country will have jurisdiction, the ensuing case is known as “litigation” and the ultimate decision by the judges is known as the Court’s “judgment”.

In contrast, when the parties agree in a contract that the dispute will be settled by arbitration, the ensuing proceedings are known as “arbitral proceedings”, and the ultimate decision of the arbitrator(s) is known as the “arbitral award”.

It is vital, before entering into a contract, to think very carefully about the entity which would have jurisdiction to hear any later dispute. Let us say that an Omani entity is considering entering into a contractual relationship with an English company. The Omani company may want the jurisdiction to be “Omani Courts”, on the basis that the procedures, etc of the courts here are well-known and familiar to that entity. However, what happens if the two entities later have a dispute which is settled by a final, non-appealable Omani court judgment? The difficulty may only be faced by the Omani entity at that juncture, because obtaining a court judgment is not the same as actually receiving the monetary damages/compensation in your company’s bank account.

The truth is that one has to think, before even entering a contract, as to what might happen if you have a dispute at a later date with your contractual counter-party. Let us say, in the example above, that the English company simply decides not to abide by the final Omani court judgment and, frankly, tries to disregard and avoid it. Let us also suppose that the English company has no assets in Oman and no presence in Oman.

The Omani company has a paper final Omani Court judgment in its favour, but how will it enforce that judgment (ie get the money which the English company has been ordered to pay)? The fact of the matter is that the Omani company may then have to start fresh court proceedings in England, where the Omani court judgment may only have evidential, rather than binding, weight. This could lead to extra cost and years of dispute, at the end of which the Omani company may not get what was decreed by the Omani Courts.

But what would have happened if the contract in question stated that any dispute between the Omani company and the English entity would be settled by arbitration in Muscat? The answer is that the Omani arbitral award would be automatically enforceable in England against the English entity. The reason for this is because both Oman and England have signed the New York Convention on the recognition of foreign arbitral awards. In the above specific circumstances, an Omani arbitral award would have much greater value to the Omani entity as compared with an Omani court judgment.

To conclude, legal advice is always recommended as regards the drafting of the jurisdiction clause. The decisions made pre-contract in this respect could be crucial to your business in a few years’ time.

-James Harbridge, Partner (Oman)