Construction of Exclusive Jurisdictional Clauses: Are Insolvency Proceedings Covered?

[Abhishek Jamalpur is a 4th year student at the National University of Advanced Legal Studies]

The National Company Law Appellate Tribunal (NCLAT) in Excel Metal Processors Limited v. Benteler Trading International GMBH and Anr confronted an interesting issue. The question was whether an exclusive jurisdiction clause in a commercial contract covers insolvency proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (IBC). The tribunal decided that exclusive jurisdictional clauses do not cover proceedings under the IBC. This post tries to address questions relating to the construction and interpretation of exclusive jurisdictional clauses in the light of insolvency proceedings. The post also seeks to discuss the decision of the NCLAT in the context of cases decided in foreign jurisdictions.

Facts of the case and order of the NCLAT

The applicant, a German company filed an application against the corporate debtor under section 9 of the IBC for default in paying US $1,258,219.42 inclusive of 15% interest per annum. The corporate debtor contended that no case could be filed in any Indian court as the agreement between the parties provided that any suit or case is maintainable only in the Court at Germany.”  The National Company Law Tribunal (NCLT), Mumbai rejected this argument, and an appeal was filed before the NCLAT.

The NCLAT upheld the order passed by the NCLT, relying on Binani Industries Limited vs Bank of Baroda and held that an insolvency proceeding is neither a ‘suit’ nor a ‘litigation’ and is not a recovery proceeding. Also, the NCLT has jurisdiction under section 408 of the Companies Act, 2013 and under section 60(1) of the IBC. In view of this, the NCLAT held that exclusive jurisdiction clauses do not cover insolvency proceedings and the NCLT and the NCLAT both have jurisdiction over such matters.

Scope of exclusive jurisdictional clauses: Whether ousting the NCLT’s jurisdiction is against public policy

It is a general rule under section 28 of the Indian Contract Act, 1872 that an agreement restraining legal proceedings is void. This rule comes with an exception that, if one or more courts have jurisdiction, the parties can agree that only one such court will have exclusive jurisdiction. The courts have continuously held that any agreement which ousts the jurisdiction of Indian courts is treated void and against public policy. This rule does not apply in cases where international trade is involved and where parties confer jurisdiction on a foreign court. However, the courts in the United Kingdom (UK), Australia and other jurisdictions have held that, where there is a mandatory statutory provision conferring jurisdiction, the contractual terms cannot exclude the application of such provision. Though ousting the NCLT’s jurisdiction was not against public policy, the courts can ignore an exclusive jurisdictional clause on the ground that it subverts statutory jurisdiction.

Interpretation of exclusive jurisdictional clauses: which rule to be followed?

Exclusive jurisdictional clauses are construed and interpreted as contractual terms to discover the mutual intent of the parties. The courts generally go by the literal interpretation and attach greater weight to the terms that the parties themselves have chosen. Where there is express mention of a certain thing, the courts will exclude any other thing of a similar nature. This exclusion is based on the maxim expressio unius est exclusio alterius. The courts, while dealing with general words in a contract, may provide a narrow and restricted interpretation to avoid absurdity and unreasonableness (see Tillmanns v SS Knutsford [1908] 2 KB 385; Thorman v Dowgate Steamship Co Ltd [1910] 1 KB 410). Also, English courts construe the terms of an agreement more forcibly against the party who puts forward that term. This construction is based on the maxim verba fortius accipiuntur contra proferentem .

However, while dealing with exclusive jurisdictional clauses, courts around the world, especially in India and the UK have given a broad interpretation to such clauses (see Fiona Trust & Holding Corporation v Privalov [2007] 4 All ER 951). Therefore, unless it is clear from the language of such clauses, an exclusive jurisdictional clause will be construed broadly in light of the above-discussed rules.

Are insolvency proceedings covered under the exclusive jurisdictional clause?

In the instant case, the corporate debtor adopted the defence that the terms any suit or case” includes insolvency proceedings. The termsuit’ means civil proceedings initiated to enforce civil rights; and the Supreme Court has held that insolvency proceeding is not a suit. However, the term ‘case’ is general and is wide in ambit. According to Black’s law dictionary, the term ‘case’ means action, cause, suit or controversy. Different courts have given varied meanings to the term ‘case’. Some courts have held that it is a controversy that is litigated, and some courts have held that it is a judicial proceeding. Courts have also held that the term ‘case’ also includes special proceedings. Going by these interpretations, it can be argued that the term ‘case’ encompasses insolvency proceedings as these are special judicial proceedings which are judicial.

However, while interpreting an exclusive jurisdictional clause in the context of the insolvency regime, it was held in AWB (Geneva) SA v North America Steamships Ltd that insolvency proceedings were not “proceedings which related to a dispute under the contract” which could be subject to the exclusive jurisdiction clause. Insolvency proceedings are not proceedings that relate to contractual obligations. A similar approach was taken in the case of Akers v Samba Financial Group.

We see in cases like Black Diamond v Fomento De Construcciones Y contratas  that insolvency proceedings are freestanding proceedings, which deal with debt restructuring and are not brought under an exclusive jurisdiction clause. In addition, the courts in Singapore have held that the objective of insolvency laws to facilitate the claims of creditors overrides the pre-insolvency contract, which includes an exclusive jurisdictional clause.

Analysis

In the opinion of the author, going by the expansive interpretation of exclusive jurisdictional clauses and the interpretation of the term ‘case’, it can be argued that insolvency proceedings are judicial proceedings and therefore fall within the ambit of the term ‘case’. However, the term should be interpreted narrowly, as including anything and everything would result in absurdity. The courts have to look into the aspect of public policy when the statute confers mandatory jurisdiction. In light of the decision of the foreign courts, statutory jurisdiction cannot be subverted by taking the defence of exclusive jurisdictional clauses. In the instant case, the corporate debtor was attempting to take advantage of the exclusive jurisdictional clause and subvert the statutory jurisdiction. It is also important to note here that in light of the maxim verba fortius accipiuntur contra proferentem, the term ‘case’ has to be interpreted narrowly against the debtor. Finally, the cases of AWB, Black Diamond and Akers (all mentioned above) provide the justification that insolvency proceedings are immune from exclusive jurisdictional clauses given in a contract. However, the tribunal did not go into the interpretation and scope of the terms of the contract and did not discuss the aspect of public policy. In the opinion of the author, the tribunal was right in excluding insolvency proceedings but failed to give sufficient reasons.

– Abhishek Jamalpur

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Leave a Reply to Archit Gupta Cancel reply

  • Have the courts in the UK and Australia held that the contractual terms cannot exclude the application of mandatory statutory provision even in the cases of international trade?

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