Contract’s Midnight Clauses: Governing law; Applicable jurisdiction and Arbitration Clause.

A commercial contract is a legal relationship, in its acrimonious standoff, the first legal hurdles to be met are Governing law; Applicable Jurisdiction; and Arbitration Clause as structured to apply to the contract. In its negotiations phase, these clauses largely are renegade to the last option and thus as referred to as midnight clause, these are glossed over in the finalization of the agreement and unless a full thought is given, if parties are from different geographies it results in litigation lawyers’ paradise.
Whilst interpreting these midnight clauses, unless clear, within the ambit of legal interpretation creates a nightmare, incurs substantial costs to the parties in its interpretation of these clauses and results in heartburn: for miscalculating the applicable forum; time arbitrage for the disposal of the core dispute issues, thus cost in the resolution of a dispute.
Prefacing the concept and premising that either or both parties (natural/legal) are from India the first landing points are The Code of Civil Procedure, 1908 (“CPC”), the Indian Contract Act, 1872 (“ICA”), and the Indian Evidence Act, 1872 (“IEA”), which have bearing on the Enforceability of forum selection clauses. CPC provides for the jurisdiction of the courts to try an action arising out of a breach of contract.[1] ICA declares any contract in restraint of legal proceedings void, if it absolutely restrains usual legal proceedings in the ordinary tribunals[2]. IEA provides that every fact, of which the court does not take judicial notice, has to be proved. Accordingly, in India, foreign laws are to be proved like any other fact by leading evidence[3]. Now, pivoting this discussion on the implications of these statutes on the validity and enforceability of forum selection clauses;
Under CPC, every suit arising out of a breach of contract is instituted in a court within the local limits of whose jurisdiction the cause of action arises. The Supreme Court has laid down the following propositions regarding the venue for the suits on contract[4]:
(i) In a court within whose jurisdiction the acceptance was communicated; the place where the contract should have been performed or its performance completed;
(ii) In the suits for agency actions, the cause of action arises at the place where the contract of  agency was made or the place where the actions are to be rendered and the payment is to be made by the agent;
(iii) Part of the cause of action arises where the money is expressly or impliedly payable under a contract;
(iv) In a case of repudiation of a contract, the place where the repudiation is received; and
(v) If a contract is pleaded as part of the cause of action giving jurisdiction to the court where the suit is filed and that contract is found to be invalid, such part of the cause of action disappears.
It was held that an Indian court does not have jurisdiction to try a suit on a cause of action, which arose wholly outside the Indian Territory[5]. Further, where two or more courts have jurisdiction to try a suit or proceeding, an agreement between the parties that the dispute between them shall be tried in one of such courts is valid and not contrary to public policy[6].
Thus the analyses are on two scenarios: when it is “contracted to refer disputes to arbitration”, the other being silence on arbitration thus disputes are to be referred to as “usual legal proceedings in the ordinary tribunals”
As with governing law, there is otherwise a risk of costly, time-consuming, and wasteful preliminary battles about whether disputes should be handled in the courts of country A or country B, or city A or city B if applicable in India and also a risk of multiple claims proceeding in parallel in several different jurisdictions simultaneously.
 

GOVERNING LAW
Here is a typical governing law clause: "This Agreement is governed by and shall be construed in accordance with the laws of [India/England/ Singapore/etc]."
While this wording is straightforward, there are several important factors to note:
The choice of governing law is not a "my law or your law" battle of strength. It may be the case that "my law" is not in fact the best choice, which is why some international contracts are governed by laws that have nothing to do with either party (e.g., international parties all over the world regularly choose English, New York or Singapore law to govern their contracts). Nor is it wise to choose a neutral third-country law as a kind of compromise, unless one is sure that the chosen law is reliable. The key point to understand is that the choice of the legal system can have fundamental, sometimes unintended consequences, even affecting the basic validity of the contract. Therefore it is vital to have informed advice and to ensure that the chosen law is reliable and effective
A common mistake is to refer to a country that has more than one legal system, e.g., "USA" or "China". Sometimes the ambiguity can be resolved by considering the wider context, but it is better to be clear by referring to, say, "New York" or "Hong Kong SAR".
Simple is best. One should avoid phrases such as "publicly available laws of [ ]" or the like. Similarly, one should avoid splitting the governing law (e.g., "issue X shall be governed by the law of [place A] and issue Y shall be governed by the law of [place B]"). Such wording is a recipe for parallel litigation and the associated costs and delays.
For similar reasons, one should generally avoid over-clever formulae "excluding the conflicts of laws rules of that country", or similar. Occasionally it can be appropriate to include such a formula, but this is a highly technical issue on which professional advice should be obtained.
 

JURISDICTION
An example of a jurisdiction clause: "The parties submit all their disputes arising out of or in connection with this Agreement to the exclusive jurisdiction of the Courts of [ ]".
Again, there are several factors to consider in drafting a clause of this type:
A jurisdiction clause represents the parties' decision to resolve their disputes in court. It is therefore an alternative to arbitration. If in doubt, one should choose a jurisdiction clause or an arbitration clause, not both. Sometimes it can be appropriate to provide for arbitration and to include a clause conferring jurisdiction on certain courts to support the arbitration and to enforce awards.
If one wants to provide for particular courts only the clause should clearly state that the jurisdiction is "exclusive". Conversely, if one wants to include a non-exclusive jurisdiction clause (e.g., because one wants to preserve their ability to sue the counterparty in several possible venues), one should spell out exactly what their intention is. That is because courts in different places have taken different approaches as to what is meant by the shorthand phrase "non-exclusive jurisdiction". In Swastik Gas[7] it was interpreted for India to be:
From the foregoing decisions, it can be reasonably deduced that where such an ouster clause occurs, it is pertinent to see whether there is unambiguous and specific accepted notions of contract would bind the parties and unless the absence of ad idem can be shown, the other courts should avoid exercising jurisdiction. As regards the construction of the ouster clause when words like 'alone', 'only' 'exclusive', and the like have been used there may be no difficulty. Even without such words in appropriate cases the maxim 'expressio unius est exclusio alterius' - the expression of one is the exclusion of another- may be applied. What is an appropriate case depends on the facts of the case. In such a case mention of one thing may imply the exclusion of another. When certain jurisdiction is specified in a contract an intention to exclude all others from its operation may in such cases be inferred. It has therefore to be properly construed.
As with governing law clauses, simple is usually best. Trying to assign different types of disputes to different jurisdictions frequently gives rise to problems, although there can be workable solutions in some particular cases. One should also avoid words that create uncertainty and ambiguity (e.g., it is better to say that courts "shall" have jurisdiction, not that they "may" have). Though in Swastik Gas[8] it was enumerated as:
Where two or more courts have jurisdiction, if the parties by agreement have chosen one court, to the exclusion of others, only the Court chosen in the agreement will have jurisdiction.
Usage of words “alone”, “only”, “exclusive” are not mandatory in a clause to ouster jurisdiction. If not used, the intention of parties and connecting factors as to situs of agreement and cause of action needs to be looked into.
Such ouster clauses do not amount to a violation of public policy and did not contravene Section 28 of the Contract Act.
One has to consider carefully whether the clause will be effective in legal and commercial terms. Will a court take jurisdiction just because the parties have chosen it in their contract? Will a judgment from that court be enforceable in the place where the defendant's assets are located? Depending upon the answers to these questions, incorporation of an arbitration clause may be a better option on some occasions.
We have looked at the purpose of governing law and jurisdiction clauses to explain why they are important and should be included in commercial contracts.
Usually, a jurisdiction clause will provide for either "exclusive" or "non-exclusive" jurisdiction. The interpretation of these terms may vary across legal systems, but in broad terms "exclusive jurisdiction" means that only the specified courts will have jurisdiction to hear disputes, and "non-exclusive jurisdiction" means those courts can hear disputes but the parties are not prevented from litigating in other courts as well or instead if they think it is appropriate to do so.
Its seminal interpretation used in common law jurisdiction is Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460; (Spiliada) Spiliada requires a court, in an application for a stay of proceedings application on the ground of forum non-conveniens, to determine on the balance of all competing factors, which forum would be the more appropriate one. Given that the action to stay was commenced in Forum 'X', the allegation that this was not the appropriate forum meant that the burden lies with the applicant to show which was the more appropriate forum. This was referenced in many judgments, In India the seminal Indian judgment being Modi Entertainment Network & Anr vs W.S.G.Cricket Pte. Ltd (2003) AIR(SC) 1177 it evolved:
(1) In exercising discretion to grant an anti-suit injunction the court must be satisfied with the following aspects:-
(a) the defendant, against whom the injunction is sought, is amenable to the personal jurisdiction of the court;
(b) if the injunction is declined the ends of justice will be defeated and injustice will be perpetuated; and
(c) the principle of comity -- respect for the court in which the commencement or continuance of action/proceeding is sought to be restrained -- must be borne in mind;
(2) in a case where more forums than one are available, the Court in the exercise of its discretion to grant anti-suit injunction will examine as to which is the appropriate forum (Forum conveniens) having regard to the convenience of the parties and may grant an anti-suit injunction regarding proceedings which are oppressive or vexatious or in a forum non-conveniens;
(3) Where the jurisdiction of a court is invoked based on a jurisdiction clause in a contract, the recitals therein regarding exclusive or non-exclusive jurisdiction of the court of choice of the parties are not determinative but are relevant factors and when a question arises as to the nature of jurisdiction agreed to between the parties the court has to decide the same on a true interpretation of the contract on the facts and in the circumstances of each case;
(4) a court of natural jurisdiction will not normally grant an anti-suit injunction against a defendant before it where parties have agreed to submit to the exclusive jurisdiction of a court including a foreign court, a forum of their choice regarding the commencement or continuance of proceedings in the court of choice, save in an exceptional case for good and sufficient reasons, with a view to prevent injustice in circumstances such as which permit a contracting party to be relieved of the burden of the contract; or since the date of the contract the circumstances or subsequent events have made it impossible for the party seeking injunction to prosecute the case in the court of choice because the essence of the jurisdiction of the court does not exist or because of a vis major or force majeure and the like;
(5) where parties have agreed, under a non-exclusive jurisdiction clause, to approach a neutral foreign forum and be governed by the law applicable to it for the resolution of their disputes arising under the contract, ordinarily no anti-suit injunction will be granted regarding proceedings in such a forum conveniens and favored forum as it shall be presumed that the parties have thought over their convenience and all other relevant factors before submitting to the non-exclusive jurisdiction of the court of their choice which cannot be treated just an alternative forum;
(6) a party to the contract containing jurisdiction clause cannot normally be prevented from approaching the court of choice of the parties as it would amount to aiding breach of the contract; yet when one of the parties to the jurisdiction clause approaches the court of choice in which exclusive or non-exclusive jurisdiction is created, the proceedings in that court cannot per se be treated as vexatious or oppressive nor can the court be said to be forum non-conveniens; and
(7) the burden of establishing that the forum of the choice is a forum non- conveniens or the proceedings therein are oppressive or vexatious would be on the party so contending to aver and prove the same.
Supreme Court of India in Modi Entertainment has held that where the parties to a contract chose the neutral forum in preference to the natural forum, they would be bound by the jurisdiction of the neutral forum unless extraordinary and unforeseen circumstances exist, which would justify a party to claim relief from its bargain of non-exclusive jurisdiction clause, but certainly not on the ground of inconvenience such as expenses and hardship of getting a witness to the agreed forum. It is a well-settled principle that by agreement the parties cannot confer jurisdiction, where none exists, on a court to which CPC applies, but this principle does not apply when the parties agree to submit to the exclusive or non-exclusive jurisdiction of a foreign court. This has to be contextually structured in view of Orchard Capital I Ltd v Ravindra Kumar Jhunjhunwala, whose appeal as jurisprudence is well placed.
 

TWO CENTRAL STRANDS OF ANALYSIS
The principle of Spiliada was revisited in Orchard Capital I Ltd v Ravindra Kumar Jhunjhunwala [2012] SGCA 16 – Court of Appeals, Singapore to interpret the following Governing Law clause: "This Agreement is governed by and construed in accordance with the laws of Hong Kong, SAR. The Parties submit to the non-exclusive jurisdiction of the courts of Hong Kong, SAR. The parties hereby knowingly, voluntarily and intentionally waive to the fullest extent permitted by law any rights they may have to trial by jury in respect of any litigation based here on, or arising out of, under or in connection with this Agreement." for a stay of proceedings initiated in Singapore against the Respondent who normally resided in Singapore and defaulted in payments.
The issue tested was -"The resultant issue is, as set out at the outset of this judgment, a simple one: ought the action was begun by the Appellant to stay on the ground of forum non-conveniens? The real question, however, hinges on the legal effect of the Clause (bearing in mind that it is a non-exclusive jurisdiction clause) – for much will flow from our finding in this particular regard.
Court of Appeal, Singapore returned its finding least in so far as non-exclusive jurisdiction clauses are concerned reflecting that are two central strands of analysis.
The first central strand is contractual in nature. Put simply, depending on the intention of the parties concerned, a non-exclusive jurisdiction clause could (taken at its highest) be given the effect of an exclusive jurisdiction clause – in which case strong cause would be required to be demonstrated by the party seeking to sue in a jurisdiction other than that stated in the relevant clause itself (in this case, the Appellant). Such effect may, for instance, be given where it would be a breach of the non-exclusive jurisdiction clause to object to the exercise of jurisdiction by the selected forum, given the wording of the clause and the circumstances. However, a possible critique of such an approach is that on occasion at least, the distinction between non-exclusive jurisdiction clauses and exclusive jurisdiction clauses will be blurred, if not effaced. Prof Yeo frankly admits this (see Yeo at 359, where Prof Yeo explains that the consequence of this contractual analysis is that there is no theoretical distinction between these two types of clauses). Such a result runs, of course, counter to the Appellant’s view (as briefly noted above at [13]) and, perhaps, is also not entirely consistent with the approach taken by the courts in OCBC Capital and Noble. On the other hand, as Prof Yeo argues, such an approach is a principled one. One can appreciate the persuasiveness of such an argument, especially if one has regard to the substance – as opposed to the mere form – of the contractual arrangement entered into by the parties. Further, as just noted, the result is by no means a forgone one if a strong cause can in fact be demonstrated by the party seeking to act in breach of the clause itself.
The second central strand is general in nature. Put simply, a non-exclusive jurisdiction clause is a factor – in all cases – in ascertaining whether or not the action concerned ought to be stayed (pursuant to the principles first laid down in the seminal House of Lords decision of Spiliada (see [12] above)), although (according to Prof Yeo) its qualitative strength as a factor will differ, depending on the precise circumstances before the court. We will, in fact, return to these principles later (see below, especially at [31]). As Prof Yeo correctly emphasizes, this second central strand is separate and distinct from the first since it is not premised on the contractual intention of the parties as such (see Yeo at 350 and 351).
 

ARBITRATION CLAUSE
Arbitration clause maps onto itself the governing law in absence of an express provision and the procedural law
In Sulamérica CIA. Nacional De Seguros S.A. and Anors v Enesa Engenharia S.A. – ENESA and Anors [2012] EWHC 42 (Comm) and Abuja International Hotels Limited v Meridien SAS [2012] EWHC 87 (Comm), the court heard argument in two very different contexts on the law governing the parties’ agreement to arbitrate but delivered judgments affirming the same principle.
The governing law (of the contract) approach: Older English decisions had held that in the absence of an express choice made by the parties, the law governing the arbitration clause would follow the governing law of the underlying contract. It was implied, they felt, that the parties intended for their express choice of governing law to also govern the arbitration clause.
Indian decisions also followed this approach (see the Supreme Court’s decision in N.T.P.C. v Singer SC 1993 AIR 998. Only where the parties did not specify either the governing law of the contract or the law governing the arbitration agreement would a presumption arise that the latter follows the law of the seat of arbitration.
The law of the seat approach: Recent English decisions (such as C v. D, [2007] EWCA Civ 1282) however, seem to favor the objective “closest and most real connection” test in deciding the proper law of the arbitration agreement, which invariably leads to the law of the seat of arbitration.
In Sulamerica, the governing law of the insurance policy was Brazilian law while the arbitration was English-seated. The law governing the arbitration agreement was not specified.
The Court, following other recent English decisions, held that the proper law of the arbitration agreement was English law because it had its closest and most real connection with the law of the seat.
This decision was appealed on the ground that the High Court judge should have held that the parties had made an implied choice of Brazilian law as the proper law of the arbitration agreement (following their express choice of Brazilian law as the governing law of the contract).
The Court of Appeal dismissed the appeal.  Lord Justice Moore-Bick stated that the proper law was to be determined by undertaking a three-stage inquiry.
The test
First, look into the express choice of the parties, if any. If this did not exist, then the courts should turn to the implied choice of the parties, and if this could not be determined, the courts should determine the system of law with which the arbitration agreement had its “closest and most real connection”.
No implied choice: There was no express party choice in Sulamerica, so Lord Justice Moore-Bick went on to consider the implied choice of the parties. He said that “in the absence of any indication to the contrary”, an express choice of law governing the substantive contract was a strong indication that implied the choice of the same law concerning the agreement to arbitrate; unless of course “there are other factors present which point to a different conclusion.”
Two important factors, in this case, indicated that the parties had not impliedly chosen Brazilian law to govern the arbitration agreement. The first was the choice of London as the seat, and the second was the fact that a choice of Brazilian law meant that the arbitration agreement was enforceable only with the insured’s consent (which, according to the court, the parties could not have intended!).
Law of the seat has the closest and most real connection to the arbitration agreement: Because there was no express or implied choice of the law governing the arbitration agreement, Judge then went on to consider which system of law the arbitration agreement had the closest and most real connection. The court determined that the arbitration clause had its closest and most real connection with the law of the seat, that is, English law.
It is interesting to note Lord Justice Moore-Bick’s words in this regard. One may disagree with this assessment, but to me, it almost seems as if once the inquiry proceeds to the third stage, it will be the law of the seat that will almost always have the closest connection to the arbitration agreement.
“… No doubt the arbitration agreement has a close and real connection with the contract of which it forms part, but its nature and purpose are very different. In my view an agreement to resolve disputes by arbitration in London, and therefore under English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective. Its closest and most real connection is with English law. I, therefore, agree with the judge that the arbitration agreement is governed by English law.”
Lord Neuberger’s observations – back to the High Court’s approach?
In Sulamerica, Lord Neuberger agreed with Lord Justice Moore-Bick’s three-stage inquiry. However, while referring to C v. D, he added the following observations:
“….there are a number of cases which support the contention that it is rare for the law of the arbitration to be that of the seat of the arbitration rather than that of the chosen contractual law, as the arbitration clause is part of the contract, but …the most recent authority in a decision of this court which contains clear dicta (albeit obiter) to the opposite effect, on the basis that the arbitration clause is severable from the rest of the contract and plainly has a very close connection with the law of the seat of the arbitration.”
Again, one may disagree with this analysis, but it seems to me that his Lordship gives precedence to the ‘close connection’ test (over the parties’ implied choice) based on the doctrine of separability (unlike Lord Justice Moore-Bick who resorted to the third step only because there was no implied choice).
Subsequent application of the three-step test
However, it is Lord Justice Moore-Bick’s three-step test that has been applied since Sulamerica. In Arsanovia Ltd v. Cruz City 1 Mauritius Holdings, [2012] EWHC 3702 (Comm), which involved Indian governing law and an English seat, Justice Andrew Smith (in the High Court) applied the three-step test and concluded that as a matter of contractual interpretation, the parties had demonstrated their mutual intention that the arbitration agreement is governed by the law of India. Because the judge was able to determine the implied choice of the parties, in this case, there was no need to resort to the closest and most real connection test (which, according to him, would have been the law of the seat).
In any case, the drafting lesson here is clear – specify the law governing the arbitration agreement. With the uncertainty of the law in this area, it seems safest to think about and solve the problem at the drafting stage itself.

SEAT AND VENUE OF ARBITRATION
Enercon (India) Ltd and Ors v Enercon Gmbh[9]- the relevant provision was “The governing law of the IPLA (the contract in question) was Indian law; the venue of the arbitration was London; and the provisions of the Indian Arbitration and Conciliation Act, 1996 were to apply” to which Hon’ble Supreme Court held that “the express mention in the arbitration clause that London was the venue of the arbitration could not lead to the inference that London was to be the Seat because although London was termed as the venue, the law governing the substantive contract, the law governing the arbitration agreement and the law governing the conduct of the arbitration were chosen to be Indian law and the closest and most real connection was with India. Once the Seat was in India, Indian Courts would have exclusive supervisory jurisdiction and English Courts cannot have concurrent jurisdiction”
 

Conclusion:
Thus, a seasoned practitioner will mentally jog the midnight clauses before penciling it down, revert and update his research where required. But treating it as a midnight clause with mindless drafting is a road full of potholes whose depth would be unknown. Tread with care...

[1] See Section 20 of CPC
[2] See Section 28 of ICA-'Agreements in restraint of legal proceedings, void'.  The exception to this is of the contract to refer to arbitration on disputes that may arise.
[3] See Section 57 and Section 58 of IEA
[4] A.B.C. Laminart Pvt. Ltd. v. A.P. Agencies, Salem, A.I.R. 1989 S.C. 1239.
[5] Bhamboo v. Ram Narain ,1928, 9 Lah. 455, (28) A.L. 297.
[6] Hakam Singh v. M/s Gammon (India) Ltd. 1971 S.C. 740.
[7] Re: SWASTIK GASES PVT. LTD (2012) 3 RLW 2241
[8] ibid
[9] (2014) AIR(SC) 3152