The Commercial Court (part of the High Courts of Justice) has recently dismissed an application to stay proceedings by various defendants (on the ground that the relevant contracts in dispute were subject to an Exclusive Jurisdiction Clause (“EJC”) in favour of the Federation of Russia (“Russia”)), on the basis that the claimants would not receive a fair trial in Russia. This article explains why, and what the consequences may be.

Exclusive Jurisdiction Clauses (EJCs)

EJCs limit which forum proceedings for a contractual dispute may be issued. This is not to be confused with a ‘choice of law’ clause which determines which law should be applied (rather self explanatory, but there is a difference). Most contracts, for simplicity, combine the two into one, as it is usually more efficient to have the same choice of law as the jurisdiction.

You can, however, have a contract which has one law governing the contract, and a separate jurisdiction (forum/location) dealing with the dispute. For example, you can have a contract where one company is based in England, and the other is Scotland.  If the performance of the contract was in Scotland, then the parties may agree that Scottish Law applies to the contract, but they may choose for the courts of England and Wales to deal with any dispute, due to the Commercial Court having a more preferable procedure. The parties would instruct Scottish lawyers, and the Commercial Court would appoint a judge qualified in Scottish law, and apply Scottish law to the dispute.

Can EJCs Be Challenged?

Long story short: yes.

The courts of England and Wales will usually give effect to an EJC, pursuant to the Eleftheria [1970] P 64 case. However, if the party contesting the EJC has ‘strong reasons’ why the clause should not be given effect, then the court may override the contract and will accept England and Wales as a more appropriate forum for the dispute.

There is, however, a test that must be met. The test derives from the case: Donohue v Armco Inc [2001] UKHL 64, [2002] 1 All ER 749 (“Donohue”). The reasons cannot be matters of convenience, such as location of key witnesses, location of key documents, procedural efficiency, but, rather, factors which go as far as amounting to a denial of justice in the foreign jurisdiction which the EJC elects.

The Legal Ramifications of the Russian Invasion of Ukraine

Since the Russian invasion of Ukraine, the EU (which includes the Republic of Ireland), the USA, and the UK all levied sanctions against Russia for breaching international law (“the Western Sanctions”) including banning companies incorporated in their respective territories from leasing aircraft to Russian companies.

Russia retaliated by implementing countermeasures to “Unfriendly Foreign States” (“UFSs”). These countermeasures included banning the export of Russian aircraft and/or engines. It further prohibited Russian insurers from entering into transactions with insurers, reinsurers and insurance brokers that are persons of UFSs; and banned persons from UFSs from undertaking any transactions that lead to the creation or termination of rights to shares in Russian LLCs without the prior consent of a Russian Government Commission.

The above countermeasures were likely implemented to ensure that Russia secured one of her most vital and strategic industries. However, English courts will not recognize a legal right arising under the law of foreign nation if it is inconsistent with the fundamental public policy of English law.

The Recent Decision in Zephyrus Capital Aviation Partners 1D Ltd and others v Fidelis Underwriting Ltd and others [2024] EWHC 734 (Comm)

In the above matter, the defendants applied to stay the proceedings, on the grounds that the contract in dispute contained an exclusive jurisdiction clause. The Claimants are 78 parties, which were incorporated in the Republic of Ireland, the USA, and Bermuda (all of which were defined as UFSs). The claimants had leased aircraft to a Russian airline under similar lease agreements, but governed by English, Californian, or New York law. The leases provided that the airlines must insure the aircraft, and all primary insurance contracts (and the majority of reinsurance contracts) were governed by Russian law and granted Russia as the appropriate forum arising from any dispute. Following the Western Sanctions and Russian countermeasures, the claimants terminated their leases of the aircraft, but the airlines did not return the aircraft.

The claimants brought proceedings against the re-insurers of the leases, under the “All Risks” or “War Risks” cover, for loss of the aircraft (as the Lessees could not return the aircraft due to the countermeasures). The insurance (and re-insurance) contracts were also mostly governed by Russian law and had EJCs in favour of Russia. The reinsurance defendants challenged the jurisdiction, relying on the EJC.

The claimants resisted the application on the following grounds:

1. There was a real risk they would not receive a fair hearing.
2. The EJC should not be enforced, as the Russian courts would refuse to give effect to the Western Sanctions and apply law that was inconsistent with English public policy.
3. Furthermore, many defendants had already submitted to the courts of England and Wales. This would mean that if the EJC were to be given effect, then there was a risk that there would be multiple proceedings and inconsistent judgments, internationally (multiplicity of proceedings).

The claimants also brought proceedings against the primary insurers in England and Wales and the majority submitted to the chosen forum. Therefore, it made sense to ensure that there was consistency between judgments. The claimants also issued proceedings regarding separate insurance policies they contracted into, on similar terms to the defendants’ policies had in place. The latter proceedings are pending.

The judge determined that there was not only a risk that the claimants would not receive a fair trial in Russia (due to the countermeasures in force), but he also noted that giving effect to the EJC may lead to a foreign court applying foreign laws that are fundamentally inconsistent with public policy of English law.

For the full judgment, click here.

What does this mean for cross-border transactions and subsequent disputes?

There are several ongoing geo-political threats. Notwithstanding the war in Ukraine and its implications regarding security and defence in Eastern Europe, there is an ongoing conflict in the Red Sea (and adjacent territories) affecting international trade (and by extension, shipping and freight insurance), the formation of BRICS (a rival to the G7), and an ongoing territorial dispute in the South China Sea. All the aforementioned challenges could risk impartiality by various foreign courts in the future, if tensions escalate further and the UK government implements similar sanctions as above. On that basis, contracting parties should consider governing law and jurisdiction clauses more carefully when negotiating their contracts, as they may struggle to obtain justice in the event of a dispute (which in the case discussed in this article, was completely outside the parties’ control).

The UK financial sanctions targets by regime can be found here.

If you have a dispute with a foreign party subject to an EJC, and believe you may not receive a fair trial as a consequence, you should seek independent legal advice.

Griffin Law is a dispute resolution firm comprising innovative, proactive, tenacious and commercially-minded lawyers. We pride ourselves on our close client relationships, which are uniquely enhanced by our transparent fee guarantee and a commitment to share the risks of litigation.  For more details of our services please email justice@griffin.law or call 01732 52 59 23.