The Contractual Context


A. Getting into the Right Court

Not long ago, a multinational enterprise with headquarters in Boston needed two cargo vessels to transport ore from its South American mines to its North American production facilities. A shipyard in a developing country with good harbors and cheap labor seemed the right place to build the vessels. Extended negotiations led to a contract between the shipyard and the multinational’s Liberian shipping subsidiary, which was established to purchase and operate the vessels in a tax-efficient manner. The multinational itself guaranteed its subsidiary’s obligations. Interim payments were to be made as the vessels were built, with the final installment of the purchase price due at completion of both vessels. When the shipyard notified the multinational that the vessels were completed, a dispute arose over the engine rooms and communication systems. The multinational maintained that the ships were not in fact finished according to contract specifications. The shipyard rejected these claims and filed suit to compel the final payment in a local commercial court.

Back in Boston, the lawyer who had advised the multinational during the contract negotiations congratulated herself on the foresight displayed in dealing with the shipyard. She had heard that courts in the shipyard’s country lacked a tradition of judicial independence. Less courteous tongues had even characterized court proceedings there as auctions, with the judgment going to the highest bidder. Contemplating this unpleasant prospect, counsel had insisted that the contract designate courts in Boston as exclusively competent to settle any dispute.

The shipyard, of course, had protested that fairness required a more neutral solution. Its attorneys suggested settlement of any dispute through arbitration in Paris under the rules of the International Chamber of Commerce. The Boston lawyer, however, stood her ground. She had once been involved in a case where the arbitrator split the difference between the parties even though her client’s case was clearly a winner. Arbitration, she said, injected too much uncertainty into the dispute resolution process. She noted that judges in Boston were trained to respect precedent, and that their decisions were subject to full appellate review.1

Hungry for business, the shipyard ceded to the Americans’ superior bargaining power. The contract was drafted to include a clause providing that “all disputes arising out of this agreement will be subject to the exclusive jurisdiction of courts located within the Commonwealth of Massachusetts.”

When the dispute over the contract specifications crystallized, things did not go according to plan. An action for damages filed by the multinational in the U.S. District Court for the District of Massachusetts was dismissed for lack of subject matter jurisdiction; the foreign subsidiary’s presence as an indispensable party to the dispute defeated the requirement of complete diversity of citizenship. Jurisdiction could not be thrust upon the court. A subsequent action brought in Massachusetts state court was also dismissed on the basis of precedent holding jurisdiction clauses presumptively invalid, never explicitly overruled, notwithstanding scholarly opinion and judicial dicta saying earlier cases were out of step with the modern trend favoring jurisdiction clauses.2

In the next act of this troubling tale, the scene shifted to a court in the sleepy port town where the ships were being built. The chief judge owned a paint company whose principal customer was the shipyard. Since the United States was not a party to any judicial jurisdiction treaty, the local court felt free to evaluate the shipyard’s commitment to litigate in American courts in light of the convenience of the American forum in the circumstances. The Massachusetts case law that had already caused problems back in Boston assisted the shipyard’s argument that the prorogation clause was not enforceable. Fairness therefore required that the court give the parties some realistic hope of a remedy. After a hearing, the judge approved the sale of the vessels at a bargain price to a local buyer, who incidentally had been a substantial contributor to the election campaign of the current prime minister.

Back in Boston, the state court decision dismissing the action was appealed to the Massachusetts Supreme Judicial Court, which overruled the earlier precedent that had held jurisdiction clauses presumptively invalid. On rehearing, the court devoted considerable attention to the shipyard’s argument that the action should be dismissed on forum non conveniens grounds, since the vessels and most of the witnesses were located abroad, and both the buyer and the seller were foreign corporations.

When the multinational finally obtained a favorable Massachusetts judgment, it moved to attach the shipyard’s bank accounts. The Bostonians were surprised to learn that the country in which the accounts were located recognized foreign judgments only on the basis of a treaty obligation. The United States, of course, had never concluded a single enforcement-of-judgment treaty.

Several members of the legal community were secretly delighted with the opportunities presented by this trans-border drama. Three tenure-hungry academics began writing critiques of the Massachusetts judgment. One had a law and economics slant, applying the Coase theorem to the efficient enforcement of international commercial agreements. Another approached the problem from a law and literature perspective, comparing the uncertainties of forum selection with the chaotic forces facing Captain Ahab in Melville’s Moby Dick. A left-leaning professor attacked the contract as a factor contributing to the oppression of disempowered workers at the shipyard.

The multinational’s disappointed chief executive, however, was not amused. Efforts to secure a fair forum had misfired. Outside counsel was dismissed, and a rival law firm began negotiating the multinational’s next overseas contract.

B. Staying Out of the Wrong Court

Imagine, if you will, a rewrite of the shipbuilding misadventure. In the new narrative our American multinational focused less on getting into the “right” court (i.e. the one in Massachusetts) and more on staying out of the “wrong” court (i.e. the foreign tribunal), giving priority to minimizing its risks rather than maximizing its advantages. In the revised script the multinational accepted the shipyard’s suggestion that any future controversy would be settled by arbitration in Paris under the Rules of the International Chamber of Commerce (ICC).

When the dispute arose, an arbitral tribunal (composed of a Belgian engineer, a Swiss professor, and a French lawyer) had no problem accepting jurisdiction. The fact that ICC arbitrators’ fees are based on a healthy percentage of the amount in dispute made their task easier to contemplate. The arbitrators found the ships had not been completed according to specifications. The shipyard was held liable to the Americans for damages incurred by the wrongful sale of the vessels. As required under the 1958 New York Arbitration Convention, the resulting award’s res judicata

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