Legal query: jurisdictional free-riding?

Great Debates
1

I know the title sounds more of a general question, but it does have a debate part, and that’s the bit I’m more interested in, so bear with me.

My wife is currently working on some deal between two large trans-national companies. These companies are based in different countries (going light on the specifics for obvious reasons). Some parts of the deal involve provisions for dispute resolution, which is pretty normal. They are of the sort that if the two contracting parties disagree about some minor matter they will go to arbitration.

The thing is that this arbitration is to be conducted under the law of a third country. Now commercially this makes sense, since neither party has an obvious skill advantage there and the third country has a decent legal system.

First off the factual questions [ul][li]How common is this practice?[/li][li]Presumably in the event that dispute resolution is required, the parties would have to pay court fees. Would they have to pay a different (higher) fee than domestic applicants? (And obviously since I haven’t named the countries, does it differ across countries?[/ul][/li]Now the issues. First the obvious one: should they have to pay higher fees?

A second, more complicated issue: Most of the time clauses like this never actually come into operation because no dispute arises. Yet the contracting parties’ confidence in the efficacy and impartiality of the third country’s legal system facilitates the agreement to some degree. The fact that the third country’s system is being “used” indicates that it would be more costly to employ or agree to employ some other dispute-resolution mechanism. So the parties are benefiting from the third country’s system regardless of whether they subsequently feel moved to use it.

The (main) question: should they have to pay something for the potential recourse to the third country’s system?

picmr

2

My off-the-cuff reaction is to answer “no” to both of your questions.

On the first point, I’m not aware of any court system that treats non-residents differently than residents, such as charging them higher fees. (In any case, the court fees that I’m familiar with aren’t that high; it’s the cost of the lawyers, the witnesses, the disbursements that makes litigation expensive.)

Second, I don’t see why the courts would charge a fee for a term in the contract that the parties may never invoke. Unless and until one of the parties invoke it, it never affects the court at all - so on what possible basis could the court charge a fee? How would it even know that the term of the contract existed?

If you don’t mind me saying so, I think you’ve got a slightly off-base view of the courts - they’re not a fee-for-service, or an industry, out to make a profit. They’re meant to be open to anyone who thinks they have a claim within the court’s jurisdiction.

That leads to one other point. There’s a difference between agreeing that the contract will be governed by the law of country A, and that any dispute will be litigated in the courts of country A. The parties can select whatever law they want to govern the contract (provided their choice doesn’t run contrary to provisions of their own countries’ law).

They can also say that the dispute will be litigated in the courts of country A, but they cannot by agreement confer on a court a jurisdiciton that it does not have. If two litigants appeared in the courts of country A and there were absolutely zero connection to that country, other than the term of the contract, it would be open to the court to decline to hear the case, because it lacked jurisdiction, or under the doctrine of forum non conveniens - that the courts of some other country were the more appropriate court.

If that were to happen, you might have the parties litigating a contract in the courts of country B, but that court would apply the law of country A to settle the dispute, as indicated by the parties agreement.

I don’t practise in this area, but I believe that choice-of-law clauses and choice-of-forum clauses are fairly typical in major contracts between parties of different nationality.

3

No, I’m not suggesting the legal system should (or indeed could be) run for profit.

The legal system is a public good and must be funded - almost entirely - by taxes.

Seeing as this evidently wasn’t altogether clear in the OP, try this as an analogy:

National defence (another public good) can be used to protect a nearby island and its inhabitants from attack. This can be done essentially at zero additional cost to the defence budget. The island gains benefits in this case in terms of increased feelings of security due to the fact that attack is now less likely. Should they be asked to contribute to the defence budget?

picmr

4

I am confused. The OP stated that arbitration was to be conducted under the laws of a third country. This does not mean in the courts of the third country. Arbitration is generally a privately offered service. An arbitrator is engaged by the parties in a dispute to weigh their respective positions under the appropriate body of law or statute and make a ruling. That ruling can be binding or non-binding, depending upon the prior agreement of the parties involved.

If Joe Echidna in Tasmania decides to use the laws of 19th century Macao as the guiding principals in his dispute with Jimmy Platypus, and Jimmy agrees, then what possible additional burden is placed upon the long-dead inhabitants of a free Portugese trading enclave should our two egg-layers actually find an arbitrator willing to decide their fates upon the principals of free booty and indigenous corruption?

5

In large, particularly multi-national contracts, serious negotiation about the dispute resolution clause is common. Where the parties don’t want the other party to have a “home court” advantage in dispute resolution, they will often agree that disputes will resolved under the laws of another jurisdiction and be either arbitrated or litigated in another jurisdiction (and they do not have to be the same). Common “neutral” jurisdictions include New York, London, Paris and Switzerland. (This situation also applies in contracts between U.S. entities from different states).

New York, for one, encourages large commercial contracts to be governed by New York law and resolved in New York courts. Under New York General Obligations Law Sec. 5-1401 any commercial agreement for a transaction valued at least $250,000 may be governed by New York law, even though the transaction and parties may have nothing to do with New York. Under Section 5-1402 of the same law, for commercial agreements valued at $1 million or more, the parties may agree to have the disputes resolved in the New York courts, even though the transaction or the parties have nothing to do with New York.

New York has elected to do this to sustain its position as a major commercial center.

6

I guess my reaction is that the courts just don’t operate on the basis that only those who pay taxes can benefit from them. They are open to anyone who believes they have a claim that the court can adjudicate.

For example, suppose you’re driving through State C. You have absolutely no connection to that state; it just happens to be between State A and State B. You have no intention of stopping, and have never ever paid any taxes to State C.

You get hit by a car in State C and are badly injured. You want to sue the driver of the other car. You have the right to go to the courts of State C and bring your lawsuit, even if you plan on never returning to State C.

The purpose of the courts is to be open to anyone who has a claim for justice. It’s not dependent on whether that person is a resident, or has paid taxes.

In this respect, the courts are different in kind from every other service offered by the government. I find the defence example simply irrelevant.