Lawyers drafting international contracts may soon have a new option for dispute-resolution clauses.

The Hague Convention, a treaty recently signed by the United States, would require foreign courts to provide more favorable treatment of U.S. judgments, thus making dispute resolution by litigation an attractive alternative to international arbitration.

The problem

U.S.-based litigants that obtain a judgment in a U.S. court over a foreign party often encounter difficulty enforcing such judgments. If the foreign entity lacks assets in the U.S., the U.S. litigant has little choice but to pursue its assets in foreign courts. But other countries' courts are much less prone to recognize and enforce U.S. judgments than U.S. courts are regarding foreign judgments (under, e.g., CPLR Article 53). The principle of international comity - important in the U.S. legal system - is often a one-way street. And there is presently no international treaty in force obligating courts to recognize or enforce foreign judgments.

Moreover, even when parties to an international contract choose a particular court in the U.S. for adjudication of disputes, foreign courts are not always likely to respect that choice. This happened recently in Matrix Integrated Solutions Ltd. v. Naccarato, 2009, O.J. No. 3187; 2009 ONCA 593, in which an Ontario appellate court essentially disregarded a forum-selection clause designating Texas, in a contract between a Texas company and an Ontario company. The Ontario court compelled the Texas company to litigate there notwithstanding the designation of Texas courts in the contract.

Because of these difficulties, international arbitration is often the international-dispute-resolution mechanism of choice. It is especially attractive because most countries are bound by the New York Convention to uphold and enforce the decisions of arbitration panels, wherever constituted. But arbitration also has its disadvantages. International arbitration panels are costly. Parties choosing arbitration are limited in their ability to conduct discovery, and they surrender their rights to appeal a panel's decision.

Hague Convention: A solution?

Last year, the United States signed The Hague Convention on Choice of Court Agreements, an international treaty that will require courts to respect parties' intentions regarding adjudication of transnational disputes and to enforce judgments of foreign courts.

The Hague Convention will apply to disputes arising from international contracts regarding civil or commercial matters that contain exclusive choice-of-court agreements. ("Choice-of-court agreement," as used in the Convention, is analogous to "forum selection clause" as commonly used by U.S. lawyers.) It will not apply to litigation between non-contracting parties (i.e., tort claims), or to litigation arising between parties of the same nationality. The Convention will apply only to business-to-business contracts - it specifically excludes litigation arising from consumer and employment contracts. It also excludes several types of litigation such as antitrust, personal-injury, and family-law issues. Intellectual-property litigation, except as to copyright, is also excluded.

Fundamentally, the Convention will do three things. Where litigation arises between parties to an international contract containing an exclusive choice-of-court clause (and the parties' home countries have adopted the Convention), it will: (1) prohibit the designated court from declining jurisdiction; (2) prohibit non-designated courts from exercising jurisdiction; and (3) require all signatory states to recognize and enforce judgments resulting from the choice-of-court agreement.

Presently only Mexico has fully acceded to the Convention, which awaits Senate ratification in the U.S. The European Commission signed on behalf of its twenty-seven member states, though the Convention must still be ratified on their behalf.

The treaty's effects

The Hague Convention will improve recognition and enforcement of foreign judgments ,in part by encouraging use of choice-of-court agreements. Under the Convention, for example - and assuming the U.S. ratifies the Convention - if a U.S. company contracts with a company from Mexico (which has acceded to the Convention) for the sale of component parts, and the parties agree to a choice-of-court clause exclusively designating, for example, the U.S. District Court for the Western District of New York for any litigation that may arise from their contractual relationship, the Convention will apply. Thus, if the Mexican company sued in Mexico for breach of contract, the Mexican court would be obligated to decline jurisdiction in favor of the Western District. This outcome would not only uphold the original negotiated intent of the parties, but it would avoid the problem of parallel litigation.

If the U.S. company obtains a judgment against the Mexican company in the Western District, and attempts to enforce the judgment against its assets in Mexico, it could do so in the Mexican courts. The Mexican courts would be generally prohibited from reviewing the merits of a judgment handed down by the Western District and would be bound by the latter court's findings of fact.

As mentioned, the Convention excludes consumer contracts. This exclusion is not clear-cut, however. The Convention's definition of "consumer" depends on the use to which a product is placed, not the product itself. A consumer is a natural person procuring goods or services for personal, family, or household use. Thus, a sales contract relating to a product would not implicate the Convention if the purchaser fits that definition, whereas the same product, purchased for business use, would implicate the Convention. A contract for components purchased by a manufacturer would not be excepted from the Convention. Similarly, if the contract governed purchase of consumer end products by a retailer, the Convention would apply.

Where a U.S. company sells software over the Internet with a so-called "click-on" contract designating the Western District and a Canadian purchaser sues in Canada, whether the Canadian court would be obligated under the Convention to decline jurisdiction would depend on the product's intended use.

The Convention does not distinguish between negotiated and non-negotiated contracts, so the fact that the parties did not negotiate the clause would not control. (This differs from domestic consumer "click-on" contracts where many U.S. courts have held non-negotiated forum selection clauses or mandatory arbitration clauses to be invalid.) If the Canadian purchaser of the software is a private citizen contemplating home use, the Convention would not obligate the Canadian court to decline jurisdiction. If the purchaser is an individual professional or sole practitioner intending to use the software in, say, a dentist's office, then the Convention would apply and the Canadian court would be required to decline jurisdiction.

Some exceptions should be noted. A non-designated court may refuse to decline jurisdiction if it determines that enforcing the contract's choice-of-court agreement would lead to a "manifest injustice" or contravene its country's public policy. In addition, courts would not be required to enforce judgments or parts of judgments not representing compensatory damages.

A party obtaining punitive damages in a U.S. court against a foreign defendant, therefore, is unlikely to receive any assistance in obtaining such damages from the courts in a foreign country where the defendant has assets. It should also be noted that under the Convention, a court will be prevented from dismissing a case on the basis of forum non conveniens if doing so overrides the contractual choice of that court by parties to an international contract.

Conclusion

The Convention represents a significant step toward the streamlining of international litigation. Presuming that the Convention gains widespread acceptance, litigation will become an acceptable alternative to arbitration for companies contracting across borders.

Lawyers contemplating advising their clients about use of choice-of-court agreements as an alternative to international arbitration should keep apprised of the progress in the U.S. and in other countries.

The Convention's text and the status of countries' ratification/accession are available at http://www.hcch.net/index_en.php?act=conventions.text&cid=98.

Benjamin Dwyer is an associate in Nixon Peabody's products: class action, trade and industry-representation practice group, and can be reached at dwyer@nixonpeabody.com. Vivian Quinn, a partner in the firm, is deputy leader of that practice group and deputy chair of the litigation department, and can be reached at vquinn@nixon peabody.com.