Validity of Contractual Clauses Regarding Exclusion of Jurisdiction

All commercial contracts (and, especially those between two parties that are located at different locations) invariably have a clause relating to jurisdiction of courts to hear any dispute arising out of such contract. Typically, the clause would be like – “Any dispute arising out of this contract will be subject to ABC jurisdiction only” or something phrased similar.

What is the validity of such a clause? A similar question came up for consideration before the Supreme Court in the case of A.V.M. Sales Corporation Vs. Anuradha Chemicals Private Limited [(2012) 2 SCC 315]. Here we take a closer look at some of the observations of the Court, and law as it appears to have been laid down, in the above case.

The question the came up for consideration before the Court in the above case was,

  • whether if two courts have the jurisdiction to try a suit, can the parties to an agreement mutually agree to exclude the jurisdiction of one court in preference to the other?; and,
  • whether the same would amount to violation of the provisions of Sections 23 and 28 of the Contract Act?

While reiterating that parties to an agreement,

  • cannot contract in violation of Sections 23 and 28 of the Contract Act [cannot contract against statutory provisions]; and,
  • cannot confer jurisdiction on a court which has no territorial or pecuniary jurisdiction to entertain a matter;

the Court observed that Section 28 of the Act, read with Section 23 of the Act, made it clear that, “if any mutual agreement is intended to restrict or extinguish the right of a party from enforcing his/her right under or in respect of a contract, by the usual legal proceedings in the ordinary tribunals, such an agreement would to that extent be void.

However, as the issue under consideration was slightly a different one, the Court relied upon on the earlier judgments passed in the following cases, to answer the question:

  1. A.B.C. Laminart (P) Ltd., Vs. A.P. Agencies – (1989) 2 SCC 163;
  2. Angile Insulations Vs. Davy Ashmore India Ltd. – (1995) 4 SCC 153; and,
  3. Hanil Era Textiles Ltd. Vs Puromatic Filters (P) Ltd. – (2004) 4 SCC 671.

In A.B.C. Laminart (P) Ltd.’s case, it was observed by the Court that:

where there may be two or more competent courts which can entertain a suit consequent upon a part of the cause of action having arisen therewithin, if the parties to the contract agreed to vest jurisdiction in one such court to try the dispute which might arise as between themselves the agreement would be valid. If such a contract is clear, unambiguous and explicit and not vague it is not hit by Sections 23 and 28 of the Contract Act. This cannot be understood as parties contracting against the statute.

A similar view was also taken in the Angile Insulations’s case, wherein it was held that where two courts have the jurisdiction consequent upon the cause of action or a part thereof arising therein, if the parties agree in clear and unambiguous terms to exclude the jurisdiction of the other, the said decision could not offend the provisions of Section 23 of the Contract Act.

The Court also pointed to the observations in the case of A.B.C. Laminart (P) Ltd. that ‘an agreement to oust absolutely the jurisdiction of the court will be unlawful and void being against public policy’, and observed that such a result would ensue if it is shown that the jurisdiction to which the parties had agreed to submit had nothing to do with the contract. If however, the jurisdiction agreed would also be a proper jurisdiction in the matter of the contract, it could not be said that it ousted the jurisdiction of the court.

Thus, from the above, it can be understood that:

  • where two courts have the jurisdiction,
  • consequent upon a part of the cause of action having arisen therewithin,
  • if the parties agree,
  • in clear and unambiguous terms,
  • to exclude the jurisdiction of the other,

then such an agreement would be valid.