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A contract was held between two companies: a Spanish company and a foreign one. They agreed to refer any dispute concerning the contract to the courts of Barcelona (Spain), and chose Spanish law as applicable law. Later, the Spanish company decided to sue its counterparty in the United States. The foreign company believed that this behaviour amounts to a breach of contract, and that it results in extra costs (such as fees for local lawyers hired to raise the plea) that should be repaired. The question is, is she right?

The issue was raised for the first time in Spain in a ruling of the Supreme Court (Tribunal Supremo, TS) from February 23, 2007, to which I referred in a previous post . Actually, the main issue in the ruling was international lis pendens. However, the TS also told us that a choice of forum clause is of contractual nature, and that failure to comply with it implies economic consequences: the defaulting party may be sued and sentenced to pay compensation for the legal costs incurred by the counterparty, when forced to defend itself in courts other than those chosen. The elected courts have jurisdiction to decide on the breach of the choice of court agreement.

Recently, the TS ruled again on the issue (STS, from January 12, 2009: see here). The circumstances of the case are those described above. The foreign company sued the Spanish one for breach of contract; both the Court of First Instance (Juez de Primera Instancia) and the Court of Appeals (Audiencia Provincial) denied the claimant’s right to compensation. The TS, however, decided otherwise and overturned their rulings.

The inconsistency between opinions is largely due to different understandings of the nature of choice of forum clauses. For the Court of First Instance and the Spanish company, the agreement to submit is not part of the contract, nor is it a contract; on the contrary, it is an agreement of adjective or procedural nature. Its breach (the non-submission of the parties to the elected Court) ends up in a restricted effect: depending on the willingness of the counterparty, the claim before the non-chosen court will not be decided by this court. The law provides no other penalty for failure to comply with the clause.

The Court of Appeals followed the Court of First Instance opinion, noting that “the principle of contractual freedom does not work the same way in cases where only private interests are at stake, and in case of procedural covenants to submit to jurisdiction” , the latter having limitations of public-procedural order; “agreements of contractual contents (economic agreements) and procedural covenants to submit to jurisdiction cannot be assimilated”; “the pact to submit to a certain jurisdiction is a subsidiary one; it only comes into play when the contract has to be enforced or interpreted.” The Court also said that there is no causal link between the breach of the covenant and the damages claimed by the foreign company in Spain: these damages being due for the proceedings before the Courts of Florida, they must be labelled as “costs of the proceedings” (legal costs); and only the Florida Court could determine the costs to be paid.

The claimant’s (the foreign company) thesis, quoting Spanish and foreign academics, is the opposite: the choice of forum agreement should be treated like any other contractual clause. The plaintiff also recalled that the agreement was not only a choice of court one; the parties had also chosen Spanish law. Finally, the claimant argued the bad faith of the defendant: sole purpose of the claim (of several hundred million dollars) in Florida was to cause further injury and to intimidate.

The TS ruled in favour of the claimant. The Court expressly stated that “[the choice of forum agreement] is incorporated to the contractual relationship as one of the rules of conduct to be observed by the parties; it creates a duty (albeit an accessory one); failure to comply with it (…) must be judged in relation to the significance that such failure may have in the economy of the contract, as this Court has consistently maintained (…) that breaches determining the economic frustration of contract for one party are to be regarded as having substantial meaning (…)”. The TS goes on saying that “(…) in the instant case, the choice of the applicable law and jurisdiction may have been crucial when deciding whether to establish the relationship. If so, they would have clear significance for the economy of the contract, given that Spanish law establishes a concrete contractual framework for the assessment of damages (for instance, it excludes punitive damages, which on the contrary may be awarded under the law of the United States of America);” ” The conscious breach of the covenant, raising a claim where the law of the U.S. was to applied (…) and asking for punitive damages , has created the counterparty the need for a defense, generating costs that go beyond the predictable expenses in the normal or the pathological development of the contractual relationship”.

Finally, the TS denied that costs can only be imposed by  the Court of Florida. In this regard, the TS said that neither the attorneys’ fees nor other damages claimed by the plaintiff are considered “costs” in the U.S. The TS  also added that even if they were to be deemed so, this would not have hindered the claim for damages for breach of contract: the only effect would have been the reduction of the amount that could be claimed. Hence the TS quashed the Court of Appeal ruling, without entering to determine whether the Spanish company acted in bad faith or with abuse of her right to litigate.

Comments on this entry are closed.

  • Adrian Briggs April 24, 2009, 1:47 pm

    A decision so obviously correct that one is left wondering what all the fuss was about. An indication of the proper citation, or a link to the judgment itself, would be helpful…

  • Marta Requejo April 24, 2009, 2:29 pm

    The decision may seem obvious, but the fact is, there is a debate on the subject here in Spain, as shown by the different opinions described. That’s why I thought the case was interesting. I have been unable to create a link to the data base where the decision has been published(Westlaw Aranzadi). Proper citation would be STS (Sala de lo Civil, Sección 1ª), sentencia núm. 6/2009 de 12 enero. RJ 2009\544.

  • Francisco Garcimarti April 24, 2009, 3:38 pm

    In Spain, as anywhere, there are always different opinions among legal scholars about anything, but the decision “is obviously correct”. That´s all.

    Furthermore, the “compensation-for-the–damage mechanism” is probably more fair and effective from a civil-law standpoint than the anti-suit mechanism. Not surprisingly, it was becoming a common practice to “contractualise” this mechanism: the parties include a jurisdiction clause in the contract and add a paragraph to this clause laying down a right to obtain a contractual compensation for its violation. Now, the Supreme Court has clarified that contractual parties anyway enjoy that right according to the Civil Code provisions on contractual damages. Note that this case-law may also be invoked as a good reason to ask for an attachment. If party A, departing from a jurisdiction clause in favour of Spanish courts, files a claim in Italy, party B -instead of asking for an anti-suit- may (i) file a claim in Spain for violation of the jurisdiction clause and (ii) ask for an attachment to guarantee the enforcement of a future ruling.

    There is an important difference between this approach and the anti-suit injunctions. The Spanish Supreme Court has based its decision taking into account the fact that the foreign court has denied its jurisdiction precisely due to the choice-of-court clause in favour of Spanish courts. Hence, this approach seems absolutely consistent with the West Tankers case-law and at the same time may des-incentive strategic behaviours. Probably, no natural defendant will introduce a “torpedo” knowing that he will be sued for damages.

  • TONI MARZAL April 24, 2009, 7:06 pm

    Had it concerned another EU member state, would it really be so different from Turner or West Tankers?

    The ECJ failed to be impressed by the fact that anti-suit injunctions were directed at plaintiffs and not courts, since it considered that they “obstructed” foreign courts.

    Could we not consider that awarding damages for a breach of the choice-of-court agreement constitutes just as much an “obstruction”? In the end, it desincentives the seizure of a foreign court as much as an anti-suit injunction. What about if the claimant had asked for injuctive relief for the breach?

  • Adrian Briggs April 24, 2009, 7:09 pm

    And if you can do this for choice of court, you can do it for choice of law. I agree that it makes anti-suit injunctions (can anyone remember them?) seem so passé. An intelligent agreement for the resolution of disputes is all you need.

  • Marta Requejo April 25, 2009, 10:09 am

    Tony: Spanish law does not know “antisuit” measures, so no point in asking for them here in Spain. Even if they could be conceived as non-specific preventive measures (as opposite to specific preventive measures, art. 727 Ley Enjuicimiento civil), they would probably rise constitutional concerns.

  • TONI MARZAL April 25, 2009, 7:13 pm

    Marta: my main question was that if the Spanish party had seized another European tribunal (say an Italian one), and if that tribunal had not yet declared itself incompetent, could the Spanish court still have awarded damages(or even issued some sort of injunctive relief against a contractual non-performance, i.e. here non-specific “medidas cautelares”) without violating the Turner-West Tankers case law, or should it instead have waited for the decision of the Italian Tribunal?

  • Marta Requejo April 27, 2009, 8:10 am

    I don’t see how Turner-West Tankers would be infringed by a Spanish decision on damages, deriving from the breach of contract. I can imagine other problems, for instance at the stage of recognition: could a Italian decision on the merits be refused recognition because the clause was considered valid in Spain? I don’t think so, as far as jurisdiction cannot be reviewed.

  • Adrian Briggs April 27, 2009, 8:12 am

    But it does not involve a review of the jurisdiction, does it ? It involves saying that the person who invoked the jurisdiction of the Italian court acted in breach of a personal obligation to behave differently, and that is all one needs to see or say.

  • Marta Requejo April 27, 2009, 8:44 am

    The decision on the breach of contract implies a decision on the validity and the scope of the clause. If the Italian Courts have decided on the merits, they must have considered the clause as not valid. That’s why I say that a hypothetical problem may arise at the stage of recognition.

  • Adrian Briggs April 27, 2009, 8:46 am

    I agree, but ‘not valid to prorogate jurisdiction’ is not the same thing as ‘making a promise about what the claimant will or will not do’.

  • Marta Requejo April 27, 2009, 8:53 am

    That’s why I am not sure about a recognition difficulty.

  • Gilles Cuniberti April 27, 2009, 11:52 am

    It was indeed a long time ago, but in my memory, anti-suit injunctions were also (at least potentially) sanctioned by a jail penalty. In certain cases, this might have made them much more effective than the mere threat to pay damages. The enforcement of a damages award necessitates assets, not the enforcement of a jail penalty.

    At the same time, the argument could be reversed: if you cannot get a hold on the offender, you may still be able to locate some of his assets, within the jurisdiction or somewhere in the EU.

  • Carlos Arrue-Montenegro August 6, 2009, 9:46 am

    According to the decision, the tribunal applied the Spanish law which was applicable to the contract according to a choise of law agreement that the TS underline many times as an important fact.

    If there wasn’t a choice of law and the law applicable to the contract was Florida’s law, for instance, the TS would consider that there still be a breach of contract that allows seeking for damages or not because both judges, applying the same law, would take the same decision ? (which is discutable because procedural aspects have a lot of influence in the decision).

    Logic says to me that breach of both clauses should be treated separately. Even if the law applied by the tribunal in breach would be the same, there is still a damage for the party who has to defend the case before an excluded tribunal. But i saw in the decision that the TS uses both breaches to justify damages. Thats a weak point of the decision that tells me that damages are only possible if the case involves both, choice of court and choice of law breach.