If you skim to the end of most contracts, you should find clauses of the kind which are often described as “midnight clauses”. These are clauses dealing with the proper law of the contract, the jurisdiction (or forum) for the resolution of disputes, and (in some cases) providing for alternative dispute resolution mechanisms, such as arbitration.
These clauses are called “midnight clauses” because consideration of what they should contain is often delayed until just before midnight (either figuratively, in the sense of “just before the contract is signed”, or literally, in the sense of “at 11.59 p.m.”). However, sleep-deprived contractual drafting can assume considerable importance when disputes arise, as a recent decision of the New South Wales Supreme Court shows.
The case concerned a dispute between an Australian company which owned the rights to a particular chemical compound, and a Swiss company which was contracted to manufacture the compound. The contract between the parties contained the following provision dealing with governing law and jurisdiction:
16.5 Governing Law/Jurisdiction. This Agreement is governed in all respects by the laws of the State of Delaware, without regard to its conflicts of laws principles. The Parties agree to submit to the jurisdiction of the courts of Delaware.
When disputes arose between the parties in late 2016, the Australian company commenced proceedings in the Supreme Court of New South Wales. Subsequently, the Swiss company commenced proceedings in Delaware. The Swiss company then applied to the Supreme Court of New South Wales to stay the New South Wales proceedings, on the basis that they had been commenced in breach of a clause conferring exclusive jurisdiction of the courts of Delaware.
The Australian company resisted the application for a stay on a number of bases, including an argument that the jurisdiction clause was not an “exclusive jurisdiction” clause. If the clause was, in fact, a “non-exclusive jurisdiction” clause, then the Australian company would retain an entitlement to commence proceedings in New South Wales courts.
So, how was the matter to be resolved? The first step was to determine the proper interpretation of clause 16.5. As the contract was governed by the law of Delaware, this meant applying Delaware law in relation to contractual interpretation. In this case, neither party led any evidence to suggest that Delaware law was different to New South Wales law on this issue. In the absence of such evidence, Australian courts presume that the foreign law is the same as Australian law. Accordingly, Australian principles concerning the contractual interpretation of commercial contracts were applied.
Applying those principles, did the absence of the word “exclusive” in clause 16.5 determine the question? The Court held that it did not. Rather, the Court looked at the fact that neither party had any connection with Delaware (and the fact that in the negotiations for the contract, each party had rejected the other side’s proposal for their own “home jurisdiction”). The Court found that by choosing a “neutral jurisdiction” (namely, Delaware), the parties should have been taken to intend that all disputes would be resolved in that neutral jurisdiction. This meant that clause 16.5 operated as an “exclusive jurisdiction” clause and accordingly, the proceedings brought by the Australian company were stayed. This means that the Australian company will have to litigate its claims in the Delaware proceedings (and to make things worse, the Australian company was ordered to pay the Swiss company’s costs of the New South Wales proceedings).
Problems in relation to “midnight clauses’ often arise because these clauses are drafted without sufficient consideration being given to the circumstances in which they may become relevant. (Of course, if the contract goes well and there are no disputes, “midnight clauses” will usually never become relevant at all).
In relation to jurisdiction, it is necessary to give careful consideration to:
- where, if disputes arise, you may need to sue the other party;
- where, if disputes arise, they may wish to sue you; and
- how and where any judgment which is obtained can be enforced. For example, there is not much benefit in a clause which confers exclusive jurisdiction on the Supreme Court of New South Wales if the other side’s assets are in a country in which Australian judgments cannot be easily enforced. In such a case, international commercial arbitration may be preferable to proceedings in a specified country’s courts.
So, the main lesson from the case is that midnight clauses are not to be slept on – and that, it should fairly be said, is one lesson we won’t be claiming as an exclusive.