The Hague Convention – A Game Changer in International Dispute Resolution?

With these aims, it sets out to challenge arbitration as the prevailing means of international dispute resolution and to make commercial litigation in state courts a viable option for trade partners worldwide.

The Hague Convention is currently applicable in 27 EU member states (Denmark has opted out) and Mexico. It has also been signed by the United States of America and Singapore, but they have yet to ratify it. However, it is much anticipated that the entry into force of the Hague Convention will provide momentum that will encourage also other states to accede.

The ‘New York Convention’ of Litigation

International commercial contracts typically include either choice of court agreements (forum selection clauses), in which the parties expressly agree to have their disputes resolved in the courts of a particular country, or arbitration agreements, in which the parties agree to have their disputes resolved in tribunals of designated arbitrators.

Both agreements intend to provide greater legal certainty to international trade partners in the event of a dispute: parties can predict the procedure, costs and time involved in the chosen method of dispute resolution and avoid parallel proceedings being commenced around the world.

However, there has been a marked contrast in the effectiveness of choice of court and arbitration agreements. While the 1958 New York Convention has long ensured that arbitration agreements are almost universally recognised, there is much less uniformity in national rules dealing with choice of court agreements. Moreover, the New York Convention has made arbitral awards enforceable virtually worldwide, whereas the transnational enforceability of state court rulings has been close to non-existent.

As the choice between litigation and arbitration often centres on the ability of parties to enforce a judgment internationally, the Hague Convention aspires to create a more level playfield between these two options. Its stated aim is to create an optional judicial dispute resolution mechanism alternative to the existing arbitration system. With a balanced enforcement regime for litigation and arbitration, international trade partners will have a genuine choice of the preferred procedure taking into consideration, e.g. appeal possibilities, secrecy, costs, precedence value, or the need for pre-trial orders.

The Key Rules

The Hague Convention sets out the following three key rules to ensure the effectiveness of choice of court agreements:

There are certain exceptions to these rules, but they are limited in scope and must be construed uniformly in all contracting states. Most notably, there shall be no review of the merits of the judgment upon enforcement.

Enforcement may be denied only if the original agreement was null and void or a party lacked the capacity to conclude the agreement; there was a significant error in procedure regarding the service of the claim to the defendant, the judgment was obtained in fraud or is otherwise manifestly contrary to the public policy of the enforcing state; or the judgment is inconsistent with another judgment in the same matter.

The Hague Convention applies to exclusive choice of court agreements in business-to-business relationships. It excludes certain matters, such as disputes relating to consumer and employment contracts, family law, insolvency, anti-trust, tort, and certain insurance, intellectual property and carriage matters.

The Next Big Thing or Much Ado about Nothing?

Many have viewed the Hague Convention as a turning point in international dispute resolution, but so far it may be difficult to see what all the fuss is about.

Within the EU, a similar regime with much more comprehensive forum selection rules is already in place on the basis of the so-called Brussels I regulation. The Hague Convention will thus have little effect as it has not, to date, been ratified outside the EU by any other state than Mexico.

The greatest significance of the Hague Convention ultimately lies in its potential. The convention was originally drawn up by major players in international trade, such as the EU, the US, Canada, Japan, China and Russia. Already a signatory, Singapore is expected to ratify the convention soon. The Hague Convention therefore ‘has the potential to become a worldwide legal basis for the recognition and enforcement of judgments resulting from a choice of court agreement between the EU and these countries’, see here.

Undoubtedly, the Hague Convention may be a ‘game changer’ for international dispute resolution, as arbitration can no longer rely on its unique enforcement mechanism to attract users. This will not, however, become reality in the short-term. With the current 156 countries that are signatories to the New York Convention on arbitration, the Hague Convention has a long way to go before increasing its current 28 contracting states to any number nearly as impressive. However, at least the road is now paved for more options in international dispute resolution.

For more information, please contact:
Ilona Karppinen