“Justice delayed is justice denied.”   Enforcement of contract rights depends on a viable system that not only applies the rule of law, but does not delay the application of law to the aggrieved party’s petition for judicial redress.   In one recent judicial decision in New York, the court addressed the question whether a possible ten year delay in adjudication in the courts of a foreign country was a sufficient balancing factor to justify retention of the case in New York rather than in the foreign forum.  The foreign forum was India.

Forum Non Conveniens.

Under the basic principle of judicial jurisdiction, a court may exercise its competency to adjudicate disputes.  Competency derives from the applicable constitutional delegation of authority to adjudicate, as well as the existence of a sufficient connection between the parties, the subject matter or the location of the events in dispute.

Under the common law system, courts have adopted the principle that they will not exercise their jurisdiction in all situations.  They have adopted the principle of “forum non conveniens”, or “inconvenient forum,” to send the adjudication of the dispute to another forum that has a greater connection, a greater public interest or tighter connection with the subject matter and/or the parties.

Under New York law, the factors to be considered in a defendant’s motion to dismiss include:

• the burden on the New York courts.
• the potential hardship to the defendant.
• the unavailability of an alternative forum in which the plaintiff may bring suit.
• the fact that both parties are nonresidents of New York.
• the fact that the transactions out of which the cause of action arose occurred primarily in foreign jurisdiction.

No one factor is decisive.  Islamic Republic of Iran v. Pahlavi, 62 NY2d 474, 479 (cert. denied 469 U.S. 1108).

Delays in India as Basis for Denial of Motion to Dismiss.

In a dispute concerning the interpretation of a letter of credit, the New York Supreme Court, Appellate Division, ruled that a trial court must consider factors in addition to the fact that the courts of India are clogged for many years.  The case involved a letter of credit issued in India to the Japanese seller of commercial goods.

The plaintiff, a Japanese corporation with principal offices in Japan, submitted an opinion of Bhupinder Nath Kirpal, a former Chief Justice of India, who expressed his conclusion that because of the huge backlog of existing cases, the fact that no preference is given to commercial cases or newly submitted cases and the shortage of judges in India, it would take the New Delhi High court at least ten years to decide this type of case.

In contrast, the  defendant bank tendered an affidavit of Aziz Mushabber Ahmadi, another former Chief Justice of India, explaining that India provides an adequate alternative forum, and that the Indian Code of Civil Procedure had been amended in 1999 and 2002 in order to expedite the resolution of commercial matters.  Former Justice Ahmadi expressed the view Indian courts could dispose of a commercial case within a year.  Another reference suggests that the case could be disposed of within one to three years.

The trial court in New York relied on the delays in India and the fact that the Indian defendant has an office in New York.  Consequently, the trial court retained jurisdiction, denying the Indian defendant’s motion to dismiss for inconvenient forum.

Other Factors.

On appeal, the Appellate Division overruled the lower court for not considering any other factors.

• Interpretation of Foreign Law; Need for Expert Testimony.
  The New York appellate court considered that the need to interpret foreign law outweighed the risk of a lengthy delay in the foreign court system.

…[The motion court failed to consider the burden of having to interpret Indian banking law.  The applicability of foreign law is an important consideration in determining a forum non conveniens motion [citation] and weighs in favor of dismissal [citation], given that expert testimony is essential.   NYLJ, May 24, 2004, p. 31, at cols. 3-4 (1st Dept. May 18, 2004).

• Comity and Interest of Foreign Courts.
  The New York appellate court also underscored the importance of the principle of judicial restraint in respect of the public interest of foreign courts and foreign legal systems.   This principle of restraint, adopted early in U.S. judicial history with Marbury v. Madison, serves to enhance the respect of foreign courts for judicial decisions of New York courts reciprocally under the principle of comity.   Thus, in considering a motion to dismiss for forum non conveniens, New York courts should:

defer to India’s interest in resolving its own affairs.  New York courts have recognized that where a foreign forum has a substantial interest in adjudicating an action, such interest is a factor weighing in favor of dismissal.   [Citation.]  As the affidavit of former Chief Justice Ahmadi noted, Indian courts are keenly interested in governing the affairs of its financial institutions to insure uniformity and consistency in the processing of financial transactions and in the interpretation of Indian banking statutes and laws.

In conclusion, the appellate court ruled that the lower court erred in concluding that India was not an adequate forum because of the delays in its court system.  The lower court had relied on an earlier decision finding that delays in Indian courts were from 15 to 20 years.  That earlier decision had been decided before the Indian judicial procedure reforms in 1999 and 2002.

Lessons in Outsourcing.

This decision highlights the critical importance of properly drafting dispute resolution clauses in outsourcing contracts.

• Foreign Governmental Interest.
  While the dispute related to letters of credit, the appellate court noted the critical interest of Indian courts in adjudicating matters relating to “processing of financial transactions.”  The same interest could be said to exist for virtually any IT-enabled transaction processing in India.  This covers all business process outsourcing.
• Choice of Law.
  This decision relates to interpretation of foreign law.  Parties to international commercial contracts in outsourcing should understand the applicable law and its role in the decision-making process under the principle of forum non conveniens.
• Choice of Forum.
  This case underscores the need for the parties to choose the relevant forum.  The New York decision did not have any discussion of the terms of the Indian bank’s letter of credit.  This litigation might have been avoided if the letter of credit had not only identified the mutually chosen applicable law, but also a mutually agreed exclusive forum for resolution of the disputes.  Perhaps the issuing bank chose not to include that choice of forum in its letter of credit terms, possibly due to the pre-reform decisions that had adjudicated that Indian courts were not a viable solution to dispute resolution.
• Guarantees.
  A guarantee is a contractual obligation to pay money or perform certain acts under pre-defined conditions.  In this situation, the dispute related to a bank guarantee in the form of a letter of credit.  In outsourcing, enterprise customers should consider the availability and suitability of possible guarantees of performance.  In view of the recent infamous bankruptcies of Enron and WorldCom, service providers may also take note of the possible value of guarantees of payment by the customer, or alternative contractual provisions assuring the service provider of its own rights of enforcement or alternatives to judicial enforcement.
• Role of Arbitration.
  An arbitration clause may overcome issues of forum non conveniens. But arbitration still retains the risk (albeit small) of non-enforcement under the rules governing recognition and enforcement of foreign arbitral awards.
• Role of Offshore Judicial Reform in Offshore Outsourcing.
  This case is a beacon and warning for foreign governments that have byzantine, poorly administered, politically influence or backlogged judicial systems.  If your government wishes to promote exports of services, you should offer a judicial system that is accessible and viable as an alternative forum under the principle of forum non conveniens. In the absence of a credible judicial system, your service providers will be forced into courts such as those of New York, and the customary international financial and practical guarantee structures in offshore outsourcing transactions might serve as barriers to entry for new  service providers.   Development of a credible judicial system does not occur overnight, but failure to make steps in that direction may retard economic development.

Decision:

Shin-Etsu Chemical Co., Ltd. v. ICICI Bank Limited, __ N.Y.S.2d __, NYLJ May 24, 2004, p. 18, cols. 1-6, p. 31, cols. 1-6 (1st Dept. May 18, 2004), by Sullivan, J. (Docket No. 3033).

Published: May 26, 2004