Jurisdiction: Brussels Regulation Welcome Clarification from the European Court of Justice, Contributed by Ben Trust and Byron Phillips, Nabarro LLP
The European Court of Justice has provided clarification – and at the same time, welcome news for banks – in a landmark ruling on Article 22(2) of Regulation 44/2001 (Brussels Regulation) which implements the Brussels Convention on governing law. The decision, that Article 22(2) should be interpreted narrowly, serves to prevent parties from evading the effect of a contractual jurisdiction clause (and thus the requirement for the case to be heard in a particular EU Member State) on the basis that the decision to enter into the contract was invalid.
Jurisdiction has long been a thorny issue, particularly in cross-border financial disputes, and banks in particular have found themselves subject to jurisdictional challenges (often by local authorities) on the back of Article 22(2) Brussels Regulation. It was important for the ECJ to provide clarity and guidance on the remit of Article 22(2) to avoid a potentially unsavoury position in any dispute where the decision-making of a contracting company is called into question, and the jurisdiction of the Member State where the company has its seat automatically overrides an agreed jurisdiction clause. This might apply despite other elements of the dispute pointing to a close connection with the contractually agreed Member State.
In the subject case, a German public transport authority, Berliner Verkehrsbetriebe (BVG) sought, unsuccessfully, to rely on Article 22(2) Brussels Regulation to argue that Germany was the appropriate Member State to hear its derivatives swap contracts dispute with JPMorgan Chase Bank NA (JPM).
Article 22(2) provides:
The following courts shall have exclusive jurisdiction, regardless of domicile: . . . (2) in proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or association has its seat.
Basically, the Article provides that where the validity of a decision made by a company is the object of the proceedings, the EU Member State in which the company has its seat will have jurisdiction. Importantly it operates to overreach any jurisdiction agreement between the parties where that agreement provides for jurisdiction to be conferred on a different Member State.
Issue in Dispute
BVG and JPM had entered into swap contracts whereby BVG would provide protection to JPM against the risks of cross-border leasing arrangements. The contracts between the parties included an agreed English law and jurisdiction clause. As part of the transaction the parties concluded a swap, after which BVG sold protection against the credit risk of 150 companies to JPM.
Under the terms of the contract, in the event of payment default by particular third parties, BVG agreed to pay JPM up to $220 million. Payment default occurred and JPM brought proceedings against BVG in the Commercial Court, part of the High Court in London, for $112 million, relying on the jurisdiction clause in the International Swaps and Derivatives Association’s Master Agreement, which conferred exclusive jurisdiction on the English Courts. BVG, however, brought parallel proceedings in Germany. BVG’s argument was that an organ of the company had acted outside its powers in concluding the contract and the contract was, therefore, void. Relying on Article 22(2) Brussels Regulation, as the central issue of the dispute was whether the contract with JPM had been entered into ultra vires, BVG claimed that Germany was the appropriate jurisdiction to determine the dispute, being the Member State in which BVG had its seat.
The Commercial Court held that the English Courts had jurisdiction,1 which was upheld on appeal.2 BVG has applied for permission to appeal to the UK Supreme Court, which referred questions relating to the scope of Article 22(2) Brussels Convention to the ECJ.
The German court stayed its proceedings pending the decision of the English Court, as the court first seized, as to whether it had jurisdiction to hear JPM’s claims. BVG appealed and the Higher Regional Court of Berlin, affirming the view of the lower court, stayed the German proceedings in light of the parallel English proceedings. The German Court referred the following question to the ECJ:
Does the scope of Article 22(2) of the Brussels Regulation also extend to proceedings in which a company or legal person objects, with regard to a claim made against it stemming from a legal transaction, that decisions of its organs which led to the conclusion of the legal transaction are ineffective as a result of the infringement of its statutes?
The ECJ on the reference of the German Court helpfully ruled that Article 22(2) Brussels Regulation should be interpreted narrowly and “as not applying to proceedings in which a company pleads that a contract cannot be relied upon against it because a decision of its organs which led to the conclusion of the contract is supposedly invalid on account of infringement of its statutes.”
In reaching its decision, the ECJ stated:
If all disputes relating to a decision by an organ of a company were to come within the scope of Article 22(2) [Brussels Regulation], that would in reality mean that legal actions brought against a company – whether in matters relating to a contract, or to tort or delict, or any other matter – could almost always come within the jurisdiction of the courts of the Member State in which the company has it[s] seat.3
Furthermore, the Court opined:
. . . in a dispute of a contractual nature, questions relating to the contract’s validity, interpretation or enforceability are at the heart of the dispute and form its subject-matter. Any question concerning the validity of the decision to conclude the contract, taken previously by the organs of one of the companies party to it, must be considered ancillary. While it may form part of the analysis required to be carried out in that regard, it nevertheless does not constitute the sole, or even the principal, subject of the analysis.4
The Supreme Court’s reference to the ECJ has since been removed from the register (Case C-54/11: Order of the President of the Court of 5 July 2011 (reference for a preliminary ruling from the Supreme Court of the United Kingdom)).
In reaching this decision, the ECJ has ensured that we should avoid a situation where all substantive elements of a dispute have a close connection with a particular Member State, and yet a defendant company can raise a defence that questions the validity of the decision to enter into a contract in order to have the dispute determined in a completely separate Member State. It is most likely that Article 22(2) Brussels Regulation would only apply in instances where the internal affairs of the company are in dispute, such as one between a company and its shareholders.
From the point of view of the English proceedings, it seems likely that JPM’s claim against BVG in the Commercial Court will be set to proceed.
Certainly, this decision will bring cheer for those parties bringing claims where jurisdiction has been arbitrarily challenged, as it should serve to prevent parties from forum shopping on the back of Article 22(2) where it is clearly not appropriate.
Ben Trust is a partner in the commercial dispute resolution team at Nabarro LLP. Ben acts for a number of quoted and unquoted companies, public bodies and other institutions. He has a broad practice and experience in both commercial litigation and arbitration, including financial services litigation, commercial fraud, professional negligence, and technology disputes. Much of his experience includes cross-border or international issues. Telephone: +44 (0) 20 7524 6234; E-mail: email@example.com.
Byron Phillips is an associate in the dispute resolution team at Nabarro LLP. He acts on a wide range of disputes, including banking litigation, arbitration, commercial fraud, financial services litigation, product liability and technology disputes. Telephone: +44 (0) 20 7524 6224; E-mail: firstname.lastname@example.org.
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