December 23, 2020

UK Court of Appeal Rules on Asymmetric Jurisdiction Clauses Under Brussels Recast

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UK COURT OF APPEAL RULES ON ASYMMETRIC JURISDICTION CLAUSES UNDER BRUSSELS RECAST

The English Court of Appeal has handed down an important judgment on the correct construction of Article 31(2) of the Brussels Recast Regulation (Regulation (EU) No. 1215/2012) (“Brussels Recast”), which is the instrument governing jurisdiction and the recognition and enforcement of judgments at an EU level. The Court has held that provision applies to so-called asymmetric jurisdiction agreements.

Background to the Proceedings

In April 2017, Etihad Airways (“Etihad”) and Air Berlin entered into several agreements comprising a package of financial support for Air Berlin. These agreements included a facility agreement governed by English law (the “Facility Agreement”) which contained an exclusive jurisdiction clause in favor of the English courts as regards proceedings brought by Air Berlin, but which was not exclusive as regards Etihad (known as an “asymmetric jurisdiction clause”). The package also included a comfort letter from Etihad (the “Comfort Letter”) in which it confirmed its (then) present intention to continue to provide support to Air Berlin.

As Air Berlin’s financial position deteriorated, in August 2017 it applied to the German courts to open insolvency proceedings; in July 2018, Air Berlin’s insolvency administrator (the “Insolvency Administrator”) commenced proceedings against Etihad in the German courts, alleging that Etihad had breached its obligations under the Comfort Letter. Etihad brought a stay application against the German proceedings which was upheld by the German first instance Court in July 2020 and, on appeal by the Insolvency Administrator, by the German Court of Appeal in November 2020.

English Procedural Background and First Instance Decision

In January 2019 Etihad commenced proceedings in the English High Court claiming declaratory relief to the effect that the Insolvency Administrator’s claims are governed by English law, the Comfort Letter (being governed by English law) is non-binding and the Courts of England and Wales are the proper forum to hear the parties’ dispute (in light of the exclusive jurisdiction agreement binding on the Insolvency Administrator in favor of the English courts). The Insolvency Administrator challenged the jurisdiction of the English courts on the basis that its claims were governed by German law and not subject to the asymmetric jurisdiction clause in the Facility Agreement.

The High Court in November 2019 handed down judgment rejecting the Insolvency Administrator’s jurisdiction challenge in its entirety. The judgment made findings on two key issues, summarized below:

The Scope Issue

The High Court found that the jurisdiction clause in the Facility Agreement covered the dispute between the parties (i.e. the dispute which was the subject of the German and English proceedings); it followed a line of case law beginning with the House of Lords’ decision in Fiona Trust & Holding Corp v Privalov[1]: English law requires a broad, purposive and commercially minded approach when interpreting jurisdiction agreements. This issue was not subject to appeal.

The Asymmetry Issue

The second issue was the effect and proper interpretation of Article 31(2) of Brussels Recast; in particular, whether it applies to asymmetric jurisdiction clauses. Article 31 applies so as to reverse the general lis pendens rules (Articles 29 and 30) which give priority to the Court first seized to decide its jurisdiction, where proceedings involving the same or related cause of action are brought before the Courts of more than one EU Member State.

The first instance judge found that Article 31(2) applies to asymmetric jurisdiction clauses, such as the one in the Facility Agreement, with the consequence that the English courts (the second seized but contractually designated Courts) were entitled to decide whether they had jurisdiction over the claim and that the German courts, despite being first seized, were required to stay their proceedings, pending confirmation by the English court whether it had jurisdiction.

English Court of Appeal Judgment

The Court of Appeal handed down its judgment on the Asymmetry Issue on December 18, 2020.

Dismissing the Insolvency Administrators’ appeal on all grounds, the Court of Appeal upheld the first instance judgment applying essentially the same reasoning.

Identifying the Relevant Obligation

Article 31(2) of Brussels Recast cross-refers to Article 25(1). The latter entitles parties, regardless of their domicile, to designate the court or courts of an EU Member State (exclusively or non-exclusively) to resolve their disputes. Article 31(2) is in the following terms:

“where a court of a Member State on which an agreement as referred to in Article 25 confers exclusive jurisdiction is seized, any court of another Member State shall stay the proceedings until such time as the court seized on the basis of the agreement declares that it has no jurisdiction under the agreement” (emphasis added).

The Court of Appeal acknowledged the principle of party autonomy—commercial parties have the right to agree the forum where their disputes will be resolved. That principle has consistently been upheld by the Court of Justice of the European Union (CJEU) and the English courts. Therefore, the correct approach, contrary to the Insolvency Administrator’s submissions which advocated a narrow meaning of “exclusive” for the purposes of Article 31(2), was to identify the relevant obligation (i.e. reflecting the parties’ autonomous legal intentions) to which Article 25 and Article 31(2) apply. Drawing on CJEU case law, the Court held that it was possible to divide the disputes covered by a jurisdiction clause into separate groups. The asymmetric clause in the Facility Agreement divided into one group, consisting of claims brought on behalf of Air Berlin, and the other consisting of claims brought by Etihad. Therefore, considered in that way, Air Berlin’s obligation to bring proceedings in the English courts was an exclusive jurisdiction agreement for the purposes of Article 31(2).

The Court’s reasoning in this regard was fortified by public policy.

Policy Objectives: Reversal of the ‘Italian Torpedo’

It was common ground that the intention of the drafters of Article 31 was to remove the mischief caused by the so-called “Italian torpedo.” That term originates from a CJEU decision in Erich Gasser GmbH v MISAT Srl[2], in which the CJEU applied the “first seized” lis pendens rule strictly, finding that the contractually designated but second seized court had to wait until the non-designated, but first seized Court (in this case the Italian court), had decided its jurisdiction, before proceeding. This allowed a party to seek to thwart the expeditious resolution of a dispute by commencing a claim in one EU court before the other party is able to do so in the contractually designated court, thus preventing the claim in the latter from progressing. The Court found that, on the Insolvency Administrator’s case, that job would be only half done. The court held that the consequence of the Insolvency Administrator’s argument was that, in respect of any asymmetric jurisdiction clause, being a widely used category of jurisdiction clause, “the party which had bound itself to accept the exclusive jurisdiction of a chosen court would remain free to adopt the same abusive tactics as the Italian party in Gasser, with precisely the same adverse consequences.”

The Insolvency Administrator conceded that asymmetric clauses come within the ambit of Article 25(1) and therefore, following the approach above, that there was no difficulty in finding that the relevant obligation conferred by that type of jurisdiction clause came within the ambit of Article 31(2). That was the only way in which the Italian torpedo mischief could be fully remediated. The Court stated its analysis followed as a matter of autonomous EU law, in interpreting Brussels Recast. The finding therefore may carry considerable weight in EU jurisdictions, not just in England.

Contradistinction to the 2005 Hague Convention

Finally, the Court rejected the Insolvency Administrator’s further argument that its narrow reading of Article 31(2) was supported by the 2005 Hague Convention on choice of court agreements. The Insolvency Administrator argued that the Hague Convention and Brussels Recast required “maximum alignment” between the two instruments—i.e. that the two instruments were within the same sphere and therefore the same definition of exclusive jurisdiction clause should apply in each instrument. The Court rejected the Insolvency Administrator’s arguments in this regard, drawing some important distinctions between the two regimes. In particular, it held that the Brussels Recast regime goes further than the Hague 2005 Convention, because whereas the Hague 2005 Convention deals solely with jurisdiction agreements, Brussels Recast contains a comprehensive system of allocation of jurisdiction based on various potential grounds, of which jurisdiction agreements are but one example. Another important distinction was that whereas the Hague 2005 Convention deals only with mutually exclusive jurisdiction agreements (an assumption made, but not decided, by the Court of Appeal), Article 25 of Brussels Recast also extends, on any view, to non-exclusive jurisdiction agreements. It also noted that the Hague 2005 Convention does not have any equivalent to the lis pendens rules of Brussels Recast.

The Court found that latter point particularly important given that Article 31(2) itself (and therefore its use of the term “exclusive”), operates as a modification of the first seized rule which has no counterpart whatsoever in the Hague 2005 Convention.

Therefore, although consistency of interpretation is a desirable general objective, the Court found that it “cannot be elevated into a controlling principle, not least because the Hague 2005 Convention is an international agreement to be construed according to the principles of international law, and is not subject to the jurisprudence of the CJEU.”

Implications

This decision will be welcome news to banks and other financial institution lenders, which frequently use asymmetric jurisdiction clauses (such as those in the LMA standard forms) in finance documents because of the benefits they provide in minimizing the risk that a debtor’s obligations will be unenforceable (for example where assets are located in jurisdictions other than that which is contractually designated).

The conclusion of the Brexit transition period this year means that Brussels Recast will in principle no longer apply to proceedings commenced in the English courts, from 1 January 2021. Although this means (at least in the near term) that the specific Article 31 mechanism at issue in this case will no longer be available to users of the English courts, asymmetric jurisdiction clauses are likely to continue to be widely used in disputes that come before the English courts (where this judgment will provide authority on the approach that the English courts should adopt).

However, this is not necessarily the end for Article 31, so far as the English courts are concerned. The U.K. government has applied to accede to the Lugano Convention, which is broadly similar to the Brussels Recast Regulation, save at least in the respect that it does not include an equivalent mechanism to Article 31. However, there have been discussions in the U.K. Parliament about the U.K.'s plans in due course, should it become a signatory to the Lugano Convention, to seek to amend it to include an equivalent to Article 31. It remains unclear whether or when the U.K. will in fact accede to the Lugano Convention because the EU's consent (as an existing signatory) is required and that has not yet been given (at the time of writing the EU and U.K. have not reached a trade deal of any kind and it is anticipated that an agreement on civil judicial cooperation between the U.K. and EU would form part of such arrangements between the U.K. and EU).

Although the long term relationship between the U.K. and EU in respect of civil judicial cooperation is not yet known, the Court of Appeal’s decision is undoubtedly significant not only domestically as a matter of English law, but also due to the Court of Appeal’s findings on the autonomous EU law interpretation of Brussels Recast, at an EU Level.

Shearman & Sterling acted for Etihad at first instance and in the Court of Appeal.

Footnotes

[1] [2007] U.K. HL 40
[2] [2005] QB 1

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