Court of Appeal finds ISDA jurisdiction clause trumps 'theoretically competing' clause in separate agreement governing wider relationship

Consistent with recent authority, the Court of Appeal has given primacy to an English jurisdiction clause in an ISDA Master Agreement (overturning the first instance decision that had declined to do so), in circumstances where there was a "theoretically competing" jurisdiction clause in a separate agreement governing the wider relationship: Deutsche Bank AG v Comune di Savona [2018] EWCA Civ 1740.

The appellate decision contributes to market certainty in respect of contracting parties' choice of jurisdiction and therefore represents good news for derivative market participants. The Court of Appeal commented that it would have been "startling" if the bank's claims for declaratory relief falling squarely under the relevant swap contracts could not be brought in the forum selected by the parties in the ISDA Master Agreement.

The approach taken by the Court of Appeal focused on determining the "particular legal relationship" to which the dispute related for the purpose of Article 25 of the Recast Brussels Regulation, which deals with jurisdiction agreements. In circumstances where there were two contracts (with theoretically competing jurisdiction clauses), it held that there was a distinction to be drawn between a generic wider relationship on the one hand, and a specific interest rate swap relationship governed by the ISDA Master Agreement on the other. It concluded in general terms that disputes relating to the swap transactions were therefore governed by the jurisdiction clause in the ISDA Master Agreement.

While it may be expected that disputes relating to a specific transaction should be governed by the contract for that transaction, the position had been undermined by the High Court decision in the instant case (which considered a number of points of Italian law and the effect of the declarations sought by the bank on any potential claims in Italy). The Court of Appeal noted that while each case should be considered on its own terms, it agreed in principle with the approach in the recent case of BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2018] EWHC 1670 (Comm): which focused on the question of whether the English Court had jurisdiction under the relevant agreements, rather than to trying to predict whether the declarations sought, if made, would act as defences in another jurisdiction (read our banking litigation e-bulletin). Given that there had been conflicting first instance decisions on this issue, it is helpful to have this clarification from the Court of Appeal.

Background

In this case, the court considered "two theoretically competing jurisdiction clauses". The clauses, in favour of the Italian and English courts respectively, were included in: (i) a written agreement dated 22 March 2007 between Deutsche Bank AG (the "Bank") and Comune di Savona ("Savona") (referred to as the "Convention"); and (ii) a 1992 multicurrency ISDA Master Agreement dated 6 June 2007 agreed between the same parties. In June 2007 the Bank and Savona executed swap confirmations, subject to the terms of the Master Agreement, by which the Bank and Savona entered into two interest rate swap transactions.

Years after the conclusion of the swaps, the validity of the transactions came under some scrutiny in Italy. In June 2016 this prompted the Bank to apply to the English Commercial Court seeking twelve declarations (in most cases) carefully tracking the wording of the Master Agreement. Savona challenged the jurisdiction of the English court in relation to five of the declarations sought, arguing that they fell to be determined in the Court of Milan and under Italian law, in accordance with the Convention.

High Court Decision

At first instance, the High Court allowed Savona's challenge to the jurisdiction of the English court in respect of the five declarations and dismissed the Bank's claims.

The High Court referred to Article 25 of the Recast Brussels Regulation, which provides that parties may agree to refer disputes in connection with a "particular legal relationship" to the court of a Member State. The High Court proceeded to consider the proper interpretation of the jurisdiction clauses, distinguishing the Bank's role as an adviser under the Convention, from the Bank's position "simply as a counterparty" under the swaps. The High Court concluded that the dispute was essentially concerned with the Bank's role as an adviser, and more naturally fell within the Italian jurisdiction clause than the English jurisdiction clause.

Court of Appeal Decision

The Court of Appeal overturned this decision, finding that all twelve declarations sought fell within the English jurisdiction clause in the ISDA Master Agreement.

In reaching its conclusion, the Court of Appeal drew a distinction between the generic relationship between the Bank and Savona, which was governed by the Convention, and the specific derivative transactions entered into between the Bank and Savona, which were governed by the ISDA Master Agreement. It commented that this was a more natural and reasonable demarcation than the High Court's distinction between "advice" on the one hand and being a "counterparty" on the other.

The Court of Appeal noted that:

• While the Convention required the Bank to provide Savona with its expertise as to how to manage its debt, any transaction or agreement proposed by the Bank for this purpose and accepted by Savona would be the subject matter of a separate contract.
• If a separate contract was proposed and approved, the relationship agreed in that contract would be the "particular legal relationship" envisaged by Article 25. Any proceedings "relating" to that contract would then be a dispute in connection with the particular relationship for the purposes of Article 25.
• Consistent with this, the interest rate swap relationship was set out in the swap contracts incorporating the ISDA Master Agreement.
• The existence of the entire agreement clause in the ISDA Master Agreement was a strong confirmation that the swap contracts were indeed separate contracts and any dispute relating to them was to come within the jurisdiction clause of those contracts.

In the Court of Appeal's view, it would have been "startling" if the Bank's claims falling squarely under the swap contracts could not be brought in the forum selected by the parties through the jurisdiction clause under those agreements, namely that contained in the ISDA Master Agreement. It said that a conclusion to that effect would have been highly damaging to market certainty.

Having found that disputes relating to the swaps were therefore to be determined by the English courts, the only question for the Court of Appeal was whether the particular declarations sought arose from disputes relating to the swaps. The Court of Appeal found, on reviewing the text of the declarations sought, that they did.