Court of Appeal finds ISDA jurisdiction clause trumps competing clause in related contract

The Court of Appeal's judgment in BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA provides further assurance that jurisdiction clauses within standard form ISDA documentation will not readily be displaced by contrary jurisdiction clauses in related contracts. The Court of Appeal gave effect to an English jurisdiction clause in an ISDA Master Agreement over an apparently competing Italian jurisdiction clause in a related financing agreement, despite a provision in the Schedule to the ISDA Master Agreement stating that, in the event of conflict, the financing agreement would prevail. The first instance decision of the Commercial Court was upheld (see our banking litigation e-bulletin).

Key to the Court of Appeal's decision was its conclusion that there was no conflict between the jurisdiction clauses, which were found to govern different legal relationships and were therefore complementary, rather than conflicting. The Court emphasised that factual overlap, between potential claims under the ISDA Master Agreement and a related financing agreement, did not alter the legal reality that claims under the two agreements related to separate legal relationships.

The Court of Appeal's decision is not unexpected, as it is in line with the recent Court of Appeal decision in Deutsche Bank AG v Comune Di Savona [2018] EWCA Civ 1740 (see our banking litigation e-bulletin) – which expressly approved the first instance decision in the present case. However, it will be welcomed as further evidence of the English court's emphasis on construing commercial contracts, and in particular standard form ISDA documentation, in order to achieve market certainty and predictability.

Following the recent publication of French and Irish ISDA Master Agreements in light of Brexit, the court's emphasis on predictability may serve as a timely reminder of the advantages of selecting English jurisdiction for ISDA Master Agreements.

Background

In 2008, a syndicate of banks led by the claimant, BNP Paribas S.A. (the "Bank"), entered into a loan agreement (the "Financing Agreement") with the defendant, Trattamento Rifiuti Metropolitani S.p.A ("TRM"), an Italian public-private partnership, to fund the building of an energy plant. The Financing Agreement included an obligation for TRM to enter into an interest rate swap with the Bank to hedge the interest rate risks associated with the loan (the "Hedging Requirement").

In 2010, pursuant to the obligation in the Financing Agreement, the parties executed a 1992 form ISDA Master Agreement (the "ISDA Agreement") and an interest rate swap.

The Financing Agreement included an exclusive jurisdiction clause in favour of the Italian court. The ISDA Agreement contained an exclusive jurisdiction clause in favour of the English court. A clause in the Schedule to the ISDA Agreement stated that, in case of conflict between the terms of the ISDA Agreement and those of the Financing Agreement, the latter should "prevail as appropriate" (the "Conflicts Clause").

In 2016, the Bank issued proceedings in the English Commercial Court against TRM seeking declarations of non-liability "in connection with a financial transaction pursuant to which [TRM] entered into interest rate hedging arrangements with the [Bank]". In 2017, TRM sued the Bank before the Italian court and then issued an application in the Commercial Court to challenge its jurisdiction.

Commercial Court decision

The Commercial Court dismissed TRM's application challenging jurisdiction. Applying Article 25(1) of the Recast Brussels Regulation, under which parties may agree to refer disputes to the court of a Member State, the Commercial Court found that the Bank had much the better of the argument that the dispute fell within the English jurisdiction clause of the ISDA Agreement. Of particular relevance are the Commercial Court's findings that:

1. There was no conflict between the two jurisdiction clauses. They could readily bear the interpretation that one concerned disputes relating to the Financing Agreement and the other concerned disputes relating to the ISDA Agreement. As there was no conflict, the Conflicts Clause in the Financing Agreement was not engaged.
2. The parties' decision to use ISDA documents was a "powerful point of context" which signalled that the parties wanted to achieve "consistency and certainty" in the interpretation of the contract. The use of ISDA documentation by commercial parties shows that they are "even less likely to intend that provisions in that documentation may have one meaning in one context and another meaning in another context".

Grounds of appeal

The claimant appealed on the following principal grounds:

1. The judge was wrong to conclude that there was no conflict between the jurisdiction clauses in the Financing Agreement and the ISDA Agreement. The Conflicts Clause therefore should have been engaged.
2. In any event, the dispute arose in connection with the parties' legal relationship set out in the Financing Agreement.

Court of Appeal decision

The Court of Appeal dismissed the appeal on all grounds. The key aspects of the judgment which are likely to be of broader interest (particularly in relation to whether apparently competing jurisdiction clauses are, in fact, in conflict with one another) are considered further below.

Guidance on competing jurisdiction clauses

The Court of Appeal set out useful guidance on how to interpret apparently competing jurisdiction clauses in related contracts:

1. The starting point is that a jurisdiction clause in one contract was probably not intended to capture disputes more naturally seen as arising under a related contract. There is therefore a presumption that each clause deals exclusively with its own subject matter and that they do not overlap, provided the language and surrounding circumstances allow. The most obvious subject matter of a generally worded jurisdiction clause will be the legal relationship created by the contract.
2. It is unlikely that sensible business people would intend that similar claims should be subject to inconsistent jurisdiction clauses. However, if the language or surrounding circumstances make clear that a dispute falls within both clauses, the presumption that the clauses deal with separate legal relationships can be displaced.
3. A broad, purposive and commercially minded approach to construction should be taken which interprets jurisdiction clauses in the context of the overall scheme of the agreements.

Do the jurisdiction clauses conflict?

Applying this approach to the present case, the Court of Appeal held that the natural interpretation of the two jurisdiction clauses was that the clause in the Financing Agreement governed claims relating to the background lending relationship set out in that agreement, and the clause in the ISDA Agreement governed claims relating to the specific interest rate swap relationship set out in that agreement. The Court of Appeal noted that this conclusion was strongly supported by the decision in Savona.

TRM sought to distinguish Savona on a number of bases, including by relying on the Conflicts Clause. With respect to the Conflicts Clause, the Court of Appeal held that the two juridisction clauses governed different legal relationships and were therefore complementary, rather than conflicting. Accordingly, the first instance judge was correct to find that the Conflicts Clause was not engaged.

Overlapping legal relationships

TRM also sought to distinguish Savona on the basis that the inclusion of the Hedging Requirement in the Financing Agreement meant that there was overlap between the legal relationships under the Financing Agreement and ISDA Agreement. It claimed that, as a result, the dispute fell within the legal relationship under the Financing Agreement. However, the Court of Appeal firmly rejected this argument:

• The Court of Appeal distinguished between factual and legal overlap. TRM alleged that there was overlap between the two agreements, as certain claims regarding the sale of the swap could be brought under both the Financing Agreement (for breach of the Hedging Requirement) and the ISDA Agreement. However, the Court of Appeal held that factual overlap between potential claims under the Financing Agreement and the ISDA Agreement did not alter the legal reality that claims under the two agreements related to separate legal relationships.
• TRM's approach would lead to fragmentation of jurisdiction, whereby different terms within the ISDA Agreement would be subject to different jurisdiction clauses in separate contracts. The Court of Appeal considered this to be undesirable and that it was generally unlikely to be the intention of sensible commercial parties.

Declarations sought

Having rejected TRM's attempts to distinguish Savona, the Court of Appeal proceeded to consider the specific declarations of non-liability sought by the Bank. Subject to the amendment of one of the declarations, the Court found that all of the declarations sought fell within the jurisdiction clause of the ISDA Agreement.

Note: In January 2020, the Supreme Court refused permission to appeal.