Conflicting jurisdiction clauses in complex financial transactions – further guidance from the Court of Appeal

The turmoil in economic markets has not surprisingly resulted in a number of court cases concerning complex financial transactions often with cross-border elements. Those transactions are commonly documented in a number of related agreements, whether entered into contemporaneously or over a period of time. Not uncommonly, by accident or design, those agreements contain different jurisdiction clauses. Which court has jurisdiction in these circumstances? This is the question the Court of Appeal has had to consider in two recent cases.

In UBS Securities LLC v HSH Nordbank AG [2009] EWCA Civ 585 the Court of Appeal considered a complex CDO transaction which consisted of a series of separate but inter-related agreements which contained conflicting jurisdiction clauses (see post). In that case the Court of Appeal looked to the agreement which was "at the commercial centre of the transaction" to determine which jurisdiction clause should cover the dispute.

In the more recent case of Sebastian Holdings Inc v Deutsche Bank AG [2010] EWCA Civ 998, the Court of Appeal has had an opportunity to consider another series of financial agreements relating to equities and foreign exchange trading. In this case the Court of Appeal distinguished the case from the fact pattern in UBS v Nordbank and found that where a claim arose under a particular agreement, the jurisdiction clause in that agreement would apply even if this resulted in a fragmentation of proceedings. This decision gives helpful and very detailed guidance on the construction of jurisdiction clauses contained in a complex series of agreements and provides an example of when the jurisdiction clause contained in the agreement which is perceived to be at the centre of a transaction will not trump jurisdiction clauses contained in other connected agreements.

The dispute in Sebastian v Deutsche Bank

Financial arrangements were entered into over a period of two years from May 2006 to January 2008 between Sebastian Holdings Inc, a company dealing in the financial markets, and Deutsche Bank AG. The eight agreements entered into related to trading in equities and foreign exchange trading. Due to the downturn in the financial markets in September 2008, Sebastian ran up significant trading losses amounting to hundreds of millions of dollars. As a result of those losses Deutsche terminated the agreements and made demands for $120,650,166 and $125,523,086 under two of the agreements, namely the FX Agent Master Agreement and the Master Netting Agreement. Both agreements contained English jurisdiction clauses.

Sebastian brought proceedings against Deutsche in the New York Supreme Court claiming damages for breach of the FX Prime Brokerage Agreement, breach of fiduciary duty and fraudulent and negligent misrepresentation amongst other causes of action. The FX Prime Brokerage Agreement had a non-exclusive New York jurisdiction clause. Deutsche subsequently brought proceedings for its claims under the FX Agent Master Agreement and the Master Netting Agreement in the Commercial Court in London. Sebastian challenged the jurisdiction of the English courts on the basis that the FX Prime Brokerage Agreement was at the centre of the dispute and that, applying the principles in UBS v Nordbank, the dispute (which included Deutsche's claims) fell within the New York jurisdiction clause. Sebastian also argued that New York was the more convenient forum to determine the dispute.

The first instance decisions

There are two first instance decisions dealing with Sebastian's challenges to the English courts' jurisdiction.

The decision by Walker J (Deutsche Bank AG v Sebastian Holdings Inc [2009] EWHC 2132 (Comm)) dealt with the question whether the English courts had jurisdiction to hear the claims brought by Deutsche or whether, applying the principles in UBS v Nordbank, the centre of the dispute lay with the FX Prime Brokerage Agreement and the claims should therefore be determined by the New York courts. Walker J rejected Sebastian's arguments and found that the jurisdiction clauses were not inconsistent but anticipated parallel proceedings as they were either non-exclusive and/or expressly allowed concurrent proceedings. Consequently, Deutsche was entitled to bring concurrent proceedings in England under the FX Agent Master Agreement and the Master Netting Agreement.

The decision by Burton J (Deutsche Bank AG v Sebastian Holdings Inc [2009] EWHC 3069 (Comm)) considered and rejected Sebastian's request that the Commercial Court should stay its proceedings on forum non conveniens grounds as he was not satisfied that New York was clearly the more appropriate forum.

Both decisions were appealed and considered by the Court of Appeal.

The Court of Appeal decision

The Court of Appeal dismissed both appeals. Its decision provides a very thorough and clear overview of the principles and case law which apply to the construction of jurisdiction clauses in the context of complex transactions and explains the limits within which the principles in UBS v Nordbank apply.

Construing "conflicting" jurisdiction agreements

The Court reiterated that in construing a jurisdiction clause "a broad and purposive construction must be followed" to avoid a dispute being litigated in different tribunals as it is unlikely that this is what rational businessmen would have intended. However, where a transaction is made up of multiple agreements the court would have to look at the scope which the parties intended to give each of the jurisdiction clauses contained in the agreements to determine whether a claim or dispute fell within the jurisdiction clauses of one or more related agreements.  The agreements and the jurisdiction clauses had to be construed in a commercially rational manner even if this resulted "in a degree of fragmentation in the resolution of disputes between parties to the series of agreements".

The claims brought by Deutsche were for debts due under the two agreements which contained English jurisdiction clauses. Unlike in the UBS case they did not more properly relate to another agreement in the transaction. The fact that the claims ultimately occurred as a result of the FX trading which was conducted under the FX Prime Brokerage Agreement as the "central" agreement did not mean that they were not primarily due and properly brought under the agreements relied upon by Deutsche. Also, the centre of gravity of the dispute did not shift to the FX Prime Brokerage Agreement simply because Sebastian chose to raise a defence under that agreement.

The parties clearly intended when entering into the FX Agent Master Agreement and the Master Netting Agreement that Deutsche should be entitled to pursue claims arising under those agreements in the courts identified in the relevant jurisdiction clauses, regardless of the defences which might be raised by Sebastian.

Staying English proceedings based on forum non conveniens

The Court found that Burton J was correct in deciding that in all the circumstances, and applying the principles in Spiliada Maritime Corporation v Cansulex [1987] AC 460, New York was not a clearly more appropriate forum. This also meant that the more stringent test that applied where there was an exclusive English jurisdiction clause (as was the case in relation to the Master Netting Agreement) could not be met. This test required that there were exceptional circumstances or strong reasons to depart from the agreed forum and to consider New York as the clearly more appropriate forum.

Comment

Although this decision does not break new ground it provides further clarity and certainty as to the scope and application of jurisdiction clauses in relation to disputes arising under complex transactions which consist of more than one agreement containing different jurisdiction clauses. It is noteworthy that the Court of Appeal did not follow the reasoning of Walker J, who took a chronological approach and focused on whether the jurisdiction clauses contained in various agreements conflicted with one another and/or did not allow for parallel proceedings.

How to determine the relevant jurisdiction clause for a dispute

Based upon the approach taken by the Court of Appeal the question to ask is whether a claim or dispute falls squarely within a particular agreement. If so, the claim is likely to be covered by the jurisdiction clause contained in that agreement. Where a claim or dispute transcends a particular agreement and is covered by overlapping agreements the agreement (and jurisdiction clause) which is more specifically invoked in the claim or dispute should prevail (cf Credit Suisse First Boston (Europe) Ltd v MLC Bermuda Ltd [1999] 1 Lloyd's Rep 767). It is likely to be easier to attribute a claim to a particular agreement within a transaction where the agreements were entered into chronologically over a longer period of time (as was the case in Sebastian) and are therefore perhaps less closely related than where agreements are entered into at the same time and form part of a transaction from the outset. Where a claim or dispute transcends a particular agreement and goes to the heart of a transaction (as was the case with the misrepresentation claims in UBS v Nordbank) the jurisdiction clause contained in the agreement "at the commercial centre of the transaction" is likely to cover the dispute.

In transactions consisting of more than one agreement it is important that parties bear in mind that certain disputes which may have otherwise fallen within a jurisdiction clause contained in a single "stand alone" agreement (based upon the broad approach in Premium Nafta Products Limited & ors v Fili Shipping Company Limited & ors [2007] UKHL 40–also know as Fiona Trust) may be considered to be more closely connected with a related agreement containing a different jurisdiction clause. However, careful drafting of jurisdiction clauses, and the principles set out by the Court of Appeal should provide a decent level of certainty.

The application of Owusu and the reflexive effect of the lis pendens rule

It is noteworthy that the parties raised two hot topics before the Court of Appeal which the court felt it did not need to consider. Deutsche referred to the controversial ECJ decision in Owusu v Jackson & ors [2005] ECR I-1383 (see post) arguing that it was not open to the English courts to consider a stay based upon forum non conveniens grounds where the English courts' jurisdiction was based upon a jurisdiction agreement covered by Article 23 of the Council Regulation (EC) No 44/2001 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Brussels Regulation). The Court of Appeal did not find it necessary to decide the point as it rejected the forum non conveniens argument on substantive grounds. Consequently, it remains unclear whether or not Owusu (which was decided in relation to the domicile rule in Article 2 Brussels Regulation) prohibits forum non conveniens considerations in other cases in which jurisdiction is founded under the Brussels Regulation.

The other topic related to the question whether the lis alibi pendens rule contained in Articles 27 and 28 Brussels Regulation should be given reflexive effect to apply in relation to competing earlier proceedings brought in a non-EU court. The lis pendens rule stipulates that an EU Member State court must or may stay proceedings where earlier identical or related proceedings have been brought before another EU Member State court. This argument was not pursued by Sebastian after Deutsche complained that it had been raised too late in the day. Although a recent High Court decision in Catalyst Investment Group Ltd v Lewinsohn & ors [2009] EWHC 1964 (Ch) came to the conclusion that the lis pendens rule should not be given reflexive effect (see post), this is a controversial topic which awaits clarification by a more senior court or the ECJ.

Alternatively, both the Owusu point and the question of whether or not to give reflexive effect to certain jurisdiction rules contained in the Brussels Regulation may be resolved as part of the ongoing review of the Brussels Regulation and the Commission's proposals which are due to be published in early 2011.