The English High Court declined jurisdiction in a case where the underlying dispute related more to Italian law than English law.[1] Although an ISDA agreement between the parties provided for English jurisdiction, this was overridden by an earlier advisory agreement which granted jurisdiction to the Italian Courts.

Background

This is the latest in a series of cases in the High Court involving interest rate swap claims by Italian municipalities against banks. Although the swaps were connected with local authority funding in Italy, the cases have been heard in London because the ISDA swap documentation is governed by English law and grants jurisdiction to the English Courts. Tactical considerations by the parties as to which would be the best forum for deciding the disputes has meant these cases have been characterised by jurisdictional contests between the English and Italian Courts.

The relevant law in this case was Article 25 of the Recast Brussels Regulation [2], which provides that where the parties have agreed that the court of an EU member state shall have jurisdiction to settle disputes, that court shall have jurisdiction. The court designated by the parties takes precedence even if proceedings are commenced first in the courts of another EU member state.

The Facts

The Italian municipality, Comune di Savona ("Savona"), applied to strike out declarations sought by Deutsche Bank AG ("Deutsche") relating to an English law ISDA agreement (the “ISDA”). The ISDA contained an exclusive jurisdiction clause in favour of the English Court (the "English Clause").

Savona had entered into two interest rate swaps with Deutsche pursuant to the ISDA in 2007. Prior to the ISDA, the parties had entered into an agreement under which Deutsche had agreed to advise Savona on its debts and derivative commitments (the “Advisory Agreement”). The Advisory Agreement was governed by Italian law and contained an exclusive jurisdiction clause in favour of the Italian Courts (the "Italian Clause"). The issue for the English Court was therefore whether the dispute between the parties fell within the English or the Italian Clauses and the answer to that question would dictate whether the English Court had jurisdiction for the purpose of Article 25 of the Recast Brussels Regulation.

Following indications of a possible claim by Savona against Deutsche for recommending the swaps, Deutsche issued a claim form in the English Court against Savona on 3 June 2016 (the “English Claim”). Savona subsequently issued proceedings against Deutsche in February 207 (the “Italian Claim”). In the English Claim, Deutsche sought 12 negative declarations arising from terms contained within the ISDA. Some of these, such as those which contended that the ISDA was valid, binding and enforceable and that Savona had capacity to enter into the ISDA were not contested by Savona. However, Savona challenged other declarations which, for example, stated that Savona was not relying on any advice provided by Deutsche.

Held

Since the English Claim preceded the Italian Claim, the Court needed to understand first what the actual dispute was between the parties. The nature of the Italian Claim was important because it provided the context in which the declarations sought by Deutsche might be used.

Deutsche conceded that any claims for breaches of the Advisory Agreement made against it by Savona fell within the Italian and not the English Clause. However, Deutsche argued that the Advisory Agreement did not oblige Deutsche to advise Savona to enter into the swaps, and if that were correct, this would have a significant impact on the true scope of the dispute.

Both sides employed Italian law experts and they agreed that there was no material difference between the English and Italian principles of contractual construction. Having heard the evidence, Mr Justice Waksman concluded that the Advisory Agreement did impose clear advisory obligations on Deutsche in respect of the swaps. The Advisory Agreement was therefore subject to a number of Italian law provisions, including the Consolidated Finance Act and regulations of CONSOB, the Italian financial services regulator. Deutsche was not able to show a good arguable case that these claims could not be made.

The Judge then focused on the nature of the Italian Claim, because this is what would give substance to any dispute which would arise from Savona's response to the negative declarations, if it had to respond to Deutsche's claim in England. He concluded that the essence of the Italian Claim related to Deutsche’s role as an adviser pursuant to the Advisory Agreement. He rejected Deutsche's submission that the Italian Claim was not in substance about the Advisory Agreement at all.

The Recast Brussels Regulation

Article 25(1) of the Recast Brussels Regulation provides as follows:

"If the parties, regardless of their domicile, have agreed that a court or the courts of a member state are to have jurisdiction to settle any disputes which have arisen or may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction…"

It was for Deutsche to show that it had a good arguable case that Article 25 applied here and that meant that Deutsche had to have the better argument.

Where there are two or more jurisdiction clauses, there is authority that the Court should strive to construe them as mutually exclusive in scope rather than overlapping. This is so even if it may cause jurisdictional fragmentation of a particular claim. There is also no presumption that a later clause is intended to cut down an earlier one, again, even if this may also lead to some fragmentation.

Interpretation of the Italian Clause and the English Clause

The Judge considered the Italian Clause first because it was first in time. He accepted the Italian law evidence that the Italian Claim fell within the meaning of a "dispute relating to" the Advisory Agreement as set out in the Italian clause.

The English Clause had to be seen in the context which included the Advisory Agreement and the Italian Clause. The English Clause related to "any suit, action or proceeding relating to this agreement". This included any dispute as to the performance or otherwise of the parties of their obligations under the swap but also any dispute as to whether it was binding or valid as a matter of English law. Since the Advisory Agreement was concerned with Deutsche as adviser and the swaps themselves were only concerned with Deutsche as counterparty, a dispute which was essentially concerned with Deutsche's role as adviser fell more naturally within the Italian Clause than the English Clause.

The Judge distinguished the decision of Ali Malik QC sitting as a Deputy High Court Judge in Dexia v Brescia [2016] EWHC 326. In that case, which was very similar, the Judge had held that the disputed declarations fell within the English Clause. The Judge did not accept that, simply because a declaration was drawn from the terms of the ISDA, it must fall within the English Clause. He also did not accept that deciding that some declarations fell within the English Clause and some within the Italian Clause was something that had to be avoided at all costs.

The Judge concluded that the Italian Claim was governed by the Italian Clause and not the English Clause. That was the context in which the negative declarations were sought. Despite the fact that the declarations were all founded upon various contractual estoppels within the ISDA, that did not mean that the dispute as to whether the declarations were correct was caught by the English Clause. In practice, a declaration that these terms were valid and binding contractual estoppels as a matter of English law would be of little use to Deutsche because the only function of the estoppels would be to act as defences to the Italian Claim and that would have to be a question of Italian law. It was not possible to confine the debate over the declarations to a purely legal question under English law. The debate might stray into what the underlying reality was and, critically, whether Deutsche had in fact given advice and if so how. For the purpose of Article 25, the dispute to which the declarations related was the Italian Claim. Deutsche could not show a good arguable case that the English Clause governed the dispute. It followed that the contested declarations should be struck out.

Comment

In this decision, Mr Justice Waksman appears to have taken a common sense approach to the question of where the real dispute between the parties lay and allowed that dispute to be resolved in Italy rather than England. In doing so, he rejected the tactical approach of the bank which sought to rely on the narrow contractual estoppel provisions of the swaps to prevent the dispute being heard in Italy.

However, the judgment does demonstrates the tension in such cases involving competing jurisdiction agreements between the desire to decide on the best forum for consideration of different parts of a claim and the potential fragmentation of claims between different jurisdictions.