The European Court of Justice recently rendered an important judgment on jurisdiction over claims of Dutch companies against directors residing outside the Netherlands. The main issue was whether the Dutch courts had jurisdiction over such claims or whether such jurisdiction was limited to the courts of the EU member state in which the director resided, in this case Germany.
In the proceedings leading to this judgment, a German former director of a Dutch BV and of its three German subsidiaries was sued on various grounds by these companies. It ultimately came down to the liability claims of the Dutch BV, based on (i) improper performance of the defendant's duties as a director (section 2:9 DCC), (ii) improper conduct as an employee (section 7:661 DCC) and (iii) unlawful (tortious) conduct (section 6:162 DCC). According to the BV the Dutch courts were competent to hear these claims; according to the ex-director the German courts had exclusive jurisdiction. The relevant jurisdiction rules with regard to the various grounds were, at the time, laid down in Regulation 44/2001 (the Brussels I Regulation). In the course of the proceedings before the Dutch courts, the relevant rules remained almost the same but were renumbered and moved to Regulation 1215/2012 (the recast Brussels I Regulation). After the Almelo District Court and the Arnhem Court of Appeal had declared themselves without jurisdiction to hear the case, the Dutch Supreme Court submitted preliminary questions to the European Court of Justice in early 2014.
Liability of director-employees
According to the ECJ, if the Dutch BV's former director is – in that capacity – also an employee of the BV, the courts of the country in which he is domiciled have exclusive jurisdiction, even if the claim is for directors' liability and irrespective of the grounds on which that liability is based. This consideration is by far the most important one in this judgment and could even be a real game changer, certainly in the Netherlands where directors are usually also employees.
Individual contract of employment
The ECJ formulates the standard for the existence of an employment contract (the Regulation itself does not contain a definition) as where, for a certain period of time, services are performed for and under the direction of the company in return for which remuneration is received, and the director is bound by "a lasting bond which brought him to some extent within the organisational framework of the business of that company". It is not relevant whether a contract of employment exists under the national law in question (autonomous interpretation of EU law). This means that for the purpose of applying the Regulation to directors of Dutch companies the subordination element is important and must be examined. By contrast, for the purpose of applying section 7:610 DCC – the Dutch statutory provision defining an employment contract – to such directors that element is downplayed to a large extent. But there are other differences as well which deserve careful attention. Under Dutch law, the relationship between a director and a listed company shall not be treated as an employment agreement (section 2:132(3) DCC); under the Regulation it is possible for such a contract to nevertheless be deemed to exist. Another example is that under Dutch law it is assumed that as a rule a director is an employee and that the subordination requirement has been met, irrespective of whether he owns any shares. Under the Regulation especially the latter aspect can be relevant, as the ECJ points out expressly.
If the director is not also an employee, this changes the situation. In the event of a claim by the company, the jurisdiction rule that will generally apply is the rule for obligations arising from a contract. Consequently, jurisdiction will be vested in the courts of the place where the obligation in question was or ought to have been performed. This follows from the ECJ's statement that a contractual relationship exists if the director and the company freely assumed mutual obligations in that the director chose to manage and administer the company and the company in turn undertook to remunerate him for those services. Furthermore the court goes on to say, perhaps superfluously, that a directorship "creates close links of the same kind as those which are created between the parties to a contract".
Regarding "the place where the obligation must be performed", the ECJ applied the concept of the "provision of a service". Under the framework of the Regulation, this means that the place of the main provision of services must be deduced, in so far as possible, from the provisions of the contract itself. In the case in question, no guidance was provided by the contract or the articles of association or any other document. In such a case it is necessary, in the ECJ's opinion, to look at the amount of time spent in a particular place and the importance of the activities carried out there.
According to the ECJ, the jurisdiction rules for non-contractual liability (unlawful/tortious conduct) – which designate the courts of the place where the harmful event occurred – only come into play when the claim is unrelated to the contractual relationship between the company and the director. It is for the relevant national court to determine whether this is the case. Conduct by a director that does not constitute a breach of his obligations in that capacity can be grounds for a claim based on unlawful (tortious) conduct. There are a few examples of this in Dutch case law.
Choice of forum
If a company is considering the appointment of a foreign-based director, both parties will benefit from having clarity on the question of which country's courts would adjudicate in the event of any liability claims. The Regulation itself sets out unequivocal rules only in the case of employees (employment contracts) and other "protected" groups. As clearly illustrated by this case, foreign-based directors who are not at the same time employees of the relevant company, in particular, will have much to gain from clarity on the above question. This is because both the classification of the contract and/or relationship (Is there a contract of employment? Is the liability in question contractual or non-contractual?) and the determination of the relevant "place" for the purposes of the Regulation can lead to unpredictable results. One concrete possibility is to include an explicit choice of forum (where the parties themselves designate the competent court) in the articles of association. Another option, making it easier to amend the relevant document in the event of future changes, is an agreement on the place where the relevant director will mainly carry out his activities.