Introduction
Facts
Claims
Challenge to jurisdiction
Decision
The High Court has dismissed UBS's challenge to jurisdiction in an approximately $495 million claim – and, in doing so, set out useful guidance in terms of how the Court will determine "where the damage has occurred" in cases of economic loss.(1) The judge looked for the most "natural analysis" in determining the manifestation of the loss, and broadly agreed that "the usual answer [in bad investment cases] will be that the loss occurs in, and at the place of, the bank account which was depleted".(2)
The underlying claims related to allegations of negligent misstatements and advice provided by UBS to the claimants which, they said, led them to make an investment that was almost completely lost when UBS exercised security over shares held by it in London as mortgagee (contrary to the statements and advice).
UBS challenged jurisdiction of the English court in relation to the claims brought by the first and second claimants. In her judgment, Mrs Justice Cockerill DBE held that the English court did have jurisdiction: the claimants had a good arguable case that the damage had occurred in England and also that their claims in tort arose out of the activities of the branch established in England (where the shares in question had been liquidated).
There is an obvious appeal to this pragmatic approach to jurisdiction. It is good news for counterparties where security is held in the United Kingdom, in terms of giving some certainty that claims arising out of margin calls would be capable of being heard in the English courts, despite international dimensions of the wider transactions. On one view, this approach to assessing when and where the loss occurred is at odds with the usual approach taken in English law in "bad investment" cases in relation to limitation and causation – in which the loss is said to occur and crystallise when the investment is made. However, the judge was not persuaded by UBS's submissions (which focused on English authorities) that there was at least a "rule of thumb" that in a case of negligent misstatement, the damage will occur where the misstatement is received and relied upon (focusing on the distinction between direct and indirect loss).
In Autumn 2013, Mr Kwok (the first claimant) decided to invest around $3 billion in certain shares (the H-shares) issued by a major Chinese financial institution (Haitong) (the investment). Kwok was then approached by a trusted friend and advisor, Mr Stephen Wong (then a managing director of wealth management at UBS), who had learned of Kwok's intentions. Wong informed Kwok that UBS was aware that Haitong would be issuing new H-shares on the Hong Kong Stock Exchange (HKEX). UBS wished to participate as a placement agent, and, if Kwok could commend UBS to Haitong, Wong and UBS would assist and advise Kwok in acquiring H-shares in an advantageous manner. Kwok decided to invest around $1billion in partnership with UBS (and the remainder through other institutions). He did recommend UBS to Haitong, and UBS was appointed as placement agent.
The investment structure was complex, driven largely by the desire to (lawfully) avoid triggering the need for approval by the Chinese securities regulator. The H-shares were acquired by a corporate vehicle (Dawn State, the third claimant), which was owned and controlled by a third party (Haixia, a Chinese financial services firm), with the purchase being funded in part ($500 million) by Kwok (through Ace Decade, the second claimant), and in part by a leveraged finance facility provided by UBS ($750 million) secured against the H-shares. The H-shares allotted to Dawn State were assigned to UBS London by way of security and deposited in a secured account held with and registered to UBS London as custodian. Following the share acquisition, Kwok (through Ace Decade as nominee) had an option to acquire Dawn State.
UBS provided the leveraged facility to Dawn State – and in all contracts it expressly identified "UBS London" or "UBS London Branch". Under the terms of the facility, UBS was entitled to terminate the financing if any of the full mandatory pre-payment events occurred, which included triggers relating to a collapse in the H-shares.
Between 1 July 2015 and 6 July 2015 there was a substantial drop in the Chinese stock markets – the price of the H-shares declined very rapidly, which triggered a series of events. UBS was entitled to (and did) demand mandatory prepayment of the entire facility over the subsequent three days (the demand notice was made in the name of UBS London Branch). The second claimant informed UBS that it could not make payments according to the stringent deadline, and, despite pleas from Kwok, Wong informed him that no additional time would be given, and UBS London had resolved to sell the H-shares that it held as security. UBS London issued a "notice of acceleration event" and then exercised its rights as mortgagee under the security terms, purportedly selling the H-shares on or around 15 July 2015. UBS London remitted the balance of $4.7 million to Dawn State (the amount remaining after all fees and charges had been applied). Ace Decade exercised its option on 18 December 2015, and therefore now owns Dawn State.
The claims were of negligent misstatement. The claimants alleged that Kwok had repeatedly expressed concerns regarding the inclusion of the mandatory prepayment provisions in the facility documentation, and had been given assurances by Wong to the effect that:
- UBS London had a policy that it would not demand additional collateral or mandatory prepayment, and even if it did make such demand, it would give them additional time to make such payments;
- UBS London had given such favourable treatment to the shareholder of the Ping An insurance company, and would treat the claimants in the same way; and
- Kwok and Ace Decade should not be concerned about the margin call and/or prepayment provisions.
The claimants maintained that those representations were false, and the advice was negligent – and that, as a result, they had suffered substantial economic loss, for which they sought damages (in the principal sum of $495 million).
UBS challenged the Court's jurisdiction in relation to claims by the first and second claimants (but not the third defendant's claims – which UBS accepted fell within a jurisdictional clause contained within a facility agreement and connected documentation).
UBS focused on the international nature of the parties' dealings:
- The relationship for the tort claims was between Kwok and Wong (who, at the time, was the managing director for UBS wealth management in UBS Hong Kong).
- The torts were alleged to have been committed by Wong in Hong Kong.
- The subject matter of the advice and misstatements related to investments in shares in a Chinese company, listed on HKEX.
- The investment had used Chinese intermediaries.
It was common ground that the Convention on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Lugano Convention) applied for the purposes of determining jurisdiction over the claims (UBS being a Swiss company domiciled in Switzerland – a member state of the Lugano Convention).(3)
The general rule under the Brussels Regime and the Lugano Convention is that a defendant should be sued in their state of domicile, with special jurisdictions operating only as derogations from the general rule, which has "overriding importance". The main focus in the judgment in this case was the exception under article 5(3) of the Lugano Convention – namely, that special jurisdiction will be established in the courts "for the place where the harmful event occurred or may occur".
UBS sought to rely largely on domestic case law, which focused on the proposition that there is at least a "rule of thumb" that in a case of negligent misstatement, the damage will occur where the misstatement is received and relied upon, and the distinction between direct and indirect loss. The judge commented that the domestic case authorities on the question of where the damage had occurred had been of little assistance, given they largely related to non-contingent loss crystallising on the entering into of an agreement. Instead, she was persuaded to take full account of the EU jurisprudence in this area.
Having carefully considered both the domestic and European case law, the judge gave useful guidance as to how the question of "where the damage has occurred" will be assessed in cases of economic loss:
- The leading European Court of Justice (ECJ) cases demonstrate that, in the context of the damage head, it is the manifestation of damage that is relevant, not the transaction that ultimately led to such loss.
- Manifestation is more likely to be associated with crystallisation of the damage than the origins of the transaction in cases where there is a difference.
- Caution may need to be exercised when looking at damage that may or may not occur depending on what happens in the future. In this context, careful thought may be needed to distinguish between the last thing that happened to bring the loss home to the claimant and the point where the loss itself becomes clear.
- While foreseeability and a consideration of factors relating to the sound administration of justice cannot provide an independent basis for a conclusion that jurisdiction resides in a particular location, the ECJ has clearly used such factors in some cases. At times, the relation of these factors to the reasoning is unclear. However, their existence and the rationale for the rule seems to justify their use by way of cross-check where the analysis simply by reference to manifestation remains troublesome.
Applying those principles in this case, the judge concluded that the only logical way to view the manifestation test in this case was to focus on the moment and place where the loss had occurred. She held that:
It cannot sensibly be said that the damage in question "actually manifested" when Mr Kwok and Ace Decade relied on the representations, or when the funds were sent (from whatever destination). Nor can it be right that damage is suffered at the last point - when Mr Kwok and Ace Decade feel the loss.
Rather, she concluded that the "most natural analysis" was to view the damage as occurring where and when the H-shares had been liquidated by UBS. Therefore, the judge held that the money in this case had been "lost" to the claimants in London, where the shares in which they had invested were held and where the funds they had invested were depleted: the loss had crystallised, manifested, and become certain and irreversible with that sale of shares. The judge also looked at the "special circumstances" by way of a cross-check – an approach justified in the authorities – and concluded that those circumstances also pointed to London (the secured account being held in London, and all contractual documents being in English and governed by English law). Accordingly, the judge held that both the test and cross-checks indicated that the requirements for article 5(3) were established, and the challenge to jurisdiction was dismissed.
For further information on this topic please contact Charlotte Henschen or Jake Hardy at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
Endnotes
(1) Kwok & Ors v UBS AG (London Branch) [2022] EWHC 245 (Comm).
(2) Professor Briggs, Civil Jurisdiction and Judgements (7th edition, 2021, at p 275).
(3) After the expiry of the transition period under the UK-EU Withdrawal Agreement, the Lugano Convention continues to apply to proceedings already commenced.