The Court of Justice of the European Union (CJEU) has ruled on the scope of Article 22(2) of the Brussels Regulation.

BACKGROUND

Article 23 of the Brussels Regulation allows EU counter-parties to choose which Member State they wish to have jurisdiction over their disputes about particular legal relationships (such as contracts). However, Article 22(2) grants exclusive jurisdiction to the courts of the Member State in which a company has its seat to determine disputes about (amongst other things) the validity of decisions made by the company, irrespective of a jurisdiction clause agreed by parties.  

In this case, the CJEU had to determine whether Article 22(2) extends to proceedings where a company or legal person defends a contract claim on the grounds that the decision to enter the contract itself breached its statutes and was thus void as being ultra vires. In short, can a company bring a breach of contract case back to its home seat in contradiction of the contract’s jurisdiction clause if it makes an ultra vires defence?

In Berliner Verkehrsbetriebe (BVG) v JP Morgan Chase Bank NA (Case C-144/10) [2011] WLR (D) 188, BVG, which is based in Berlin, and New York-based JP Morgan entered into a swap contract, under which BVG agreed to pay JP Morgan if third parties defaulted, in exchange for a premium. The contract contained an English jurisdiction clause. The third parties defaulted, BVG did not pay, and JP Morgan’s UK subsidiary sued BVG in the English High Court, which in principle had jurisdiction by virtue of the jurisdiction clause and Article 23.  

BVG argued, amongst other things, that the swap contract was invalid because BVG had acted ultra vires in entering the transaction. BVG asked the English court to decline jurisdiction on the basis of Article 22(2). The English court would not decline jurisdiction and dismissed BVG’s argument. After appeals, the English Supreme Court referred the question to the CJEU.  

BVG also sued JP Morgan in Berlin, seeking, amongst other things, a declaration that the swap contract was void because it was made ultra vires. BVG argued that, even though the Berlin court was the second court seised, which would usually mean the court should decline jurisdiction in favour of the first court seised, pursuant to Article 27, the Berlin court had exclusive jurisdiction to hear the case under Article 22(2), which overrode the English court’s Article 23 jurisdiction. The Berlin court disagreed and stayed the German proceedings. After a series of appeals, the appellate court referred the question to the CJEU.  

DECISION

The CJEU decided that Article 22(2) must not be interpreted as applying to proceedings where a company’s defence to a contract claim is that the contract was entered into ultra vires. It held that the Article 22(2) must be interpreted strictly. A broad reading would mean that actions against a company would almost always be heard by the courts of the company’s seat, as the company could just tactically plead an ultra vires defence. If Article 22(2) was so interpreted, parties would be denied the chance to choose the forum for their dispute. This would both erode the general aims of the regulation to make highly predictable rules of jurisdiction and undermine legal certainty.  

The Court stated that Article 22(2) was to give jurisdiction only in

…proceedings whose principal subject-matter comprises the validity of the constitution, the nullity or the dissolution of the company, legal person or association or the validity of the decisions of its organs.

COMMENT

This decision is highly significant and will likely be applauded, particularly by the financial services industry, which would otherwise risk having to litigate in counterparties’ home seats notwithstanding jurisdiction clauses in derivatives contracts.