In a robust and important judgment on the Jurisdiction Regulation handed down in May, the ECJ has effectively eliminated the ability of parties to avoid the effect of a jurisdiction clause in a contract by claiming that their decision to enter into the contract was in breach of their constitution and therefore invalid.

Background

EC Regulation No 44/2001 sets out provisions in relation to jurisdiction and the recognition and enforcement of judgments in civil and commercial matters in the EU (the Jurisdiction Regulation, also known as the Brussels Regulation).

Article 22(2) of the Jurisdiction Regulation provides that, in proceedings which have as their object the validity of the constitution of companies (or other legal persons) or of the validity of the decisions of their organs, the courts of the Member State in which the company (or the legal person) has its seat shall have exclusive jurisdiction to deal with the matter.

In a recent reference for a preliminary ruling by the German courts, the European Court of Justice (ECJ), held that Article 22(2) does not apply to contractual disputes in which a company pleads that the contract cannot be enforced against it because a decision of its organs, which led to the conclusion of the contract, infringed its constitution and was therefore invalid.

Article 22(2), the ECJ stated, only covers proceedings whose “principal subject-matter” comprises the matters listed in Article 22(2).

Facts

JPMorgan Chase Bank NA (JPM) had entered into a financial derivative contract with Berliner Verkehrsbetriebe (BVG), which conferred jurisdiction on the English courts.  As a result of non-payment, JPM issued proceedings against BVG in England.  BVG in its defence submitted that the contract was invalid because it had acted contrary to its constitution in entering into the contract and that the decision of its organs to do so were therefore void.  On this basis, BVG requested the English courts to decline jurisdiction in favour of the German courts pursuant to Article 22(2).  The English High Court and the Court of Appeal denied BVG’s request.

BVG appealed to the English Supreme Court and issued proceedings in the German courts, which led to the reference to the ECJ.  The German courts asked whether the scope of Article 22(2) extends to proceedings in which a company or legal person objects, with regard to a claim made against it arising from a legal transaction, that the decision of its organs which led to the conclusion of the legal transaction are ineffective as a result of infringements of its constitution.

Decision

The ECJ held that Article 22(2) should be interpreted “by taking account of matters other than its wording, in particular of the purpose and the general scheme of that regulation”.  Accordingly, the ECJ held that Article 22(2) should be interpreted narrowly.

The ECJ held that in a dispute of a contractual nature, questions relating to the validity, interpretation and enforceability of the contract itself are at the heart of the dispute, whereas questions relating to validity of the decision to conclude the contract “must be considered ancillary”.  The ECJ recognised that while the validity of the decision to conclude the contract may form part of the overall analysis, it does not constitute the “sole, or even the principal, subject of the analysis”.

Comment

As the ECJ noted, if all disputes in relation to a decision by a company’s organ were to fall within the scope of the Article 22(2), then it would be sufficient for a party to argue, as a preliminary issue, that the decision that led to the conclusion of the contract or the harmful act is invalid in order to ensure that the courts where it has its seat are conferred with exclusive jurisdiction to deal with the dispute – that is not the purpose of Article 22(2).

The ECJ’s important ruling provides clarity and certainty in relation to an aspect of the Jurisdiction Regulation that has been deployed by parties (especially in relation to financial transactions), in more recent times, as a means to avoid the express choice of jurisdiction agreed upon between the parties and cause delay and inconvenience. It limits the scope of Article 22(2) to those proceedings which truly relate to the validity of a company’s constitutions and decisions and, in other cases, allows parties’ express choice of jurisdiction to triumph.

Case reference: Berliner Verkehrsbetriebe (BVG), Anstalt des Offentlichen Rechts v JP Morgan Chase Bank NA (C-144/10)