The European Court of Justice (ECJ), the ultimate court of appeal for issues of European law, has made a landmark ruling which reinforces the primacy of contractual choice of jurisdiction. The decision will be welcomed by parties contracting with parties from a European jurisdiction, as the risk of a challenge to the agreed jurisdiction has been greatly reduced.

Brussels Regulation

The case concerned the scope of Article 22(2) of the Brussels Regulation. The Brussels Regulation provides rules for the recognition and enforcement of judgments in civil and commercial matters, and applies throughout the European Union (except in Denmark). The general rule in the Brussels Regulation is that the courts of the member state in which the defendant is domiciled are to have jurisdiction (Article 2). It is only when one of the exceptions listed in the Regulation applies that the defendant may or must be sued in the courts of another member state. Article 22 lists some of the exceptions and Article 22(2) provides:

“In proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or association has its seat.”

The dispute

The ECJ case arose from litigation on a swap agreement entered into between Berliner Verkehrsbetriebe (BVG), an institution established under German law which runs the public transport system in Berlin, with JP Morgan Chase Bank (JPM). The contract contained a clause conferring jurisdiction on the English courts. JPM began proceedings against BVG in the English courts for payment of amounts due under the swap. BVG claimed that the decision to enter into the swap was ultra vires, or beyond its powers, and claimed that the English courts should decline jurisdiction on the basis of Article 22(2). The English case proceeded to the Supreme Court, the highest court in England, which decided to refer questions on Article 22(2) to the ECJ.

Meanwhile, BVG began proceedings in Germany on the basis that the contract was void as it was ultra vires and claimed that the German court had jurisdiction under Article 22(2) because the dispute was concerned with the validity of decisions made by the organs of a legal person whose seat was in Germany. At first instance and on appeal, the German courts declined jurisdiction as proceedings were first begun in England, and the Berlin appeal court referred the issue to the ECJ.

Narrow or broad interpretation?

The question which was posed to the ECJ by the German court was whether the scope of Article 22(2) of the Brussels Regulation extends to proceedings in which a company or legal person objects, with regard to a claim made against it in relation to a legal transaction, that the decisions which led to the conclusion of the legal transaction are ineffective as a result of the infringement of its statutes. The ECJ ruled that the Brussels Regulation does not apply in this situation. The ECJ adopted a strict interpretation with respect to Article 22, following a previous decision in relation to Article 16 of the Brussels Convention (which was the precursor to the Brussels Regulation and is essentially identical to Article 22 of the Brussels Regulation), that as that article constitutes an exception to the general rule on jurisdiction, it must not be given a broader interpretation than required by its objective. Allowing a broader interpretation would mean that almost all legal actions against a company would be within the jurisdiction of the courts of the member state where the company had its seat, merely by the company pleading that invalid decisions of its organs led to the conclusion of the contract. This would deny parties to a contract autonomy to choose a forum and would contradict one of the general aims of the Brussels Regulation, which was to seek to attain predictable rules of jurisdiction and legal certainty.

Decision-making ancillary

The ECJ found that the rationale behind Article 22(2) was that the courts of the member state where a company had its seat would be best placed to decide a dispute relating exclusively, or even principally, to the validity of a decision of that company's decision-making body. However, in a contractual dispute, it is questions relating to the validity, interpretation or enforceability of a contract which form the subject matter of the dispute. Questions as to the validity of the decision to conclude the contract may form part of the analysis, but they must be considered ancillary. There was therefore not a close link, with the courts in the state of the party pleading the invalidity of decisions of its organs which would justify conferring exclusive jurisdiction on those courts.

The decision will be welcomed by all those contracting with European parties as it will effectively prevent parties from circumventing the effect of an agreed jurisdiction clause by raising an argument that their decision to enter into the contract in question was invalid.

The ECJ ruled that the case should be heard in London. That should be welcomed by financial institutions, and other organisations, involved in cases where issues have been raised as to the legal capacity of local authorities to enter the transaction. Such cases will now be able to proceed in the courts of the jurisdiction that was contractually agreed by the parties.