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Court has jurisdiction even when the underlying contract is void

 

06 November 2008

Court of Appeal held in Deutsche Bank v Asia Pacific [2008] EWCA Civ 1091 that a jurisdiction clause conferred jurisdiction on the chosen court over alternative claims under Article 23 of the Brussels Regulation, notwithstanding the fact that those alternative claims were predicated on the success of a defence that the underlying contract was void.

The decision provides the important clarification that jurisdiction clauses should be placed on broadly the same footing as arbitration clauses in terms of separability, as considered by the House of Lords in Fiona Trust.

In March 2006 the Claimants (represented in these proceedings by Allen & Overy LLP) entered into a US$210 million credit agreement (the Agreement) with the First Defendant, a Taiwanese telecommunications company, which was guaranteed by its parent company, the Second Defendant.  The Agreement was governed by English law and contained a jurisdiction clause which gave the English courts exclusive jurisdiction to settle any disputes “in connection with” the Agreement.

In March 2007 the Claimants declared various events of default under the Agreement.  When the Defendants failed to pay outstanding sums of approximately USD175 million, the Claimants commenced proceedings in the English courts, claiming for the debt due under the Agreement and/or damages for breach of contract.  The proceedings were served on the Defendants’ agent for service of process and no objection as to jurisdiction was raised at that stage.

The Defences

The Defendants raised two defences.  First, the Defendants argued that the Agreement and the guarantee were void because the individuals who signed them on behalf of the Defendants did not have authority to enter into the transaction due to procedural defects in the board resolutions which authorised them to sign the relevant documents.  Secondly, the Defendants argued that the Agreement and the guarantee were void as they were not in the best interests of the Defendants.

The Alternative Claims

In response, the Claimants made an application to amend their pleadings to add alternative claims in restitution and misrepresentation contending that if, as the Defendants alleged: (a) the Agreement was void, then any monies advanced had been paid pursuant to a mistake of fact and/or law and the sums advanced should be repaid (the Restitution Claim); and (b) if there had been no board meeting of the First Defendant authorising its Chairman to enter into the Agreement, then the Chairman of the First Defendant misrepresented to the First Claimant that such a meeting had taken place (the Misrepresentation Claim) (together, the Alternative Claims).

Article 23 of the Brussels Regulation:   It was common ground between the parties (at least for the purposes of the appeal) that the Alternative Claims fell within the terms of the exclusive jurisdiction clause. 

The main issue was whether the jurisdiction clause operated to give the English court jurisdiction over the Alternative Claims, notwithstanding that the Alternative Claims would only arise if the Agreement itself had been found to be void.  Article 23(1) of the Brussels Regulation provides that:

“if the parties, one or more of whom is domiciled in a Member State, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. Such an agreement conferring jurisdiction shall be either (a) in writing or evidenced in writing…”

Under European law, a party seeking to establish jurisdiction under Article 23 must demonstrate clearly and precisely that the jurisdiction clause was the subject of consensus between the parties.  If that was in dispute, the claimant must show that, on the available material, the requirements of form in Article 23(1) were met.

The First Instance Decision

At first instance, Flaux J found in favour of the Defendants and dismissed the Claimants’ application, holding that the English court had no jurisdiction under Article 23 to determine the Alternative Claims. 

Although the Alternative Claims fell within the scope of the jurisdiction clause, he considered that the Claimants could not clearly and precisely demonstrate a consensus between the parties as to the jurisdiction clause in the context of a claim predicated on the underlying agreement being void. The Claimants appealed.

The Court of Appeal Decision

The Court of Appeal allowed the appeal. Longmore LJ, who delivered the judgment of the Court, considered that, as the primary claim fell within the jurisdiction clause, which was itself within Article 23, it would follow from this that, both as a matter of construction of the clause and as a matter of European law, the Alternative Claims also came within the terms of Article 23.  The English Court, therefore, had jurisdiction to resolve those claims or, at the very least, there was a good arguable case to that effect.

Consensus under Article 23:  Longmore LJ considered that the formal requirements of Article 23 were met in the present case in as much as the agreement confirming jurisdiction was itself in writing and contained in a written agreement. 

That agreement had been signed or ‘chopped’ by all the parties. In those circumstances, it was clear that consensus had been reached on the clause for the purpose of Article 23, subject to the argument that the signatories had no authority to execute the documents.

Doctrine of separability:  It was held that a jurisdiction clause, like an arbitration clause, was a separable agreement from the underlying contract.  This was uncontroversial both as a matter of domestic law (Fiona Trust v Privalov [2008] 1 Lloyd's Rep 254; [2007] Bus LR 1719) and as a matter of European law (Benincasa v Dentalkit SRL [1997] ECR 1-3767). Longmore LJ said that it followed that disputes about the validity of the contract in issue in the present case had to be resolved pursuant to the terms of the exclusive jurisdiction clause. 

It was only if the jurisdiction clause was itself under some specific attack that a question could arise on whether it was right to invoke the jurisdiction clause.  Examples of this might be fraud or duress alleged specifically in relation to the jurisdiction clause.  However, it would be unlikely that mere unsupported allegations to that effect would render a jurisdiction clause inapplicable. 

The authorities did not lay down any requirement that jurisdiction clauses were not to apply if there was a plausible allegation that the contracts, in which such clause were contained, were vitiated by mistake, misrepresentation, illegality, lack of authority or lack of capacity.

The Defendants have indicated that they intend to appeal to the House of Lords.

Comment:  The Court of Appeal’s affirmation of the separability doctrine will, no doubt, be welcomed by contracting parties as a clear, pragmatic and legally sound ruling. 

The Court’s view is in line with the recent decision of the House of Lords in Fiona Trust regarding the separability of arbitration clauses and now confirms jurisdiction clauses to be on broadly the same footing as arbitration clauses. As in Fiona Trust, the case suggests that an exclusive jurisdiction clause may only be open to attack in the limited circumstances where it can be shown that there never was any agreement at all. 

For example, if the signature on a document was procured by forgery, or where the agreement was signed by an individual who clearly had no authority to conclude any agreement at all (for example, the office cleaner).  In the absence of such circumstances, the claimant should be entitled to the certainty that the exclusive jurisdiction clause will be upheld.

A decision which seeks to safeguard the doctrine of separability and indicates a clear wish to ensure that the English court’s approach to jurisdiction clauses is consistent with international commercial expectations will, no doubt, give comfort to contracting parties.  On a practical level, we would recommend that lenders continue to protect their interests by seeking specific confirmation from signatories that they have the authority to enter into the jurisdiction clause as a separate representation to the underlying agreement.

Further Information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commerical dispute resolution.  For more information please contact Pallavi Sekhri pallavi.sekhri@allenovery.com , or tel +44 (0)20 3088 2621.

 

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