Spanish Subsidary Sued by IRS Investor Despite IRS Being Entered into by UK Parent
Court of Appeal of Madrid, decision of 5 February 2014
Suing a Spanish subsidiary of an international bank in relation to contracts which the subsidiary is not even party to, is becoming a new trend in Spain.
The Court of Appeal of Madrid has upheld a claim by a Spanish company (claimant) against the Spanish subsidiary of a UK financial entity in relation to an Interest Rate Swap (IRS) even though the IRS was entered into between the claimant and the UK entity. The subsidiary was said to be operating "indistinctively regarding their clients".
The IRS was entered into in October 2008 after negotiations between the claimant's legal representatives and employees of the Spanish subsidiary. These negotiations took place at the offices of the subsidiary. The employees explained the characteristics of the IRS and facilitated the signing of all the relevant documentation. The IRS was governed by Spanish law and contained a jurisdiction clause submitting disputes to the Courts of Madrid. The contract was signed by the client in the subsidiary's premises. It was not signed by the employees of the subsidiary but it already carried the signature of a representative of the UK parent company. Due to plummeting interest rates, the claimant suffered huge losses on the IRS and sought a declaration in the Courts of Madrid that the IRS was null and void due to lack of valid consent. The claimant alleged, in essence, that it had not fully appreciated the nature of the transaction as this had not been properly explained.
However, the claimant filed the claim only against the subsidiary, not the UK parent company. Under Spanish law, a claim seeking a contract to be avoided may only be filed against the contractual counterparty, regardless of who actually provided the wrong information that led to a lack of valid consent.1 The defendant subsidiary therefore argued that the claim against it should fail as it was not a party to the IRS. However, the Court of Appeal pierced the corporate veil of the UK parent company because the subsidiary was operating "indistinctively regarding their clients", and in particular because negotiations were carried out by employees of the subsidiary. Thus the Spanish subsidiary was to appear as defendant, instead of the parent company.
Comment
This ruling is novel under Spanish law. This is the first time that a Spanish court has pierced the corporate veil based on the fact that employees of a subsidiary provided explanations about the contract to be entered by the parent company. The ruling however is not binding (as only decisions of the Spanish Supreme Court are binding).
The Spanish Supreme Court has established on many occasions that the individual or entity appearing as defendant must have a connection with the legal consequences sought by the plaintiff.2 In previous similar finance disputes, the Spanish Courts have held that the mere fact of belonging to a group doesn't mean that the company which has been sued has standing regarding the claim.3 The concept of separate legal personality has clearly been established by the Spanish Supreme Court.4 Belonging to a group does not entitle a claimant to bring a claim regarding a contract entered into by another member of the group, or to be sued regarding that contract. The Supreme Court has reiterated on several occasions that piercing the corporate veil in order to attach liability to a group member should be used very sparingly and only when the corporate legal personality is used merely as a means to evade responsibilities.5 Many financial entities use their corporate web to provide auxiliary services. The existence of these subsidiaries is not intended to let such entities escape responsibilities. In this case, the court appeared to be swayed by the fact that the subsidiary had played an active role in providing information to the claimant, but this could be said to have been provided on the parent company's behalf.
In addition, there was a contractually agreed jurisdiction clause allowing the claimant to sue the UK entity in Spain anyway so it is not immediately obvious why the Spanish entity was targeted. In other cases, the contractually agreed jurisdiction clause may specify a jurisdiction other than Spain – in such a case a ruling like this could be seen as undermining the jurisdiction agreement.
A claimant considering taking advantage of this ruling in order to sue a Spanish subsidiary of an international bank may be deterred by other decisions in similar cases in which the courts considered that the Spanish subsidiary lacked standing to appear as defendant, and by the costs penalty should such a claim fail. If a claimant wrongly sues a subsidiary when it is evident that the contract was entered into with the parent company, the subsidiary is entitled to a cost award in its favour.
Footnotes
1. Claimants may bring different actions against the company or individual that provided wrong information, but they cannot pretend a declaration that the contract is null and void suing those individuals and not the counterparty in the agreement.
2. For example, the decisions issued by the Spanish Supreme Court on 21 April 2004; 3 October 2002 and 28 February 2002.
3. For example, the decision issued by the Court of First Instance 57 of Madrid on 20 December 2013 and the decision issued by the Court of First Instance 63 of Madrid on 9 October 2012.
4. For example, decision issued by the Spanish Supreme Court on 20 May 1998 5 The Spanish Supreme Court has established these criteria in numerous decisions, such as the judgment dated 25 September 2007 or the one dated 19 April 2007.
5. The Spanish Supreme Court has established these criteria in numerous decisions, such as the judgment dated 25 September 2007 or the one dated 19 April 2007.
