CJEU rules on jurisdiction in prospectus liability claim

Request for Preliminary Ruling: Kolassa v Barclays Bank plc [2015] EUECJ C-375/13, 28 January 2015

The Court of Justice of the European Union (Fourth Chamber) has ruled on jurisdiction in a prospectus liability claim, concerning index certificates issued by a UK bank, and purchased by an Austrian investor (consumer) via a professional intermediary. The court ruled that under Article 5(3) Brussels Regulation1 (now Article 7(2) Brussels Recast) the "place where the harmful event occurred" includes where an investor suffers loss. The CJEU held that the court at the place where the investor is domiciled has jurisdiction, on the basis of where the loss occured, particularly when the loss occurred in the investor's bank account in that jurisdiction.

A UK bank (Bank) issued index certificates and sold them to institutional investors, including DAB Bank AG, which has its seat in Munich. The institutional investors sold them on to consumers.

DAB Bank AG transferred the index certificates to its subsidiary in Austria, direktanlage.at AG, which sold them on to private individuals, including the claimant, Mr Kolassa, domiciled in Austria, who invested EUR 69,000.

In accordance with its General Terms and Conditions of Business, direktanlage.at AG fulfilled Mr Kolassa's order "in securities account", meaning that it held, as covering assets, all its customers' certificates in its own name at Munich, on behalf of the client in question.

The certificates were in bearer form. The amount repayable and, therefore, the value of the certificates are governed by an index made up of a portfolio of several target funds, so that the value of the certificates is directly indexed on this portfolio. The investment failed and the value of the certificates is currently estimated to be EUR 0.

At the time of the issue of the certificates Barclays distributed a base prospectus dated 22 September 2005, which was distributed in Austria too. The certificates were issued in 2006. Repayment is due in 2016. The transacting clearing house for this purchase was a company with its seat in Frankfurt-am-Main. This is also where the "global note" was deposited.

Mr Kolassa sought to recover damages from the Bank before the Austrian court (Handelsgericht Wien) in which he asserted contractual rights and claims in tort or delict (alleging irregularities in the prospectus and failures of control, in breach in particular of the Austrian Law on Capital markets and the Law on Investment Funds). The Bank refuted all the allegations and also challenged jurisdiction. It is the Bank's challenge to the jurisdiction of the Austrian courts that formed the basis of this CJEU ruling.

Article 5(3) - place where harmful event occurred or may occur

The CJEU ruled that the Austrian court has jurisdiction in this dispute, as Austria was the place that Mr Kolassa had suffered his loss. Under Article 5(3) of the then Brussels Regulation (now Article 7(2) of the Recast Brussels Regulation), in tortious or delictual claims, the courts of the place where the harmful event occurred or may occur, have jurisdiction. This is intended to cover both the place where the damage occurred and the place of the event giving rise to it.

Where had the damage/loss occurred?

The CJEU ruled that the damage occurred where Mr Kolassa suffered it. "The courts of the place where an applicant is domiciled have jurisdiction, on the basis of the place where the loss occurred, in particular when that loss occurred itself directly in the applicant's bank account held with a bank established within the area of jurisdiction of those courts".

According to the CJEU, this interpretation of Article 5(3) enabled an applicant to identify easily the court in which he may sue and the defendant to foresee in which court he may be sued. An issuer, when deciding to distribute a prospectus in other Member States, must "anticipate that inadequately informed operators, domiciled in those Member States, might invest in that certificate and suffer loss".

The court stated that it would not have been sufficient for Mr Kolassa to have simply shown that he suffered financial consequences in Austria (as his place of domicile) if both the events causing loss and the loss itself occurred in another Member State.

Where was the place giving rise to the damage?

The CJEU commented that the "place giving rise to the damage" was not Austria, as the alleged breach by the Bank of its legal obligations had not taken place there – there was no evidence to show that any decisions concerning the content of the prospectus, or arrangements for the investments, or drafting of the prospectus, had taken place in Austria.

Article 5(1) - matters relating to contract

The CJEU found that the Austrian court did not have jurisdiction under Article 5(1) (matters relating to a contract). While Article 5(1) did not require the conclusion of a contract directly between Mr Kolassa and the Bank, it did require that as a matter of EU law (not national law) there was a legal obligation freely consented to by the Bank towards Mr Kolassa. This is because the jurisdiction of the national court under Article 5(1) depends upon the "place of performance of the obligation in question". No such obligation existed in this case, even if, as the court recognised, under the national law applicable, the Bank has certain obligations towards Mr Kolassa.

Article 15 - consumer claims

The fact that Mr Kolassa had purchased the investment via a professional intermediary precluded the operation of Article 15, which applies to consumer claims. Article 15 must be interpreted strictly and it requires the consumer to have concluded a contract directly with the defendant – this requirement is not satisfied when there is a chain of contracts through which the rights and obligations of the defendant in question are transferred to the consumer. An applicant who, as a consumer, has acquired certain rights which relate to a bearer bond from a third party professional (here, the Austrian bank), without a contract having been concluded between that consumer and the issuer of the bond (which it is for the national court to verify), may not invoke jurisdiction under Article 15 against the issuer in an action based on the bond conditions, prospectus liability and breach of information and control obligations.

Finally the CJEU ruled that, for the purpose of determining jurisdiction under the 2001 Brussels Regulation, it is not necessary to conduct a comprehensive taking of evidence in relation to disputed facts that are relevant both to the question of jurisdiction and to the existence of the claim. It is, however, possible for the court seised to examine its jurisdiction in the light of all the information available to it, including the allegations made by the defendant.

Comment

A CJEU ruling concerning a document which is so commonly used by finance parties will always attract attention. The CJEU has concluded that a bank having its seat in the United Kingdom may be sued in respect of liability in tort/delict in Austria as the place of domicile of an investor who acquired certificates, in particular when that loss itself occurred directly in the applicant's bank account in Austria.

Interestingly, the CJEU disagreed with the Advocate General's Opinion2 (albeit reaching the same end result), which found that the "place where the harmful event occurred" must be interpreted as encompassing the place where the bond holder is domiciled, if the publication of the prospectus in the Member State in which the holder is domiciled gives rise to financial damage. The CJEU judgment is unclear on the issue of prospectus distribution – it definitely states that the prospectus was distributed in Austria, but then later states that the harmful event did not happen there as the prospectus was not originally distributed there. The Advocate General, however, found that it was the publication of the prospectus in Austria that would be determinative.

The AG's opinion is more in line with English case law. For example, McGraw Hill International (UK) Ltd v Deutsche Apotheker Und Arztebank EG [2014] EWHC 2436 was a mis-selling claim by investors who bought Constant Proportion Debt Obligations (CPDOs) arranged by the then ABN Amro Bank NV, and rated by Standard & Poor's (S&P). Cooke J ruled that the English court could not take jurisdiction in a claim against S&P under Article 5.3. In this case there was no contention that the damage occurred in England, so the focus was on the place of the event giving rise to the damage. S&P argued, unsuccessfully, that this was England because the origin of the alleged defective credit rating lay in London and in the creation of the marketing material there and that, therefore, this was where the mis-statements originated. Cooke J rejected this argument, finding instead that, in relation to the allegedly misleading written materials, the place where the harmful event occurred for the purposes of Article 5.3 was the place where the materials were delivered and received, not the place where they originated. This was in each investor's country of domicile, not England.

Jurisdiction clauses in a prospectus and bonds terms and conditions are of course not going to help in this type of situation, where there is no contractual nexus between the claimant and the bank.

The case highlights the risk of issuers facing a legal challenge by an investor in a court other than that which has been selected in the contractual documentation. Where a prospectus liability claim is brought can affect its outcome. Despite the harmonisation of content requirements, the Prospectus Directive3 provides for only limited harmonisation of liability for information included in a prospectus. Responsibility for the contents must be taken at least by the issuer or its board, the offeror, the person requesting admission to trading or the guarantor (Article 6), however, the standard of liability is left to individual Member States to determine. Article 4(1) Rome II Regulation uses the same test of the "place where the damage occurred" in order to determine the applicable law in tortious claims. Recital 7 of the Rome II Regulation provides that the scope and provisions of Rome II should be consistent with, inter alia, the old 2001 Brussels Regulation. It seems therefore that the Kolassa ruling could also impact on the applicable law applied in non-contractual disputes such as prospectus liability claims, allowing a Member State court where an investor is domiciled (and where the loss was suffered) to apply its own law to a prospectus liability claim. 

The European Securities and Markets Association (ESMA), at the request of the European Commission, published a report in 2013 comparing liability regimes applied by Member States in relation to the Prospectus Directive4. It compares the civil, administrative and government liability, criminal liability and sanctions applied in each regime. ESMA concluded that the diversity of different regimes could, particularly on cross-border transactions, make it difficult for market participants to assess their respective risks and rights in relation to prospectus liability.

It is not surprising that the CJEU ruled that the applicant could not invoke jurisdiction on the basis of Article 15 (consumer claims) or Article 5(1) (matters relating to contract) given the lack of any contractual nexus between Mr Kolassa and the Bank. It is more noteworthy, however, that the CJEU placed emphasis on the location of the applicant's bank account, rather than focussing solely on domicile. This may be regarded as unwelcome to the extent that it creates further uncertainty over the question of where an issuer may be sued – not only will domicile be relevant but what bearing does the location of any account have, if in a different place? The ruling does not appear to deal with the situation where the investor uses monies from a bank account located in another Member State – would the other Member State's court have jurisdiction in such a scenario? If the answer is yes, this would be problematic from a risk assessment point of view for banks. While it is possible to predict that investors from a Member State where a prospectus is distributed may purchase, it is completely impossible to predict with any certainty from where the investment proceeds will be paid.

Footnotes

<sub>1. This has been superseded by Regulation (EC) 1215/2012 ("Recast Regulation") which replaced the Brussels Regulation from 10 January 2015. See: http://www.allenovery.com/publications/en-gb/Pages/Brussels-Regulation-recast-an-update.aspx.
2. http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:62013CC0375
4. Directive 2010/73/EU, amending Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading.
4. http://www.esma.europa.eu/system/files/2013-619_report_liability_regimes_under_the_prospectus_directive_published_on_website.pdf</sub>