English court’s jurisdiction over Italian swaps dispute confirmed

Deutsche Bank AG (the Bank) and Comune di Savona (Savona) entered into two interest rate swaps in June 2007 under a 1992 ISDA Master Agreement, Schedule and two swap confirmations (the Swaps). The Swaps were governed by English law and contained an exclusive jurisdiction clause in favour of the English courts (the English Jurisdiction Clause). Previously, in March 2007, the Bank and Savona had entered into a separate agreement for the Bank to provide certain unpaid assistance with the management of Savona’s indebtedness (the Convention).  The Convention was governed by Italian law and contained an exclusive jurisdiction clause in favour of the Courts of Milan (the Italian Jurisdiction Clause).

In light of the threat of potential legal action by Savona in Italy, the Bank issued a protective claim against Savona in the English High Court seeking 12 declarations concerning the entry into, validity, enforceability, interpretation and performance of the Swaps. 

Parties disagree on which court has jurisdiction – England or Italy?

Savona acknowledged that half of the declarations fell within the jurisdiction of the English court but challenged the English court’s jurisdiction over the other six declarations (even though, with one exception, the declarations closely tracked the wording of contractual representations in the ISDA Master Agreement).  After conceding that the declaration tracking the entire agreement clause fell within the English court’s jurisdiction, the five declarations challenged by Savona broadly concerned its understanding of the Swaps and the nature and extent of any advice provided by the Bank in relation to Savona’s entry into them.  Basing its challenge on Article 25 of the Recast Brussels Regulation (which provides that parties may agree to refer disputes in connection with a “particular legal relationship” to the courts of a Member State and that the courts of the contractually agreed Member State will have jurisdiction to hear the dispute), Savona argued that the challenged declarations fell within the scope of the Italian Jurisdiction Clause in the Convention. 

At the time of Savona’s jurisdiction challenge there were no Italian proceedings on foot. However, shortly before the first instance hearing, Savona commenced proceedings in Milan claiming, among other things, breaches of the Convention based on advice allegedly provided by the Bank concerning the Swaps.  

At first instance, HHJ Waksman QC upheld Savona’s jurisdiction challenge as, in his view, the Bank’s claims in the challenged declarations fell “more naturally” within the Italian Jurisdiction Clause in the Convention. Acknowledging that his decision could lead to fragmentation with some issues to be determined in England and others in Italy, and notwithstanding that most of the declarations mirrored the terms of the Swaps, it followed from the Judge’s finding that the Convention was concerned with the Bank’s role as adviser while the Swaps simply concerned the Bank as counterparty.

Court of Appeal 

The Court of Appeal overturned the judgment at first instance and returned to the established position that disputes regarding declarations derived from an English law contract with an exclusive jurisdiction clause in favour of the English courts are likely to be determined by the English courts.  The Court of Appeal’s unanimous decision accordingly provides welcome certainty for contracting parties. In particular, the judgment provides helpful guidance on determining the “particular legal relationship” to which a dispute relates for the purposes of Article 25. 

How to determine which ‘particular legal relationship’ the dispute relates to

Giving the leading judgment, Longmore LJ stated that the correct demarcation between the two relationships was between: (i) the generic relationship set out in the Convention; and (ii) the specific interest rate swap relationship set out in the Swaps. 

The Convention made it clear that if a particular transaction was subsequently proposed it would have to be approved by Savona and would be the subject matter of a separate contract. That separate contract (i.e. the Swaps) would be the “particular legal relationship” relating to the proposed transaction envisaged in Article 25. Longmore LJ held that the existence of an entire agreement clause in the Swaps was strong confirmation of this delineation but that he would have reached the same conclusion without it.  

With this approach the Court of Appeal gave the exclusive jurisdiction clauses in each of the Swaps and the Convention a mutually exclusive construction, in line with earlier authority (see Monde Petroleum v Western Zagroz [2015] 1 Lloyds Rep. 330). 

Declarations raised disputes in relation to the Swaps

Concluding in general terms that disputes relating to the Swaps had to be determined by the English courts, Longmore LJ then considered whether the challenged declarations in fact raised disputes relating to the Swaps.  

In all cases it was held that they did: all of the declarations which closely tracked the Swaps’ wording “self-evidently” raised a dispute concerning the Swaps and fell within the English Jurisdiction Clause. In relation to the declaration which did not track the wording of the Swaps (a declaration of non-liability), the court concluded that it did no more than make explicit the alleged consequences of the other declarations and therefore also fell within English Jurisdiction Clause.

Noting that all questions of construction will ultimately depend on the terms of the relevant contracts, the Court of Appeal did not expressly approve or disapprove recent first instance jurisdiction decisions in the Italian swaps context, namely Dexia Crediop SpA v. Provincia Di Brescia [2016] EWHC 3261 (Comm) and BNP Paribas SA v Trattamento Rifiuti Metropolitani SpA [2018] EWHC 1670 (Comm). However, Longmore LJ agreed in principle with the approach of Knowles J in BNPP v TRM, which was to focus on whether the English court has jurisdiction rather than to try to predict whether the declarations if made would act as defences in Italy (as the Judge had done at first instance in this case).

Expert evidence in jurisdiction disputes  

In their judgments both Lord Justices Longmore and Gross took the opportunity to express unease at the proliferation of expert evidence on foreign law in jurisdiction applications. Although Savona did not obtain permission from the court for its lengthy expert evidence, it was accepted by the Judge at first instance. 

However, the Court of Appeal considered that the only relevance of foreign law was to questions of construction of jurisdiction clauses – namely whether there was any difference between the relevant principles under English law and the potentially competing foreign law. They recommended that this point be considered by the Commercial Court Users Committee with a view to expressly stating in the court rules that the court’s permission was required to adduce expert evidence in interlocutory applications. 

Comment

The Court of Appeal’s decision marks a return to predictability in the interpretation of potentially competing jurisdiction clauses. In particular, Lord Justice Gross acknowledged the need to preserve market certainty in the ISDA context, stating that it would be “startling” if the bank’s claims falling squarely within the terms of the swap contracts could not be brought in the forum expressly chosen by the parties. 

Notwithstanding this helpful judgment, the decision is a reminder to parties to ensure there are consistent governing law and jurisdiction clauses across suites of documents if that is intended; if that is not possible or required, explicit reference should be made to the relative scope of any potentially competing jurisdiction clauses. 

If a jurisdiction dispute did arise, parties would also be well advised to consider at an early stage whether expert evidence on foreign law is required and to seek permission from the court if it is.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review​, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.​​​