ECJ ruling: parties can take comfort in their contractually agreed jurisdiction clauses

Where parties have a contractually agreed jurisdiction clause providing that disputes are to be heard in a particular EU Member State, can a company seek to divert jurisdiction to the Member State where it has its seat, by arguing that the company’s decision to enter the contract was invalid? A recent landmark ruling by the European Court of Justice ("ECJ") means that the ability of a company to do this under Council Regulation 44/2001 ("the Brussels Regulation") is effectively curtailed. Parties can, therefore, take comfort that their intention to have any disputes litigated in a particular jurisdiction will not be circumvented by such assertions. The decision also reinforces the importance of taking care over jurisdiction clauses.

Point at issue

Parties often face concerns as to whether the entities with whom they have contracted have the capacity or authority to enter into the agreements in question, particularly, for example, when they are dealing with local authorities. In litigation involving companies based in EU Member States, the issue of capacity may affect where any dispute is to be heard by virtue of the Brussels Regulation. Article 22(2) provides that where the validity of decisions of the organ of a company is the object of the proceedings, the member state where the company has its seat will have jurisdiction. This jurisdiction will "trump" any agreed jurisdiction clause in the contract (even an "exclusive jurisdiction clause") that confers jurisdiction on a different Member State.

Background

In this case, Berliner Verkehrsbetriebe (BVG) Anstalt des öffentlichen Rechts v JPMorgan Chase Bank NA, Frankfurt Branch (Case C-144/10), JPMorgan brought an action to enforce a financial derivatives contract with BVG (a public transport provider in Berlin), in England on the basis of an English jurisdiction clause. Under the contract, BVG had agreed to pay JPMorgan up to USD 220 million in the event of payment default by certain third party companies. BVG brought parallel proceedings in Germany, where it had its seat, arguing that the German courts had primary jurisdiction by virtue of Article 22 because it was seeking to assert that the contract was void, as it had acted outside its powers in concluding the contract.

ECJ Decision

The ECJ ruled that Article 22(2) must be interpreted narrowly. It would only apply to proceedings where the object of those proceedings was the validity of a decision of the company. It would not apply, therefore, where a company pleads that a contract is void. In those circumstances the validity of the contract is the object of the proceedings and the issue of whether the company has the capacity to enter into the contract is only an ancillary issue. The validity of that decision might only form one part of the analysis required; it would not constitute the sole or even main part of the analysis. As such, the proceedings might not have a particularly close connection to the State where the company has its seat. It would be contrary to the administration of justice to confer exclusive jurisdiction on a Member State solely on that basis. Otherwise, if all decisions relating to a decision by an organ of a company were to come within the scope of Article 22(2), in reality, a company could ensure jurisdiction for the Member State where it had its seat, merely by pleading the invalidity of a decision of its organs as a defence or raising this as a preliminary issue where legal actions were brought against it, whether in contract, tort or any other matter, and this was not intended.

Effect

As such, the practical application of Article 22(2) is likely to be restricted to those involving the internal affairs of the company i.e. in disputes between director or shareholder and the company. Parties can be reassured that those who wish to argue the invalidity of a company’s decision making process in entering a contract will not be able to rely on Article 22(2) as a basis for forum shopping.

Lawyers Richard Marsh, Julie Simpson Day