10 March 2020
Lending Focus - March 2020 – 6 of 7 Insights
Etihad Airways PJSC (Etihad) was a significant shareholder in Air Berlin plc (Air Berlin) in April 2017 when – against a backdrop of prolonged financial difficulties for the airline – it entered into a number of agreements in order to provide the airline with financial support.
These included an English law facility agreement for up to EUR 350 million (the Facility Agreement) and a comfort letter which was issued to Air Berlin's directors stating that Etihad's intention was to continue providing the necessary support to enable Air Berlin to meet its financial obligations as they fell due (the Comfort Letter). Air Berlin's auditors signed off its financial statements on a going concern basis, apparently in reliance on Etihad's continued support.
Air Berlin's problems continued and, in August 2017, Etihad refused to fund a loan requested under the Facility Agreement, or to provide any further funding. In August 2017, Air Berlin entered into insolvency proceedings in Berlin. The airline has since ceased operations.
In July 2018, Air Berlin's insolvency administrator, Professor Doctor Lucas Flöther issued proceedings in Germany against Etihad on the basis that it had breached the terms of the Comfort Letter by failing to support Air Berlin.
As an alternative claim, in the event the Comfort Letter was determined not to be legally binding, Air Berlin brought a pre-contractual claim under the German civil law doctrine of culpa in contrahendo, where a party may be found liable for its conduct in pre-contractual negotiations if that conduct influences the other party to do something which is against its own interests.
Etihad issued its own proceedings in England, seeking (among other things) a declaration that it was not liable to Air Berlin. It also sought a declaration that the claims being made before the German courts were in fact governed by English law and subject to the exclusive jurisdiction of the English courts.
If true, the German courts would be required to stay the German proceedings pursuant to Article 31(2) of Council Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (commonly referred to as the Brussels Regulation Recast).
In forming this position, Etihad relied on Article 25 of the Brussels Regulation Recast and the jurisdiction clause contained within the Facility Agreement, which it argued would apply to the Comfort Letter. The Comfort Letter itself did not contain a jurisdiction clause.
Air Berlin challenged the English court's jurisdiction, arguing that the jurisdiction clause in the Facility Agreement did not apply to the Comfort Letter and therefore the matters brought before the German court. It applied instead to have the English proceedings stayed in favour of the German proceedings, as would be required if Article 31(2) did not apply as the German court would be the court first 'seised'.
Article 25 of the Brussels Regulation Recast provides that an agreement between contracting parties that the courts of a particular Member State will have jurisdiction "to settle any disputes which have arisen or which may arise in connection with a particular legal relationship" will confer jurisdiction on the courts of that Member State, provided that the agreement is valid under the laws of that Member State, and that such jurisdiction will be exclusive unless the parties have agreed otherwise.
The English court therefore had to determine whether the jurisdiction clause in the Facility Agreement actually applied to the Comfort Letter as a matter of English law.
The governing law and jurisdiction clauses in the Facility Agreement were drafted on broadly standard LMA terms which will be familiar to many readers, stating that the Facility Agreement was governed by English law, that the courts of England would have "exclusive jurisdiction to settle any disputes arising out of or in connection with [the Facility Agreement] (including a dispute relating to non-contractual obligations arising from or in connection with [the Facility Agreement]…) (a Dispute)" and that the relevant clause was "for the benefit of the Lender [ie Etihad] only" such that "the Lender shall not be prevented from taking proceedings relating to a Dispute in any other courts with jurisdiction".
After consideration of the relevant authorities, Mr Justice Jacobs was of the view that the parties had intended disputes arising under the Comfort Letter to fall within the jurisdiction clause contained in the Facility Agreement.
In reaching this position, Jacobs J said he had taken into account:
Article 25 further requires that the dispute in question arose "in connection with a particular legal relationship" between the parties. Again, Jacobs J was satisfied the dispute in question arose from the parties' relationship as lender and borrower, which was also the relationship in connection with which an agreement had been reached as to a particular court having jurisdiction.
With these hurdles cleared, the court could then turn to the question of whether the court should be required to stay the proceedings as requested by Air Berlin.
Article 31(2) broadly provides that where proceedings are brought before the courts of a Member State on which an agreement as referred to in Article 25 confers exclusive jurisdiction in relation to such proceedings, the courts of any other Member State shall stay any concurrent proceedings until such time as the first court declares that it does not have jurisdiction.
As mentioned above, Article 25 provides that the jurisdiction conferred on any court by agreement between the parties will be exclusive unless the parties have agreed otherwise.
The jurisdiction clause in the Facility Agreement was formulated as what is commonly called an "asymmetric jurisdiction clause", where only one party (usually, as in this case, the borrower) agrees that a particular court has exclusive jurisdiction while the other party (usually the lender) has discretion to bring proceedings before any other court with jurisdiction. Air Berlin argued that this asymmetry precluded the jurisdiction clause from being determined to confer exclusive jurisdiction under Article 25 such that Article 31(2) was not engaged.
Jacobs J had regard to a number of previous cases (most notably Commerzbank v Liquimar) where the English court had affirmed that an asymmetric jurisdiction clause could still fall within the scope of Article 25.
He reiterated that it was important to consider each party's obligations separately: here, the borrower was contractually bound not to bring proceedings other than in the chosen jurisdiction, and it was this term that the lender was seeking to enforce. It was therefore irrelevant whether the same term bound Etihad in determining whether the English courts had exclusive jurisdiction in this case.
Jacobs J therefore rejected Air Berlin's application to stay the English proceedings. The substantive dispute between the parties will be heard at a later date.
Those who frequently receive legal opinions on financing transactions may well have seen qualificatory language as to the effectiveness of asymmetric jurisdiction clauses before, and this case is further indication of the English courts' continued willingness to accept that such clauses can confer exclusive jurisdiction within the scope of Article 31(2), depending on the circumstances.
Of course, the United Kingdom is currently in a transition period as part of its withdrawal from the European Union, and how the English courts will approach clauses of this nature after 31 December 2020, when the Brussels Regulation Recast is unlikely to apply, is less certain.
Jacobs J did give some consideration to the question of whether an asymmetric jurisdiction clause may be an exclusive jurisdiction clause for the purposes of the Hague Convention, which is more likely to govern questions of this nature in the future. He concluded that "there are good arguments" that it would, which is helpful but, as it didn't have a bearing in this case, only obiter. As such, we will watch developments in this area with interest!
In the meantime, contracting parties should think carefully about which courts they expect to bring proceedings before in the future, and be mindful that a jurisdiction clause could extend beyond the scope of the document in which it is contained, depending on the drafting and the circumstances of the case.
To leave no room for doubt, parties would be advised to include a jurisdiction clause in any document which might one day become contentious, even an agreement which is not intended to be binding (such as Etihad's comfort letter), to avoid any nasty surprises.
by Cheng Bray