Landmark ECJ Decision Curtails Attempts to Avoid Jurisdiction Clauses

In a landmark decision issued on 12 May 2011 concerning Article 22(2) of Council Regulation 44/2001 (the “Brussels Regulation”), the European Court of Justice (“ECJ”) has very significantly narrowed the circumstances in which a party can seek to have litigation in which issues of its legal capacity arise decided in its home jurisdiction. Below is a summary of Berliner Verkehrsbetriebe ("BVG") -v- JPMorgan Chase Bank NA, Frankfurt Branch (C-144/10) in which Linklaters acted for JPMorgan and here is a link to the case.

Background

The decision is particularly topical. There are a number of cases currently before the English courts in which European local authorities are seeking to escape contractual liability on the basis that that they lacked legal capacity to enter the transaction and it is void. These parties have challenged the jurisdiction of the English courts relying on Article 22(2) of the Brussels Regulation. This provides that in proceedings which “have as their object … the validity of the decisions of [the organs of companies or other legal persons]” the EU member state in which the company has its seat has exclusive jurisdiction.

JPMorgan had entered into a transaction with the Berlin State Transport Authority. The transaction was done on ISDA terms with English courts chosen to resolve disputes. JPMorgan sought to enforce the contract against BVG in English proceedings. BVG contested jurisdiction under Article 22(2) arguing that it had lacked capacity to enter the transaction and that the case would have the validity of BVG’s decision to enter the transaction as its object. It also commenced its own proceedings against JPMorgan in Berlin.  

In finding in JPMorgan’s favour, the English Court of Appeal (see [2010] EWCA Civ 390) said that the appropriate way to determine whether the case fell within Article 22(2) was to stand back and look at all the issues in the case to decide what it was principally about. If a range of defences would be raised (eg misrepresentation, breach of duty and so on) -  as the court found would be the case here – it would not be right to say that the proceedings had the “validity of a decision” as their object.

The Berlin Court also found in JPMorgan’s favour – albeit for different reasons - determining that it was not an Article 22(2) case and should be heard in England where the parties had agreed in their contract to resolve any dispute and where the courts were first seised of the case. However, on appeal, certain questions were referred for decision by the ECJ.

Decision of the ECJ

The ECJ has now ruled that Article 22(2) does not apply to a case of this kind for one very simple reason. That is that this is not a case about the validity of a decision of an organ of a company at all. It is a case about the validity of a contract - and that is not caught by Article 22(2). It was important that, Article 22(2) being an exception to the general rules on jurisdiction, it be given a very narrow construction.  

The ECJ was concerned that if all disputes which somehow brought in to question a decision by an organ of a company were to come within the scope of Article 22(2) that would in reality mean that any legal actions bought against a company – whether in matters relating to a contract, tort or any other matter – could almost always come within the jurisdiction of the courts of the EU member state in which the company had its seat.  

Implications

So the legal position is now such that there is very limited scope indeed for an Article 22(2) challenge by those not happy with their contractual choice of jurisdiction. The English Court of Appeal test still left it open for the party who was able to say that his defence only arose from a lack of capacity to avail himself of Article 22(2) and have the case moved from the jurisdiction selected in the contract to his home jurisdiction.

However following the ECJ ruling, the circumstances in which an entity will be able to rely on Article 22(2) are very limited indeed – and probably confined to disputes internal to the company (for example between the company and a shareholder). 

In light of this decision we can now expect a number of cases seeking to enforce contracts against European local authorities to begin to progress through the courts. 

For any questions on the ECJ judgment please contact Kathryn Ludlow in our London office or Klaus Saffenreuther (who led the advocacy before the ECJ) in our Frankfurt Office.