Worldwide: ROME II – Opportunities And Risks For The Financial Sector

This alert reports a French case that relates to a hedge fund registered in the Cayman Islands, the investment agreement of which was governed by Cayman law, and where the actions complained about (withdrawing from the fund) were arguably strongly connected with the Cayman Islands. Yet, applying Rome II, the Paris Court of Appeal held that the law applicable to the action was French law because the damage resulted from orders given in France and damage was suffered by a French entity.

The EU Rome II Regulation1 on the law applicable to torts has been in force for close to five years. Appellate jurisdictions in the EU are just starting to grapple with the core principles contained in it. The decision of the Paris Court of Appeal,2 involving claims totalling €60 million brought by an investment fund and a fund manager against a bank, demonstrates the importance of understanding how Rome II operates and how it may impact on financial structures in the EU.


Applying Rome II, since 11 January 2009, EU courts (excluding Denmark) have been applying the same set of rules to determine the law that governs non-contractual obligations. Rome II marked a change of approach in most EU countries compared with the applicable laws in force prior to its introduction.

Pursuant to Rome II, the general rule (art 4(1)) is that the law applicable to a tort (a wrongful act) will be the law of the country in which the damage occurs. Prior to Rome II, the place where the tort took place (lex loci delicti) was the relevant touchstone for most EU jurisdictions. The Rome II formulation is generally viewed as being favourable to the victim of an alleged cross-border tort. Rome II offers greater prospect of foreign tort laws being applied to domestic acts, where foreign interests are adversely affected by such acts. This is of particular concern to UK-based entities where the loss in question is pure economic loss, as is typically the case when financial structures are in issue. Under English law, pure economic loss is not readily recoverable in tort. But such losses may well be recoverable where foreign tort law applies.

The Paris Court of Appeal Decision

Within a complex financial structure, a Cayman Islands-based master fund (Maximus) and its French-based fund manager (Anakena) brought a claim against Natixis, a well-known French bank. The claim arose in the wake of the Lehman Brothers' liquidation in 2008. Natixis was a shareholder in two Cayman Islands hedge funds, which in turn invested in Maximus, allowing Maximus to develop a portfolio of assets. Anakena was a fund manager and managed one of the hedge funds and Maximus. There was no direct contractual link between either of the two claimants and Natixis. Therefore, Anakena and Maximus framed their claim against Natixis in tort.

Maximus and Anakena alleged that Natixis was liable in tort, based on the application of French law. They argued that Natixis had exited one of the hedge funds in a wrongful brutally abrupt manner. The claimants alleged that this action led to a fire sale of assets by Maximus. Anakena and Maximus claimed €60 million in losses.

Natixis argued that Cayman Islands law applied and that, consequently, no claim in tort could lie where a party exercises its contractual rights. Natixis asserted that its exit from the hedge fund had been achieved strictly in accordance with the applicable contractual provisions. Alternatively, it argued that there was no liability under French law because there had been no intention to harm, and/or the losses claimed lacked the necessary causal link.

Natixis argued that – pursuant to Rome II art. 4 – Cayman Islands law applied because the initial direct loss occurred in the Cayman Islands, where the affected fund was registered and where it generated its profits. Natixis also argued that the "wrongful act" was manifestly more closely connected with the law of the Cayman Islands, the law governing the investment agreement between Natixis and the hedge fund.

The judgment does not set out the claimants' arguments supporting the application of French law. However, the Court of Appeal upheld the application of French law, based on the application of Rome II art. 4, citing a number of reasons:

  • The claim involved three parties, two of whom were French
  • The claim related exclusively to reasons and conditions attaching to the orders by a French bank (Natixis) given to a French manager (Anakena), albeit relating to a Cayman Islands fund
  • The direct damage alleged, resulting from orders given in France by Natixis to Anakena, occurred in France in that Anakena was mothballed and no longer received commission
  • The immediate direct effect was therefore in France, the loss invoked by Maximus resulted only from Natixis withdrawing from the hedge fund, not a party to the action
  • The wrongful act was manifestly more closely connected with France, notwithstanding that the investment agreement was subject to Cayman Islands law given that the claim was in tort and the hedge fund was not a party to the action

The court nevertheless dismissed Anakena and Maximus' claim because it found that they were unable to show that Natixis' actions constituted a tort under French law.


Rome II may form part of either a defensive or an offensive strategy when parties vie to allocate liability in tort within a multi-party contractual framework. The case summarised above is illustrative in that regard.

Anakena and Maximus no doubt considered, and with justification, that their claim was considerably stronger if governed by French law. The Court of Appeal (and the Court of First Instance) agreed with the claimants that French law applied.

It should be noted, somewhat confusingly in this case, that the alleged wrongful acts in question appear to have taken place at the end of 2008, while Rome II – in principle – only applies to events occurring after 11 January 2009.3 Yet the court and the parties appear, nevertheless, to have proceeded on the basis that Rome II applied.

The reasoning of the court is perhaps questionable in any event. When analysed, what the court appears to have done is to accumulate connecting factors to France in order to conclude that French law was the appropriate applicable law. Even in the pre-Rome II era, this type of approach might have raised eyebrows as French law has not generally sided with such a "proper law" approach, with the arguable exception of complex cross-border situations, of which this case would be an example.

However, timing issues aside, article 4(1) directs the court to determine only one thing – the country in which the damage occurs. The law of that country should govern the tort claim, irrespective of the country in which the event giving rise to the damage occurred or of the country or countries in which the indirect consequences of the event may occur. The listing of various factors by the court obscures rather than elucidates the problem before it. And apparent resort by the court to art 4(3) – which allows for the application of the law of another country where the tort is manifestly more closely connected to such other country, rather than the country in which the direct damage occurs – reveals an inconsistent approach. It would only be permissible to consider article 4(3) if the court had concluded that the damage had been suffered in the Cayman Islands – which it did not do. And, given the significant involvement of Cayman Islands entities, it might be questioned as to how the court could justifiably conclude that the alleged tort was "manifestly" more closely connected to France. Conversely, article 4(2) provides that where the claimant and defendant both have the same country of residence – seemingly applicable to Natixis and Anakena, both France-based entities – the law of that country should apply. Thus, so far as Anakena's claim was concerned, the court was no doubt right to conclude that French law applied. But the same cannot be said with such conviction for Maximus, whose losses accounted for €32 million of the total losses sought against Natixis.

In the final analysis, whatever criticisms may be made of the reasoning, the Paris Court of Appeal provides considerable food for thought. It underlines the importance of structuring matters so that any likely damage will occur in a jurisdiction that, in tort terms, is either "victim friendly" or "victim unfriendly", depending on which party is likely to be making a claim. The relatively mechanical application of Rome II offers up possibilities in this area that did not exist before. France and French law are generally considered to be victim friendly in matters of tort,4 which undoubtedly spurred the claimants on in this matter. An appeal to the Supreme Court has been filed.

1. Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations.
2. SAS Anakena and Société Maximus Master Fund Ltd v Natixis, N° 12/02707, 26 March 2013.
3. Homawoo v GMF Assurances SA (Case C-412/10), 17 November 2011.
4. In this regard, the reader is invited to read a recent article by one of the authors of this alert: "Breach of Contract as the Basis for Third-Party Claims in Tort: a French Affair with Cross-Border Implications", Andrew Tetley, [2013] L.M.C.L.Q. 199.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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