European Union: Activity Of International Banks' Branches

Last Updated: 27 August 2014
Article by Richard Caird, Sam Coulthard and Alexandra Doucas

Clarification on the application of the Brussels Regulation to the activities of banks' branches in McGraw Hill International (UK) LTD v. Deutsche Apotheker Und Arztebank EG and Others [2014] EWHC 2436 (Comm)

The caption of this judgment disguises a jurisdiction hearing contested between Standard & Poor's (S&P) and ABN Amro Bank NV (now The Royal Bank of Scotland NV) (ABN). The underlying dispute is one in which a bank incorporated in one EU state, acting by a branch in another, structured and had rated a financial product which was sold to investors in a number of other EU countries. Claims are now made in respect of that product by the investors, under the laws of their own states of domicile.

If this type of scenario is the fabric of international banking, this judgment represents a judicial unpicking of the strands so far as jurisdiction is concerned. With so many states involved, it is obviously very much open to question which court should determine the dispute. Such questions are to be answered as between EU member states by the Brussels Regulation, and this judgment provides useful guidance as to how the Regulation can be applied to a situation of this kind. It also provides a useful example of some of the procedural complexity which can result when one party seizes the initiative by issuing proceedings for a negative declaration as to liability in one state, in order to prevent a substantive claim being launched in another.

Facts and background to the proceedings

The complaint underlying the proceedings is brought by SRR, a legal foundation domiciled in the Netherlands, which has taken assignment of the claims of various investors in Constant Proportion Debt Obligations (CPDOs) arranged by ABN and given credit ratings by S&P. The investors were domiciled in Germany, Austria and Switzerland.

The inference from the facts recited in the judgment is that S&P, seeing that SRR was likely to issue proceedings in the Netherlands, pre-empted it by seeking a negative declaration in England that it was not liable to SRR in respect of its rating of the CPDOs. It added ABN as a defendant to its proceedings seeking the following relief: 

  1. a declaration that ABN was not liable to SRR in respect of the CPDOs (referred to by the Judge as the Principal Declaration Claim); and
  2. a declaration that if (contrary to its primary case) S&P was liable to SRR, then ABN was also liable to SRR in respect of the same damage (referred to by the Judge as the Alternative Declaration Claim).

S&P failed to satisfy the Judge that, as a threshold issue, there was a genuine dispute between it and ABN in relation to the Principal Declaration Claim: S&P and ABN agreed on the premise of the declaration. Contrary to ABN's assertions that the Alternative Declaration Claim also disclosed no dispute between S&P and ABN (as it concerned ABN's liability to SRR only), the Judge held that there was a serious issue to be tried in that regard. Were ABN ultimately required to defend S&P's proceedings, ABN would deny the Alternative Declaration Claim.

S&P did not seek any contribution or indemnity from ABN. The inference is that as SRR was yet to defend the proceedings at the time of the hearing, it had not asserted any counterclaim and there was therefore no live claim for damages in the proceedings in respect of which an indemnity could be sought. 

SRR did indeed go on to issue proceedings in the Netherlands against both ABN and S&P based on liabilities arising under German, Austrian and Swiss law. As between SRR and S&P, the pre-existing English proceedings (in respect of which SRR raised no objection) meant that S&P's liability would be determined in England. 

ABN, however, challenged the jurisdiction of the English court in respect of the Principal and Alternative Declaration Claims, on the basis that it was domiciled in the Netherlands, had (properly) been sued there by SRR, and that it was desirable for all issues in relation to the same facts to be determined by the same court.

Burden of proof and relevant provisions of the Brussels Regulation

The usual rule set out in the Brussels Regulation is that a party domiciled in a Member State of the EU is entitled to be sued in the courts of that Member State (the domiciliary principle), unless one of the specific criteria for establishing jurisdiction elsewhere is satisfied. The judgment provides a useful reminder of two points in relation to establishing jurisdiction:

  1. that the claimant (here S&P) must show a good arguable case why the usual domiciliary principle should be displaced (rather than the Defendant, ABN, needing to prove that it should apply); and
  2. that it is the allegations of the party alleging liability which are important for these purposes. In a case such as this, that is not necessarily the claimant. Here, S&P was seeking negative declarations, rather than making any positive allegations of liability. It was therefore the allegations made by SRR (which appears to have played no part in the hearing) in the proceedings in the Netherlands which were crucial to the question of the proper court to hear the claims between S&P and ABN.

S&P relied on three provisions of the Regulation which state that the domiciliary principle may be displaced:

  1. Article 5.3 - "in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred";
  2. Article 5.5 - "as regards a dispute arising out of the operations of a branch, agency or other establishment, in the courts for the place in which the branch, agency or other establishment is situated"; and
  3. Article 6.2 - where a party is sued "as a third party in an action on a warranty or guarantee or in any other third party proceedings, in the court seised of the original proceedings, unless these were instituted solely with the object of removing him from the court of the jurisdiction which would be competent in his case".

The Judge's findings

The Judge's conclusions on each of these provisions should be of broader interest and application, outside the confines of this case.

Article 5.3

SRR's allegation against S&P and ABN was that the statements made about the rating of the CPDOs were misleading, and that this gave rise to a number of causes of action under the laws of Germany, Austria and Switzerland. The Judge found that it was, in English law terms, a claim for negligent misrepresentation. According to the Judge's findings of fact, the material marketing the CPDOs, including the rating, was generated in London by ABN (a company domiciled in the Netherlands), and disseminated to investors in Germany, Austria and Switzerland who then decided to invest.

Where, then, had the "harmful event" for the purposes of article 5.3 occurred? Applying previous authorities, the Judge held that the harmful event in relation to negligent misrepresentation could equally take place in the place from which the relevant statements were put into circulation, or the place in which they were acted upon. Scrutinising SRR's allegations in the Dutch proceedings, it was clear that the relevant representations were acted upon in Germany, Austria and Switzerland.

Interestingly, the Judge found that the relevant statements were "put into circulation" there as well. In doing so, he drew a distinction between the place in which the statements originated, and the place where they were communicated, and it was the latter which was relevant for the purposes of article 5.3. The Judge held that the marketing material containing the statements was provided to investors during meetings in their own states of domicile.

Article 5.5

S&P alleged that the subject of the Alternative Declaration Claim (ABN's liability to SRR) arose out of the operations of ABN's London branch and that ABN could therefore properly be sued in England. 

The way in which the court considers arguments of this nature (as exemplified here) is subtly different in character to its consideration of other exceptions to the domiciliary principle, and that difference is important. It could be said that in relation to provisions such as article 5.3 (above) or 6.2 (below), the challenge relates to the domiciliary principle itself. In relation to article 5.5, the challenge is in some ways more to the physical place of domicile. The rationale appears to be that if a dispute is naturally described as having arisen out of the activities of a particular branch, that branch is a more appropriate "home" for the defendant for those purposes than its corporate domicile.

Applying that principle here, the Judge held that he must (for these purposes) compare the appropriateness of England as a jurisdiction with that of the Netherlands, ABN's place of domicile. The jurisdictions which might be relevant for the purposes of article 5.3 (Germany, Austria and Switzerland) were not relevant here.

On the facts, the Judge determined that the dispute arose out of the operations of ABN's London branch, in particular as a result of the creation there of all relevant marketing material. It was also ABN's London branch which devised, structured and marketed the CPDOs and which liaised with S&P in relation to the rating. For that reason, and despite S&P's inability to establish jurisdiction in England on any other basis, the Alternative Declaration Claim will be determined by the English court. This gives rise, so far as ABN is concerned, to the risk of defending simultaneous proceedings in England and the Netherlands, but the Judge was clear that while this would be undesirable, it was not a result to be avoided at any cost. 

Article 6.2

By contrast, S&P failed in relation to article 6.2. The Judge agreed with ABN that the present proceedings were not third party proceedings, S&P had sued ABN as a defendant like any other. S&P's perspective seems to have been that in real terms, it was itself in the position of defendant to SRR's claims, and reserved its right to seek an indemnity from ABN in respect of any liability it was proven to have. However, the Judge held that the court could not proceed on any other basis than the present one, which was that S&P had made a claim against ABN and there were, at present, no live claims against either by SRR in the English proceedings.

The Judge also noted that S&P's reason for including ABN as a defendant, motivated by its desire to avoid duplicative proceedings, seemed to have been to remove ABN from the jurisdiction of the Dutch court.

Key conclusions 

The judgment makes useful reading from various perspectives. The key points which should be drawn from it are perhaps these:

  1. Where a bank carrying out business internationally has structured its business such that some products or services are provided by a specific branch, it should be ready to be sued in the place of domicile of that branch.
  2. The court will not go to any lengths to avoid duplicative proceedings in EU states.
  3. Where the court considers jurisdiction in cases where negligent misrepresentation is alleged, it will consider the place from which the misstatements were put into circulation as good a place to found jurisdiction as that where they were received. The place where representations are put into circulation is not always the same as their place of origin, and it will be important to scrutinise how, where and to whom they are communicated.
  4. Proceedings seeking negative declarations are commonly used by parties who want to make sure that claims they know may be made against them are made in a court of their choosing. The Judge's conclusions on article 6.2 of the Regulation are a reminder that parties must take the rough with the smooth if they proceed in that way, and that they cannot automatically then assume the role of defendant where it is convenient to do so.

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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