CREST payments: provisions precluding legal set-off
The Chancellor, Sir Andrew Morritt, has considered the effectiveness of contractual and similar provisions which purported to preclude the exercise of legal rights of setoff. In this case, the provisions were contained in the rules of the CREST system (particularly Rule 7, para. 3.2) and the deed of agreement executed by the issuer of the relevant dematerialised debt securities that were to be issued and settled within the CREST system (such deed of agreement being executed pursuant to Rule 7 para 5 of the CREST rules). The issuer of the securities, which were Eligible Debt Securities for the purposes of the system, wished to assert the right of legal set-off against debts due to it by the recorded holder of the securities.
The Chancellor noted that the rights as to legal set-off were originally established under the Insolvent Debtors Relief Acts of 1729 and 1735. They are now to be found in S. 49(2) of the Supreme Court Act 1981 and CPR Rule 16.6. Relying upon the decisions of Lord Denning MR in Halesowen Presswork & Assemblies Ltd v. Westminster Bank Ltd [1971 1 QB 1, at 34, Hirst J in Hong Kong and Shanghai Banking Corp. v. Kloeckner & Co. AG [1990] 2 QB 514 and the Court of Appeal in Coca-Cola Financial Corp. v. Finsat International Ltd [1998] QB 43 and notwithstanding the very old decisions in Lechmere v. Hawkins (1798) 2 Esp 626 and Taylor v. Okey (1806) 13 Ves Jun 181, his Lordship held that it was possible by contract to exclude legal rights of set-off. He then went on to hold that the provisions in the CREST rules and the deed of agreement, which precluded the issuer of the securities from exercising a right of setoff or counterclaim, were intended to apply to both rights of legal set-off and rights of equitable set-off. In this, he drew upon what had been said by Parker LJ in Continental Illinois National Bank and Trust Company of Chicago v. Papanicolaou [1986] 2 Lloyd's Rep 441 that the natural meaning of a clause requiring payment "without set-off or counterclaim" covered all types of set-off, especially when taken in the relevant commercial context. That context was the requirement that a party's obligations should be settled promptly and treated as if they were independent obligations.
His Lordship also distinguished the position in this case from the situation where the courts may have been willing to stay the enforcement of a judgment relating to obligations under negotiable instruments pending the resolution of a counterclaim (see, for instance, the discussion in the Kloeckner case, at 524 and 526). In this case, there was nothing in the relevant provisions to indicate an intention to treat the obligations as akin to those under a negotiable instrument and in none of the negotiable instrument examples were there contractual provisions intended to prevent the assertion of rights of set-off. Furthermore, even if there were such a provision relating to a negotiable instrument and the court was nonetheless prepared to grant a stay, it could not be assumed that the court would adopt the same attitude with "respect to what is required to be a CREST payment with all that that entails".
The Chancellor said that the fact that the other party had become insolvent and gone into administration or receivership did not change the approach that should be taken to clauses excluding set-offs and counterclaims. It was precisely in those circumstances that the provisions were needed. In this regard, he referred to Morrison Knudsen Corp. of Australia Ltd v. Australian National Railways Commission (1996) 22 ACSR 262, Isovel Contracts Ltd v. ABB Building Technologies Ltd [2002] BCLC 390 and John Dee Group Ltd v. WMH (21) Ltd [1998] BCC 972. It should be noted, however, that the mandatory rules of insolvency set-off in administration (or liquidation) did not apply in this case, for two reasons. First, there was no mutuality between the counterclaims, as the debt due to the insolvent party was held by the latter on trust for a third party. Secondly, the insolvent party was in administration and Rule 2.85 of the Insolvency Rules 1986 (SI 1986/1925, as amended by SI 2005/527), which contains the provision as to set-off in administration, had not been applied.
Re Kaupthing Singer and Friedlander Ltd (in Administration); Newcastle Building Society v. Mill [2009] EWHC 740 (Ch) ( Sir Andrew Morritt C, 8/4/2009).
Avoidance of cross-border transactions within an EU insolvency
The European Court of Justice has decided that the courts of the EU state where insolvency proceedings have been opened will have jurisdiction to determine, in the context of their own insolvency laws, the validity under those laws of a transaction entered into by the insolvent debtor in favour of a third party in another EU state. This is because Art. 3(1) of the EC Insolvency Regulation (1346/2000/EC OJ L160/1 30/6/2000), when taken in conjunction with the Recitals to the Regulation and Arts 16(1) and 25(1) of the Regulation, confers international jurisdiction on such a court to hear and determine actions which derive directly from the insolvency proceedings and actions that are closely connected with them. Pursuant to Arts 16(1) and 25(1), a judgment given by such a court against the third party should be recognised and enforced in the EU state where the third party is present.
Although it did not refer to this point, the conclusions of the ECJ are supported by Art. 4(2)(m) of the Regulation. It provides that the law of the state where the insolvency proceedings have been opened shall determine "the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all creditors". It makes sense that the courts of that state should make a determination on such matters by applying their own insolvency law and that such a determination should be recognised and enforced in other EU member states. This, of course, is subject to the specific exceptions to the application of Art. 4(2)(m) that will be found by the application of Arts 9 and 13 of the Regulation.
The facts of the case concerned proceedings that the liquidator of a German company had brought in the German courts, to retrieve a payment that the insolvent debtor had made to a Belgium payee. The payment had been made the day before the insolvency proceedings had been commenced. The German courts requested the ECJ to determine if they had international jurisdiction to determine the matter. The ECJ replied to the effect that the German courts did have that jurisdiction.
Seagon v. Deko Marty Belgium NV Case C- 339/07 (ECJ decision 12/2/2009).
Jurisdiction in tortious claims under the EC Regulation on jurisdiction and judgments and the right of an agent to enforce a contract for its own benefit under the Contracts (Rights of Third Parties) Act 1999
Christopher Clarke J has considered the basis of jurisdiction available for tortious claims under the EC Regulation on jurisdiction and judgments (EC 44/2001 OJ L12/1 16/1/2001). Art. 5(3) of the Regulation confers a basis of jurisdiction in such claims on the courts of an EU member state with which the tort is connected, provided that the defendant is domiciled in another EU member state. His Lordship also addressed the question of whether under English law an agent for one of the parties to a contract could rely on the Contracts (Rights of Third Parties) Act 1999 so as to enforce the contract for the agent's own benefit.
The issue under the Regulation concerned the claim of an English company against a Swedish domiciled third party, alleging that the third party had tortiously induced a breach of contract between the English company and its Turkish counterparties or, alternatively, a similar claim against the third party in the tort of conspiracy. The contract was between the English company and Turkish underwriters, under which the English company was appointed as the recovery agent of the Turkish underwriters, arising from the collision and sinking of a vessel. The contract provided for payment to the recovery agent of any amounts due to the underwriters from third parties, from which the recovery agent would deduct its fees and commission before passing on the balance to the underwriters. It was alleged that, with knowledge of the contract, the Swedish third party entered into a direct agreement with the Turkish underwriters, pursuant to which it paid the Turkish underwriters directly, thereby depriving the recovery agent of its right to receive the payments and so achieve payment of its own fees and commission.
The issue under the 1999 Act concerned a claim that the English company was entitled to enforce, for its own benefit, a separate contract that, acting as agent for the Turkish underwriters, it had entered into with the Swedish party. The contract provided that any payments due by the Swedish party to the Turkish underwriters would be paid to the English company or the underwriters' solicitors as the agent of the underwriters.
The issues will be dealt with in turn below.
Jurisdiction under Art. 5(3) is an alternative to the primary basis of jurisdiction conferred by Art. 2 of the Regulation, under which jurisdiction is conferred on the courts of an EU state in which the defendant is domiciled. Art 5(3) provides that:
"A person domiciled in a Member State may, in another Member State, be sued...in matters relating to tort, delict or quasi-delict, in the courts of the place where the harmful event occurred or may occur."
Christopher Clarke J summarised various case law that had been developed in relation to Art. 5(3). As the article provides a derogation from the principal rule of jurisdiction under the Regulation, by which jurisdiction is vested in the courts of the EU member state which is the place of the defendant's domicile, Art. 5(3) should not be seen as a way of easily by-passing that rule so that jurisdiction is founded on the place of the claimant's domicile (see Dumez France SA v. Hessische Landesbank (Case C- 68/95) [1990] ECR I-49). Jurisdiction under Art. 5(3) depends upon a close connection between the dispute and the relevant jurisdiction (Kalfelis v. Bankhaus Schroder Munchmeyer Hengst & Co. (Case 189/87) [1988] ECR 5565). Nonetheless, the claimant will be entitled to sue in that jurisdiction, even if it is also his place of domicile, if he properly is entitled to do so under Art. 5(3). The wording of Art. 5(3) is to be given an autonomous meaning and should not be interpreted by reference to the particular requirements of national law as to the founding of a cause of action in tort (Alfred Dunhill Ltd v. Diffusion Internationale de Maroquinerie de Prestige SARL [2002] 1 All ER (Comm) 959, Sunderland Mutual Marine Insurance Co. Ltd v. Wiseman (The Seaward Quest) [2007] EWHC 1460 (Comm), [2007] 2 Lloyd's Rep 308).
In Handelskwekerij GJ Bier BV v. Mines de Potasse d' Alsace SA (Case 21/76) [1976] ECR 1735, [1978] 1 QB 708, the European Court of Justice held that Art. 5(3) should be construed so that the claimant could commence proceedings "at the place where the damage occurred or the place of the event giving rise to it". In this case, the claimant relied upon the first of those alternatives. Christopher Clarke J examined the case law that had been developed in determining the place where the damage occurred, although it has to be said that the case law is not entirely clear on this issue, particularly where the claim is for economic loss rather than physical damage.
In the Dumez case, a distinction was drawn by the ECJ between the place where the damage occured and the place where it might be suffered. Where the claimant is an indirect victim or is claiming indirect losses, the important question is where the event which gave rise to the damage produced its initial and directly harmful effects, rather than a place where it might later have manifested itself to the claimant. In Marinari v. Lloyd's Bank PLC (Case C-364/93) [1995] ECR I- 2719, [1996] QB 217, the ECJ said that it was not possible to found jurisdiction on the place where consequential financial damage was suffered, as opposed to the place where the initial damage had arisen. In Reunion Europeenne SA v. Splietoff's Bevrachtingskantoor (Case C-51/97) [1998] ECR I-6511, the ECJ said that in the context of damage to goods in transit which were the subject of an international contract for the carriage of goods, the damage would be suffered where the carrier was due to deliver the goods under the contract, rather than the final place of delivery of the ultimate consignee where, for instance, the goods had been subsequently delivered by another journey. In Domicrest Ltd v. Swiss Bank Corp. [1999] QB 548 Rix J said that where the claimant acted on the strength of a tortious misrepresentation by the defendant, the question was: what would have happened if the misrepresentation had not been made? The answer is that the damage would not have been suffered. It followed that the damage was suffered where the claimant acted on the strength of the misrepresentation, rather than the place from which the misrepresentation was made or even the place to which it was communicated, if that was not the place where the claimant acted on the strength of it.
In this case, the claimant said that England was the place where the tortious damage occurred because that was where the payment should have been made to it under the contract between the claimant and the Turkish underwriters. The defendant argued that the harm occurred either in the place from which the relevant payment by the defendants was made to the Turkish underwriters, which was Sweden, or the place in which it was received, which was Turkey. His Lordship, agreeing with the claimant, held that the claimant suffered the damage in England, as that was the place where the payment that the claimant did not receive should have been paid under the contract, if the defendant had not wrongly interfered in the performance of the contract. Christopher Clarke J went on to say:
"I do not ignore the danger of conflating the place where the damage occurred with the place where the loss was suffered. There is, however, a difference between a case in which the claimant complains that he has lost his money or goods (as in Domicrest or The Seaward Quest) and a case in which the claimant complains that he has not received a sum which he should have received. In the former case the harm may be regarded as occurring in the place where the goods were lost (Domicrest) or the place from or to which the monies were paid (The Seaward Quest), although the loss may be said to have been suffered in the claimant's domicile. In the latter case the harm lies in the non receipt of the money at the place where they ought to have been received, and the damage to him is likely to have occurred in the place where he should have received it. That place may well be the place of his domicile and, therefore, also the place where he has suffered loss. An analogy may be drawn with the non delivery of cargo at the destination port: see Reunion Europeenne."
Turning now to the second issue, S. 1 of the Contracts (Rights of Third Parties) Act 1999 provides as follows: "
(1) Subject to the provisions of this Act, a person who is not a party to a contract (a 'third party') may in his own right enforce a term of the contract if—
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a
benefit on him.
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party."
The question which arose was whether the term of the agreement that the English company had entered into on behalf of the Turkish underwriters with the Swedish company, in providing that payments would be made by the Swedish company either to the English company, acting as agent for the underwriters, or to the solicitors for the Turkish underwriters, had intended to confer a benefit of the payment obligation in favour of the English company, so that it could enforce that benefit for itself. It was agreed that there was no express provision within Para. (a) of S. 1(1), so the question was whether Para. (b) of that section applied. Christopher Clarke J noted that in Prudential Assurance Co. Ltd v. Ayres [2007] EWHC 775 (Ch) Lindsay J had said that S. 1(1)(b) might apply even if the conferral of a benefit on the third party was not the predominant purpose or intent behind the relevant term. Although the case went to the Court of Appeal ([2008] EWCA Civ 52, [2008] 1 All ER 1266), this point did not arise in the appeal. Christopher Clarke J went on say, however, that simply because a person's position would be improved if the contract were honoured did not mean that the contract intended to confer a benefit on that person. The word "confer" as used in S. 1(1)(b) connotes the concept that one of the purposes of the bargain reached between the contracting parties was to benefit the third party, rather than it just being one of its incidental effects arising from the performance of the contract.
His Lordship held that it was not intended that the benefit of the payment provision should be conferred on the English company within the sense of S. 1(1)(b). The provision simply stipulated the means by which the Swedish company would discharge its payment obligation to the Turkish underwriters. The intended beneficiaries of the provision were the Turkish underwriters on whose behalf the payment would be received by the English company or the solicitors acting for the Turkish underwriters. This was to be contrasted with the situation where the third party was not acting as the agent or trustee of one of the contracting parties. In addition, the fact that the Swedish company could make the payment to either the English company or the solicitors of the Turkish underwriters, indicated that the payment provision had not been intended to confer a benefit on them. It simply specified an appropriate method by which payment could be made by the Swedish company. His conclusion was not affected by the fact, if such it be, that payment was often made to recovery agents who would thereby be enabled to deduct their own fees before passing on the balance to their principals.
For similar reasons, his Lordship was also of the view that if the provision purportedly did confer a benefit on the English company, the English company would not be entitled to enforce it because S. 1(2) applied. On a proper construction of the contract, the parties to it had intended that the English company would not be entitled to enforce the payment provision for its own benefit. This was because of the alternative mechanism for payment to the Turkish underwriters solicitors and the inconsistency of that with an intention to confer an enforceable right upon the English company. It was also conceivable that the parties to the contract might agree that payment could be made to the Turkish underwriters directly, without the necessity of using the stipulated methods of payment. In short, the real position was that the contract provided for an obligation that the Swedish company would pay the Turkish underwriters and it also provided for mechanisms by which that obligation could be discharged, in much the same way as the contract might have provided for payment to be made to a bank account.
Dolphin Maritime & Aviation Services Ltd v. Sveriges Angartygs Assurans Forening [2009] EWHC 716 (Comm) (Christopher Clarke J 2/4/2009).
Jurisdiction in a claim against a foreign non-EU defendant: a contract governed by English law
In cases where the EC Regulation on jurisdiction and judgments (EC 44/2001 OJ L12/1 16/1/2001) does not apply, such as where the defendant is not domiciled in an EC member state, and the defendant (or its duly appointed agent) is not within the jurisdiction, it is necessary in most cases to obtain the court's permission to serve the proceedings on the defendant out of the jurisdiction. The grounds for this were contained in what used to be CPR rules 6.20 and 6.21. Since 1st October 2008, they will be found in CPR rules 6.36 and 6.37, together with Practice Direction B which supplements Section IV of Part 6 of the CPR. The grant of such permission is discretionary. CPR rule 6.37 (3) makes this clear when it says that, "The court will not give permission unless satisfied that England and Wales is the proper place in which to bring the claim".
One ground on which the court's permission may be sought is that which was formerly comprised in CPR 6.20(5) and is now Para. 3.1 (6) of Practice Direction B. It concerns a claim that "is made in respect of a contract" with an English connection. This includes a case under sub-para. (c) where the contract is governed by English law. It is worth noting that Para. 3.1(7) contains a separate ground, where the claim is in respect of a breach of contract committed within the jurisdiction.
The Court of Appeal has considered two points relating to the grant of permission for a claim to be brought. The first concerned whether England should be considered as the proper place for the claim to the brought. The second, which was one of the matters relevant to its deliberations on the first point, concerned the weight that should be given to the fact that the contract to which the claim related was governed by English law. The leading judgment was delivered by Lawrence Collins LJ, with whom Sir Mark Potter P and Wilson LJ agreed.
As to the first point, Lawrence Collins LJ summarised what Lord Goff had said in Spiliada Maritime Corp. v Cansulex Ltd [1987] AC 460. The claimant has the burden of persuading the court that England is clearly the appropriate forum for the trial of the action. This might be expressed as England being the appropriate forum or the natural forum or the forum in which the case may be suitably tried in the interests of the parties and for the ends of justice or that England is the place with which the action or dispute has its most real and substantial connection. Whichever of those formulas is used, the same factors must be taken into account. They include the availability of witnesses, the governing law, the residence or place of business of the parties and the ground of jurisdiction upon which the claimant relies.
On the second point, Lawrence Collins LJ said that it was clear that a choice of English law to govern a contract does not amount to a choice of England as the forum in which any dispute should be heard (see Macsteel Commercial Holdings (Pty) Ltd v. Thermasteel V (Canada) Inc. [1996] CLC 1403, at 1407 (Sir Thomas Bingham MR) and 1408 (Millett LJ)). The choice of the governing law of the contract is one, but not a predominant, factor that should be taken into account. Lawrence Collins LJ referred to what Lord Wilberforce had said in Amin Rasheed Shipping Corp. v. Kuwait Insurance Co. [1984] AC 50, at 72, that the factors included the nature of the dispute, the legal and practical issues involved, local knowledge, availability of witnesses and their evidence and expense. That approach had the support of Lord Goff in the Spiliada case, as well as the Court of Appeal in The Elli 2 [1985] 1 Lloyd's Rep 107. In the Spiliada case, Lord Goff had said that the governing law of the contract might be either of great importance or of little importance, depending upon the circumstances. In that regard, see also May LJ in The Elli 2 [1985] 1 Lloyd's Rep 107, at 118. His Lordship referred to what he had said in Sawyer v. Atari Interactive Inc. [2005] EWHC 2351 (Ch), [2006] ILPr 8, at [54], that in the absence of the formal defence, the court must identify the issues in dispute and consider the appropriateness of the competing forums.
Factors which may weigh in favour of an English forum would include the fact that an issue of public policy was involved (as in El du Pont de Nemours v. Agnew [1987] 2 Lloyd's Rep 585 and Mitsubishi Corp. v. Alafouzos [1988] 1 Lloyd's Rep 191) or the fact that another forum might insist on applying its own law and refuse to apply English law as the specifically chosen law of the contract (see Coast Lines Ltd v. Hudig and Veder Chartering NV [1971] 2 Lloyd's Rep 390, aff'd [1972] 2 QB 34). If there is an issue as to the construction of an English law contract then that might also weigh in favour of an English forum. The same would apply in reverse, so that a contract governed by an foreign law would be better interpreted by the courts of that foreign law than an English court (see Parker LJ in Seashell Shipping Corp. v Mutualid de Seguros del Instituto Nacional de Industria, The Magnum [1989] 1 Lloyd's Rep 47, at 51).
On the other hand, the use of the English language in the negotiations leading to the contract, whilst it may be relevant, is not a matter of great weight. This is because English is the common lingua franca in a great deal of international business.
In this case, the Court upheld the view that the judge had taken, which was that the matter was finely balanced but that England was the appropriate forum and that leave should be given for the proceedings to be heard in England. The judge had not given undue emphasis to the connection of the governing law of the contract as being English law, nor to the fact that the contract was written in English and that the negotiations leading up to it had been conducted in English. He had weighed up the various relevant factors, including those matters, and had come to a balanced conclusion. His reasoning had been along the following lines. The facts showed that neither the dispute nor either of the parties had a connection with England. Although the defendant and all of its witness were resident in Turkey, the dispute had no factual connection with Turkey. The claimant had offices in Switzerland and the Lebanon. The negotiations which led to the contract were conducted in English and largely took place in Switzerland. On the other hand, the English court was better placed to determine the contents and the meaning of the contract than a Turkish court, especially as evidence might have to be given as to what the contract was intended to cover, interpreted in the light of the negotiations which led to it. Whilst the claimant's witnesses usually spoke French, they would be able to give their evidence in English, which would be better than if they had to give evidence that would then be translated into Turkish before a Turkish court. Although the evidence of the defendant's witnesses, if given before an English court, would probably be given in Turkish and translated into English, their evidence would concern what they had said when they had spoken English in the negotiations. If issues arose as to whether the officers of the defendant had ostensible or usual authority to contract on its behalf, that would be determined by an English court, applying English principles as to the conflict of laws, in accordance with English law as the putative governing law of the contract they had purported to enter into on behalf of the defendant.
The balance of all of those factors pointed to England as being the appropriate forum.
Novus Aviation Ltd v. Onur Air Tasimacilik AS [2009] EWCA Civ 122 (27/2/2009).
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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