UK: Jurisdiction Clauses – Recent Decisions

Last Updated: 8 December 2009
Article by Sue Millar and Edward Davis

In four recent decisions, the English Court has considered, and provided some clarification on, the appropriate approach in relation to jurisdiction clauses in complex banking transactions, and the granting of anti-suit injunctions. We summarise these cases below.

(1) In Highland Crusader Offshore Partners LP and Others v Deutsche Bank AG and Another [2009] EWCA Civ 725 the Court of Appeal considered whether or not it was appropriate to grant an anti-suit injunction to restrain foreign proceedings where the parties had entered into a contract containing an English non-exclusive jurisdiction clause.

In October 2007, Deutsche Bank AG and Deutsche Bank Securities Inc (together "DB") entered into agreements with the Highland companies (collectively "Highland") on materially identical terms pursuant to which Highland agreed to buy from DB tranches of asset backed collateralised loan obligations with a face value of US$600 million. The agreements took the form of Global Master Repurchase Agreements (the "GMRAs").

Clause 17 of the GMRAs provided that they would be governed by and construed in accordance with the laws of England and that the parties irrevocably submitted to the jurisdiction of the Courts of England. However, that clause went on to say that "nothing in this paragraph shall limit the right of any party to take proceedings in the Courts of any other country of competent jurisdiction".

On 30 September 2008 DB made margin calls on Highland which Highland did not pay. DB subsequently served default and valuation notices claiming sums amounting to over US$70 million.

On 16 October 2008 Highland filed proceedings against DB in the District Court of Dallas County, Texas, alleging amongst other things that DB had induced Highland to agree to buy securities by fraudulent or negligent misrepresentations. On 7 November 2008 DB issued proceedings against Highland in the Commercial Court in England for the amounts stated in the default valuation notices. On 27 February 2009 DB issued an application in the Commercial Court for an anti-suit injunction (i.e. an order restraining Highland from pursuing the proceedings in the US). On 3 April 2009 the Commercial Court granted DB such an order. Highland appealed.

The Court of Appeal helpfully set out the key principles in respect of anti-suit injunctions, including the following:

1 Under English law the Court may restrain a defendant over whom it has personal jurisdiction from instituting or continuing proceedings in a foreign court when it is necessary and in the interests of justice to do so.

2 The parties seeking an anti-suit injunction must generally show that proceeding before the foreign court is or would be vexatious or oppressive.

3 In order to establish that proceeding in a foreign court is or would be vexatious or oppressive on grounds of forum non conveniens, it is generally necessary to show that England is clearly the more appropriate forum and that justice requires that the claimant in the foreign court should be restrained.

4 An anti-suit injunction requires caution because it involves interference with the process of a foreign court. The stronger the connection of the foreign court with the parties and the subject matter of the dispute, the stronger the argument against intervention.

5 The prosecution of parallel proceedings in different jurisdictions is undesirable but not necessarily vexatious or oppressive.

6 An application to stay, on forum non conveniens grounds, an action brought in England pursuant to an English non exclusive jurisdiction clause will ordinarily fail, but it does not follow that an alternative forum is necessarily inappropriate or inferior.

The Court of Appeal then considered the cases where applications have been made to the English Court for an anti-suit injunction on the basis of a non-exclusive jurisdiction clause. It concluded that the starting point for considering the effect of a non-exclusive jurisdiction clause must be the wording of the clause itself. A party cannot be said to be in breach of a contract containing a non-exclusive jurisdiction clause merely by pursuing proceedings in an alternative jurisdiction. By contracting for non-exclusive jurisdiction, the parties have anticipated and accepted the possibility of parallel proceedings and so only foreign proceedings which are vexatious and oppressive for some reason independent of the non-exclusive jurisdiction clause will be restrained by injunction. It was not right to start with a general presumption that parallel proceedings in a non-selected forum were to be regarded as vexatious or oppressive. Duplication of litigation through parallel proceedings is undesirable, but it is an inherent risk where the parties use a non-exclusive jurisdiction clause.

Accordingly, the Commercial Court Judge had misdirected himself as to the correct principles and the Court of Appeal had to make its own decision whether an anti-suit injunction ought to be granted. The Court of Appeal concluded that it should not be. The last sentence of clause 17 of the GMRA could not be relied on of itself to suggest that the prosecution of parallel proceedings in another jurisdiction would be oppressive or vexatious. Little significance should be attached to the fact that the Texas action was started prior to the English action because the outcome should not be affected by what was little more than an accident of timing and parties should not be encouraged to rush to "fire the first shot". Far more important was what had happened in the foreign proceedings. The Texas Judge had decided to accept Highland's suit, and there was no suggestion that that decision violated principles of international law. Accordingly, his decision whether to accept jurisdiction should be respected. Moreover, although the contract was governed by English law and had an English non-exclusive jurisdiction clause, there was otherwise relatively little else to connect the dispute with England.

Practical implications

If banking documents have clauses submitting disputes to the non-exclusive jurisdiction of the English Courts, it is likely that the parties will be presumed to have contemplated (and accepted) the possibility of parallel proceedings being started in another jurisdiction, even where proceedings have been started in England first. In order to avoid the possibility of parallel proceedings, the contractual documentation would need to be drafted in such a way as to prevent parallel proceedings between the same parties, or should include exclusive (rather than non-exclusive) jurisdiction clauses. That said, even where a document contains an exclusive English jurisdiction clause, that is unlikely to prevent proceedings being started against a third party in a foreign jurisdiction, even where the subject matter of those proceedings is the same as English proceedings – see the Morgan Stanley case below.

(2) In Morgan Stanley & Co International Plc v China Haisheng Juice Holdings Co Ltd [2009] EWHC 2409 (Comm), the Court considered whether an exclusive jurisdiction clause in a currency swap ISDA Master Agreement, in favour of the English Courts, extended to claims against an entity that was not a party to the agreement.

China Haisheng Juice Holdings Co Ltd ("CH") (a Cayman Islands registered company, listed on the Hong Kong stock exchange but operationally based in China) had an exchange rate exposure. Morgan Stanley Asia Limited ("MSAL"), a Hong Kong company in the Morgan Stanley group, discussed with CH how that risk might be hedged. To this end, in July 2008, Morgan Stanley & Co International Plc ("MSIP") (an English company) and CH entered into a currency swap transaction, and in this regard executed an ISDA Master Agreement, as amended by a Schedule and a Credit Support Annex. Pursuant to these documents CH was liable to pay MSIP collateral in respect of any transaction where the exposure exceeded US$10 million. MSAL was not a party to the ISDA Master Agreement.

The Master Agreement provided that it would be governed by and construed in accordance with the laws of England and Wales, and Section 13(b) provided that "with respect to any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement ("Proceedings"), each Party (1) irrevocably submits to the exclusive jurisdiction of the English courts...". It also provided that "an Affiliate may enforce the rights expressly granted to an Affiliate under this Agreement, if any, subject to and in accordance with this clause, Section 13(a)and (b) of this Agreement and the provisions of the Contracts (Rights of Third Parties) Act 1990."

In September 2008, the US$/Renminbi exchange rate moved against CH and, according to MSIP, CH became liable to provide collateral. CH did not do so. The transactions were subsequently restructured but on 30 March 2009 MSIP again notified CH that it was required to provide collateral, and again CH did not do so.

CH commenced proceedings in China against MSIP and MSAL on 2 April 2009, claiming rescission of the currency swap transactions and compensation for the losses suffered by CH. CH alleged that the swaps, which MSAL had said were bespoke and designed for its benefit, were unsuited to CH and its business.

On 13 May 2009, MSIP issued proceedings in the English Court seeking approximately US$26 million plus interest due under the Master Agreement. MSIP also sought a declaration and anti-suit injunction against CH.

MSIP argued that an anti-suit injunction should be granted because under the terms of the exclusive jurisdiction clause in the Master Agreement, CH had agreed to bring its claims against both MSIP and MSAL in England. An anti-suit injunction would ensure that all claims and counterclaims would take place in one jurisdiction (namely England). In the alternative, if on the true construction of the jurisdiction clause, CH had only agreed to bring its claims against MSIP (and not MSAL) in England, MSIP sought an anti-suit injunction in relation to CH's proceedings against MSIP in China.

CH accepted that it could not prevent MSIP from pursuing its claim for amounts due under the Master Agreement in the English Court. However, CH argued that the exclusive jurisdiction clause only extended to the claims it had brought against MSIP and did not extend to its claims against MSAL. CH further maintained that refusing to grant the anti-suit injunction would afford a better prospect of all claims being pursued in one place, namely China.

The Court granted an anti-suit injunction to restrain CH's claim against MSIP in China, but declined to grant an anti suit injunction to restrain CH's claim against MSAL in China. The Judge held that the exclusive jurisdiction clause in the Master Agreement applied only to claims between the parties to that agreement.

The Judge accepted that, in construing the jurisdiction clause, he should be guided by the approach taken by Lord Collins in UBS AG v Nordbank AG – i.e. that jurisdiction clauses should be construed in the light of the transaction as a whole. However, in his view, the key question was whether the exclusive jurisdiction clause would reasonably be understood to mean that MSIP and CH promised each other that the claims arising out of or in connection with the Master Agreement would be brought in England regardless of whether the claims were against a non-party to the Master Agreement. The words "any suit, action or proceedings relating to any dispute arising out of or in connection with this Agreement" had to be construed in the context of the agreement as whole and in particular the whole of clause 13. In particular, clause 13(b)(ii) expressly dealt with third party rights. It enabled an affiliate of MSIP to enforce a right expressly given to it under the Master Agreement but did not deal with claims against an affiliate. There was nothing absurd about the result of that clause, which was that claims by affiliates (in respect of rights granted to them) had to be brought in the agreed jurisdiction, but claims against affiliates could be brought in any jurisdiction.

Furthermore, there was "considerable imbalance" between a party and a non-party as regards jurisdictional issues. This suggested that the parties, acting as rational businessmen, were not in fact likely to have intended that any dispute with a third party should be decided by the same Court that decided disputes between the parties to the agreement.

Therefore, taking into account the whole of clause 13 and the imbalance or difference between the position of the parties inter se, and the position of the parties and non-parties inter se, the Judge did not consider that clause 13 could reasonably be understood to mean that MSIP and CH had agreed that claims arising out of or in connection with the Master Agreement were to be submitted to the English Court regardless of whether the claims were against the other party or a non-party.

Notwithstanding CH's arguments against the grant of an anti-suit injunction to restrain CH's claim against MSIP in China, in particular that the centre of gravity of the dispute between CH, MSIP and MSAL was China, the Judge's view was that there was no authority to suggest that an anti-suit injunction could properly be granted to restrain a party who had sued in the agreed exclusive jurisdiction. Moreover, even if there were factors favouring Chinese jurisdiction, it was doubtful that a careful weighing of forum non conveniens factors would constitute a strong reason for not enforcing an exclusive jurisdiction clause.

Practical implications

The consequence of the Judge's decision was that there would be two sets of proceedings on foot, namely MSIP's claim against CH in the English Court for sums due under the Master Agreement and CH's claim against MSAL in the Chinese Court for damages.

The case demonstrates that where the parties to documents such as ISDA Master Agreements (and related Confirmations and Annexes) have freely negotiated a jurisdiction clause, a party will generally not be able to persuade the Court to weigh up the merits of the dispute being pursued in the agreed forum or another jurisdiction. This can, however, mean that the Court's hands are tied by the exclusive jurisdiction clause, such that parallel proceedings on the same subject matter (albeit involving different or additional parties), in different jurisdictions, cannot be avoided.

(3) In Deutsche Bank AG v Sebastian Holdings Inc [2009] All ER (D) 133 (Aug), the Court considered the question of appropriate jurisdiction in light of different choice of (non-exclusive) jurisdiction clauses in multiple agreements which, together, governed a prime brokerage arrangement.

The context of this dispute was that Deutsche Bank AG ("Deutsche") acted as prime broker for Sebastian Holdings Inc ("SHI"). A series of contractual arrangements were entered into by the parties to govern their relationship, including an ISDA Master Agreement containing an English non-exclusive jurisdiction clause, and an FX Prime Brokerage Agreement containing a New York non-exclusive jurisdiction clause. The issue before the Court was whether Deutsche was entitled to pursue proceedings in London, in light of the relevant jurisdiction clauses, and in light of the fact that SHI had already issued proceedings in New York.

In contesting the jurisdiction of the English Court, SHI sought to rely on the apparent inconsistencies between the jurisdiction clauses in the multiple agreements governing the relationship between the parties, and in particular on the New York non-exclusive jurisdiction clause in the FX Prime Brokerage Agreement. In the recent decision of the Court of Appeal in UBS AG v HSH Nordbank AG similar questions relating to the interpretation of jurisdiction clauses were considered. As explained above, in the UBS case, the Court held that where jurisdiction clauses were inconsistent it was necessary to identify the contracts forming the "commercial centre of the transaction" in order to identify the prevailing choice of jurisdiction. SHI argued that the FX Prime Brokerage Agreement was at the commercial centre of this transaction.

In the Deutsche Bank case, however, the jurisdiction clauses were consecutive, so rather than looking for the commercial centre of the transaction, the Court took the ISDA Master Agreement as the initially agreed position and considered whether this position had been altered by the clauses which were subsequently agreed. It held that the initially agreed position had not been altered. There was no inconsistency between the jurisdiction clauses, essentially because the clauses in question were non-exclusive, thereby permitting either party to bring proceedings in any jurisdiction, including parallel proceedings in multiple jurisdictions. In many ways, the conclusion was merely the natural application of the decision of the Court of Appeal in Royal Bank of Canada v Co-operative Centrale Raiffeisen-Boerenleenbank BA [2004] EWCA Civ. 07, in which the Court held that the correct interpretation of a non-exclusive jurisdiction clause is that "the parties must have had in contemplation the possibility of virtually simultaneous trials with all the additional burdens which the judge described since such is an obvious possible consequence". This was of course the same point made by the Judge in the Highland case referred to above.

Practical implications

The Judge in this case did not look for the commercial centre of the transaction (because he found that the jurisdiction clauses in the different documents were not inconsistent). However, this decision, like in UBS, underlines the extent to which different jurisdiction clauses, in the context of a matrix of contractual agreements, can create scope for arguments and delay by counterparties, with the objective of seeking a more advantageous forum in which to resolve a dispute. A bank should therefore ensure clarity and consistency in its standard documentation before that documentation is put to use.

The decision again highlights the willingness of the Courts, like in Morgan Stanley, to interpret jurisdiction clauses (and other contractual arrangements) literally, notwithstanding potentially inefficient consequences (i.e. parallel proceedings, with the resultant cost and risk of inconsistent decisions).

Finally, the case, like UBS, Highland and Morgan Stanley, illustrates a trend that is likely to continue in the post credit crunch landscape. Banks are likely to continue to seek to contest legal disputes in London, in light of a number of recent bank friendly decisions (in particular JPMorgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 2848 (Comm) and IFE Fund SA v Goldman Sachs International [2007] EWCAC iv 811), in which the English Courts have shown a reluctance to impose duties of care on banks.

(4) In Calyon v Wytwornia Sprzetu Komunikacynego PZL Zwidnik SA ([2009] EWHC 1914 (Comm)) the English Court had to determine the validity of an English exclusive jurisdiction clause in a 1992 ISDA Master Agreement (Multicurrency Cross Border) (the "ISDA Master Agreement"), in circumstances where the ISDA Master Agreement had not been negotiated or signed by the parties but was incorporated by the terms of a Confirmation. The Courts upheld the English jurisdiction clause, even though one party believed the Confirmation to be governed by a different Master Agreement, which was subject to Polish law.

The Claimant ("Calyon") entered into a number of derivative contracts with the Defendant ("PZL"), in order to hedge PZL's exchange rate risk. Where the contracts were simple put and call options, Calyon's Warsaw branch kept the trades on its books and was the counterparty to the confirmations. Where the products were more structured, they were kept on the books of Calyon's London branch and the London branch was the counterparty to the trades. PZL always dealt with the same employee at Calyon's Warsaw office, regardless of which type of trade was being negotiated, although PZL was aware that the pricing for the structured products was done by Calyon's London office.

At some point before 17 April 2008, Calyon sent PZL a Master Agreement (the "Polish Master Agreement") between Calyon's Warsaw branch and PZL which governed put and call options, under which all disputes were to be settled by the Court of Arbitration at the Association of Polish Banks. On 17 April 2008, Calyon and PZL entered into a Target Redemption Forward Transaction on the telephone. As this was a structured product, Calyon's London branch sent PZL an ISDA Confirmation which was said to be subject to the terms of the ISDA Master Agreement. On the same day, PZL signed and returned the Polish Master Agreement to Calyon's Warsaw branch. PZL never signed an ISDA Master Agreement with either of Calyon's branches.

The parties proceeded to conclude a number of simple trades (for which PZL was sent Confirmations from Calyon's Warsaw branch governed by the Polish Master Agreement) and a number of structured trades (for which PZL was sent ISDA Confirmations from Calyon's London branch).

Subsequently, PZL disputed the terms of a structured trade (governed by an ISDA confirmation which PZL also did not sign). Calyon commenced proceedings in London and subsequently PZL commenced proceedings in Poland. PZL also brought an application for a declaration from the English Courts that they did not have jurisdiction to hear Calyon's claim. PZL believed that all its trades with Calyon were governed by the Polish Master Agreement (rather than the ISDA Master Agreement) and were therefore not subject to the jurisdiction of the English Courts. PZL also argued that the disputed transaction (a strip of ratio forwards) was simply a series of options and therefore fell within the definition of put and call options, which the Polish Master Agreement governed.

Under Article 23(1) of the Brussels Regulation, in order for a choice of exclusive jurisdiction to have effect, such an agreement must be either (a) in writing or evidenced in writing; or, (b) in a form which accords with practices which the parties have established between themselves; or (c) in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned".

The Judge pointed out that the formalities listed at (a) to (c) are imposed to ensure that the agreement between the parties had truly been established. The Judge held that Calyon had a much better argument than PZL to establish that the disputed trade was subject to the jurisdiction of the English Courts, rather than the Polish Courts, and that the jurisdiction clause had effect under Article 23(1)(b) of the Brussels Regulation. He based his judgment on a number of facts, including:

  • PZL had signed all the previous ISDA Confirmations for structured trades and returned them to Calyon's London branch. It was clear on the face of the Confirmations that Calyon's London branch was the counterparty, that the transactions were subject to the ISDA Master Agreement and that they were subject to English law.
  • Calyon had explained to one of PZL's employees the difference between the structured and simple trades, both in terms of counterparty and the governing agreement (i.e. the ISDA Master Agreement).
  • There had been a discussion between Calyon and PZL about Calyon's intention to send PZL a draft ISDA Master Agreement for their legal department's comments.
  • Whilst PZL immediately challenged the terms of the disputed transaction, it did not challenge the applicability of the ISDA Master Agreement and English governing law until almost four months later. The Court concluded that PZL had fair and reasonable notice that the disputed transaction would be entered into on the ISDA Master Agreement terms and therefore the English Courts had

jurisdiction to hear the dispute.

Practical implications

Financial institutions will welcome this decision, as it upholds the validity of the jurisdiction provisions that are incorporated into ISDA Confirmations by reference to the ISDA Master Agreement. However, this case is also a reminder of the importance of promptly obtaining signed Confirmations from customers

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.

This article was originally written for Stephenson Harwood's quarterly publication, Finance Litigation Legal Eye. If you would like to receive this publication, please contact Stephenson Harwood (link to Stephenson Harwood website here www.shlegal.com).

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