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Partner Abdulali Jiwaji and Associate Nils De Wolff examine the Court of Appeal’s decision in Deutsche Bank AG v Comune di Savona, and the guidance it provides, particularly in the context of the International Swaps and Derivatives Association.

Abdul and Nils’ article was published in Compliance Monitor, 5 November 2018, and can be found here.

The Court of Appeal has recently overturned a Commercial Court’s decision in respect of a jurisdiction challenge relating to interest rate swaps entered into under an ISDA Master Agreement: Deutsche Bank AG v Comune di Savona [2018] EWCA Civ 1740.

The decision follows a line of recent first instance decisions and means more certainty for the derivatives market. It also contains some important observations on the effect of entire agreement clauses and the use of expert evidence of foreign law.

Background

In March 2007, the parties Deutsche Bank AG (the “Bank“) and an Italian local authority, Comune di Savona (“Savone“), entered into a written agreement (the “Convention“) pursuant to which the Bank agreed to provide, for no consideration, certain advice and assistance in relation to Savona’s existing derivative commitments and in relation to the restructuring of its present debts. The Convention contained an Italian law and exclusive jurisdiction clause (the “Italian Jurisdiction Clause“).

Following entry into the Convention, the parties executed two interest rate swap transactions in June 2007 (the “Swaps“), which were subject to the terms of an ISDA Master Agreement (the “Master Agreement“).

The Master Agreement, as amended by the Schedule, included (amongst others) a standard English law and exclusive jurisdiction clause (the “English Jurisdiction Clause“), an entire agreement clause and a non-reliance clause providing that Savona was not relying on any advice from the Bank and acting on its own account in entering into the Swaps.

The dispute 

The Bank became aware of a review of the Swaps by the Court of Auditors in April 2016, which was critical of them and the basis on which they had been recommended to Savona. Appearing to anticipate possible proceedings being brought in Italy, the Bank sought 12 negative declarations in the English Commercial Court, which, with one exception, tracked the wording of the Master Agreement. The declarations sought (amongst others) that:

1. Savona had made its own independent decision to enter into the Swaps and did not rely on any advice or recommendation from the Bank, and

2. the Bank did not act as a fiduciary for Savona and complied with all its obligations in connection with the Swaps.

Savona challenged the English Court’s jurisdiction over a number of the declarations pursuant to Article 25 of the Recast Brussels Regulation 1215/2012 (the “Brussels Recast“)[1], including as regards the nature and extent of any advice provided by the Bank in relation to Savona’s entry into the Swaps.

First instance decision

HHJ Waksman QC held that the English Court did not have jurisdiction over the contested declarations, on the basis that they fell within the Italian Jurisdiction Clause.

Having considered lengthy expert evidence on Italian law, the Judge looked at the particular contractual context. He found that the Convention concerned the Bank’s role as advisor and felt, conversely, that the Master Agreement related simply to the Bank’s role as counterparty to the Swaps. Since the “dispute” under Article 25 of the Brussels Recast, to which the Bank’s declarations related, concerned the Bank’s role as advisor, the Judge held that it fell much more naturally within the Italian Jurisdiction Clause.

Court of Appeal’s decision

The Court of Appeal (the “CA“) overturned the Commercial Court’s decision and held that the declarations fell within the English Jurisdiction Clause.

The CA focussed on the “particular legal relationship” to which the “dispute” (for the purpose of Article 25 of the Brussels Recast) related. It set out the material terms of the Convention and Swaps and found, on the most natural reading, that the Convention clearly contemplated that any subsequent contract proposed by the Bank and entered into by Savona would be the subject of a separate contract.

Longmore LJ noted that there existed a clear demarcation between the parties’ two relationships – (i) the generic relationship, which was set out in the Convention and (ii) the specific interest rate swap relationship set out in the Swaps subject to the terms of the Master Agreement. Accordingly, any disputes relating to the swap transactions had to be determined by the English courts.

The question that then fell to be determined was whether the particular contested declarations raised disputes which related to the swap transactions or to the generic wider relationship. Having analysed the declarations, the CA found that each raised a dispute which related to the swap contracts and so the English court had jurisdiction to entertain them.

Case comment

Competing jurisdiction clauses have been considered in a number of recent first instance decisions.[2] The CA’s judgment in Deutsche v Savona gives a clear indication of the preferred approach to the interpretation of competing jurisdiction clauses, particularly in the ISDA context. The question will be one of construction and the outcome will depend on the “particular legal relationship“, as envisaged by Article 25 of the Brussels Recast, over which a “dispute” has arisen.

The decision also contains important observations on the effect of entire agreement clauses, which the Court found to be a “strong confirmation” that the swap contracts were separate contracts. The CA held that, in the circumstances, the entire agreement clause in the swap contracts did not exist just for the purpose of excluding collateral warranties (as identified by the lower court) but also for the purpose of expressing the parties’ intention that the swap contracts were indeed self-contained.

Finally, the CA noted its “considerable unease about the proliferation of expert evidence of foreign law“. It observed that, in a case such as this, where the only issue relates to the construction of a foreign jurisdiction clause, the only relevance of evidence of foreign law is to “inform the court of any difference of law in relation to the principles of construction“. Having armed itself with such information, the Court’s job is then to look at both jurisdiction clauses and decide whether the claim falls within the English jurisdiction clause.

Brexit and English jurisdiction clauses

As matters stand, where parties have specified the courts of an EU Member State, the current rules (largely set out in the Brussels Recast) dictate that the EU courts will defer to the specified court – and more particularly, in the case of competing jurisdiction clauses, the choice of jurisdiction applicable to the “particular legal relationship” in connection with which the “dispute” has arisen.

After Brexit, the UK will cease to be a Member State and so the Brussels Recast will not protect jurisdiction agreements in favour of English courts before the courts of Member States[3]. However, this does not mean that English jurisdiction agreements will not be upheld. The Government has already indicated its intention to accede to the Hague Convention on Choice of Court Agreements in its own right (which it can do without the consent of the remaining 27 EU member states). This sets out jurisdiction rules where there is an exclusive choice of court agreement.[4] There have also been indications that the Government may seek to reach a separate bilateral agreement closely reflecting the position under the Brussels Recast, although this would likely require the UK to “have regard” to the case law of the Court of Justice of the European Union (CJEU). As a minimum, the UK would likely negotiate membership of the 2007 Lugano Convention (which is almost identical to the Brussels Recast, although it doesn’t safeguard against the so-called “Italian torpedo”[5]).

Ultimately, the modalities of any post-Brexit arrangements may vary slightly, and Member States may not defer to the English courts in quite the same way as now. However, whatever arrangement the UK ends up with, the EU courts will, in all likelihood, continue to respect exclusive choice of jurisdiction clauses.

[1] Article 25 gives jurisdiction to the courts of the Member State chosen by the parties and provides as follows: “if the parties, regardless of their domicile, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction…”

[2] Dexia Crediop SpA v Provincia di Brescia [2016] EWHC 3261 (Comm), BNP Paribas SA v Trattamento Rifiuti Metropolitani SpA [2018] EWHC 1670 (Comm) and Deutsche Bank AG v Comune di Savona [2017] EWHC 1013 (Comm).

[3] The current form of the Withdrawal Agreement allows the Brussels Recast to continue to apply to legal proceedings commenced in the UK before 1 January 2021.

[4] See Articles 5 and 6.

[5] This is where priority is given to the court “first seized”. Any other Member State court would have to stay its proceedings until the jurisdiction of the first court is established, even if the first action was brought in breach of an exclusive jurisdiction clause, which could give rise to lengthy delays.