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ECJ rules on scope of Article 22(2) Brussels Regulation
Practical Law UK Legal Update 0-506-1309 (Approx. 7 pages)
ECJ rules on scope of Article 22(2) Brussels Regulation
by PLC Dispute Resolution
| Published on 18 May 2011 • ExpandEngland, European Union, Germany...Wales |
In Berliner Verkehrsbetriebe (BVG), Anstalt des offentlichen Rechts v JPMorgan Chase Bank NA, Frankfurt Branch (Case C-144/10), the ECJ considered the scope of Article 22(2) of the Brussels Regulation in the context of whether it applied to proceedings in which a company raised an objection regarding the validity of the decisions of its organs. (Free access)
Speedread
The Court of Justice of the EU (ECJ) has made a landmark ruling on the scope of Article 22(2) of the Brussels Regulation. In proceedings which have as their object the validity of decisions of the organs of a company, Article 22(2) confers exclusive jurisdiction on the member state in which the company has its seat. That exclusive jurisdiction "trumps" any contractually agreed jurisdiction clause. The ECJ has held that Article 22(2) must be interpreted narrowly and does not apply to proceedings where a company claims that a contract cannot be relied on against it because a decision of its organs which led to the conclusion of the contract was invalid.
The ECJ's ruling follows a reference of certain questions by the Higher Regional Court of Berlin, which had stayed proceedings brought by Berliner Verkehrsbetriebe (BVG) against JPMorgan Chase Bank NA, Frankfurt Branch, on the basis that there were already parallel proceedings before the English courts, brought by JPMorgan. Both sets of proceedings concerned a swap contract between the parties, which contained an English jurisdiction clause. BVG argued that the contract was void on the basis, in particular, that the decisions of its organs that led to the conclusion of the contract were invalid. As such, the German courts had jurisdiction under Article 22(2).
The ECJ ruled that for Article 22(2) to be engaged, the validity of the decision to conclude the contract must constitute the subject matter of the proceedings, as opposed to being merely ancillary. In a contractual dispute, questions relating to the contract's validity form the subject matter of the dispute; any question concerning the validity of the decision to conclude the contract must be considered ancillary. Article 22(2) did not apply in such cases.
The decision effectively eliminates the ability of parties to circumvent the effect of a jurisdiction agreement they have concluded by raising an argument that their decision to enter into the contract in question was invalid.
(Berliner Verkehrsbetriebe (BVG), Anstalt des öffentlichen Rechts v JPMorgan Chase Bank NA, Frankfurt Branch (Case C-144/10) [2011] EUECJ (12 May 2011).)
Background
Article 22: exclusive jurisdiction
Article 22 of the Brussels Regulation provides an exception to the basic rule that defendants should be sued in the courts of their domicile. It sets out certain situations in which the courts of member states have exclusive jurisdiction regardless of domicile, including the following:
"2. In proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or association has its seat.
4. In proceedings concerned with the registration or validity of patents, trade marks, designs, or other similar rights required to be deposited or registered, the courts of the Member State in which the deposit or registration has been applied for, has taken its place or is under the terms of a Community instrument or an international convention deemed to have taken place."
In Berliner Verkehrsbetriebe (BVG) and another v JPMorgan Chase Bank NA and another [2010] EWCA Civ 390, the Court of Appeal held that the court should make an "overall judgment" of the issues in a case to determine whether the proceedings were "principally concerned" with the matters falling within Article 22, particularly where the case involved a number of issues. For further discussion on this case, see Legal update, Article 22(2) requires "overall judgment" on the nature of the proceedings.
Article 23: jurisdiction agreements
Article 23 provides that choice of jurisdiction agreements will have the effect of conferring exclusive jurisdiction on the chosen courts (unless the parties have agreed otherwise). However, Article 23(5) provides that:
"Agreements ... conferring jurisdiction shall have no legal force ... if the courts whose jurisdiction they purport to exclude have exclusive jurisdiction by virtue of Article 22."
The Jenard Report
The Jenard Report on the Brussels Convention (the predecessor to the Brussels Regulation) (OJ 1979 C 59/1) is frequently referred to as an aid to construction. In connection with Article 22, it explains that:
"The matters referred to in this Article will normally be the subject of exclusive jurisdiction only if they constitute the principal subject matter of the proceedings of which the court is to be seised."
The Jenard Report goes on to explain that the policy behind Article 22(2) is:
"to avoid conflicting judgments being given as regards the existence of a company or association or as regards the validity of the decisions of its organs. For this reason, it is obviously preferable that all proceedings should take place in the courts of the State in which the company or association has its seat."
For further information on the jurisdiction provisions in the Brussels Regulation, see Practice note, Jurisdiction: an overview.
Facts
JP Morgan Chase Bank (JPM) had entered into a swap contract on ISDA terms with Berliner Verkehrsbetriebe (BVG), a public law institution established under German law that is responsible for the public transport system in Berlin. The contract contained a clause conferring jurisdiction on the English courts.
The English proceedings
JPM commenced proceedings against BVG in the English courts seeking payment of sums allegedly due under the contract. BVG argued, among other things, that the swap was invalid because it was ultra vires BVG and that the decisions of its organs that had led to the conclusion of the contract were null and void. It also applied to the English court to decline jurisdiction in favour of the German courts on the basis of Article 22(2) of the Brussels Regulation. The Commercial Court held that the English court had jurisdiction and that decision was upheld on appeal (see Legal update, Article 22(2) requires "overall judgment" on the nature of the proceedings). BVG has applied for permission to appeal to the Supreme Court, which has also referred questions relating to the scope of Article 22(2) to the ECJ (see OJ 2011 C 120/7). That reference remains pending.
The German proceedings
In the meantime, BVG had commenced proceedings in the German courts, seeking a declaration that the swap contract was void for ultra vires. It argued that the German courts had jurisdiction under Article 22(2) because the dispute was concerned with the validity of decisions made by the organs of a legal person whose seat was in Germany. The German court stayed its proceedings pending the decision of the English court, as the court first seised, as to whether it had jurisdiction to hear JPM's claims. BVG appealed and the Kammergericht Berlin (Higher Regional Court of Berlin) took the same view as the lower court and stayed the German proceedings in light of the parallel English proceedings. It referred three questions to the ECJ for a preliminary ruling under Article 267 of the Treaty on the Functioning of the European Union:
- Does the scope of Article 22(2) of the Brussels Regulation also extend to proceedings in which a company or legal person objects, with regard to a claim made against it stemming from a legal transaction, that decisions of its organs which led to the conclusion of the legal transaction are ineffective as a result of the infringement of its statutes?
- If the first question is answered in the affirmative, is Article 22(2) of the Brussels Regulation also applicable to legal persons governed by public law in so far as the effectiveness of the decisions of its organs is to be reviewed by the civil courts?
- If the second question is answered in the affirmative, is the court of the member state last seised in legal proceedings required to stay the proceedings under Article 27 of the Brussels Regulation even if it is claimed that, because a decision of the organs of one of the parties is ineffective under its statutes, an agreement conferring jurisdiction is likewise ineffective?
The ECJ only had to consider the first question referred.
Decision
The ECJ ruled that:
"The [Brussels Regulation] must be interpreted as not applying to proceedings in which a company pleads that a contract cannot be relied upon against it because a decision of its organs which led to the conclusion of the contract is supposedly invalid on account of infringements of its statutes."
The court noted at the outset that the reference had been made in the context of proceedings between BVG and JPMorgan, where BVG had brought an action asking the German courts to declare void the same contract which JPMorgan was seeking to enforce in the English court proceedings.
In reaching its decision, the ECJ analysed the rationale behind Article 22(2) in the context of the purpose of the Brussels Regulation and applied established principles of interpretation.
Although there was a divergence between the various language versions of Article 22(2), it was well-established in case law that different language versions of the text of EU laws must be given a uniform interpretation by reference to the purpose and general scheme of the rules of which the relevant provision forms part. Therefore, Article 22(2) had to be interpreted taking into account matters other than its wording, in particular the purpose and general scheme of the Brussels Regulation.
The general rule in the Brussels Regulation is that the courts of the member state in which the defendant is domiciled are to have jurisdiction (Article 2). It is only in the special cases exhaustively listed in the Regulation that the defendant may or must be sued in the courts of another member state. The ECJ has adopted a strict interpretation in respect of Article 22, having held, in relation to Article 16 of the Brussels Convention (which is essentially identical to Article 22 of the Brussels Regulation), that as it constitutes an exception to the general rule on jurisdiction, it must not be given a broader interpretation than required by its objective (Hassett and Doherty (Case C-372/07) [2008] EUECJ; see Legal update, ECJ interprets Article 22 of the Brussels Regulation).
A broad application of Article 22(2) would deny parties to a contract autonomy to choose another forum. Its application to any proceedings where a question concerning the validity of a decision of a company's organs was raised would contradict one of the general aims of the Brussels Regulation, which was to seek to attain predictable rules of jurisdiction (Recital 11 in the Regulation's preamble) and also the principle of legal certainty. In practice, it would mean that all legal actions against a company would almost always be within the jurisdiction of the courts of the member state where the company had its seat, merely by the company pleading that invalid decisions of its organs led to the conclusion of the contract. The objective of predictability would be undermined if jurisdiction depended on whether or not a company raised that issue.
The rationale behind Article 22(2) was that the courts of the member state where the company had its seat would be best placed to decide a dispute relating exclusively, or even principally, to the validity of a decision of that company's organs. However, in a contractual dispute, questions relating to the validity, interpretation or enforceability of a contract form the subject matter of the dispute. Although questions as to the validity of the decision to conclude the contract might form part of the analysis, they must be considered ancillary. As such, there was not necessarily a close link with the courts in the state of the party pleading the invalidity of decisions of its organs such as to justify conferring exclusive jurisdiction on those courts.
The ECJ distinguished the position from that in the case of GAT (Case C-4/03) [2006] ECR I-6509, where it had been held that Article 16(4) of the Brussels Convention (essentially identical to Article 22(4) of the Brussels Regulation) applied to any proceedings in which the validity of a patent was put in issue, whether as a claim or defence, conferring exclusive jurisdiction on the courts of state in which the patent was registered. The validity of the patent was an essential issue and therefore the courts of the member state where it was registered were best placed to adjudicate on the issue. The same did not apply in a case where a company party to a contractual dispute alleged that the decision of its organs leading to the conclusion of the contract was invalid.
Comment
This is a landmark ruling which has significantly restricted the scope of Article 22(2). Given the primacy of Article 22 over other jurisdictional rules in the Brussels Regulation, the decision is consistent with the narrow interpretation required for such a powerful "trumping" provision.
The decision will be welcomed by financial institutions and other organisations involved in cases where issues have been raised as to the legal capacity of local authorities to enter the transaction. Such cases will now be able to proceed in the courts of the jurisdiction that was contractually agreed by the parties.
Similarly, the prospect of corporate entities seeking to circumvent the effect of jurisdiction agreements they have concluded by raising an argument that the company's decision to enter into the contract in question was invalid, will effectively be eliminated.
It remains to be seen what effect the ECJ's decision will have on the English proceedings between these two parties. However, it seems likely that, although the Supreme Court's reference to the ECJ in the English proceedings remains pending, JPMorgan's claim against BVG in the Commercial Court will be set to proceed, as will several other cases involving similar jurisdictional issues.