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Important High Court Ruling guides banks on the jurisdiction limits of the English courts to decide derivatives issues

Competing Jurisdiction Clauses and the ISDA Master Agreement

Giving judgement in Deutsche Bank v Comune Di Savona [2017] EWHC, HHJ Waksman QC has provided useful guidance as to how the High Court will approach the issue of whether it has jurisdiction in circumstances where there are two competing jurisdiction clauses in related agreements. The decision is particularly relevant to the scope of the standard jurisdiction clause included in ISDA Master Agreements.

The Italian municipality of Savona (Savona) successfully applied to strike out part of an application made against it on the grounds that the High Court did not have jurisdiction to decide Deutsche Bank’s (DB) previous application for a number of declarations of non-liability based on representations given by Savona in an ISDA Master Agreement entered into by the parties. HHJ Waksman ruled that the issues raised by the declarations sought by DB were more closely connected with a related agreement between the parties, which pre-dated the ISDA Master Agreement, that gave exclusive jurisdiction to the Italian courts. In reaching the decision he stressed that the Court needs to look at the wider context of the dispute between the parties, the essential nature of the dispute, and importantly the scope of any prior contract and jurisdiction clause.

Facts

This case is one of a string of recent cases brought by Italian municipalities who entered into swap or other derivative transactions in the lead up to the financial crisis. In March 2007 the parties entered a contract whereby DB would provide financial advice to Savona regarding its debt, including recommending any financial instruments Savona should enter (the “Convention”). Savona subsequently entered into two swap arrangements with DB in June 2007 pursuant to an   ISDA Master Agreement (ISDA Agreement). The Convention was governed by Italian law and gave the Italian courts exclusive jurisdiction whereas the ISDA Agreement was governed by English law and gave the English courts exclusive jurisdiction. When DB became aware that Savona was likely to bring a claim against it in Italy under the Convention, DB sought various declarations of non-liability from the High Court based on representations made by Savona in the ISDA Master Agreement. The ISDA Master Agreement contained representations from Savona to the effect that Savona was not entering the swaps in reliance on any advice given by DB – it was in relation to the declarations based on these representations the Court had to decide whether it had jurisdiction.

Under the applicable EU regulation parties domiciled within the EU are able to decide which courts of an EU member state “have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship”. The question before the Court was therefore whether the declarations sought by DB were “in connection” with the ISDA Master Agreement or the Convention as this would determine the issue of jurisdiction.

Ruling

In deciding that disputed declarations had a closer connection to the Convention than the ISDA Master Agreement (and therefore the issue properly fell within the Italian exclusive jurisdiction clause) Waksman HHJ gave the following useful guidance:

  1. Waksman HHJ stressed that where the Court is faced with two jurisdiction clauses in different agreements between the same parties, the Court should strive to construe the clauses as mutually exclusive and not overlapping. While previous cases (notably Dexia v Brescia [2016] EWHC 3261) had highlighted that the negative effect of this approach was that legal disputes might be fragmented between the two competing jurisdiction clauses the judge stated that this was not “a consequence which must be avoided at all costs”. 
  1. Waksman HHJ noted that there is no presumption that, where to jurisdiction clauses appear to overlap, that the later clause is intended to cut down the earlier – even if this results in fragmentation of where various disputed issues must be decided. Furthermore, Waksman HHJ expressly rejected DB’s argument that the entire agreement clause in the ISDA Agreement had the effect of overriding the jurisdiction clause in the Convention.   
  1. When the Court is considering the scope each competing jurisdiction clause the words should not be analysed in a vacuum but rather the court should take into account the particular contractual context: “it all depends on the facts and the context, including, critically, the essential nature of the dispute and the nature and scope of any prior contract and jurisdiction clause”. 
  1. The judge specifically rejected DB’s argument that the jurisdiction clause in the ISDA Master Agreement should be given more weight than that of the Convention due to the well-known and internationally recognised nature of the ISDA Agreement, requiring that it be given universal and consistent interpretation. Waksman held that this approach could not be taken where another jurisdiction clause was involved and stressed that the jurisdiction clause in the ISDA Agreement “”had to be construed in light of the prevailing legal context which includes the Convention and the Italian Clause”.
  1. Addressing the point that the declarations sought by DB were directly based on equivalent terms included in the ISDA Master Agreement, Waksman rejected the conclusion that this must automatically mean that the jurisdiction clause in the ISDA Agreement must apply in relation to those declarations: “I do not accept that because the declaration is drawn from a contractual term, then, without any discussion about it, it must fall within the English Clause”.

Conclusion

This decision provides important guidance to banks and other financial institutions as to the limits on the jurisdiction of the English courts to decide issues under the ISDA Agreement in circumstances where the parties have entered into earlier related agreements. Where earlier agreements have been entered, the institutions can not simply assume that the terms of the later ISDA Agreement will prevail. This, in turn, may threaten the ability of financial institution to rely on important representations added to the ISDA Agreement specifically so that the institution can rely on the English law principle of contractual estoppel to protect it from claims.

In order to prevent the consideration of important contractual protections included in the ISDA Agreement falling under the jurisdiction clause of a separate contract consider the following practical steps:  

  1. ensure that clear express wording is including in any ISDA Agreement to the effect that the parties agree that, in relation to such representations, the terms of the Master Agreement take precedence over all prior agreements between the parties, preferably naming all potential competing agreements.
  2. where financial institutions are entering into contracts to provide advice which are likely to result in derivative transactions being entered into should carefully consider the governing law and jurisdiction clauses of that agreement so that it mirrors that of any following ISDA Master Agreement entered into. This should avoid the costs and inconvenience of the dispute being fragmented with various issues being litigated in different jurisdictions. 

 

Charles Spragge, Partner and Max Palmer, Associate

 This briefing was posted on 15 June 2017.