FKI Engineering Ltd & Anor v De Wind Holdings Ltd & Anor

This is another jurisdiction dispute. The main question is whether Article 6 of the Judgments Regulation 44/2001 permits the appellant, De Wind GMBH, a German company (DWG) to be sued here because the claim against it is so closely connected with the claim against its English parent company De Wind Holdings Limited (DWL) that it is expedient to hear and determine the claims together to avoid the risk of irreconcilable judgments resulting from separate proceedings. David Steel J held that it did but gave DWG permission to appeal. DWG contends that the judge’s decision was wrong because the claim against it was not closely connected with the claim against DWL and because DWL’s claim does not pass the merits threshold.

DWG designs and manufactures wind turbines. Before 4 July 2005 it was wholly owned by the first claimant, part of an engineering group whose parent was the second claimant. Nothing turns on the separate identities of the claimant companies, whom I shall simply call FKI. DWG has always been loss-making. To maintain its solvency FKI had among other things entered into a series of capital reserve agreements (CRAs) with DWG under which it agreed to make a number of substantial payments.

By an agreement made between FKI and DWL dated 4 July 2005 FKI agreed to sell its entire interest in DWG to DWL on terms which reflected the fact that DWG was loss-making. Completion of the sale and purchase of the shares was conditional upon DWG having €3,278,000 of cash in its bank accounts and upon repayment of all intra-group indebtedness. Net tangible assets of DWG were forecast to be €27,778,000. After completion a balance sheet was to be agreed or settled by expert determination and payment was to be made of any difference between the forecast and actual values of the net tangible assets. DWL also agreed to indemnify FKI against any liabilities which it incurred under a number of identified performance bonds and guarantees which DWG’s bankers had given on its behalf.

Following completion of the sale the parties failed to agree a completion balance statement. The dispute was resolved by expert determination which required FKI to pay DWL €339,000. By this time, however, FKI had paid €1,649,716 to DWG’s bankers in respect of payments which had been made under the performance bonds and guarantees to which I have referred. FKI sought repayment of this amount from DWL under the indemnity and, when it failed to pay, issued a statutory demand. This resulted in correspondence between solicitors, in the course of which DWL’s solicitors indicated that DWG had claims against FKI which would be pursued in Germany. In due course FKI were sent a copy of draft proceedings, prepared by German lawyers, which formulated these claims. Those proceedings were issued in Germany on 20 July 2006, but these English proceedings had been started a fortnight earlier.

In the English proceedings the first claim against DWL was for the €1,649,716 plus interest under the indemnity. Nothing turns upon this claim, for which the English court obviously has jurisdiction.

It is FKI’s second claim against DWL which it relies on as what has been called “the anchor claim” for its claim against DWG. This, so far as it is relevant, is a claim for damages for breach of contract. The claim against DWG is for declarations that FKI is not liable upon the claims made in the German proceedings.

FKI’s second claim against DWL, described in its Particulars of Claim as a “contingent claim”, is made on the premise, which is denied, that it is liable for the claims made in the German proceedings. The Particulars of Claim set out the nature of the two claims made in the German proceedings: the first, a claim for payment of €25.6 million, allegedly still due under the CRAs; the second is a claim for repayment of €32.56 million allegedly paid by DWG to FKI in breach of German company law. The pleading then explains why FKI says that it is not liable for either claim. It had paid the amounts due under the CRAs in full, in cash or by crediting DWG’s loan accounts on dates and amounts which are particularised. Its defence to the company law claim does not matter for present purposes. These particulars led to the claim for the negative declaration against DWG. Paragraph 39 of the pleading then says that if, contrary to its case, FKI was liable to DWG as alleged, amounts due under loans made by FKI to DWG would be revived so as to extinguish any such liability.

The so-called contingent claim followed, insofar as it is material, in paragraphs 42 to 48. Here FKI relied on a term of the share sale agreement, which at paragraph 8 of part 2 of Schedule 7 said:

“The buyer shall provide the Seller with such access to the…accounts, working papers and other financial information of the Buyer as is reasonably necessary for the purposes of this Agreement.”

The purposes of the agreement included the preparation of the completion balance statement which was to include the amount of DWG’s net tangible assets so as to determine what adjustment to the consideration for the transaction needed to be made.

Paragraphs 47 and 48 allege:

“In breach of its obligations under paragraph 8 of Part 2 of Schedule 7 to the Share Sale Agreement [DWL] failed to provide to [FKI] financial information reasonably necessary for the purposes of the Agreement, namely that [DWL] and [DWG] were in the process of preparing a claim against [FKI] (which, on the hypothesis of [FKI]’s contingent claim against [DWL] was valid) for €57,167,751 and/or that [DWG] was entitled to payment of that sum from [FKI].

In consequence of [DWL]’s breach of its obligations under paragraph 8 of Part 2 of Schedule 7 of the Share Sale Agreement, the Completion Net Tangible Assets of [DWG] were under-stated by €57,167,751 in the Draft Completion Balance Sheet and in the Completion Balance Sheet as determined by [the expert], and [FKI] has suffered loss and damage in that sum.”

At the end of the pleading the claim for damages for breach of contract against DWL is made “pursuant to paragraph 48”.

The €57 million figure is the total of both claims made in the German proceedings. At the hearing before the judge FKI conceded that it could not recover the amount of the claim for breach of German company law (€32.6 million) on the basis pleaded in paragraphs 47 and 48 because this amount could not have been included in DWG’s net tangible assets even if FKI had known about the claim. I shall have to return to the reason for this later.

So much for the facts. The objects of the Judgments Regulation are well known. Preamble 11 says that :

“The rules of jurisdiction must be highly predictable and founded on the principle that jurisdiction is generally based on the defendant’s domicile and jurisdiction must always be available on this ground save in a few well-defined situations in which the subject matter of the litigation or the autonomy of the parties warrants a different linking factor.”

Article 6 contains a number of those exceptions. Article 6(1) provides:

“A person domiciled in a member state may also be sued…where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.”

Mr Samek for DWG made a number of submissions about the meaning and effect of Article 6(1) which I must deal with at the outset. First he says that a claim for the purposes of Article 6(1) must be one which can properly be brought in the domestic court. As a general proposition, I would accept this, although Mr Samek referred us to a recent decision of the ECJ in Reisch  Montage AG v Kiesel Baumaschinen Handels GMbH (Case C-103/05), which casts some doubt upon this proposition. In that case proceedings had been brought by the creditor of a bankrupt in the court of his domicile and, relying on Article 6(1), his guarantor domiciled in another member state. The claim against the bankrupt was time-barred but the ECJ held that nevertheless the claim against the guarantor could proceed under Article 6 (1) which was not affected by a procedural bar contained in a national provision.

Leading on from his first submission Mr Samek submits that a contingent claim is not a claim and cannot be made either in domestic law or as an “anchor” claim under Article 6(1). Any such claim, he says, which, like the claim in the present case, is put “in the alternative if, which it is denied, the claimant is liable to X then the defendant is liable to the claimant” is contingent in this sense and so must await the finding of liability upon which it is premised before it can properly be made.

In support of this surprising submission, Mr Samek relied on an English case: Competitive Insurance Co Ltd v Davis Investments Ltd [1975] 1 WLR 1240,but was unable to point to or rely on any European case which supported his submissions about the meaning of the word “claim” in Article 6(1). I do not accept these submissions. The Competitive Insurance case is not authority for the wide proposition for which Mr Samek contended. Gough J had to decide whether a liquidator -- who was defending his decision to reject a proof of debt in the course of the winding up -- could be sued personally for breach of fiduciary duty if his defence (the merits of which had not been decided) was successful. The judge struck out the claim on the basis that it disclosed no reasonable cause of action and was vexatious or an abuse of process. One of his reasons for doing so was that the claim was premature, but I do not see that this case provides any precedent for the instant case which is a claim for breach of contract subject to rules of procedure, which are different from those in force 30 years ago. The fact is that alternative claims of the kind I have described are commonplace in domestic litigation and are not confined to straightforward claims for contribution, to which different considerations may apply. They are claims, even though premise upon a finding of liability which is denied. There is nothing to indicate either that the meaning of the word “claim” in Article 6(1) should be given any such restricted meaning.

Mr Samek’s third submission is that (assuming there is a claim here) when one comes to consider whether it is closely connected with another claim, one must compare the claims and not any contingency which might connect them. Here the anchor claim is for breach of the share sale agreement; the claim against DWG arises under the CRAs. Those claims are not closely connected, Mr Samek submits, although FKI’s anchor claim is contingent upon its liability to DWG. I do not think this is the right approach. Article 6(1) requires one to identify the anchor claim and then the claim against the person domiciled in another member state and see whether they are so closely connected so as to make it expedient to determine them together. The claim in each case must be the whole claim; so a claim for breach of contract involves consideration of the breach relied on, causation and loss. It is not enough simply to look at the contract itself and see whether it is closely connected with the subject matter of the claim against the non-domiciled party.

With these considerations in mind I turn to the facts of this case. What is the anchor claim made by FKI? It is a claim for breach of the share sale agreement for failing to provide financial information. The cause of action has already arisen as Mr Samek conceded. There is nothing contingent about it. The loss is claimed on the basis that, but for the breach, the €25.6 million which FKI owed to DWG would have been shown as an asset among the net tangible assets which appeared in the completion statement in which case, DWL would have had to pay this amount to FKI. Damages of this amount are claimed, but no assessment of such damages is possible without deciding whether or not DWG’s claim for the €25.6 million is valid. That is the question raised by the claim against DWG for a negative declaration. Exactly the same question is raised by DWG in its claim in the German proceedings. The claims are, it seems to me, inextricably linked, and so it must be expedient to hear them together to avoid the risk of irreconcilable judgments. No question of forum convenience arises when one is applying the provisions of the Judgment’s Regulation.

Accordingly, this court has jurisdiction to hear the claim against DWG under Article 6(1) and its jurisdiction challenge must, I think, fail. This was the judge’s conclusion which he expressed shortly and I agree with it.

It is common ground that in considering such a challenge to jurisdiction the court must look at the merits of the anchor claim. The standard to be applied is that of serious issue to be tried or real prospect of success, which I take to mean the same. Before the judge Mr Samek made seven points which he identified as insurmountable hurdles to FKI’s claim. The judge rejected each of them. DWG appeal his conclusion on hurdles 4, 5 and 6. It is perhaps worth noting that, if valid, these points could have been deployed by DWL as grounds for obtaining summary judgment against FKI, but this was not the way in which the matter proceeded, although DWL and DWG have the same English legal representation.

Hurdle 4 raises a short point. What Mr Samek submits is that because FKI accepted that its claim for the €32.6 million would fail, it should for the same reasons have accepted (or the judge should have decided) that its other claim for €25.6 million would fail. In support of this submission, Mr Samek relies on FKI’s expert accountant’s report prepared for the purposes of these proceedings. In his conclusion about the €31.6 million claim, the accountant said:

“3.12

In relation to the €31.6 million claim, if the terms of reference and parties instructed the independent accountant to assess the facts as they existed as at the date of the Completion Balance Sheet, and to apply a UK GAAP to the question of whether an asset should be recognised, then no recognition of the contingent asset amount would be made in the Completion Balance Sheet unless the independent accountant was convinced that recovery of the amount claimed was virtually certain (which is very unlikely given the early status of the legal action under German law).”

But the conclusion about the other claim was expressed in the preceding subparagraph of the report as follows:

“In relation to the €25.6 million claim, the overall effect of the accounting adjustments required to reflect the existence of any valid debt of €25.6 million due from FKI Ltd to DW GmbH would be to increase Net Tangible Assets by 25.6 million.”

Mr Samek argues that this latter conclusion was not supported by earlier passages in the report.

The judge dealt with this point by saying:

“39.

In fact the claim for payment of €25.6 million was, on the Claimants’ case, quite distinct from the claim for repayment, the latter depending by virtue of German law on insolvency. In short the recovery of the €31.6 million was not ‘virtually certain’ but a mere claim. In contrast there was a dispute between the experts retained by each side as to whether the €25.6 million claim should be treated as a valid debt. This is not an issue that I can summarily determine.”

I agree with the judge’s conclusion about this. FKI’s expert clearly distinguished the two claims. If his reasons for doing so were not cogent; that gives scope for cross-examination but it is not the stuff for summary judgment.

Hurdle 5 is based upon what FKI plead in paragraph 39 of its Particulars of Claim, to which I have referred. What is said is that, if, as is contended, FKI’s liability for DWG’s claim revives DWG’s liability to repay loans, any increase in the net asset value to take account of the former would be matched by a corresponding decrease in value to take account of the liability involved in the latter. So it is said that the anchor claim fails for circuity on FKI’s own case.

The judge rejected this argument by saying:

“…what is described as a logical difficulty by DWG is in fact a proposition which is denied by them. The position of DWG appears to be that the previous loans would not revive, as it was a condition of the [Share Sales Agreement] that all outstanding group indebtedness had to be repaid. This is an issue that I cannot decide summarily.”

So what the judge is saying is that it was not open to DWG on behalf of DWA to take up wholly inconsistent stances. The evidence of its German law expert was that the proposition that the debt would revive was “a non-point because it was a condition that all outstanding intra-group indebtedness had to be repaid”. In any event the anchor claim was pleaded on the basis that the point made in paragraph 39 had failed. If it succeeds the anchor claim does not arise. All in all I do not think that the point raised by hurdle 5 was fit for summary determination.

Hurdle 6 arises out of the fact that paragraph 10.1 of Schedule 7 part 2 of the share sales agreement provides:

“The Completion Balance Sheet shall be produced using the same bases, principles and assumptions employed in producing the management accounts of the Seller known as the MRs (“MRs”) and UK GAAP and shall be consistent with earlier MRs…”

Mr Samek’s point is that as the management accounts were based on the assumption that the CRAs had been fully performed, it would not have been proper to make any adjustment to the net realisable assets contained in the completion statement to reflect the fact that those agreements had not been fully performed.

The judge dealt with this point at paragraph 43 in his judgment, where he said:

“The answer, as put forward by the Claimants, is that no want of consistent treatment is involved. The payments under the CRAs were treated as an investment in both the management accounts and group accounts. This is clearly a triable issue.”

FKI’s management accounts were prepared on the basis that debts due were recorded as assets. Preparation of the completion statement on the same basis would require it to show that debts due to DWG should also be treated as assets. No inconsistency of treatment would be involved. But if the management accounts were wrong, and were wrong to the tune of €25.6 million, it would be absurd to suggest that this provision in the share sales agreement required the completion statement to be prepared in a way which perpetuated the error. I think the judge was obviously right to say that this point raised a triable issue.

So for the reasons I have given I reject both of DWG’s challenges to the judge’s decision and would dismiss this appeal. This makes it unnecessary to consider the point raised in the respondent’s notice upon which we heard no argument.

I agree. Mr Samek argued that as a matter of English law, FKI’s “contingent   claims” against DWL were premature and therefore improperly   brought. In   support of that proposition he relied, as my Lord has  indicated,  on  some  observations of Gott J in Competitive Insurance Ltd v Davis Investments Ltd [1975] 1 WLR 1240 at 1245, which he said established that when a claim is premised on a finding of fact which the claimant opposes, it is to be regarded as premature and improperly brought. I am not persuaded that Gott J’s observations, which have to be seen in the context of the facts of that particular case, establish any such universal rule; and Mr Samek was not able to cite any more recent authority to suggest that there is any such universal rule of practice today. I am satisfied that there is not. Rejecting the argument based on prematurity, David Steel J observed that it could not be said that no cause of action had accrued. Mr Samek accepted that he could not quarrel with that statement, and that concession, properly made, is in my judgment a simple and complete answer to the allegation that the claim was improperly brought.

Mr Samek also argued that whenever anybody advances a claim against two persons in the alternative, one of which is dependent on the failure of the other claim, the claim against the second defendant is not a claim within the meaning of Article 6. He was not able to cite any authority to support that construction of Article 6, nor to advance any persuasive reason why it should be so construed. To apply such a limitation into Article 6 would militate against the objective spelled out in paragraph 15 of the preamble:

“In the interests of the harmonious administration of justice it is necessary to minimise the possibility of concurrent proceedings and to ensure that irreconcilable judgments will not be given in two Member States. There must be a clear and effective mechanism for resolving cases of lis pendens and related actions and for obviating problems flowing from national differences as to the determination of the time when a case is regarded as pending.”

Take a simple case involving a contract for the sale of goods by A to B and a contemporaneous sub sale by B to C. The goods are delivered by A to C, C fails to pay. After repeated demands B sues C for the price. C raises a defence that the goods were defective. B is sceptical of this defence but for safety’s sake he seeks to join A as second defendant on the basis that if the goods were defective it would follow that A was in breach of contract. Mr Samek accepts that on his construction of Article 6, B could not rely on that Article to join A as a party to the action, because, on his submissions, B would not have a claim against A. This construction would defeat the plain purpose spelled out in paragraph 15 of the preamble. On the issue of whether on the facts FKI’s claim against DWL raises a sufficiently triable case on the merits, I agree with all that Tuckey LJ has said and have nothing to add.

I agree that the appeal should be dismissed for the reasons which my Lords have given.