Case No: 2010 Folio 50
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
The Hon Mrs Justice Gloster, DBE
Between :
(1) UBS AG, LONDON BRANCH (2) UBS GLOBAL ASSET MANAGEMENT (UK) LIMITED | Claimants |
- and - | |
KOMMUNALE WASSERWERKE LEIPZIG GMBH | Defendant |
Mr. Mark Hapgood QC, Mr. Richard Slade QC and Mr. James Cutress
(instructed by Mayer Brown International LLP) for the Claimant/Respondent
Mr. Tim Lord QC and Ms Sarah Abram
(instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for the Defendant/Applicant
Hearing dates: 13/14 July 2010; further submissions received 23 August – 1 September 2010
Judgment
The Hon Mrs Justice Gloster DBE:
Introduction
This is an application by the defendant, Kommunale Wasserwerke Leipzig GmbH (“KWL”), that the Court should declare that it has no jurisdiction, alternatively should not exercise jurisdiction, over proceedings issued by the claimants, UBS AG, London Branch (“UBS AG”) and UBS Global Asset Management (UK) Limited (“UBS AM”), in this Court on 18 January 2010 (“the English Proceedings”).
The grounds for the application are that:
the German court has exclusive jurisdiction under Article 22.2 of Council Regulation (EC) 44/2001, namely the Jurisdiction and Judgments Regulation (“the Regulation”), because the proceedings
“… have as their object … the validity of the decisions of [the] organs”
of KWL, as set out in that article; or, in the alternative,
pursuant to Articles 27, 28 and 30 of the Regulation, the German court was first seised of proceedings involving the same cause of action and between the same parties, or alternatively a related action.
Once again, the subject matter of the dispute is credit default swap arrangements and the first skirmish is over jurisdiction. That skirmish has ranged largely over the same battlefields as the recent decisions of Berliner Verkehrsbetriebe (BVG) Anstalt Des Offentlichen Rechts v JP Morgan Chase this Bank N.A. and JP Morgan Securities Ltd (Footnote: 1) and Depfa Bank plc v Provincia di Pisa (Footnote: 2).
And, once again, the claimants contend that jurisdiction is established under Article 23 of the Regulation on the grounds that the relevant swap contracts contain an English court exclusive jurisdiction clause, and the defendant challenges jurisdiction on the basis that Article 22.2 trumps Article 23, because the decisions by its directors to enter into the swap arrangements were allegedly ultra vires or otherwise invalid.
Factual background
The parties
UBS AG is a well-known international bank, organised under the laws of Switzerland, whose registered offices are in Basel and Zurich, with a registered branch office in London. UBS AM is a private company, incorporated under the laws of England and Wales, having its registered office in London. It is an asset management company within the UBS group. Except where it is necessary to distinguish between the two companies, I refer to them together as “UBS”.
KWL is a private limited company incorporated under the laws of Germany, with its registered office in Leipzig. It is common ground that it has its seat in Germany and that, as a matter of German law, it is a limited liability company (Gesellschaft mit beschränkter Haftung - GmbH), founded under private law. Its majority shareholder is Leipziger Versorgungs-und-Verkehrgesellschaft GmbH (the Leipzig Supervisory and Transport Company) (“LVV”), a private law company established by the City of Leipzig. Its minority shareholder is Zweckverband Wasservorsorgung und Abwasserbeseitigung Leipzig Land (“ZV Wall”). ZV Wall is a special purpose association, created under German public law for the joint provision of services of a municipal nature established by the local communities in Leipzig Land.
KWL’s primary business is providing the water supply to the city of Leipzig. It is also responsible for the disposal of the city’s waste water and other related activities of a municipal nature.
Factual background
Between 1998 and 2003, without any involvement on the part of UBS, KWL entered into a number of cross-border lease transactions (“CBLs”) with US or UK investors, pursuant to which it leased its primary assets to such investors for an average period of 99 years. The assets were then leased back to KWL through shorter sub-leases with terms of about 30 years, with an option to KWL to terminate the head leases and repurchase the underlying assets in 2025 and again in 2033. If KWL did not exercise those options, it forfeited its assets to the US or UK investors. The CBLs created short-term liquidity for KWL, but imposed a long-dated funding requirement in respect of the repurchase options.
KWL therefore had to ensure that it would have funds available to exercise the repurchase options. It did this by investing the premiums paid by the investors in four unsecured corporate bonds, cash deposit payment undertaking agreements, or payment undertaking agreements. The respective obligors under these financial instruments were four financial institutions, Bayerische Landesbank (“Balaba”), MBIA Global Funding LLC (“MBIA”), Merrill Lynch Capital Services Inc (“ML”) and General Electric Capital Corporation (“GECC”) (collectively “the Financial Companies”). The instruments were to generate a coupon during their terms and then lead to the repayment of principal at maturity, thereby providing funds for KWL’s repurchase options. Again, UBS was not involved in these transactions.
The effect of the transactions was that KWL had long-term, or very long term, exposure to the creditworthiness of each of the Financial Companies. If any of those companies were unable to satisfy their payment obligations under their respective bonds or payment undertaking agreements (“PUAs”) (referred to as the “equity defeasance risk”), KWL would be left with a funding gap. In other words, if any of the Financial Companies actually failed, KWL would have been required to make all outstanding payments under the CBLs, as and when they fell due.
According to UBS, in about mid 2006, KWL, or certain of its directors, decided, in circumstances unknown to UBS, to restructure KWL’s equity defeasance risk, with the aim of diversifying its credit risk across industries, countries and over asset classes, to introduce a “first loss” protection to limit the risk to the investor, and to enhance its investment yield. In making that decision, KWL was advised by Value Partners Group (“Value Partners”), acting as KWL’s financial advisers.
The precise role of UBS in relation to the conclusion of the four transactions entered into, or purportedly entered into, by KWL to achieve this aim, may be in dispute in the proceedings and it is not necessary for me, for present purposes, to go into it in any detail. To summarise the matter neutrally, it appears that UBS was asked by Value Partners and KWL to restructure KWL’s existing credit risk. To achieve this end, or purportedly to achieve this end, KWL entered into four series of transactions (“the Transactions”), which were subject to ISDA (Footnote: 3) Master Agreements. The first such transaction, entered into in June 2006 (“the June 2006 Swap”), was with UBS alone; this transaction is the subject matter of the current proceedings. The three subsequent transactions were entered into with UBS and other banks (“the Subsequent Swaps”). In essence, the Transactions involved:
KWL purchasing credit protection for the equity defeasance risk in respect of each bond or PUA from UBS AG,
KWL selling credit protection to UBS AG or, in the case of the Subsequent Swaps, to other banks, and
KWL entering into a Portfolio Management Agreement with UBS AM, as manager of the “reference portfolio”, to which I refer below.
For present purposes it is only necessary for me to summarise the agreements which comprised the June 2006 Swap, although the structure was typical of all the Transactions. The June 2006 Swap related to the PUA in respect of which Balaba was the obligor (“the Balaba PUA”). The first element of this transaction was a Credit Default Swap (“CDS”) entered into between UBS AG and KWL, on 8 June 2006 (effective 9 June 2006) pursuant to which KWL bought credit protection from UBS AG against the equity defeasance risk that Balaba would be unable to honour its payment obligations under the Balaba PUA, such that, if Balaba suffered a Credit Event (as defined), UBS AG would be required to make payments equivalent to the outstanding payments under the Balaba PUA. KWL paid a premium of US dollars (“$”) 1.6 million to UBS AG in respect of this protection.
The second element (“the Balaba CDO”) of the transaction was a credit default swap in respect of a collateralised debt obligation (known as a “CDO”), pursuant to which KWL sold credit protection to UBS AG on a 1.5% tranche (“the CDO Tranche”) of a reference portfolio comprising 100 reference entities (known as the “BLB1 Portfolio”). As at 7 June 2006, the notional value of the BLB1 Portfolio at the outset of the transaction (“the Reference Portfolio Notional”) was $6,793,639,000 and each reference entity in the BLB1 Portfolio represented 1% of that amount. The CDO Tranche had a Loss Threshold Rate of 3.6%. This meant that KWL would not become liable to make any payment to UBS AG pursuant to the portfolio swap until a number of Credit Events affecting the BLB1 Portfolio had occurred and resulted in 3.6% of the Reference Portfolio Notional on any given day being completely written off. Once the Loss Threshold had been reached, KWL became liable to make floating rate payments to UBS AG. UBS AG paid a premium of $22.7 million in return for this credit protection. The maximum amount of KWL’s exposure under the Balaba CDO is £153,727,000. According to UBS’ evidence, KWL’s maximum exposure under the CBL transactions in relation to the Balaba PUA was £154,385,122 (if a default under the Balaba PUA occurred).
On the face of the documents, the two swaps described in paragraphs 13 and 14 above were separate transactions in the sense that they were not expressed to be interdependent in any legal sense. In fact the first element, the CDS, has since been unwound as between KWL and UBS AG, whilst the Balaba CDO remains in place.
The reference portfolios under the second element of the 2006 Swap, and under each of the Subsequent Swaps, were active rather than fixed, and therefore a portfolio manager was required. KWL appointed UBS AM as its discretionary portfolio manager, under the terms of four portfolio management agreements (“PMAs”), one in respect of each of the Transactions. UBS AG was also a party to the PMAs, in its capacity as swap counterparty. Following entry into the Transactions, UBS AM actively managed the portfolios pursuant to the PMAs, making an overall total of 270 substitutions of reference entities across the portfolios.
UBS contends that the commercial effect of the Balaba CDO was to “swap” the single entity Balaba risk into a risk spread across a portfolio of 100 well-known companies; and that this successfully diversified KWL’s risk and provided it with a yield in the form of an up-front net premium of $21.1 million. KWL does not accept that this characterisation is accurate, but argues, on the basis of UBS’ construction of the Balaba CDO (namely that once the tranche of protection provided by KWL was reached, the occurrence of three credit events in a portfolio of a hundred entities led to liability of almost £100 million), that there was no meaningful diversification. However, this is not an issue which I have to decide for the purposes of this application.
Prior to execution of the June 2006 Swap, Freshfields, who were advising KWL, had provided both KWL and UBS AG with separate opinions that KWL had the capacity to enter into the June 2006 Swap. Freshfields’ opinion, as addressed to UBS AG and UBS AM, and known to KWL, was not based on any assumption that the June 2006 Swap had been entered into by KWL to reduce its risk to exposure from existing financial instruments, viz. the CBLs. An earlier draft had been based on such an assumption, but this paragraph was removed before the final opinion was issued. In addition, prior to execution, KWL made a series of representations to UBS, including that it had made its own independent decision to enter into the transaction; that it was capable of assessing the merits of and understood the terms and risks of the transaction; that it was not relying on any communication from UBS as investment advice; that UBS was not acting as an adviser to KWL; that KWL had capacity to enter into the transaction; and that all necessary internal approvals had been obtained.
Governing law and jurisdiction clauses
Under the terms of the relevant ISDA Master Agreement, both elements of the June 2006 Swap were governed by English law, and, as between England and Germany, were subject to exclusive English jurisdiction clauses; see Section 13 of the ISDA Master Agreement, which was in the following terms:
“13. Governing Law and Jurisdiction
a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. [This was English law.]
b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement (“Proceedings”), each party irrevocably:-
i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law,
ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) …”
The relevant provisions of the PMAs provided as follows:
“23 GOVERNING LAW
This Agreement (and any dispute, controversy, proceeding or claim of whatever nature arising out of or in any way relating to this Agreement or its formation) shall be governed by, and shall be construed in accordance with, English law.
24. JURISDICTION AND SERVICE OF PROCESS
With respect to any suit, action or proceedings relating to this Agreement (Proceedings), each party irrevocably submits to the jurisdiction of the English courts and waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings had been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction.”
Events leading to the service of the English proceedings
In the aftermath of the global financial crises in 2008/2009, the reference portfolios declined in value. In March 2009, KWL and Value Partners alleged to UBS for the first time that Balaba, ML, MBIA and GECC should not have been included in the reference portfolios. Further, by an e-mail dated 1 April 2009, KWL made a number of criticisms of UBS AM’s portfolio management, including allegations that the portfolio had been managed in a sub-standard manner. Thereafter, discussions were held between UBS, KWL and Value Partners as to how the Transactions might be restructured. However, no restructuring went ahead and, in or about December 2009/January 2010, KWL and/or LVV engaged KPMG and SAM Sachsen Asset Management (“SAM”) to carry out a review of KWL’s exposure under the Transactions. According to UBS’ evidence, it became apparent to UBS at this time that KWL was becoming increasingly reluctant to acknowledge the liability that UBS contends was likely to arise under the June 2006 Swap in 2010.
According to UBS, in December 2009 there occurred the first “Credit Event” (as defined) which would be likely to result in the loss threshold under the June 2006 Swap being exceeded, and a Cash Settlement Amount (as defined) becoming payable by KWL at a date in the future. As a result, UBS AG served a Credit Event Notice and Notice of Publicly Available Information on KWL (“the Notice”) dated 16 December 2009.
Following service of the Notice, a number of articles appeared in the German press, in which allegations were made about UBS’ conduct in relation to the Transactions. These press reports included a variety of allegations, amongst other things:
that, in response to the Notice, Klaus Heininger and Andreas Schirmer, managing directors of KWL at the time of the Transactions, had been sent on “administrative leave” by KWL in connection with their role in the Transactions, and that criminal charges were being filed against them by LVV;
that Mr. Heininger and Mr. Schirmer entered into “secret highly speculative transactions” with UBS which were not recorded in KWL’s books or accounts and that they had assured UBS “that they had the approval of the supervisory board and shareholders, which was not true.”;
that (in contradiction to ii) above) Mr. Heininger informed the KWL supervisory board of his plans during a meeting in September 2006;
that the articles of incorporation of “the municipal enterprise” prohibited such deals;
that it was unclear whether Mr. Heininger and Mr. Schirmer were aware of the “poor quality” of the portfolios or whether UBS AG “bamboozled them”;
that KWL would attempt to limit the damage by pointing out possible errors on the part of UBS, the banks and the arrangers, for example violations of disclosure obligations regarding CDO risks;
that UBS were “financial jugglers of all kinds … who made the miraculous multiplication of cash through the bank’s London branch office sound appealing”;
that UBS was “entitled to a significantly larger share in the profits than KWL”;
that the reference portfolios were comprised by UBS “packaging its bad securities in portfolios, with which KWL allowed itself to be bamboozled”;
that KWL wanted to do its utmost to collect compensatory damages from (among others) the arrangers of what were described as “secret” transactions;
that the Transactions had been examined by Saxony’s anti-corruption unit.
As a result of the discussions between UBS, Value Partners and KWL, the questions received from KPMG and SAM and the allegations made in the German press, UBS AG and UBS AM started the English Proceedings in the Commercial Court on 18 January 2010.
In the English Proceedings, UBS AG sought, amongst other things:
declarations as to the validity and enforceability of the June 2006 Swap;
declarations that prior to and/or upon entering the June 2006 Swap, KWL made its own independent decision to enter into that transaction, that the transaction was appropriate or proper for KWL, and that KWL did not rely on any oral or written communication of UBS as investment advice or as a recommendation to enter that transaction;
declarations that prior to, or upon, entering into the June 2006 Swap, the defendant was capable of assessing the merits of and understood (on its own behalf or through independent professional advice) and accepted the terms, conditions and risks of that transaction;
a declaration that UBS AG did not act as a fiduciary for or as an adviser to KWL in respect of the June 2006 Swap; and
a declaration that the June 2006 Swap and the PMAs are governed by English law.
In the English Proceedings, UBS AM sought, amongst other things:
declarations as to the validity and enforceability of the PMAs;
similar declarations in relation to the PMAs, as those sought in relation to the June 2006 Swap set out at subparagraphs 25 ii) – iii) above;
a declaration that UBS AM had properly performed its duties as portfolio manager and that it did not (and was not required to) act in any capacity other than portfolio manager; and
a declaration that the PMAs are governed by English law.
In the format current at the date of issue, no money claim was included in the Claim form, because the date of issue of the English Proceedings pre-dated the time (18 March 2010) when, according to UBS, the first Cash Settlement Amount fell due from KWL under the Balaba CDO. As described below, UBS took no steps to serve the English Proceedings until 1 March 2010.
After issue of the English Proceedings, there were further serious allegations made in the German press about UBS’ supposed conduct. These included (but were not limited to) allegations that UBS had not met its duty of care, that Mr. Heininger and Mr. Schirmer had opened “secret” accounts with UBS with respect to the Transactions, that UBS had been involved in “dubious business practices” with German municipalities, that “Leipzig” had found “a major business law firm that would be willing to sue UBS for poor advice/mis-selling”, that UBS wanted to use KWL as a recipient of dubious risks - a “dumping ramp for subsequently smuggling toxic credits into KWL’s portfolio”, and that there was a serious lack of diversification in the reference portfolios.
I refer to these allegations because UBS contends that certain of the issues raised in these articles are highly likely to feature in the English Proceedings; that, it contends, is not merely because, by its claim, UBS will seek to vindicate its reputation and rebut what it asserts are scandalous and defamatory allegations made against it, but also because UBS submits that it is inevitable, whatever KWL’s present stated position is, that KWL will seek to raise many of the issues by way of defence or counterclaim to UBS’ claim. In addition, in January 2010, according to UBS, a further credit event occurred which led to a series of high-level, without prejudice, meetings between the parties. At this stage, while the discussions and meetings were ongoing, UBS apparently took the view that it was possible that the issues between the parties would be resolved without fully contested legal proceedings. According to its evidence, UBS did not wish to escalate the position by serving the claim form on KWL whilst there remained a realistic prospect, or so it seemed, of a resolution.
According to KWL’s evidence, neither it nor its lawyers were aware of the issue of the English Proceedings. Although KWL’s English solicitors, Quinn Emanuel Urquhart & Sullivan UK LLP (“Quinn Emanuel”) searched the court record during February 2010, the searches revealed nothing because of an error in the court register. However on Friday, 26 February 2010, KWL informed UBS that KWL saw no option but to commence proceedings against UBS. On Saturday, 27 February, UBS became aware of a press release issued by KWL on the previous evening, which stated that KWL had filed proceedings in the Civil Chamber of the Leipzig Landgericht (the Leipzig Regional Court) (“the Leipzig Landgericht”) against UBS AG and others (“the German Proceedings”).
Once it became clear to UBS that it would not be possible to resolve the matter at that stage, UBS AG and UBS AM’s English solicitors served the English Proceedings on KWL on Monday, 1 March 2010, by delivery to an agent for service of process within the jurisdiction, pursuant to the provisions of the ISDA Master Agreement and the PMAs. On 15 March 2010 KWL filed its acknowledgement of service in the English Proceedings, indicating an intention to contest jurisdiction.
The German Proceedings
On 26 February 2010, KWL sent its Complaint to the Leipzig Landgericht by fax. On 1 March 2010, the Leipzig Landgericht received the original version of the Complaint. The claim was made against UBS AG, and two other banks who were parties to two of the Subsequent Swaps. The Complaint seeks declarations that the CDO elements of the June 2006 Swaps and the relevant Subsequent Swaps are null, on the alleged grounds that the transactions were outside the statutory purposes of KWL and that its directors were unauthorised to conclude such transactions, without the prior approval of its Advisory Board and a resolution of its shareholders.
On 2 March 2010, the Leipzig Landgericht wrote to KWL’s German lawyers inviting KWL to provide payment of the relevant court fees in a sum of Euros 274,368; the fees were paid on the same date. On 17 March 2010 the Leipzig Landgericht received KWL’s amended Complaint, seeking a declaration to the effect that UBS was not entitled to any payment in respect of the June 2006 Swap. On 19 March 2010, the initial Complaint made in the German Proceedings was served on UBS AG. On 26 March 2010 the amended Complaint was served on UBS AG.
The German Proceedings seek only to set aside that element of the June 2006 Swap in which KWL sold credit protection and is “out of the money”, not those in relation to which it bought credit protection - i.e. the CDS - (which were for KWL “in the money”), which, as I have said, were unwound.
As at the date of the hearing before me, UBS AG had indicated to the Leipzig Landgericht its intention to contest the jurisdiction of the Leipzig Landgericht and to seek appropriate orders for a stay of the German Proceedings.
UBS AG’s application to amend the English Proceedings
UBS AG has an application for permission to amend its Claim form, essentially to add a monetary claim for £99,811,724.44 which it claims is now outstanding in respect of the June 2006 Swap. The parties agreed that I should determine that application when judgment is handed down.
Proceedings in the Leipzig Landgericht subsequent to the hearing in the Commercial Court
Following the hearing in the Commercial Court, I was subsequently provided by Mayer Brown International LLP, UBS’s solicitors, with a copy of the order/directions made on 16 August 2010 by the Leipzig Landgericht in the following terms (as per a translation supplied by Mayer Brown):
“Order of the President as of 16.08.2010
1) It is pointed out to the claimant that, based on the current status of the factual allegations, the Chamber cannot accept jurisdiction over any of the respondents for the reliefs sought.
Already after the submission of the claim, there is no reason to believe that the requirements of Article 22 point 2 of the European Jurisdiction and Enforcement Regulation (EJAER) or those of Article 16 point 2 of the Lugano Convention are met. The scope of application of these provisions is obviously not established. Nor is it apparent that the German courts have international jurisdiction over the action brought against the respondents 1.) [UBS AG] and 3.) [Depfa Bank] under other legal aspects.
In respect to the respondent 1.), [UBS AG] the proceedings would be stayed until the London High Court of Justice reaches its decision insofar as, as set out by the latter in detail, the declaratory action filed there in opposition in the sense of Article 27 section 1 and Article 30 of the EJAER has been instituted before the local action. If the High Court of Justice accepts jurisdiction, the action filed against respondent 1.) would be dismissed as inadmissible. In this respect, the claimant is asked to take a position regarding the time of the submission and service of the complaint before the Court in London, as plead by the respondent 1.).
The territorial jurisdiction of the Regional Court in Leipzig, as far as we can tell, has not been established for the claim against the respondent 2.). The Chamber again refers to the order of the President as of 08.03.2010, with respect to which the claimant has not taken a position in spite of the fact that a deadline has been set for this purpose. The claimant may state if, alternatively, it will apply for removal and referral to the possibly competent Regional Court of Stuttgart.
The claimant gets an opportunity to take a position with respect to the respondents’ claim of lack of jurisdiction by 09.09.2010. In the meantime, a reply in the case is not required. Where required and possible after the claimant has stated its position, the Chamber would conduct a separate hearing about the admissibility of the claim pursuant § 280 section 1 of the Code of Civil Procedure (ZPO, Zivilprozessordnung).
2.) Item) to Party V, KlV with written submissions of the respondents 1.) -.3.) as of 09.08.2010
3.) Resubmission with FA.”
The passages emphasised in bold above are those relied upon by UBS in support of its contention that, although KWL has an opportunity to provide further submissions to the Leipzig Landgericht on the jurisdiction point, the Leipzig Landgericht is clearly of the view, on the basis of the factual allegations before it in KWL’s existing complaint, that it does not have jurisdiction.
According to Quinn Emanuel’s response, this order was not a final order of the Leipzig Landgericht, but merely a “preliminary view” expressed prior to the court hearing full submissions on the point.
The first issue:
Does the Leipzig Landgericht have exclusive jurisdiction over the claims made in the English Proceedings by virtue of Article 22.2 of the Regulation?
Article 22.2 of the Regulation provides as follows:
“The following courts shall have exclusive jurisdiction regardless of domicile:
…
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.”
Article 25 provides as follows:
“Where a court of a Member State is seised of a claim which is principally concerned with the matter over which the courts of another Member State have exclusive jurisdiction by virtue of Article 22, it shall declare of its own motion that it has no jurisdiction.”
The Court’s approach to this application
Both Mr. Timothy Lord QC, leading counsel on behalf of KWL, and Mr. Mark Hapgood QC, leading counsel on behalf of UBS, agreed that, in the light of the Court of Appeal’s recent decision in BVG v JP Morgan (supra), the correct approach to this application was that to be found in the judgment of Aikens LJ (Footnote: 4) in that case, although Mr. Lord reserved the right to challenge the correctness of that decision, if this matter goes further.
For the purposes of this application, I identify the following specific propositions referred to in the judgment of Aikens LJ, as governing the court’s approach to the determination of the first issue:
For Article 22.2 to be engaged, the question is whether or not the action is “principally concerned with” an Article 22.2 issue. The words “…. proceedings which have as their object….” in Article 22.2 should be interpreted as “proceedings which are principally concerned with”. (Footnote: 5)
An action is not “principally concerned” with an Article 22.2 issue simply because an Article 22.2 issue is raised. Because Article 22.2 is one of the articles on jurisdiction which creates an exception to the general rule of jurisdiction set out in the Regulation, it must not be given an interpretation that is broader than necessary to fulfil its objective (viz. of ensuring that the sound administration of justice is achieved by giving exclusive jurisdiction to the courts of the State concerned with the land, company, public registers, patents and so forth). Thus:
“… it is not axiomatic that any proceedings that raise an issue about the validity of the constitution of any company or the validity of a decision of its organ must be most soundly dealt with by the court of the state where the company has its seat, particularly if the parties have chosen another jurisdiction to solve their disputes. The validity issue may be one of many other issues which had nothing to do with the validity of the company or the validity of decisions of its organs and those other issues may have to be decided by a different applicable law and may concern facts which are unrelated to the state where the company has its seat. In such a case the sound administration of justice could well require the courts of another state to determine the issues. That is even more so when the parties have agreed the jurisdiction of the resolution of disputes.” (Footnote: 6)
The mere fact that proceedings raise a number of issues and one of them is within the terms of Article 22.2 and the resolution of that issue may be “dispositive” of the proceedings as a whole, or could have a “decisive influence” on the outcome is not enough to make the proceedings “principally concerned with” that issue. (Footnote: 7)
What Article 22.2 calls for is an exercise in “overall classification” and the making of an “overall judgment” to assess what is the principal concern of the proceedings overall and whether the proceedings are “principally concerned” with one of the matters set out in Article 22.2. (Footnote: 8)
This exercise in “overall classification” involves consideration of the question as to whether it is clear that, granting jurisdiction to the courts of the relevant state (i.e. where the land is; where the company has its seat; etc) will result in the sound administration of justice. It is only necessary to displace the general rule as to jurisdiction or the parties’ own agreed jurisdictional choice if,
“… overall, the proceedings are so closely connected with matters of local company law and internal corporate decision-making in respect of the company that the proceedings should not be tried anywhere but in the courts of the state where the company has its seat.” (Footnote: 9)
In considering whether or not Article 22.2 issues are raised, the court must consider the nature of both the claim and any defences. (Footnote: 10)
In this context I also refer to the comments of Hamblen J in Depfa (supra) (Footnote: 11) that:
“… the court should be alive to the risk of applicants displaying only part of their hand in order to wrest jurisdiction away from the contractually chosen forum in favour of their home court.”
and that:
“The court’s task is to assess as best it can on the material before it whether the proceedings are likely to be “ principally concerned” with an Article 22.2 issue.” (Footnote: 12)
I agree with both those comments.
The expert evidence of the German lawyers
Before turning to consider the respective submissions of the parties, and to address the question as to whether, on the basis of an overall classification the English Proceedings are likely to be principally concerned with an Article 22.2 issue, I summarise very briefly the expert evidence of the German lawyers, which was adduced to the court on the application. This related to the German law of ultra vires, corporate capacity and directors’ authority. It formed the basis of KWL’s arguments:
that there was (at the very least) a good arguable case that there were substantial issues of law and fact as to the validity of the Balaba CDO; and
that there was (at the very least) a good arguable case that the validity issues raised in such evidence were questions as to the validity of the decisions of KWL’s organs within Article 22.2.
Professor Dr. Horst Eidenmüller provided an initial, and a supplemental report in reply, on behalf of KWL (“the Eidenmüller Reports”); Professor Dr. Siegfried Elsing provided a report on behalf of UBS (“the Elsing Report”). Both experts are highly distinguished lawyers; neither gave evidence orally or was cross-examined; and it is not necessary for me, for the purposes of this application, to decide whose view of German law is right where they differ.
It appeared to be common ground between the experts that, under German law, there is a distinction to be drawn between the “power of representation” of a managing director of a GmbH (“Vertretungsmacht”) and his “authority of representation” (“Geschäftsführungsbefugnis”). The first concerns the “external sphere” of a GmbH, and determines what the managing director can do (i.e. has capacity to do) on behalf of the company vis-à-vis third parties. The second relates to the “internal sphere” between the managing director and the GmbH and defines the scope of acts which he is personally authorised to carry out on behalf of the company, as a result of internal restrictions on, or limitations of, his authority.
It also appeared to be common ground that, as a matter of statute law, the power of representation of a managing director, so far as a third party is concerned, is illimitable and unlimited, subject to three exceptions material for present purposes. (Footnote: 13) These were:
in circumstances where representative power is allocated by statute law to another organ of the company, in particular to the shareholders’ assembly; for example the power of appointing or removing managing directors or amending the articles of association in particular respects which, pursuant to statute law, are allocated to shareholders;
in cases involving fundamental decisions that affect the company’s corporate structure and constitution, where statute law (as opposed to limitations in the company’s articles of association, or internal limitations) makes the managing director’s (external) power of representation contingent upon the prior (internal) approval by the shareholders’ assembly; for example, changing the corporate form of the GmbH or selling all the company’s assets and property, which by statutory provision are allocated to the shareholders’ assembly; and
in circumstances where there has been an abuse by the managing director of his power of representation, because he has exceeded the internal restrictions on the exercise of his power of representation, and the third-party knew, or could not have failed to realise, that the agent had acted beyond his internal limitations.
For KWL, Professor Eidenmüller relied upon three different concepts of ultra vires or lack of capacity, the effect of which, he said, would render the Balaba CDO void or invalid. I briefly summarise below Professor Eidenmüller’s three concepts, together with Professor Elsing’s response to the arguments contained in the Eidenmüller Reports.
Concept (1): It was common ground, as between both experts, that, in the case of a company incorporated under German public law, legal transactions, which are effected by the statutory representatives or agents of a corporate body incorporated under German public law, and which fall outside the public corporate body’s functions and sphere of activity, as defined by law or charter, are null and void.
However, Professor Eidenmüller contended that this concept also applied to private companies (GmbH), such as KWL, which were owned by municipal companies or companies in public ownership. He argues (Footnote: 14) that transactions such as the CDOs accordingly fell outside KWL’s functions and sphere of activity, which were limited to the provision of water facilities and disposal of waste water in the Leipzig district, and accordingly were ultra vires and therefore invalid, notwithstanding KWL’s private status as a GmbH. He referred to a case, Hauptgeschäftsstelle Fischwirtschaft, decided in 1956 (Footnote: 15) by the German Federal Court of Justice (Bundesgerichtshof or “BGH”), where the question was expressly left open.
Professor Elsing, on the other hand, stated that, as a matter of German law, the public law concept of ultra vires (i.e. acts beyond the legal capacity of an entity) was inapplicable to a private company such as KWL, incorporated under private law as a GmbH, notwithstanding that it pursued a public law purpose (viz. the supply of water and disposal of waste water). He stated that a private company could be incorporated for any lawful purpose, and that the objects (or purposes) stated in the GmbH’s articles of association do not limit the legal capacity of the company. He put forward a number of powerful arguments (Footnote: 16) to support his contention, including reference to the requirements of European Company Law. In relation to the Hauptgeschäftsstelle Fischwirtschaft case, he referred (Footnote: 17) to two recent decisions, decided in 2005 and 2008, relating to swap transactions entered into by municipal GmbHs, where the validity of the swaps was upheld, respectively by the Higher Regional Court of Naumberg and the District Court, and Higher Regional Court, of Würtzburg, notwithstanding challenges to their validity.
Concept (2): Professor Eidenmüller argues that the CDO Transactions were null and void, on the grounds that:
“While single acts outside the company’s objects are fully valid, such agreements which amount to a material change of the company’s line of business are not in the powers of the directors.” (Footnote: 18)
In other words, Professor Eidenmüller seeks to argue that concluding the agreements required an express resolution of KWL’ s shareholders, because it operated to change the purpose of the company as specified in the articles of association, and therefore fell within the proposition set out at paragraphs 47(i) and/or (ii) above. In support he relied upon a Federal Supreme Court decision about directors who entered into an intercompany agreement to submit their company to the direction and control of another company.
Professor Elsing’s response is that the conclusion of the CDO Transactions cannot be said to have done anything to change KWL’s articles or constitute a fundamental decision affecting the corporate structure or constitution of KWL. In entering into the transactions, KWL’s managing directors simply entered into a contractual relationship with UBS on behalf of KWL. Nor could it be said that the conclusion of such transactions violated the power of representation of another organ even if it were the case factually that the managing directors entered into the transactions without any prior approval from the Supervisory Board or shareholders. (Footnote: 19) The case cited by Professor Eidenmüller referred to a transaction of totally different character - an organisation agreement under corporate law, which altered the corporate structure of the company in a manner that could otherwise only be achieved through an amendment of its articles of association, not a contract under the law of obligations, as are the swap transactions in the instant case. (Footnote: 20)
Concept (3): As stated above, the experts were largely in agreement that, in circumstances where there had been an abuse by the managing director of his power of representation, because, in entering into a particular transaction, he had exceeded the internal restrictions on the exercise of his power of representation, and the third-party knew, or could not have failed to realise, that the agent had acted beyond his internal limitations, the transaction would either be null and void, or invalid (a distinction which is not material for present purposes). Concept (3) addressed this principle of “an abuse of power of representation”. There was some disagreement between the experts as to whether the concept was a corporate law, or a private law concept, but this was not a material point. As Professor Elsing pointed out, in order to find such an abuse, one must not only determine whether the managing directors exceeded their internal authority vis-a-vis the company (the objective criterion), but also one must establish what were the intentions and the knowledge of the persons acting on both sides of the transaction (the subjective criterion).
Both experts took the view, on the limited facts available to each of them, that, as a matter of law and on the construction of KWL’s articles of association, KWL’s managing directors would have (in the case of Professor Eidenmüller), or probably would have (in the case of Professor Elsing), exceeded the internal restrictions on the exercise of their power of representation, if the approval of the supervisory board and/or shareholders approval had not been obtained (in other words, that the objective criterion necessary to constitute “an abuse of the power of representation” was satisfied).
Although Professor Eidenmüller purported to express the view that the subjective criterion was also satisfied, namely that UBS knew, or could not have failed to realise, that the managing directors had acted beyond their internal limitations, I agree with Professor Elsing’s approach, and with Mr. Hapgood’s submission, that this issue is essentially a matter of fact regarding the state of UBS’ knowledge, and not one of German law. Whether or not this criterion is satisfied will depend on all the relevant evidence surrounding the Balaba Swap, including the circumstances relating to the advice given by Freshfields. Indeed, even in relation to the objective criterion, it seems to me from the evidence (Footnote: 21) that there are likely to be a number of factual issues relating to the knowledge or approval of KWL’s supervisory board and shareholders in relation to the Transactions. Thus, in general terms, the experts are agreed as to the constituent legal elements involved in Concept (3).
It was also Professor Elsing’s view that, on the facts of the case, there was no “decision” (i.e. no resolution) under German law which triggered the application of Article 22.2. (Footnote: 22) His view was that KWL’s challenge was directed at the contract itself. Professor Eidenmüller’s view is that Article 22.2 of the Regulation does not require a formalised procedure or an explicit resolution (Footnote: 23). Mr. Lord referred to various authorities which he submitted showed that it had been decided that Article 22.2 was not concerned only with internal disputes within the company or entity; e.g. paragraph 21 of the Court of Appeal’s judgment in BVG. I am not sure that this is precisely the point that Professor Elsing is making, but I do not regard this area of dispute between the experts as one that is sufficiently material to affect my overall classification of the proceedings. It is clear, not least from the BVG decision, that Article 22.2 can be engaged in the context of transactions between a company and third parties. The issue as to whether or not there had been any “decision” was not one that featured in Mr. Hapgood’s oral arguments.
KWL’s submissions in relation to the first issue
Mr. Lord submitted that, applying the approach expounded by the Court of Appeal in BVG, the English Proceedings are, on an overall judgment, “principally concerned with the validity of the Balaba CDO”, for the following reasons:
The question of the validity of the Balaba CDO lies at the heart of the litigation. The issue comes very close to being a dispositive matter: if the Balaba CDO is invalid, all of UBS AG’s claims in relation to it will fall away. Whilst the invalidity of the Balaba CDO will not strictly dispose of the claims for declarations in respect of the PMAs, these are clearly intended to be parasitic on the CDO transactions. If or to the extent that the CDO transactions are invalid for the reasons in Concepts (1) – (3), there is no practical reason why the declaratory relief proceedings regarding the PMAs should continue.
The validity issues are logically the first issues which fall to be determined. This underlines their prominence. Mr. Hapgood, in the course of his oral arguments, accepted that serious issues arise in relation to all three concepts.
“KWL readily accepts that these proceedings will raise issues other than the questions of validity of the Balaba CDO. KWL is still investigating the relevant facts, in particular those relating to the background against which the Balaba CDO was concluded. KWL fully reserves its rights in relation to any particular defences or counterclaims, which it may advance, in addition to that regarding validity. However, KWL does accept that the other issues in the proceedings may include certain other matters identified in Mr. McDonald’s first witness statement.” In his oral submissions in reply, Mr. Lord stated that KWL had no present intention to make claims of mis-selling, or for breach of a duty of care, but that it did not disavow the possibility of such claims being made in the future. However such submission (not unjustifiably) was made in heavily caveated terms. Indeed, Mr. Lord indicated that KWL might well make a claim for misrepresentation by omission.
Questions as to UBS’ subjective understanding of how the Balaba CDO worked or whether the transaction was of the type which KWL could lawfully enter into and had properly authorised are important issues which on any view will be raised in these proceedings. Accordingly “questions which are relevant to the validity issues are therefore likely to be intimately enmeshed with key points on the substance of the claim: this emphasises the extent to which matters relating to validity form the lynchpin of these proceedings and why the proceedings are “principally concerned with” validity. Because the issues of validity in this case raise questions of what was done to authorise the Balaba CDO, what UBS knew (actually or constructively) and the interaction between UBS and KWL, the factual points relevant to the Article 22.2 claim are likely to permeate the remainder of the issues in the claim to a much greater extent than was recognised to be the case in BVG or Depfa v Pisa.
Moreover Mr. Hapgood accepted in argument that all three German law Concepts raise serious issues to be tried .
Many of the so-called issues which Mr. Hapgood submitted were issues that would arise in the proceedings were fanciful and amounted to a smokescreen. The issues referred to in the German press articles were unlikely to surface in the English Proceedings. The German Proceedings brought by KWL were clearly limited to validity issues. Moreover, many of the factual issues referred to by Mr. Hapgood were in reality factual issues that were relevant to Concept (3).
Accordingly the court should be satisfied that these proceedings are “principally concerned” with questions of the validity of the Balaba CDO, that Article 22.2 is engaged and that the German courts have exclusive jurisdiction.
Moreover, recognising the exclusive jurisdiction of the German court would result in the sound administration of justice for the following reasons in particular:
the issues of validity raise real and substantial questions of German law which the German courts would be far better placed to determine than this Court; these questions include
whether the ultra vires doctrine applies to private companies in public ownership and performing exclusively public functions (Concept (1)), described by Professor Eidenmüller “as a question of fundamental importance to the further development of German law”; and
whether Concept (2) is applicable in circumstances where the directors of a company purport to commit to a transaction which would in effect change its objects.
These proceedings raise precisely the sort of issues of “local company law and internal corporate decision-making” which the Court of Appeal found in BVG should probably be considered by the courts of a company’s home state of incorporation, in the interests of the sound administration of justice.
In Depfa, Hamblen J found that the sound administration of justice did not require that the Italian courts should have exclusive jurisdiction, because the case would not demand an enquiry into the internal decision-making procedures of the defendant entity. (Footnote: 24) However the present case is quite different in this regard: Concepts (2) and (3) in particular will demand a detailed enquiry into how the Balaba CDO was actually internally approved by KWL and, in contrast, what steps should be taken by virtue of German law and KWL’s constitution in order for KWL to enter into such a transaction.
The presence of the English exclusive jurisdiction clause is irrelevant to the consideration of the issue of the sound administration of justice. Article 23 (5) of the Regulation provides expressly that exclusive jurisdiction and Article 22.2 trump a jurisdiction clause.
The fact that the Balaba CDO and the PMAs are governed by English law and may raise some questions of the law of agency is irrelevant. It is inevitable in the present case that wherever it is tried, the court will have to grapple with issues of foreign law.
UBS’ submissions in relation to the first issue
Mr. Hapgood submitted that the English Proceedings could not be classified overall as proceedings principally concerned with the validity of a decision of an organ of KWL, for the following (amongst other) reasons:
The case could not sensibly be distinguished from the facts of BVG. In both cases, the defendants’ attempt to escape their contractual obligations on the basis of highly technical points about capacity were but one of numerous issues in a much wider piece of litigation.
In the present case the non-Article 22.2 issues went far wider than they did even in the BVG case.
There were a whole range of issues relating to the contractual enforceability of the Balaba CDO and the PMAs which had nothing to do with the validity of the decision-making process of KWL’s managing directors and which were likely to assume the greatest importance in the litigation. These issues, both factual and legal, were identified not only in Mr. McDonald’s witness statement but also could be discerned from the various allegations which had been made against UBS in the German press. During the course of the hearing, Mr. Hapgood produced an extensive list of such issues.
As Aikens LJ pointed out in the BVG case (Footnote: 25), a substantial issue would arise as to how the Balaba CDO and the Subsequent Transactions worked according to their terms. This would not only necessitate the court looking at the Transactions themselves, all of which were subject to English contractual documentation, based upon common law principles and standard English financial market terms, but the court would also need to have an understanding as to how the previous transactions, namely the original CBLs and the four corporate Bonds worked. In the light of the allegations of contractual misconduct that inevitably would be made by KWL against UBS, it would be necessary for evidence to be adduced to explain the commercial risks to which KWL was exposed under these transactions, and to explain what, commercially, was the purpose of the Balaba CDO and the Subsequent Transactions and whether they were designed to achieve, or did achieve, diversification of risk in circumstances where, so UBS alleges, KWL was locked into a long-term investment structure, with only four counterparties.
In the light of KWL’s reservation of all its rights as to what it might allege by way of defence and counterclaim, and the fact that it was still conducting enquiries into the circumstances surrounding the transactions, it was highly probable that the kind of allegations, which had featured in the German press, would form the basis of complaints against UBS AG of mis-selling, negligent advice, breach of duty (both of care and fiduciary) and misrepresentation. These no doubt would form the basis of KWL’ s defence or counterclaim that the Balaba CDO was not enforceable as against it, and/or alternatively that any liability of KWL was matched by the quantum of its counterclaim as against UBS AG. This was an issue that was very much in the public arena, since, in a decision dated 24 March 2005, the Naumberg Higher Regional Court had dismissed allegations that a municipal GmbH lacked capacity to enter into a swap type transaction, but had gone on to hold the bank liable for negligent advice. Indeed this was an authority addressed by Freshfields in its opinion on capacity provided to UBS dated 7 June 2006.
Furthermore the issues raised as against UBS AM by KWL, in respect of the former’s role in constructing and managing the portfolios, have nothing to do with the capacity issue. These include allegations that the four Financial Institutions with whom KWL had entered into the Bonds should not have been included in the reference portfolios and that UBS AM managed the portfolios during the currency of the Transactions in a sub-standard manner. The requests by SAM for monthly and quarterly reports and information about the flow of funds under the Transactions strongly suggest that issues in the English Proceedings will include criticisms of UBS AM’s management over a period exceeding three years.
In addition, the press reports suggest that other serious allegations will be made against UBS AM, not least for misrepresentation, the inclusion of the Financial Institutions in the reference portfolios and serious self-dealing breaches of fiduciary duties. These are all issues that arise in the context of UBS’ English Proceedings.
Moreover, even when one addressed the so-called “capacity” issues, as raised under Professor Eidenmüller’s three concepts, the reality was that any such dispute would centre on a factual enquiry as to whether UBS AG knew, or could not have failed to recognise that the relevant acts were outside the managing directors’ authority of representation. There was very little, if any, disagreement as between the experts as to the constituent legal elements of Concept (3). Although UBS accepted, for present purposes, that Concepts (1) and (2) raised serious issues to be tried, the reality was that Professor Eidenmüller’s arguments in relation to these points were not based on any sound authority and were “adventurous”. The English court was better placed than the German court to conduct an enquiry into the state of UBS’ knowledge, since the transaction took place at UBS’ London branch and the documents were all in English. Moreover, the relevant evidence in relation to this issue will overlap with the issues of mis-selling and failure to advise, since matters such as UBS’ perception of the risk profile of the Swaps, and UBS’ perception of KWL’s motivations for entering into the Swaps will be relevant on the former issue as well.
The sound administration of justice did not require jurisdiction to be granted to the German court. The proceedings were not so closely connected with matters of internal decision-making by the relevant entity that they should not be tried anywhere but in the courts of the State of its seat. Moreover the following points supported UBS’ administration of justice arguments:
Under both the ISDA Master Agreements and the PMAs, the parties have agreed that English law should determine the disputes between them. The sound administration of justice required that appropriate weight should be given to the contractual wishes of the parties.
It was very likely, if the English proceedings were stayed, that the German Proceedings would ultimately raise all of the same issues that would have been raised in England. It was not consistent with the sound administration of justice that KWL should be able to wrest jurisdiction from the contractually chosen forum on one basis, and then be in a position to expand its German proceedings to include all its allegations which would not fall within Article 22.2. That was especially so in circumstances where KWL accepts that the issues raised in the English proceedings (apart from “capacity”) are live issues, had specifically stated that its enquiries were ongoing and had reserved its position as to what defences and counter claims it might raise.
UBS AM is not a party to the German proceedings. The English court is the only court presently seised of the issues as between KWL and UBS AM. UBS AM is one remove from any issue regarding KWL’s capacity to enter into the Balaba CDO.
Determination of the question “with what will the English Proceedings be principally concerned?”
I conclude, applying the approach articulated by Aikens LJ in BVG, that the English Proceedings are not likely to be “principally concerned” with the “validity of the decisions of” KWL, such as to require a declaration pursuant to Article 25 of the Regulation that the English court has no jurisdiction in relation to UBS’ claims, on the basis that the German court has exclusive jurisdiction. Based on the material which I have seen and have referred to above, I characterise the English proceedings as being “principally concerned with” the enforceability of the Balaba CDO at the suit of UBS AG, UBS AG’s entitlement (if any) to receive payment thereunder, and the conduct of UBS AM as portfolio manager under the PMAs. As part of those overall issues, the court will have to consider the various defences likely to be put forward by KWL, of which an important one, which could perhaps be decisive, will no doubt be the ultra vires or capacity defence based on Professor Eidenmüller’s three Concepts. But the reality is that the ultra vires /capacity issues are not going to be the principal focus of the English Proceedings as a whole.
Thus, I agree with Mr. Hapgood that, against the evidential background of the recent discussions between the parties, the allegations in the German press, and KWL’s express reservation of all its rights for the purposes of any defence and counterclaim in the English Proceedings, the likelihood is that KWL is going to seek to challenge the enforceability of the Balaba CDO on numerous legal and factual grounds apart from the ultra vires or capacity defence.
I accept Mr. Hapgood’s submission that the following issues (Footnote: 26) (amongst many others) are likely to arise in any trial of the disputes between UBS and KWL in relation to enforceability of the Balaba CDO, UBS AG’s money claims thereunder and the PMAs:
How did the June 2006 Swap, including the Balaba CDO, work according to its terms?
What was the nature of the relationship between KWL and UBS AG and, in particular, whether that relationship imposed any duty of care on UBS AG to advise KWL with respect to the June 2006 Swap, the Balaba CDO and the PMAs etc. or to ensure that the transaction was appropriate and suitable for KWL’s needs?
As a matter of law, was UBS entitled to rely upon and/or was KWL contractually bound or estopped by, the various representations made by KWL in the numerous contractual documents relating to the Transactions; for example: KWL’s letter of authority; KWL’s “objectives” letter dated 24 May 2006; the fact that identified Risk Factors were disclosed to KWL; KWL’s Answers to UBS’ Due Diligence Questions; KWL’s letter of representation, warranty and acknowledgement dated 24 May 2006; the representations made by KWL in the added Section 15 of the ISDA Master Agreement; and the representations made by KWL in clause 15.1 of the PMAs?
In particular, was KWL precluded from asserting any duty of care on the part of UBS AG to advise or any fiduciary duty on its part?
Did UBS AG in fact advise KWL in relation to the June 2006 Swap and, if so, what was the nature of that advice?
If any duty of care and/or fiduciary duty did arise, what was its scope and did UBS AG discharge any such duty? This, in turn will involve consideration of inter alia the following issues:
What was KWL’s risk exposure under the CBLs and/or the bonds or PUAs entered into with the Financial Institutions?
In what respects did the June 2006 Swap or the Subsequent Swaps change that risk exposure, either in relation to the scale of risk or its nature?
Could KWL have entered into the Balaba CDS (under which it bought protection) on the same terms as to premium without also entering into the CDS of the CDO portfolio (under which it sold protection)?
Whether UBS AG failed adequately to disclose any risks associated with the June 2006 Swap to KWL?
Did UBS AG take steps to ensure that the June 2006 Swap was brought before the KWL’s supervisory board and did this satisfy its duty of care?
What was the role of Value Partners and what advice did it give pursuant to the terms of its retainer?
What was the degree of risk in relation to the reference entities in the PMAs and the likelihood of a relevant number of defaults in the context of those agreements?
Was there any reason not to include the names of the four Financial Institutions, in relation to which KWL had an existing exposure under the Bonds, as entities in the reference portfolio?
Whether UBS AG made any misrepresentations to KWL prior to its entry into the June 2006 Swap and, if so, whether KWL relied on such statements in entering into the transaction?
If UBS AG did breach any duty to KWL or make any misrepresentations, whether KWL suffered any loss as a result? This is likely to involve consideration of whether:
KWL would have entered into the June 2006 Swap in any event, given the advice it received from Value Partners and/or Freshfields;
KWL would have entered into a different, potentially lower risk transaction instead; and
whether KWL would be required to repay the large premiums it received for entering into the June 2006 Swap and the Subsequent Swaps;
Whether the June 2006 Swap was void and/or invalid because it:
was ultra vires the corporate capacity of KWL under Concept (1);
was outside the power of representation of KWL’s managing directors because statute law required the approval of the supervisory board and/or its shareholders assembly, in that the June 2006 Swap involved a fundamental decision that affected the company’s corporate structure or effectively disposed of all the company’s assets and property, under Concept (2); and/or
was an abuse by the KWL managing directors of their power of representation, because they had exceeded the internal restrictions on the exercise of their power of representation, and UBS AG knew, or could not have failed to realise, that they had done so, under Concept (3)?
Whether KWL is liable to pay UBS AG the sum of £99,811,724.44 and/or any other sum between now and trial pursuant to the terms of the June 2006 Swap?
Whether UBS AM owed any duties to KWL to advise in relation to the Transactions, or of care ? (This will involve an analysis of how the PMAs worked according to their terms, and of the effect of the English law contractual documentation bearing upon that question.)
What was the scope of any duties which UBS AM owed to KWL in relation to the construction of the Portfolios?
To the extent that UBS AM owed any such duties, did it discharge them?
Whether UBS AM complied with its obligations of ongoing portfolio management after the execution of the PMAs? (This will require consideration of the duties/standards of care set out in the PMAS and the management of the portfolios by UBS AM over the period since execution of the Transactions.)
If UBS AM did breach its duties, the extent to which this caused KWL any loss?
Thus, it can be seen that, although the ultra vires/capacity issues are likely to require determination in the English Proceedings, it cannot be said, looking at the matter overall, that they are so predominant as to predicate the characterisation of the proceedings as “principally concerned” with issues of German law relating to the validity of decisions of an organ of a corporate entity, so as to result in the German court having exclusive jurisdiction.
Nor in my judgment does the sound administration of justice require that these proceedings should be tried in Germany. Looked at as a whole, they are not so closely connected with matters of internal decision-making that they should not be tried anywhere other than in the courts of KWL’s seat. In coming to this conclusion, I take into account the following factors:
The ultra vires/capacity issues arise in the context of a commercial contract or series of contracts between UBS AG, KWL and UBS AM which, by their terms are governed by English law and exclusive, or non-exclusive, English jurisdiction clauses. That is a factor which has to be given appropriate weight, in considering what is required by the concept of “the sound administration of justice”.
On my assessment of the expert evidence, the most significant issue on capacity will be the application of Concept (3), where there is no real dispute between the experts as to German company law. The dispute will be focused on the factual issue of UBS’ state of knowledge and what the supervisory board and/or the shareholders were told about the Transactions. The relevant evidence on this issue is likely to overlap with allegations of mis-selling and failure to advise. I am not convinced that Concept (1) will give rise to any difficulty of determination, given the current state of the authorities which are fully rehearsed in the experts’ existing reports. Nor does it seem to me that the experts’ difference of opinion in relation to Concept (2) requires that only the German courts should resolve all the issues that are likely to arise in any proceedings between UBS AG, UBS AM and KWL.
The other issues or likely issues in the English Proceedings are not within Article 22.2. The policy underlying Article 22.2 does not require those other issues to be tried in the German court. It is not consistent with the sound administration of justice that KWL should be entitled to rely on the limited Article 22.2 issue for the purpose of ensuring a transfer from the contractually chosen forum to Germany, and then be at liberty to include in the German Proceedings all the other allegations, which it is likely to raise and which do not fall within Article 22.2.
UBS AM is not a party to the German proceedings, yet KWL’s application seeks a stay of the entire English Proceedings, including the claims for declaratory relief made by UBS AM, on the grounds that the German court has exclusive jurisdiction. Again, the underlying policy of Article 22.2 does not require such an extreme course.
This is not a case where large number of shareholders or bondholders are going to be affected by the outcome of the ultra vires/capacity issues. The relevant parties to the litigation are limited to KWL, UBS AG and UBS AM. Whilst the decision may economically affect the shareholders in KWL, they are not in any sense parties to the proceedings.
All the relevant contractual and related documentation appears to be in English and subject to English law. Although no doubt there will be internal KWL documents in the German language, the commercial context is an English swap transaction, conducted in London, on English market ISDA terms with the London branch of a Swiss bank, with English solicitors acting for KWL.
For all the above reasons, I conclude that the English Proceedings are not principally concerned with the validity of the decisions of organs of KWL; that such issues as do fall within Article 22.2 do not require that the English court should declare that the German court has exclusive jurisdiction in relation to UBS AG and UBS AM’s claims; or that the English Proceedings of such claims should be dismissed, or stayed pending resolution of the German proceedings.
The second issue: which court was first seised?
KWL’s second, and alternative, argument is that, pursuant to Articles 27, 28 and 30 of the Regulation, the German court was first seised of proceedings involving the same cause of action and between the same parties, or alternatively a related action.
The relevant Articles provide as follows:
“ Section 9
Lis pendens – related actions
Article 27
1. Where proceedings involving the same cause of action and between the same parties are brought in the courts of different Member States, any court other than the court first seised shall of its own motion stay proceedings until such time as the jurisdiction of the court first seised is established.
2. Where the jurisdiction of the court first seised is established, any court other than the court first seised shall decline jurisdiction in favour of that court.
Article 28
1. Where related actions are pending in the courts of different Member States, any court other than the court first seised may stay its proceedings.
2. Where these actions are pending at first instance, any court other than the court first seised may also, on the application of one of the parties, decline jurisdiction if the court first seised has jurisdiction over the actions in question and its law permits the consolidation thereof.
3. For the purposes of this Article, actions are deemed to be related where they 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.
Article 30
For the purposes of this Section, the court shall be deemed to be seised:
1. At the time when the document instituting the proceedings or an equivalent document is lodged with the court, provided that the plaintiff has not subsequently failed to take the steps he was required to take to have service effected on the defendant ….”
In support of this contention, Mr. Lord submitted that Article 27 of the Regulation was engaged in relation to UBS AG’s claims against KWL, whilst accepting that Article 27 was not engaged in relation to UBS AM’s claim, since no proceedings had been brought by KWL against UBS AM in Germany. He submitted that, because UBS AG’s English claim involves the “same cause of action” as KWL’s German claim, and the Leipzig Landgericht was the court first seised, the English court was obliged under Article 27.1 of its own motion to stay the English Proceedings until such time as the jurisdiction of the German court was established. It was not for the English court to make its own evaluation of whether it considers that the German court has jurisdiction over the substantive proceedings. (Footnote: 27)
In relation to UBS AM’s English claim, Mr. Lord submitted that such claim was a “related action” within Article 28.3 of the Regulation, because it was so closely connected with UBS AG’s claim that it was “expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings”. Such a position was consistent with the decided authorities on Article 28 such as The Tatry (Footnote: 28).
Whilst Mr. Lord accepted that this argument might lead to an outcome whereby the German court (as the court first seised) might subsequently decline jurisdiction on the grounds that the English courts had exclusive jurisdiction over the dispute between UBS AG and KWL pursuant to Article 23.1, because of the exclusive English jurisdiction clause, it was clear to me that the purpose of this alternative argument was in fact to enable KWL to re-run the Article 22.2 issue before the German court in circumstances where, ex hypothesi, it had failed in the English court.
Mr. Lord further submitted that, on the chronology as set out in paragraphs 21 to 35 above, although the English claim form was launched before the German claim, UBS had deliberately delayed in serving its claim form for approximately 6 weeks. This meant that UBS had “subsequently failed to take the steps he was required to take to have service effected on the defendant” for the purpose of Article 30.1. The consequence was that UBS’ claim had lost priority as against the claim issued subsequently by KWL in the Leipzig Landgericht, because KWL had proceeded immediately to take all of the necessary steps to ensure that its claim was served.
In support of this contention Mr. Lord submitted as follows:
The wording of Article 30.1 made it clear that service of a claim cannot be postponed indefinitely without the claim losing priority.
As far as KWL knew there was no decided European or English case which dealt specifically with the question whether deliberate delay by a party in effecting service may amount to a failure to take the necessary steps within the meaning of Article 30.1. In some English cases, it appeared to have been assumed (without the question actually being decided), that the English court was seised upon issue of the claim form, even if service does not happen some time until after a related claim has been launched in another jurisdiction. Mr. Lord referred to a number of authorities including JP Morgan v Primacom (Footnote: 29) and Royal and Sun Alliance v MK Digital FZE (Footnote: 30).
Mr. Lord also prayed in aid the decision of Tugendhat J in Debt Collection London Limited v S K Slavia Praha-Fotbal AS (Footnote: 31) and the Commission’s Explanatory Memorandum for what became the Regulation. (Footnote: 32) This latter stated:
“Article 30 … reconciles the various procedural systems while ensuring both that applicants will all be on an equal footing and that there can be no abuse of procedures”
KWL’s argument was that, by delaying service of its claim form, UBS clearly intended to obtain the advantage from the Regulation rules of reserving its forum of choice, whilst keeping its options open as to whether and when to pursue its claim and seeking to pre-empt any rival claim by KWL. UBS was in substance engaging in forum shopping, which the proviso to Article 30.1 was designed to avoid. The European abuse of law principle therefore lent further support to KWL’s suggested interpretation of Article 30.1.
Finally, Mr. Lord submitted that, if there were any room for doubt as to whether his interpretation were the correct one, the English court should refer the question to the European Court of Justice pursuant to Article 267 of the Treaty on the Functioning of the European Union. In this context he relied upon the dictum of Sir Thomas Bingham MR. that, where a question of European law is critical to an English court’s decision,
“… the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself.” (Footnote: 33)
In his submissions in reply, Mr. Lord handed in to the court a formulation of the proposed question for reference to the European Court of Justice. I attach the draft question as an appendix to this judgment.
Substantially for the reasons put forward by Mr. Hapgood in his submissions in answer to Mr. Lord’s arguments in relation to Article 30, I reject KWL’s arguments on this point. I assume for the purposes of argument, but without deciding, that the claim brought by UBS AG involves the same cause of action as that brought by KWL against UBS AG in the Leipzig Landgericht. Likewise, I assume for the purposes of argument, but without deciding, that the claim brought by UBS AM is a related action within Article 28.
In my judgment, KWL’s argument that the German court was the first seised is unsupportable.
For the purposes of Article 30, KWL must show that UBS failed to take steps which it “was required to take to have service effected on the defendant”. European law does not prescribe what steps UBS was “required to take”. Nor does the decision in Debt Collection London Limited v S K Slavia Praha-Fotbal AS provide any assistance in this respect, because in that case it was Czech law which required the court fee to be paid.
In the present case the relevant requirement is to be found in CPR 7.5. That provides that a claim form which is to be served within the jurisdiction must be served within four months of the date of issue; and one which is to be served outside the jurisdiction must be served within six months of the date of issue. There is no additional requirement upon the claimant to serve “forthwith” or “as soon as practicable”. Nor is there any obligation upon a claimant to choose the quickest method of service, for example personal service rather than service by contractually-agreed method. Under CPR 7.6, a claimant who seeks to extend the time for compliance with CPR 7.5, must explain how he has taken all reasonable steps to comply with rule 7.5 (i.e. served within the requisite four- or six-month period), not how he has acted with all reasonable speed since issue of the claim form.
Under CPR 7.7, where a claim form has been issued, the defendant can make an application that the claimant serve the claim form on him. The rule does not assume that the claimant has committed any procedural breach by not having served the claim form. I agree with Mr. Hapgood’ s submission that it is only after a claimant fails to serve the claim form, despite having been ordered to do so, or after the relevant four month, or six month, period has expired, that he fails to take the steps required by CPR 7.7.
In the circumstances of the present case, it was, in my judgment, entirely reasonable for UBS to refrain from serving the claim form during the period when without prejudice communications were taking place. It is impossible to characterise such conduct as an abuse of process, as KWL seeks to do. Nor do I accept Mr. Lord’s submission that UBS was guilty of “forum shopping” by issuing proceedings in the contractually agreed exclusive jurisdiction, and delaying service of those proceedings pending commercial negotiations.
However, in any event, it does not seem to me that my conclusion as to the reasonableness of UBS’ behaviour is of any relevance. It cannot be appropriate that, under Article 30, the relevant court has to conduct an enquiry as to whether, applying some wholly uncertain subjective criteria, it regards the issuing party as having inappropriately delayed the service of process. That would introduce the very uncertainty that Article 30 was apparently designed to avoid. The only criterion has to be that the issuing party has subsequently “failed to take the steps he was required to take to have service effected on the defendant”.
The English court was therefore first seised, both in relation to UBS AG’s claim, and in relation to UBS AM’s claim, on 18 January 2010 when UBS’ claim form was issued in the Commercial Court. Moreover, on this analysis, there is no basis for the English court staying the UBS AM claims under Article 28, since only the court second seised is able to stay proceedings where there are related proceedings elsewhere.
In the circumstances, I see no basis for referring the question of European law to the European Court of Justice. The court can, with complete confidence, resolve the issue itself. Moreover, in the light of my decision on the Article 22.2 issue, the presence of the exclusive English jurisdiction clause in relation to UBS AG’s claim against KWL, and the absence of any German proceedings against UBS AM, it is difficult to characterise the point as one that is “critical” to my decision overall.
Conclusion
Accordingly, I dismiss KWL’s application to dismiss or stay these proceedings.