10 Feb 2017

Stephenson Harwood successful in landmark loan enforcement case

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Introduction

The judgment of Mr Justice Cranston in Commerzbank AG v Pauline Shipping and Liquimar Tankers Management Inc, 3 February 2017, is one of great importance for banks and other parties involved in international finance.

The Judge held that the jurisdiction clause in a shipping loan agreement and related guarantee (an "asymmetric" clause of a kind commonly used in finance documentation) permitted the bank to bring enforcement proceedings in England against the borrowers, in spite of the fact that the borrowers had already started proceedings against the bank in Greece.

In this Briefing Note, Duncan McDonald (who led the team at Stephenson Harwood acting for the successful bank), discusses the implications of the judgment.

The problem of multiple claims

The background is the problem of claims being brought in the courts of different EU Member States between the same parties and involving the same issues. This situation can occur even where the relevant contract contains a jurisdiction clause providing that any claims shall be brought in the courts of a named Member State.

Historically the problem could arise because European law effectively decided that the court where proceedings were commenced first should prevail, even in the face of an exclusive jurisdiction clause specifying that all disputes must be submitted to the courts of a different Member State. So a party which anticipated being sued in the courts of Member State A (the courts identified in the jurisdiction agreement) could delay or disrupt the proceedings by commencing proceedings first in Member State B (preferably a Member State the courts of which have a reputation for slow proceedings or which would be less familiar with the relevant principles of English law). If a claim was subsequently brought in the courts of Member State A, that claim had to be stayed.

The Recast Regulation on Jurisdiction and the Enforcement of Judgments 2012 ("the Recast Regulation") was intended to deal with this problem. It provides that where there are proceedings in different Member States between the same parties involving the same cause of action, and the courts of one of those Member States has exclusive jurisdiction under a jurisdiction agreement, then the courts of any other Member State must stay their proceedings until the court specified in the exclusive jurisdiction agreement declares that it has no jurisdiction. So the court specified in an exclusive jurisdiction agreement prevails, not the court where proceedings were commenced first.

Whilst the intention of the Recast Regulation was clear, the question in the present case (previously undecided by the English courts) was how it applies to an asymmetric jurisdiction clause, a clause which is very common in finance documentation but which may also be found in many other areas of commerce.

The facts

The judgment relates to two sets of proceedings before the Commercial Court in London. The claimant in both proceedings is Commerzbank, a German bank. The defendant in the first action is Liquimar Tankers Management Inc as guarantor of a loan made by the bank. The defendants in the second action are (i) Pauline Shipping Ltd, the borrower under a second loan made by the bank and (ii) Liquimar, as guarantor of that loan. Stephenson Harwood instructed Poonam Melwani QC of Quadrant Chambers who represented the bank at the hearing.

Both the loan and guarantee documentation contained asymmetric jurisdiction agreements. These provided that either party could bring proceedings in the English courts, but that the bank (alone) also had the right to sue in any other court of competent jurisdiction. Clauses of this kind are important to banks, as they give them flexibility to seek enforcement wherever a borrower has assets, while ensuring that the bank can only be sued in the named jurisdiction. Such clauses are, the Judge observed, "a long established and practical feature of international financial documentation".

Following events of default by the borrowers the bank warned Liquimar and Pauline of its intention to commence proceedings in England. However, before the bank brought its claim in England, Liquimar and Pauline commenced proceedings against the bank in Greece.

In the Greek proceedings Liquimar and Pauline sought orders that there was no liability to the bank under the guarantee, and claimed damages from the bank under Greek law for (amongst other things) reputational loss.

The bank subsequently commenced proceedings in England against Liquimar and Pauline, claiming (amongst other things) the amount outstanding under the loan, a declaration of non-liability in respect of the claims made by Pauline and Liquimar, and damages and/or an indemnity for breach of the jurisdiction clauses in the loan agreements and guarantees. It was common ground between the parties that (apart from the claims for breach of the jurisdiction clauses) the claims in the London actions involved the same causes of action as the claims in the Greek actions.

Liquimar and Pauline applied for (among other things) a stay of the actions in England, in favour of the matters in issue being decided by the Greek court.

The Recast Regulation and exclusive jurisdiction

The issue was therefore whether the bank could proceed with its claim in England, in spite of the parallel proceedings in Greece. The answer turned on whether the asymmetric jurisdiction clause conferred exclusive jurisdiction on the English courts for the purposes of the Recast Regulation.

Liquimar and Pauline argued that the bank should not be allowed to proceed in England, and that the English court should stay its proceedings pending the ruling of the Greek court. Their core argument was that the asymmetric jurisdiction clause was not an exclusive jurisdiction clause, on the ground that the clause permitted the bank to commence proceedings not only in England but in any other court of competent jurisdiction. Accordingly, they argued, the bank could not rely on the rule that the courts named in an exclusive jurisdiction clause should prevail.

The judgment

The Judge refused the defendants' applications for a stay and confirmed that the English courts had jurisdiction. Accordingly, the bank could continue with its claim in England.

The Judge held that the reference in the Recast Regulation to "an agreement [which] confers exclusive jurisdiction" includes asymmetric jurisdiction clauses such as those in the present case:

"where a clause confers exclusive jurisdiction on the court or courts of a Member State when one party sues, the clause will still be an exclusive jurisdiction clause for the purposes of [the Recast Regulation] even where, if the other party to the clause sues, the clause shows the parties to have agreed that jurisdiction is to be conferred differently, or allowed to engage differently."

The Judge went on to say that the conclusion that an asymmetric jurisdiction clause was exclusive was consistent with the aims of the Recast Regulation, which were to enhance the effectiveness of exclusive jurisdiction clauses and to avoid abusive tactics. The defendants had agreed to sue only in England, but instead had initiated proceedings in Greece. It would undermine the agreements of the parties and foster abusive tactics if the jurisdiction clauses in the present case were not to be treated as exclusive.

Comment

The judgment provides welcome certainty in an area where there had previously been much academic debate but no determination of the matter by the English courts. It enhances the effectiveness of asymmetric jurisdiction clauses, and makes it less likely that abusive tactics will be successful.

Part of the object of the Recast Regulation was to prevent "torpedo litigation" whereby a party to a jurisdiction agreement would commence proceedings in a jurisdiction other than the agreed one, thus causing delay and disruption. That objective would have been completely undermined if the relevant provision of the Recast Regulation had been held not to apply to asymmetric jurisdiction clauses, which are standard in finance documentation.

Subject to any appeal, the matter is now settled so far as the English courts are concerned. Whilst there remains some uncertainty about how such clauses will be treated in other jurisdictions it is to be hoped that, in the interests of discouraging abusive litigation tactics, the courts in other jurisdictions will agree with the approach taken by the Judge in this case.

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Duncan McDonald
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