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12 Sep 2018

Competing jurisdiction clauses in interest rate swap cases

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Two recent decisions, with similar facts, have provided clarity on the approach the Courts should take when faced with competing jurisdiction clauses. In Deutsche Bank AG v Comune di Savona [2018] EWCA Civ 1740 (27 July 2018) the Court of Appeal overruled an earlier decision of the lower court, drawing on the recent Commercial Court decision of Mr Justice Knowles in BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2018] EWHC 1670 (Comm), and finding that the English Court had jurisdiction to hear claims for declarations regarding the terms and effect of an ISDA Master Agreement.

The issue of competing jurisdiction clauses is a common problem in cases relating to interest rate swaps (or other hedging/derivative transactions), primarily arising when the contractual arrangements that govern the underlying relationship between the parties have jurisdiction clauses that differ from the jurisdiction clause of an ISDA Master Agreement that the parties later enter into in respect of interest rate and other swaps. There has been a divergence in a number of first instance decisions in such cases, on which the Court of Appeal's decision in Deutsche v Savona provides some clarity.

In Savona, the parties had entered into an underlying advisory agreement (the "Convention") that gave exclusive jurisdiction to the Courts of Milan, and then subsequently entered into a multicurrency ISDA Master Agreement in respect of two interest rate swap transactions, which gave non-exclusive jurisdiction to the English Courts.  A number of years later, Savona and the bank were publicly criticised by the Italian Court of Auditors for entering into these transactions, which led to Deutsche commencing proceedings in the Commercial Court in London, seeking declarations relating to the validity of the swaps. Savona challenged the jurisdiction of the English Court on the basis that the Convention was the agreement that governed the legal relationship in question and therefore it was the Milan Court that had jurisdiction. Savona then issued proceedings in Italy.

Savona's jurisdiction challenge was heard in the Commercial Court by HHJ Waksman QC, who found in favour of Savona on the basis that while, if read in a vacuum, the English law jurisdiction clause would bring the declarations sought within the jurisdiction of the English Court, this would not take account of the contractual context of the agreement, or the desirability of avoiding any overlap between two jurisdiction clauses.

The Court held that the Convention was concerned with Deutsche's role as an adviser and the Master Agreement was concerned with Deutsche's role as a counterparty to the swap transactions. The Judge therefore considered that while the declarations sought related to the swaps, they essentially concerned Deutsche's role as an adviser and were therefore much more naturally within the scope of the Italian jurisdiction clause. The Judge further found that the declarations sought could act as defences to proceedings in Italy arising out of the Convention, and that the English Court should therefore not be given jurisdiction to make those declarations.

Following this decision, Mr Justice Knowles reached a different conclusion in BNP Paribas v Trattamento, on similar facts. In this case, the parties had entered into a financing agreement which gave the Courts of Turin exclusive jurisdiction, whilst an ISDA Master Agreement that the parties subsequently entered into, in respect of related interest rate swaps, gave the English Courts non-exclusive jurisdiction. BNP Paribas issued proceedings in England seeking declarations in respect of the validity of the swaps.  Trattamento challenged the jurisdiction of the English Courts.

The Judge considered that the declarations sought derived directly out of the language of ISDA Master Agreement, or were consequent on those declarations, and the English Court therefore had jurisdiction to hear BNP Paribas' claim. The language of the two jurisdiction clauses made it clear that one was concerned with the finance agreement and one with the ISDA Master Agreement, which reflected the fact that the parties had more than one relationship.

Mr Justice Knowles referred to the fact that, in Deutsche Bank v Savona, HHJ Waksman QC had considered how the English declarations could act as a defence to Italian proceedings, which suggested that they were caught by the Italian law and jurisdiction Convention, but considered that this approach risked taking the focus away from the relevant question as to whether the English Court actually had jurisdiction.  The Judge further found that the most compelling reason for reaching his decision in respect of the jurisdiction clause in the ISDA Master Agreement was the fact that ISDA Master Agreements are worldwide standard documents that parties enter into for the purpose of achieving consistency, certainty and predictability. Although relevant background is to be taken into account in matters of contractual interpretation, a standard form document is not context specific and therefore evidence of the particular factual background or matrix has a much more limited, if any, part to play in its interpretation.

The appeal of the decision in Deutsche v Savona was heard by the Court of Appeal shortly after this decision. The Court of Appeal upheld Deutsche’s appeal, broadly following the approach in BNP Paribas and finding that the declarations sought were within the jurisdiction of the English Court. The Court's judgment set out guidance on how the construction of jurisdiction clauses in these situations should be approached. In particular, the Court found that:

  • Questions of construction must depend on the terms of the individual contract;
  • The Convention and the Master Agreement established two separate "particular legal relationships" for the purposes of Article 25 of the Recast Brussels Regulation (which provides that, where the parties have agreed that a court of a member state is to have jurisdiction to settle disputes which may arise in connection with a particular legal relationship, that court shall have jurisdiction); the Convention established the generic relationship and the Master Agreement the specific interest rate swap relationship;
  • The existence of an entire agreement clause in the Master Agreement was a strong indication that the swap contracts were separate contracts;
  • Whilst it is desirable for potentially conflicting jurisdiction clauses to be given mutually exclusive constructions, this may not always be possible and so the Court should not seek to adopt a convoluted construction simply to ensure that the two clauses are mutually exclusive;
  • The approach of Mr Justice Knowles in BNP Paribas v Trattamento, that the focus of the question before the Court should be on whether the English Court has jurisdiction and not an exercise of predicting whether declarations could act as defences in other proceedings, was approved.

Although the Court of Appeal in Savona made it clear that questions of construction must depend on the terms of the individual contracts, this decision has provided helpful clarification on the approach to construing competing jurisdiction clauses where, as frequently happens, a general (often advisory) relationship is followed by a specific hedging contract under an English law ISDA Master Agreement.  The Court's reliance on the entire agreement clause will also be of comfort to participants in the financial markets.

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