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Court of Appeal upholds decision on importance of industry standard documents in conflicting jurisdiction clauses

13 June 2019. Published by Andy McGregor, Head of Civil Fraud and Steven Rajavinothan, Associate

The Court of Appeal upheld the decision of the High Court[1], highlighting the risk that the English and Italian Courts may reach different decisions on the underlying factual background of related disputes even where the disputes could be said to fall under different agreements [2]. Therefore, parties need to appreciate that the English Court will put the certainty of industry standard documentation (such as ISDA Master Agreements) first such that it is dangerous to have different jurisdiction and/or governing law clauses in related agreements.

Background

In October 2008, Trattamento Rifuiti Metropoliani SpA (TRM) entered into a Financing Agreement with a syndicate of banks led by BNP Paribas SA (BNPP) in order to design, build and operate a facility in Torino to convert waste into energy.

In March 2010, in accordance with the Financing Agreement, TRM and BNPP entered into an interest rate hedging transaction governed by a 1992 edition ISDA Multi-Currency Cross Border Master Agreement which was expressly governed by English law and provided that:

"In the case of conflict between the provisions of this Agreement and the [Financing Agreement] … the provision of the [Financing Agreement] … shall prevail".

Later that month, the parties agreed an interest rate swap under the Master Agreement.

The dispute

In September 2016, BNPP commenced proceedings against TRM in the English Commercial Court. BNPP sought various declarations in relation to TRM's obligations under the interest rate swap conducted under the ISDA Master Agreement.

In April 2017, TRM commenced proceedings against BNPP in Italy in respect of whether the hedging strategy was properly implemented.

The High Court decision

The High Court began its analysis of jurisdiction by referring to Article 25(1) of the Brussels Regulation (Recast) which provides that if parties have agreed that the courts of a Member State have jurisdiction to settle any disputes that arise, that court has jurisdiction to do so, irrespective of where the parties are domiciled.

TRM objected to BNPP commencing proceedings in England on the grounds that there was no serious issue to be tried because there was no dispute regarding the ISDA Master Agreement. The High Court disagreed: while there was no dispute over the validity of the ISDA Master Agreement, there was a dispute as to the rights BNPP had under the interest rate swap conducted under the ISDA Master Agreement.

TRM also unsuccessfully argued that the English court had no jurisdiction to hear the claim because:

  1. the ISDA Master Agreement provided that in cases of conflict, the Financing Agreement would prevail over the ISDA Master Agreement; and
  2. the factual context surrounding the agreements should be considered in interpreting the jurisdiction clauses, and the context supported TRM's position.

The High Court held that there was no conflict as the parties had different relationships, with the Financing Agreement and the ISDA Master Agreement governing different legal relationships.  Therefore, the respective jurisdiction clause in each of the agreements was concerned with separate matters. Applying a broad and purposive construction of the contracts (as per Sebastian Holdings Inc v Deutsche Bank [2011] 1 Lloyd’s Rep 106), the Court found that the jurisdiction clauses could fit together and alas, there was no basis for rewriting the contracts.

 

The High Court disagreed that the factual context supported TRM's position.  The Court found the use of ISDA documentation – an industry standard document – was the most important point of factual context; it signalled the parties' interests in achieving consistency and certainty in this area of financial transacting.  The Court added that where parties use industry standard documentation, they are even less likely to intend that provisions in that documentation may have different meanings depending on the context.

 

The grounds of appeal

 

TRM appealed the High Court's decision on the basis that:

  1. The judge failed to construe, correctly or at all, the Financing Agreement jurisdiction clause;
  2.  The judge did not correctly conduct the analysis required by Article 25 of the Brussels Regulation (Recast);
  3. The judge was wrong to find that the conflicts provision in the ISDA Master Agreement was not engaged; and
  4. The judge was wrong to find that, with one exception, all of the declarations sought either derive directly from the contractually agreed language of the interest rate swap, and in particular the ISDA Master Agreement or are consequent on those declarations.

The Court of Appeal decision

 

The appeal was dismissed on all four grounds.

 

Considering the first three grounds together, the Court of Appeal found that the High Court's interpretation of the jurisdiction clauses was correct; where a court is "faced with multiple jurisdiction clauses, it must construe them all and do so in a careful and commercially-minded way", as was confirmed in the recent Court of Appeal decision in Deutsche Bank AG v Savona [2018] EWCA Civ 1740.  In this case, the Court of Appeal found that the clauses concerned different matters: the ISDA Master Agreement jurisdiction clause was to govern any disputes relating to the interest rate swap conducted under the Master Agreement (although pursuant to the Financing Agreement), whilst the Financing Agreement jurisdiction clause was to govern disputes relating to the Financing Agreement.  The Court of Appeal held that the parties had two distinct legal relationships in relation to one another and that the two jurisdiction clauses should be understood as being complementary rather than competing; therefore, the conflicts provision in the ISDA Master Agreement was not engaged and disputes concerning the swap fall exclusively within the jurisdiction clause of the ISDA Master Agreement.

 

The fourth ground of appeal was dismissed on the grounds that all of the declarations sought, with only minor amendments, were governed by the ISDA Master Agreement (and therefore, the English jurisdiction clause) because the declarations were related to the interest rate swap rather than the underlying relationship governed by the Financing Agreement.

 

Comment

 

The Court of Appeal decision reinforces the High Court's findings that it is i) important that jurisdiction clauses provide parties with certainty as to where their disputes will be resolved and ii) parties' use of industry standard documentation is an indicator that they are even less likely to intend that provisions in that documentation may have different meanings depending on the context.

Additionally, this decision clarifies that before it can be said that jurisdiction clauses are in conflict, the Court must be satisfied that a dispute cannot be said to be more clearly governed by a jurisdiction clause in one agreement rather a conflicting jurisdiction clause in another agreement.

[1]  Please see the authors' article on the High Court judgment here: https://www.internationallawoffice.com/Newsletters/Litigation/United-Kingdom/RPC/Importance-of-industry-standard-documentation-when-considering-competing-jurisdiction-clauses

 

[2] BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2019] EWCA Civ 768