ISDA agreement wins jurisdiction clause battle in Court of Appeal

The Court of Appeal recently confirmed that an English jurisdiction clause in the underlying International Swaps and Derivatives Association Master Agreement under which certain swaps were made should be applied to disputes relating to the swap transactions, rather than an Italian jurisdiction clause in a competitor agreement governing the parties' generic relationship.

In Deutsche Bank AG v Comune di Savona⁽¹⁾ the Court of Appeal confirmed that an English jurisdiction clause in the underlying International Swaps and Derivatives Association (ISDA) Master Agreement under which certain swaps were made should be applied to disputes relating to the swap transactions, rather than an Italian jurisdiction clause in a competitor agreement governing the parties' generic relationship.

Background

In 2007 Deutsche Bank entered into several agreements with the Italian local authority, Comune di Savona, including:

• an agreement entitled 'the Convention' in which Deutsche Bank agreed to provide general advisory services to Savona; and subsequently
• an ISDA Master Agreement and two interest rate swap transactions governed by its terms.

Both agreements contained jurisdiction clauses – the Convention was subject to the Court of Milan, whereas the Master Agreement was subject to the English courts. Materially, the Master Agreement itself contained an entire agreement clause.

In 2016 an Italian judicial body published a decision which criticised Savona's entry into the swap transactions and envisaged possible legal action regarding their validity.

This decision prompted Deutsche Bank to issue proceedings in the English High Court seeking a number of declarations that the swap transactions were valid, tracking the wording of various clauses in the Master Agreement. In response, Savona issued an application challenging the English court's jurisdiction pursuant to Article 25 of the Recast Brussels Regulation. The jurisdiction challenge turned on whether the English or Italian jurisdiction clauses in the two agreements governed the dispute.

At first instance, the court held that the Italian jurisdiction clause in the Convention governed the dispute and found in favour of Savona. Deutsche Bank appealed the decision.

Appeal

The Court of Appeal overturned the first-instance decision, finding in favour of Deutsche Bank.

The court began by setting out various statements of principle about what approach should be adopted in cases where two theoretically competing jurisdiction clauses existed. One such case was Monde Petroleum SA v Westernzagros Ltd,⁽²⁾ which stated that such clauses would generally be construed as mutually exclusive rather than overlapping (provided that the language and surrounding circumstances allowed this).

Accordingly, the court considered where the appropriate demarcation existed between the relationships governed by the two contracts. The court identified two distinct legal relationships:

• a generic relationship governed by the Convention; and
• a specific interest rate swap relationship governed by the Master Agreement or swaps contracts.

In arriving at this view, the court thought that the existence of an entire agreement clause in the Master Agreement was a "strong confirmation" that the swaps contracts were self-contained contracts and disputes relating to them would fall within the Master Agreement jurisdiction clause, regardless of any previous relationships.

The Court of Appeal's point of demarcation was different to that decided at first instance. At first instance, it had been held that the demarcation point lay, on the one hand, between Deutsche Bank's generic advisory duty as applied to the swaps contracts (which would be covered by the Convention) and, on the other hand, Deutsche Bank's role as a counterparty to the swaps contracts (which would be governed by the Master Agreement), which would presumably cover situations relating to the validity or mis-performance of the swaps. The Court of Appeal criticised this approach as being "less natural and reasonable" than its own view and disagreed with the High Court's lack of emphasis on the entire agreement clause in the Master Agreement.

Having established the English court's jurisdiction, the Court of Appeal was prepared to grant the specific declarations sought by Deutsche Bank which either tracked precisely the wording of the Master Agreement or, in the case of one declaration, "[made] explicit the alleged consequences of the other declarations".

It is also noteworthy that the Court of Appeal was critical of the first-instance decision insofar as it had heard evidence from Italian law experts and gone on to consider the impact of granting the declarations sought on proceedings relating to the swaps agreements that were underway in Italy. In the Court of Appeal's view, this was unnecessary and the appropriate remit of the English court in such applications was to "look at both jurisdiction clauses and decide whether the English claim fell within the English [jurisdiction] clause". The only relevance of foreign law evidence in such applications was to inform the court of any difference in the law in the other jurisdiction regarding contractual construction, and the court emphasised that parties should seek permission before adducing extensive foreign law expert evidence.

The court also approved of the recent High Court decision in BNP Paribas S A v Trattamento Rifiuti Metropolitani SpA⁽³⁾ (for further details please see "Importance of industry-standard documentation when considering competing jurisdiction clauses"). That case also involved swaps contracts governed by the terms of an ISDA Master Agreement with an English jurisdiction clause competing against an Italian jurisdiction clause in a separate contract and focused solely on the issue of whether the English court had jurisdiction.

Comment

This decision will provide counterparties entering into specific transactions via framework agreements (eg, those provided by ISDA) with significantly greater certainty that a specific transaction entered into pursuant to such an agreement will be governed by the jurisdiction specified in that agreement. However, as the court stressed, questions of construction depend on the terms of individual contracts and so different cases will turn on their own facts.

^References

^{(1) [2018] EWCA Civ 1740.}

^{(2) [2015] EWHC 67 (Comm).}