Where's the damage? High Court dismisses jurisdiction challenge in US$495 million claim
The High Court has dismissed UBS' challenge to jurisdiction in a ca. US$495 million claim – and in doing so set out useful guidance in terms of how the Court will determine "where the damage has occurred" in cases of economic loss. The judge looked for the most "natural analysis" in determining the manifestation of the loss, and broadly agreed that "the usual answer [in bad investment cases] will be that the loss occurs in, and at the place of, the bank account which was depleted."(1)
The underlying claims relate to allegations of negligent misstatements and advice provided by UBS to the claimants which, they say, led them to make an investment that was almost completely lost when UBS exercised security over shares held by it in London as mortgagee (contrary to the statements and advice).
UBS challenged jurisdiction of the English court in relation to the claims brought by the first and second claimants. In her judgment, Mrs Justice Cockerill DBE held that the English court did have jurisdiction: the claimants had a good arguable case that the damage had occurred in England and also that their claims in tort arose out of the activities of the branch established in England (where the shares in question had been liquidated).
There is an obvious appeal to this pragmatic approach to jurisdiction. It is good news for counterparties where security is held in the UK, in terms of giving some certainty that claims arising out of margin calls would be capable of being heard in the English courts, despite international dimensions of the wider transactions. On one view, this approach to assessing when and where the loss occurred is at odds with the usual approach taken in English law in "bad investment" cases in relation to limitation and causation – in which the loss is said to occur and crystallise when the investment is made. However, the judge was not persuaded by UBS' submissions (which focused on English authorities) that there was at least a "rule of thumb" that in a case of negligent misstatement, the damage will occur where the misstatement is received and relied upon (focusing on the distinction between direct and indirect loss).
In Autumn 2013, Mr Kwok (the first claimant) decided to invest around US$3 billion in certain shares (the "H-Shares") issued by a major Chinese financial institution ("Haitong" and the "Investment"). Mr Kwok was then approached by a trusted friend and advisor, Mr Stephen Wong (then a Managing Director of Wealth Management at UBS) who had learned of Mr Kwok's intentions. Mr Wong informed Mr Kwok that UBS were aware that Haitong would be issuing new H-Shares on the Hong Kong Stock Exchange ("HKEX"). UBS wished to participate as a placement agent, and if Mr Kwok could commend UBS to Haitong then he and UBS would assist and advise Mr Kwok in acquiring H-Shares in an advantageous manner. Mr Kwok decided to invest around US$1billion in partnership with UBS (and the remainder through other institutions). He did recommend UBS to Haitong, and UBS was appointed as placement agent.
The investment structure was complex, driven largely by the desire to (lawfully) avoid triggering the need for approval by the Chinese securities regulator. The H-Shares were acquired by a corporate vehicle (Dawn State, the third claimant) owned and controlled by a third party (Haixia, a Chinese financial services firm), with the purchase being funded in part (US$500 million) by Mr Kwok (through Ace Decade, the second claimant), and in part by a leveraged finance facility provided by UBS (US$750 million) secured against the H-Shares. The H-Shares allotted to Dawn State were assigned to UBS London by way of security and deposited in a secured account held with and registered to UBS London as custodian. Following the share acquisition, Mr Kwok (through Ace Decade as nominee) had an option to acquire Dawn State.
UBS provided the leveraged facility to Dawn State – and in all contracts it expressly identified UBS London or UBS London Branch. Under the terms of the facility, UBS was entitled to terminate the financing if any of the Full Mandatory Pre-Payment Events occurred, which included triggers relating to a collapse in the H-Shares.
Between 1 and 6 July 2015 there was a substantial drop in the Chinese stock markets – the price of the H-Shares declined very rapidly which triggered a series of events. UBS was entitled to (and did) demand mandatory prepayment of the entire facility over the subsequent three days (the demand notice was made in the name of UBS London Branch). The second claimant informed UBS that it could not make payments according to the stringent deadline, and despite pleas from Mr Kwok, Mr Wong informed him that no additional time would be given, and UBS London had resolved to sell the H-Shares which it held as security. UBS London issued a "Notice of Acceleration Event" and then exercised its rights as mortgagee under the security terms, purportedly selling the H-Shares on or around 15 July 2015. UBS London remitted the balance of US$4.7 million to Dawn State (the amount remaining after all fees and charges had been applied). Ace Decade exercised its option on 18 December 2015, and therefore now owns Dawn State.
The claims are in negligent misstatement. The claimants allege that Mr Kwok repeatedly expressed concerns regarding the inclusion of the mandatory prepayment provisions in the facility documentation, and was given assurances by Mr Wong to the effect that (i) UBS London had a policy that it would not demand additional collateral or mandatory prepayment, and even if it did make such demand, it would give them additional time to make such payments, (ii) UBS London had given such favourable treatment to the shareholder of the Ping An insurance company, and would treat the claimants in the same way, and (iii) Mr Kwok and Ace Decade should not be concerned about the margin call and/or prepayment provisions.
The claimants maintain that those representations were false, and the advice was negligent – and that as a result they have suffered substantial economic loss, for which they seek damages (in the principal sum of US$495 million).
Challenge to jurisdiction
UBS challenged the court's jurisdiction in relation to claims by the first and second claimants (but not the third defendant's claims – which UBS accepts fall within a jurisdictional clause contained within facility agreement and connected documentation).
UBS focused on the international nature of the parties' dealings: the relationship for the tort claims was between Mr Kwok and Mr Wong (who at the time was the Managing Director for UBS Wealth Management in UBS Hong Kong), the torts are alleged to have been committed by Mr Wong in Hong Kong, the subject matter of the advice and misstatements relates to investments in shares in a Chinese company, listed on HKEX, and the investment used Chinese intermediaries.
It was common ground that Lugano II applied for the purposes of determining jurisdiction over the claims (UBS being a Swiss company domiciled in Switzerland – a Lugano member state)2
The general rule under the Brussels-Lugano scheme is that a defendant should be sued in their state of domicile, with special jurisdictions operating only as derogations from the general rule which has "overriding importance". The main focus in the judgment is the exception under Article 5(3) of the Lugano Convention: that special jurisdiction will be established in the courts:
"for the place where the harmful event occurred or may occur."
UBS sought to rely largely on domestic case law, which focused on the proposition that there is at least a "rule of thumb" that in a case of negligent misstatement the damage will occur where the misstatement is received and relied upon and the distinction between direct and indirect loss. The judge commented that the domestic case authorities on the question of where the damage had occurred had been of little assistance, given they largely related to non-contingent loss crystallising on the entering into of an agreement: instead she was persuaded to take full account of the EU jurisprudence in this area.
Having carefully considered both the domestic and European case law, the judge gave useful guidance as to how the question of "where the damage has occurred" will be assessed in cases of economic loss:
i. The leading CJEU cases demonstrate that in the context of the damage head it is the manifestation of damage that is relevant, not the transaction that ultimately led to such loss.
ii. Manifestation is more likely to be associated with crystallisation of the damage than the origins of the transaction in cases where there is a difference.
iii. Caution may need to be exercised when looking at damage that may or may not occur depending on what happens in the future. In this context careful thought may be needed to distinguish between the last thing that happened to bring the loss home to the claimant and the point where the loss itself becomes clear.
iv. While foreseeability and a consideration of factors relating to the sound administration of justice cannot provide an independent basis for a conclusion that jurisdiction resides in a particular location, the CJEU has clearly used such factors in some cases. At times the relation of these factors to the reasoning is unclear. However their existence and the rationale for the rule seems to justify their use by way of cross-check where the analysis simply by reference to manifestation remains troublesome.
Applying those principles in this case, the judge concluded that the only logical way to view the manifestation test in this case is to focus on the moment and place where the loss occurs. She held that "[i]t cannot sensibly be said that the damage in question "actually manifested" when Mr Kwok and Ace Decade relied on the representations, or when the funds were sent (from whatever destination). Nor can it be right that damage is suffered at the last point - when Mr Kwok and Ace Decade feel the loss."
Rather, she concluded that the "most natural analysis" is to view the damage as occurring where and when the H-Shares were liquidated by UBS. Therefore, the judge held that the money in this case is "lost" to the claimants in London, where the shares they had invested in were held and where the funds they had invested were depleted: the loss crystallises, manifests, becomes certain and irreversible with that sale of shares. The judge also looked at the "special circumstances" by way of cross check – an approach justified in the authorities – and concluded that those circumstances also pointed to London (the secured account being held in London, and all contractual documents were in English and governed by English law). Accordingly, the judge held that both the test and cross-checks indicate that the requirements for Article 5(3) were established, and the challenge to jurisdiction was dismissed.
1 Professor Briggs, Civil Jurisdiction and Judgements (7th ed. 2021 at p. 275)
2After the expiry of the transition period under the UK-EU Withdrawal Agreement, the Lugano Convention continues to apply to proceedings already commenced