In interpreting jurisdiction clauses in complex contract
litigation over collateralized debt (real estate backed security) obligations
where one party has sued in New York courts and opposing party has invoked
jurisdiction of English courts over similar issues, Court of Appeal (Civil
Division) upholds lower court’s ruling that rejected resort to English courts
This appeal turns on the construction of jurisdiction
clauses. The principal issue is whether the English jurisdiction clause in one
of the documents recording the complex transaction between the parties applies
to the claims in the action in England for the negative declaration. The
English court of first instance concluded that it did not.
This dispute concerns derivatives in relation to the
property market, or Collateralized Debt Obligations (CDOs). The contractual
documentation in this matter consists of more than 500 pages; its size and
complexity, which is no doubt duplicated in many other transactions, make it
easier to understand, if not to excuse, why many senior banking figures
throughout the world had little understanding of this market and of the very
high risks their institutions were undertaking.
HSH Nordbank AG (HSH) is a commercial bank incorporated in
Germany with dual headquarters in Hamburg and Kiel. The first claimant, UBS AG,
is incorporated in Switzerland, where it has its head office, and has
substantial offices worldwide, including in New York and London.
The second claimant, UBS Securities LLC (UBS LLC), is an
affiliate of UBS. It is incorporated in the United States and has its principal
place of business here. The appellate court generally refers to either or both
of them as “UBS.”
The relevant transactions took place in 2002/2003 between
UBS and LB Kiel. HSH has assumed all material assets, rights and obligations of
LB Kiel, and it is in that capacity that HSH has sued UBS in New York state
court and is being sued by UBS in England. HSH is domiciled in Germany for the
purposes of Council Regulation 44/2001 on jurisdiction and the recognition and
enforcement of judgments in civil and commercial matters (the Brussels I
Regulation).
UBS filed its English action for negative declaratory relief
against HSH on February 25, 2008, in anticipation of proceedings which HSH was
going to lodge against UBS in New York later the same day. In its complaint,
HSH alleged mis‑selling and mismanagement of the securities which were the
subject of the complex arrangements between the parties. The original complaint
relied on the following causes of action: breach of contract; fraud; negligent
misrepresentation; breach of fiduciary duty; breach of an implied covenant of
good faith and fair dealing; unjust enrichment; and constructive trust.
The only possible basis for the jurisdiction of the English
court is the jurisdiction clause in one of the agreements in the CDO
transaction. HSH applied in the English proceedings for an order that the
English court had no jurisdiction to try UBS’s claim in the English
proceedings. In the alternative, HSH asked the court to stay any exercise
jurisdiction on forum non conveniens grounds. The Judge below decided that the
English court did not have jurisdiction in respect of the claims made in the
English proceedings, and that there was no need to rule on the alternative
application for a stay.
The only point of the English proceedings is to pre‑empt any
decision of the New York court in the proceedings brought there by the
Defendants in the English proceedings. If the relevant claims (for fraudulent
and negligent misrepresentation) in the New York proceedings do not stand, the
English proceedings become pointless. UBS moved the New York court for an order
(1) dismissing the complaint on substantive grounds, and alternatively (2)
dismissing or staying the action on jurisdictional grounds.
The New York judge acceded in part to UBS’s motion to
dismiss. HSH, however, has revived some of the relevant claims in an amended
complaint; that is itself the subject of a further motion to dismiss by UBS on
the ground of the res judicata effect of the New York court’s prior judgment. .
That court has heard – but not yet decided – that motion.
Kiel wished to invest in real estate related credit and
asset backed securities. At the time of the transaction in March 2002, the
market evaluated these as outperforming similarly rated corporate securities.
As a result, LB Kiel invested in a multiple tranche synthetic CDO. [tranche
means “slice” in French].
A CDO is a financial structure at the center of which a
special purpose vehicle (SPV) issues tranches of debt securities, the
performance of which is linked to a portfolio of assets. The SPV may either
hold the underlying assets (a cash CDO) or accept exposure to assets such as
corporate bonds or asset‑backed securities via a credit default swap (CDS) with
a financial counterparty (a synthetic CDO). The performance of CDOs is linked
or “referenced” to the pool of underlying bonds or securities, the “Reference
Pool”.
In a synthetic CDO, the issuer may (as in the present case)
invest the proceeds of CDOs issued in a portfolio of high quality, typically
AAA‑rated assets (collateral); investors use those collateral assets to
generate income to make coupon (interest) payments on the CDOs. In the case of
a default of any of the Reference Pool to which the SPV is exposed, it serves
to pay the financial counter party the loss due under the CDS. On each occasion
on which one of the assets in the Reference Pool defaults or is subject to some
other credit event (such as a downgrading of its credit rating), then a payment
becomes due from the SPV to the financial institution under the CDS.
At the same time, the default correspondingly reduces the
principal and interest due from the SPV to the CDO note holder. CDO notes are
usually issued in different classes, as a means of allocating the losses
sequentially commencing with the most “junior” tranche of notes. When the
original principal amount of such class of notes are written down to zero, and
then losses are allocated to the next “higher” tranche of notes, until the entire
capital structure is exhausted or the maturity date of the CDO notes occurs.
In actively managed CDOs, one of the parties to the
transaction commonly has the right to alter the composition of the Reference
Pool. Such a right potentially increases the risk for the holder of the CDO
note. This is particularly true if the party with the right to alter the
composition of the Reference Pool has an economic interest in the transaction,
as in the present case.
In this case UBS set up the SPV as the financial institution
under the CDS while LB Kiel was the original holder of the CDO Notes issued by
the SPV. The SPV used for the issue of the credit linked notes was a Cayman
Islands [in West Indies] company set up by UBS called North Street Referenced
Linked Notes, 2002‑4 Ltd (NS4). NS4 issued three categories of notes in U.S.
dollars. The first category comprised $500 million of floating rate notes of
classes A to D (the NS4 Notes). LB Kiel received the NS4 Notes which provided
credit protection to UBS against certain credit risks in relation to the
Reference Pool; it amounted to a pool of international assets selected by UBS
with an emphasis on U.S. commercial and residential real estate backed bonds
and other asset‑backed securities.
The CDS with NS4 gave UBS the right to alter the Reference
Pool within certain parameters. The effect was that LB Kiel provided credit
protection to UBS in the event of defaults which would result in reductions in
the principal amounts of the NS4 Notes.
UBS was the manager responsible to allocate and substitute
assets in the Reference Pool. It was also the direct recipient of any payments
from the SPV due to credit events in respect of securities in the Reference
Pool. Accordingly, in order to protect LB Kiel, LB Kiel and UBS joined the
Reference Pool Side Agreement (RPSA) as a condition of buying the CDO Notes.
The RPSA created obligations for UBS in connection with UBS’s management,
selection, and substitution of securities in the Reference Pool. In return, LB
Kiel issued to UBS $500 million of puttable (i.e. redeemable on certain
conditions) medium term notes (the Kiel MTN Notes) under LB Kiel’s existing MIN
program.
There had for some years been in existence a program which
had been agreed between LB Kiel and its Dutch subsidiary, LB Schleswig‑Holstein
Finance BV (LB Finance’) and a group of banks (the Dealers), which included
UBS. On September 11, 2001, the parties signed an amended and restated program
agreement (the Program Agreement or PA). The PA set out terms and conditions
which would apply if either LB Kiel or LB Finance agreed with any Dealer for
the issue and purchase of notes.
The normal practice would then be for the Dealer to sell the
Notes in the secondary market. An information memorandum also dated September
11, 2001 (the Information Memorandum or IM) set out the terms and conditions of
Euro Notes. The Kiel MTN Notes fall within this category. Condition 19(a)
provided that English law would govern the Notes. and by clause 19(b) there was
a jurisdiction clause partially in these terms:
“The Issuer agrees, for the exclusive benefit of the Agents,
the Noteholders, the Receiptholders and the Couponholders that the courts of
England are to have jurisdiction to settle any disputes which may arise out of
or in connection with the Agency Agreement, the Notes, the Receipts and/or the
Coupons and that accordingly any suit, action or proceedings arising out of or
in connection with the Agency Agreement, the Notes, the Receipts and the
Coupons (together referred to as ‘ Proceedings’) may be brought in such
courts.”
On January 23, 2002 UBS and LB Kiel signed a letter
agreement (the Letter Agreement or LA). It confirmed the purchase by LB Kiel of
what became the NS4 Notes subject to acceptable documentation. New York law was
to govern the LA but it did not expressly deal with jurisdiction.
UBS and NS4 next entered into a credit swap. Under it, UBS
bought credit default protection from NS4 with respect to the Reference Pool as
described in the Offering Circular. English substantive law was to govern it
and it contained a non‑exclusive English jurisdiction clause. The RPSA,
however, was subject to New York law and contained a non‑exclusive New York
jurisdiction clause.
On March 5 2002, LB Kiel issued to UBS $500 million of Kiel
MTN Notes. They were redeemable in that the principal amount of each note with
accrued interest would become payable to a note holder on any business day at
the note holder’s option subject to written notice being given 5 business days
in advance.
The other March 5 document was a “Dealer’s Confirmation”
signed by UBS AG. It ended up with a jurisdiction clause which read: “Subject
as provided in this sub‑clause (2), the parties hereby irrevocably agree that
the courts of England are to have exclusive jurisdiction to settle any disputes
which may arise out of, or in connection with, this Agreement and the parties
accordingly submit to the exclusive jurisdiction of the English courts for any
suit, action or proceedings arising out of, or in connection with, this
Agreement (together referred to as Proceedings).”
After the court’s dismissal of most counts, HSH filed an
Amended Complaint in the New York proceedings on December 10, 2008. There are
now four causes of action in the New York complaint: (1) breach of the
contract; (2) fraudulent misrepresentation; (3) negligent misrepresentation;
(4) breach of the implied covenant of good faith and fair dealing.
On January 16, 2009, UBS moved to dismiss the
misrepresentation claims in the Amended Complaint. The New York court heard the
matter in April 2009 and that court should rule on it in the autumn.
Relying substantially on Article 23 of the Brussels I
Regulation, the English Court of Appeal (Civil Division) dismisses the English
appeal. It was common ground that HSH is domiciled in Germany for the purposes
of the Brussels I Regulation, and that the only possible basis for jurisdiction
in the English action is the jurisdiction clauses in the Dealer’s Confirmation
and the Kiel MTN Notes But nothing turns on the jurisdiction clause in the Kiel
MTN Notes, since they passed immediately to NS4. It is therefore the Dealer’s
Confirmation which was the focus of the trial judge’s decision and of this
appeal.
The question on this issue is whether the claims in the draft
particulars of claim fall within the Dealer’s Confirmation jurisdiction clause,
with the consequence that the English court has jurisdiction under Article 23
of the Brussels I Regulation. It provides that: ‘If the parties, one or more of
whom is domiciled in a Member State, have agreed that a court or the courts of
a Member State are to have jurisdiction to settle any disputes which have
arisen or which may arise in connection with a particular legal relationship,
that court or those courts shall have jurisdiction. Such jurisdiction shall be
exclusive unless the parties have agreed otherwise.
In a unanimous affirmance of the court below, the Court of
Appeal (Civil Division) explains its rationale. “UBS’s arguments [in this
appeal] are essentially these. It accepts that a claim for post‑inception
breaches of the RPSA would be outside the scope of the Dealer’s Confirmation
jurisdiction clause. That would include the first and fourth causes of action
in the amended New York complaint.”[¶ 56].
“The proper approach to the construction of clauses agreeing
jurisdiction is to construe them widely and generously, and the words ‘arising
out of’ or ‘in connection with’ apply to claims arising from pre‑inception
matters such as misrepresentation.”
“The Dealer’s Confirmation jurisdiction clause had been
specially renegotiated to provide expressly for the exclusive jurisdiction of
the English court. If the parties had intended to give it a narrower scope,
they would have done so. They must have envisaged the risk of a clash, and
could have avoided it. The meaning of the clause is to be determined as at the
time it was entered into and not by reference to later events .” [¶¶ 60‑61].
“In determining which contract a dispute arises from, or in
connection with, in a multi‑contract situation, a degree of common sense is
appropriate: ... The parties entered into different agreements for different
aspects of an overall relationship, with different terms as to jurisdiction.
All matters relating to the CDO Note, including the Note itself (as set out in
the Indenture), the Letter Agreement and the RPSA, are [made expressly] subject
to the laws of New York. All those agreements contain submissions to the
jurisdiction of the courts of New York, except for the Letter Agreement, which
is silent as to jurisdiction and would not entitle UBS to sue HSH in England.”
“The question on this part of the appeal is whether the
claims in the English action fall within the jurisdiction agreement in the
Dealer’s Confirmation. That question turns on whether, in the light of the
complex documentation as a whole, the parties should be taken objectively to
have intended by the jurisdiction clause in the Dealer’s Confirmation that,
when a dispute arose as to whether the transaction as a whole was induced by
fraudulent or negligent misrepresentation, the issue whether the issue and
transfer of the Kiel MTN Notes was so induced should be subject to the
exclusive jurisdiction of the English courts, while the question whether the
conclusion of the other agreements was induced by the same alleged
misrepresentations should be subject to the non‑exclusive jurisdiction of the
New York courts. The claim form in the English proceedings makes no mention of
the Dealer’s Confirmation.” [¶¶ 71‑73].
“Plainly the parties did not actually contemplate at the
time of the conclusion of the contracts that there would be litigation in two
countries involving allegations of misrepresentation in the inception and
performance of the agreements. But, in my judgment, sensible business people
would not have intended that a dispute of this kind would have been within the
scope of two inconsistent jurisdiction agreements. The agreements were all
connected and part of one package, and it seems to me plain that the result for
which UBS contends would be a wholly uncommercial result and one that sensible
business people cannot have intended.”
“It is fanciful to suppose (as UBS contends) that the
Dealer’s Confirmation jurisdiction clause had been specially renegotiated to
provide expressly for the exclusive jurisdiction of the English court to deal
with disputes of this kind, or that the parties must have envisaged the risk of
a clash.”
“The Dealer’s Confirmation is expressed to be issued
pursuant to LB Kiel’s US$20 billion Global Medium Term Note Programme and
simply confirms the issue of the US$500 Kiel MTN Notes to UBS as one of the
dealers on HSH’s bond programme. UBS immediately transferred them to NS4. NS4
kept the Kiel MTN Notes as an investment or ‘collateral’ to create income in
order to fund payments under the NS4 Notes.” [¶¶ 84‑86].
“The New York complaint alleges, inter alia, that (a) UBS
induced HSH to purchase the NS4 Notes by misrepresentations concerning the
credit quality of the Reference Pool to which payments under the NS4 Notes were
linked; (b) UBS failed to operate a Commitments Committee, as required by the
RPSA, so as to select Reference Pool assets with stable or improving credit
profiles, carefully monitor the credit status and quality of each asset, and avoid
downgrades. As Justice Lowe stated in his decision of October 21, 2008: ‘HSH’s
overarching claim is that UBS failed to maintain the promised high quality of
the notes in the Reference Pool, by failing to ensure that the Commitments
Committee keep an eye on the condition of the investments.’” [¶ 89].
“Whether a jurisdiction clause applies to a dispute is a
question of construction. Where there are numerous jurisdiction agreements
which may overlap, the parties must be presumed to be acting commercially, and
not to intend that similar claims should be the subject of inconsistent
jurisdiction clauses. The jurisdiction clause in the Dealer’s Confirmation is a
‘boilerplate’ bond issue jurisdiction clause, and is primarily intended to deal
with technical banking disputes. Where the parties have entered into a complex
transaction, it is the jurisdiction clauses in the agreements which are at the
commercial centre of the transaction which the parties must have intended to
apply to such claims as are made in the New York complaint and reflected in the
draft particulars of claim in England.” [¶ 95].
“The action in England is intended to mirror the New York
proceedings. I have already emphasised that the essence of the claims for
misrepresentation in New York is that HSH was induced to purchase the NS4 Notes
in reliance on the fraudulent and negligent misrepresentations, and would not
have purchased them in the absence of those representations. No sensible
commercial interpretation of the jurisdiction clause in the Dealer’s
Confirmation could have the result that identical misrepresentation claims
would fall both within that clause and within the non‑exclusive New York
jurisdiction clauses, simply because the consideration for the transaction was
the issue of the Kiel MTN Notes.
In my judgment the standard form bond issue jurisdiction
clause in the Dealer’s Confirmation does not apply to claims that the
transaction as a whole, and in particular the purchase of the NS4 Notes, was
induced by misrepresentation. I am satisfied that the judge’s decision [below]
was right.”[¶ 97] Both of my colleagues agree with this opinion.
Citation: UBS AG v. HSH Nordbank AG, [2009] E.W.C.A.
Civ. 585; 2009 WL 1657158 (June 18, 2009).
**** Mr. William B. Blanchard (“Bill Blanchard”) is a Real Estate Attorney with offices in St. Charles and Oakbrook Terrace, Illinois. Bill specializes in representing real estate clients for purchases and sales as well as home owner real estate tax assessment appeals. Mr. Blanchard is General Counsel for Gaia Title, Inc. a title insurance agency and settlement services provider. The Company is owned by real estate attorneys who demand exemplary title insurance services and accurate and efficient settlement services. As General Counsel he is responsible for title examination, commitment and policy review, escrow settlement supervision and regulatory review. - Attorney Profile: https://solomonlawguild.com/william-b-blanchard%2C-esq - Attorney News: https://attorneygazette.com/william-blanchard%2C-esq#40b43d7b-94b2-48d3-b055-1979a636f1e7
