Posts Tagged Choice of law

Dana Gas v Deutsche Bank et al. Islamic financing. Interest v usury (riba). Depecage, von Munchausen and overriding mandatory law. Partial unenforceability. All in the face of anti-suit.

In [2017] EWHC 2928 (Comm) Dana Gas v Deutsche Bank et al., Leggatt J treats his readers to a concise insight into islamic finance (particularly in para 10) which he needs to do to inform readers of the essence of the case. The operation essentially involves raising investment (with a view to restructuring), organised by the main agreement (of the ‘Mudarabah’ type), subject to UAE law, and supported by a purchase undertaking of the same date, subject to English law. The set-up therefore evidently is not one of dépeçage per se (this would require one and the same agreement being subject to different laws) however it comes close.

Inevitably following unfavourable market conditions, an anti-suit injunction was sought and obtained in the UAE, followed however by English proceedings which required the aint-suit to be lifted – something which Dana Gas did not succeed in as a result of shareholder opposition. The English proceedings were effectively saved from collapse by the involvement of a third party, BlackRock, who as a non-party to the UAE sharia proceedings, were not bound by the anti-suit injunction. The somewhat complicated result is that the English proceedings really can only limp along.

Dana Gas seek confirmation that the transaction is unlawful and all the relevant contractual obligations are unenforceable as a matter of UAE law. Leggatt J with neither emotion nor hesitation refers essentially to Rome I’s universal application: the Mudarabah agreement is subject to UAE law and he is happy to assume it is invalid under UAE law – hence not enforceable by an English court. See in this respect Article 10(1) Rome I.

That however leaves the viability of the purchase undertaking. (at 46) The fact in and of itself that the contract or its performance would be regarded as invalid or unlawful under the law of some other country than England (for example, a country where one of the parties is domiciled or carries on business) is generally speaking irrelevant (reference is made to Kleinwort, Sons & Co v Ungarische Baumwolle Industrie AG [1939] 2 KB 678.

At 48, Dana Gas sets out its case for unenforceability of the purchase agreement under English law. This includes reference to ordre public but also inevitably an attempt to ‘contaminate’ the purchase agreement with the Mudarabah agreement. Leggatt J justifiably turns this around: at 54: it is apparent from the purchase agreement’s terms that the risks against which the Purchase Undertaking is intended to protect the Certificateholders include the risk that the mudarabah and the transaction documents governed by UAE law will turn out to be invalid. That is why they needed to be separated. (In that respect merging the two agreements into one and applying dépeçage might give even stronger force to this argument: however I do not know whether under UAE law such construction would be acceptable).

Further arguments swept aside, the Court turns to ordre public.

Dana Gas nb had employed both ordre public and, earlier Article 9(3) Rome I: overriding mandatory law: a rare treat indeed. Relevant English precedent is Ralli Brothers: Ralli Brothers v Cia Naviera Sota y Aznar [1920] 1 KB 614: an English court will not enforce an obligation which requires a party to do something which is unlawful by the law of the country in which the act has to be done. Rome’s Article 9(3) operates in a similar context. However Dana Gas later abandoned that claim for (at 80) those rules of law are only applicable if and in so far as the obligations in question have to be performed in the UAE – quod non.

A switch was then made to ordre public, now with Foster v Driscoll [1929] 1 KB 470 as leading precedent. However, here too, it is only if a contract has as its object and intention the performance in a friendly foreign country of an act which is illegal under the law of that country that the contract will be considered (at 82 in fine) contrary to English public policy.

Conclusion:  the Purchase Undertaking is valid and enforceable.

Without claiming anything near proper competence in Islamic finance law, it would seem that Dana Gas does not introduce new principles in that area. However in diligently applying conflicts analysis, Leggatt J in my view does practice a great service: he re-emphasises the need for parties clearly to identify locus implementi: the place of performance of an obligation. When obligations are marked out for a seperate lex causae, such clear identification of place of performance will insulate them from collapse.

Geert.

(Handbook) of Private International Law, 2nd ed. 2016: essentially, almost every section of Chapters 2 and 3.

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Dankor. On the perils of forgetting to exclude renvoi in choice of law and court agreements.

It is one of the pinnacle theories of conflict of laws and when first introducing students to it, they almost invariably respond glassy-eyed. Renvoi has an unlimited ability to surprise parties and courts alike. It is best excluded, either by Statute, or by the parties, but frankly to be on the safe side: always and everywhere best by both. (Lest there are well considered arguments not to do so in a specific instance. As readers of my book know, the Brussels I Recast provisions on renvoi for choice of court (complicating less fori prorogati) is not such an instance: Handbook 2016, p.128-129, Heading 2.2.9.4.2).

At issue in Dankor [Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (2d) 150839] was the choice of court and governing law clause cited by the court at 44:

“The parties agree that this agreement was executed in Kane County, Illinois and shall be governed by the law of the State of Illinois. Any claims, lawsuits, disputes or claims arising out of or relating to this agreement shall be litigated in Kane County, Illinois.”

This clause could be a boilerplate or midnight clause except those routinely do exclude renvoi. ‘The law of the State of Illinois’ in the clause would then be followed by ‘excluding its choice of law rules’ or something of the kind. Why it was dropped here is entirely unclear. As Clifford Shapiro writes ‘So what happens when an Illinois general contractor fires a New York subcontractor who was working on a New York project under a subcontract that required Illinois law to apply and litigation to take place in Illinois? Unfortunately for litigants, what can happen is nearly three years of jurisdictional litigation in both New York and Illinois, and then dismissal of the Illinois case less than 60 days before trial with an order directing the case to be re-filed in New York.’

As the court notes (at 69) choice of court and choice of governing law are separate issues (for that reason they are als best dealt with in clearly separated contractual clauses). Relevant precedent for the validity of the former is Rieker 378 Ill. App. 3d 77, 86 (2007). Applying Rieker, and following Section 187(2) of the Restatement (Second) of Conflict of Laws, the Court held (reference is best made to Clifford’s summary or to the judgment itself) that New York law applied to the validity of the clause, leading to its being void: New York law mandatorily prohibits application of another State’s law or litigation outside of the State for New York construction projects (Illinois incidentally has a mirror provision).

Need one say more? Renvoi is always best excluded. It would not necessarily have made this clause enforceable: ordre public discussions could always still be raised. However it sure as anything would have made the validity of the clause much more likely.

Geert.

(Handbook of) EU Private international law, 2nd ed. 2016, Chapter 1, Heading 1.4).

 

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Going European: California S.B. 1241. Employee protection for choice of law and choice of court.

Thank you Cozen O’Connor for alerting me. California’s Senate Bill 1241 was signed into law at the end of September. It will apply to employment contracts entered into, modified, or extended on or after 1 January 2017.

The Bill will feature in a forthcoming article that I am co-authoring with Jutta Gangsted. I have not (yet) studied the preparatory work in detail however the Bill immediately calls for comparative analysis with the EU’s’ approach to this particular ‘protected category’: what is a labour (employment) contract; how does ‘primarily resides and works in California’ compare with ‘habitually carries out his work’ and ‘domicile’; when exactly is a contract ‘modified’ (on this see for the EU, Nikiforidis). The starting point of both the California and the EU rules is the same: employees cannot be considered to really consent to either choice of law or choice of court hence any clause doing same will be subject to mandatory limitations.

Geert.

(Handbook of) European Private international law, 2nd ed. 2016. Chapter 2, Heading 2.2.8.3, Chapter 3, Heading 3.2.5.

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Commission effectively supplements Rome I using the posted workers Directive. Defines ‘temporary employment’ as not exceeding 24 months.

Update 31 May 2017 A quick note by way of interim update: the proposal is stuck in Parliament (awaiting committee decision).

Thank you Fieke van Overbeeke for pointing this out to me. The EC have proposed to amend the posted workers Directive, to address unfair practices and promote the principle that the same work at the same place be remunerated in the same manner.

The amendment essentially relates to Article 8(2) of the Rome I Regulation, which partially corrects choice of law made in the context of contracts for employment. The proposal amounts to Union harmonisation of the concept ‘temporary employment’, as one not exceeding 24 months.

The proposal, if adopted, would insert an Article 2a in the posted workers Directive, 96/71, as follows:

Article 2a
Posting exceeding twenty-four months
1. When the anticipated or the effective duration of posting exceeds twenty-four
months, the Member State to whose territory a worker is posted shall be deemed to
be the country in which his or her work is habitually carried out.
2. For the purpose of paragraph 1, in case of replacement of posted workers
performing the same task at the same place, the cumulative duration of the posting
periods of the workers concerned shall be taken into account, with regard to workers
that are posted for an effective duration of at least six months.

Recitals 6-8 give context:

(6) The Rome I Regulation generally permits employers and employees to choose the law
applicable to the employment contract. However, the employee must not be deprived
of the protection of the mandatory rules of the law of the country in which or, failing
that, from which the employee habitually carries out his work. In the absence of
choice, the contract is governed by the law of the country in which or, failing that,
from which the employee habitually carries out his work in performance of the
contract.
(7) The Rome I Regulation provides that the country where the work is habitually carried
out shall not be deemed to have changed if he is temporarily employed in another
country.
(8) In view of the long duration of certain posting assignments, it is necessary to provide
that, in case of posting lasting for periods higher than 24 months, the host Member
State is deemed to be the country in which the work is carried out. In accordance with
the principle of Rome I Regulation, the law of the host Member Sates therefore applies
to the employment contract of such posted workers if no other choice of law was made
by the parties. In case a different choice was made, it cannot, however, have the result
of depriving the employee of the protection afforded to him by provisions that cannot
be derogated from by agreement under the law of the host Member State. This should
apply from the start of the posting assignment whenever it is envisaged for more than
24 months and from the first day subsequent to the 24 months when it effectively
exceeds this duration. This rule does not affect the right of undertakings posting
workers to the territory of another Member State to invoke the freedom to provide
services in circumstances also where the posting exceeds 24 months. The purpose is
merely to create legal certainty in the application of the Rome I Regulation to a
specific situation, without amending that Regulation in any way. The employee will in
particular enjoy the protection and benefits pursuant to the Rome I Regulation.

It would obviously be attractive to ensure the same rule is verbatim included in a future amendment of the Rome I Regulation.

Geert.

(Handbook of) EU Private International Law, 2nd ed 2016, Chapter 3, Heading 3.2.5.

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Banco Santander Totta: the High Court upholds snowball interest rate swaps under English law. The ‘purely domestic contracts’ provision of Article 3(3) Rome I is not engaged.

A longer title than readers are used to from this blog. However judgment itself is also an unusually long 163 pages. In Banco Santander Totta, the High Court was asked whether snowball interest rates swaps in loan agreements between a Portuguese Bank and four Portuguese public transport companies, should be declared invalid under Portuguese ‘mandatory’ law, applicable by use of the corrective mechanism of Article 3(3) Rome I.

The Transport Companies do not assert that BST wrongly advised them to enter into the swaps, or misrepresented the swaps to them. Rather,  defences raised by the Transport Companies are that:

(1) under Portuguese law, each company lacked capacity to enter the swaps which are therefore void; this is on the basis (among other reasons) of an assertion that the swaps were speculative transactions; this defence applies regardless of the law applicable to the swaps; it is common ground that, if correct, it is a complete answer to the claim;

(2) although English law governs the Master Agreements, this is subject to Art. 3(3) of the Rome Convention; this provides that where all the elements relevant to the situation at the time of the choice of law are connected with one country only, the choice does not prejudice the application of rules of the law of that country which cannot be derogated from by contract (“mandatory rules”). Portuguese mandatory rules apply to the swaps, giving rise to two defences: a) under rules dealing with gaming and betting and ordre public, the swaps are void for being unlawful “games of chance”, alternatively speculations; b) seven of the nine swaps are liable to be terminated under rules dealing with an “abnormal change of circumstances” (which termination takes effect as though the swaps were void); this is on the basis that since 2009 (following the financial crisis), the reference interest rates relating to the swaps (EURIBOR and LIBOR) have been close to zero (and remain so at the time of this judgment);

(3) in presenting the swaps to the Transport Companies, the bank acted in breach of its duties under provisions of the Portuguese Securities Code which implement relevant European Union legislation; these apply to the bank as a financial intermediary and relate to the protection of the legitimate interests of the Transport Companies as clients, and to conflicts of interest; the breach is said to entitle the Transport Companies to damages thereby extinguishing their liabilities under the swaps.

Blair J reviews precedent (European (limited, mostly related to the preparatory works), English and Portuguese (likewise limited) and decides against the engagement of Article 3(3). I will not regurgitate all of the analysis: readers are best referred to the judgment, in particular p.65 onwards, and the decision at 411, where Blair J concludes

because of the right to assign to a bank outside Portugal, the use of standard international documentation, the practical necessity for the relationship with a bank outside Portugal, the international nature of the swaps market in which the contracts were concluded, and the fact that back-toback (sic) contracts were concluded with a bank outside Portugal in circumstances in which such hedging arrangements are routine, the court’s conclusion is that Art. 3(3) of the Rome Convention is not engaged because all the elements relevant to the situation at the time of the choice were not connected with Portugal only. In short, these were not purely domestic contracts. Any other conclusion, the court believes, would undermine legal certainty.  

The latter element is quite important. Referring in particular to Briggs (at 374), the Court holds that the uncertainty of the rule of Article 3(3) should lead to its narrow interpretation. I agree. With party autonomy the core consideration of the Regulation, standard recourse to Article 3(3) [or 3(4) for that matter) under the pretext for instance of a general campaign against fraus legis is most definitely not warranted.

Permission was granted to appeal the issues on the Rome Convention (thank you to Ali Malek QC for pointing that out).

Geert.

(Handbook of) European Private International Law, 2nd ed. 2016, Chapter 3, Heading 3.2.8, Heading 3.2.8.1

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Unjust enrichment under Rome II. The High Court in Banque Cantonale de Genève.

RPC and Sarah Shaul it seems, like me, are hoovering up database backlog – once again thank you to their excellent blog for alerting me to Banque Cantonale de Genève v Polevent. Other than the direct impact for the interpretation of Rome II‘s Article 10, and its relation with Article 4’s general rule, an important lesson from the case to me seems to be, yet again, the relevance of the articulation of claims, for the determination of jurisdiction.

Facts are as follows (at 2 ff). Claimant (“BCGE”) is a bank in Geneva. On 24 March 2104 a man calling himself Mr. Dumas telephoned BCGE and asked to speak to Yvan Nicolet of the accounting department. He was not in the office and so the call was taken by Jacqueline Konrad-Bertherin. Mr. Dumas asked her to send a confidential message to what he said was the private mail address of Eric Bourgeaux, the deputy CEO of BCGE. She did so and received a reply from someone claiming to be Mr. Bourgeaux instructing her to pay Euro 6,870,058 from BCGE to the Natwest Bank in London in favour of Polevent Limited. She did so. She believed she had been instructed to do so by Mr. Bourgeaux; but she had not been. The fraud was discovered and repayment was requested later that day.

Shortly before the fraud Natwest had been advised of a freezing order against Polevent in favour of an Italian company Enoi SpA (“Enoi”). The funds were therefore frozen in Polevent’s account with Natwest. BCGE has claimed damages from Polevent for deceit. BCGE accepts that that claim is governed by the law of Geneva. It has also advanced a claim against Polevent in restitution on the basis that the sum was paid by mistake. It claims that since Polevent must have realised that the sum was paid by mistake the conscience of Polevent was affected such that a constructive trust arises thereby providing BCGE with a proprietary claim in respect of the frozen funds. BCGE says that this proprietary claim is governed by English law.

Enoi is another creditor of Polevent. Enoi maintains that BCGE’s claim for restitution, in common with the claim is in deceit, is governed by the law of Geneva which does not recognise a proprietary claim. The resulting dispute is therefore between two creditors of Polevent. That company is in liquidation and has taken no part in this dispute.

 

The only preliminary issue which the High Court was asked to adjudicate on is worth repeating in full:

“On the basis of the facts as pleaded in the Amended Particulars of Claim and on the basis that the claim set out at paragraph 13 of the Amended particulars of Claim is governed by the law of Geneva, are the claims set out at paragraph 15 of the Amended particulars of Claim governed by English law or by the law of Geneva ? ”

One can appreciate why two different claims were formulated here.

For the claim in damages for deceit, BCGE accept Geneva law applies. The claim for restitution on the basis of unjust enrichment, however, is covered in its view by Article 10(3) Rome II: the law of the place in which the unjust enrichment took place, this being England, hence allowing for the existence of a constructive trust and priority in the pecking order following Polevent’s insolvency.

Enoi argue that the claim in restitution, like the claim in damages, is covered by the law of Geneva: at 9:

The submission of counsel for Enoi is that the law governing the claim in restitution is the law of Geneva by reason of Article 4(1) of Rome II. The claim arises out of the tort/delict of fraud and so the governing law is that of the place in which the damage occurred, namely, Geneva. Alternatively, the governing law is the law of Geneva pursuant to Article 10(1) on the grounds that the unjust enrichment concerns a relationship arising out of a tort/delict such that the governing law is that which governs that relationship, namely, the law of Geneva. In the further alternative the governing law is the law of Geneva pursuant to Article 10(4) on the grounds that the obligation arising out of the unjust enrichment is manifestly more closely connected with Geneva.

Both parties of course reverse engineer their governing law arguments: being aware of the attraction of one State’s laws over the other, counsel brief is to convince the court that the matter is characterised so that it leads to the warranted applicable law.

Enoi suggest that BCGE in reality have one claim only: one in fraud, a tort, it argues, from which the claim in unjust enrichment follows in a dependent fashion. Teare J disagrees (at 13). A claim in restitution need not be fault-based. It is a separate claim, to which Article 10’s regime applies (in the end leading to a finding of English law).

The judgment is in fact quite short. Its crucial implication to me would seem to be that BCGE has won the day by formulating two separate heads of action. Teare J acknowledges that his view may be an ‘unduly English law’ view, in other words, that he read the formulation of two claims at face value, as being two separate claims, because English law recognises non-fault based unjust enrichment. Regardless of the fact that other States, including European States, do so too, the obvious question is whether the EU’s qualification would be the same. The concept of unjust enrichment, like the concept of tort, necessarily needs to be an ‘autonomous’ one. Yet without much guidance in the preparatory works of Rome II on this concept, who can blame national law for filling in the blanks?

Geert.

(Handbook EU Private International Law, 2nd ed 2016, Chapter 4, Heading 4.7).

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Consenting to choice of court under the common law. The Privy Council in Vizcaya v Picard.

In Vizcaya v Picard, the Privy Council considered the issue of consent to a choice of court clause in the event no such choice has been made verbatim. It was alleged that choice of court had been made implicitly but clearly by reference to an applicable law agreement in the underlying contract. RPC have a review of the case on their blog and I am grateful to them for bringing it to my attention.

The case is a fall-out of the Bernard Madoff Ponzi scheme, carried out through Mr Madoff’s company Bernard L Madoff Investment Securities LLC (“BLMIS”), a New York corporation. After Madoff’s fraud came to light in 2008, Irving Picard (“the trustee”) was appointed as trustee in BLMIS’s liquidation in the US Bankruptcy Court for the Southern District of New York (“the New York BankruptcyCourt”). The trustee commenced proceedings under the anti-avoidance provisions of the US Bankruptcy Code against investors who had been repaid before the fraud was discovered, including the appellant, Vizcaya Partners Limited (“Vizcaya”), a BVI (British Virgin Islands) company which carried on business as an investment fund, and which invested about US$328m with BLMIS between January 2002 and December 2008, but was repaid US$180m before the fraud was discovered.

The Appeal before the Privy Council concerns primarily the content and scope of the rule in common law that a foreign default judgment is enforceable against a judgment debtor who has made a prior submission to the jurisdiction of the foreign court (as distinct from a submission by appearance in the proceedings).  Brussels I or the Recast was not applicable to the case. In that Regulation (Article 25), the expression of consent with choice of court must take one of thee forms: essentially: written (or oral but confirmed by written agreement); in accordance with lex mercatoria; or in accordance with established business practice simply between the parties.

The question in the case at issue is whether the agreement to submit must be express, or can also be implied or inferred. The Privy Council settled the uncertainty which would seem to have existed for some time in the common law, in favour of an answer in the affirmative. Consent to jurisdiction can be implied. What needs to be shown though is real ‘agreement’, or ‘consent’ (in European private international law with respect to the similar discussion re choice of law (Rome I) I would say the test is one of ‘clearly established’), quod non in casu. Choice of law (here: in favour of New York law) can be a factor but not a solely determinant one. Moreover, choice of court viz one’s business transactions does not imply automatic extension to insolvency proceedings.

Crucial precedent, it would seem. Geert.

European private international law, second ed. 2016, Chapter 2, Heading 2.2.9

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