Posts Tagged Fraus omnia corrumpit

Turkish Supreme Court rejects choice of court agreement on basis of ‘good faith’. Accepts asymmetric clauses.

Koray Söğüt and Suha Yılmaz reported recently on Turkish Supreme Court case-law in the area of choice of court. The report is very much worth a read. On choice of court agreements, what the Supreme Court seems to say is that when choice of court is made away from Turkey,  Turkish law will make that choice subject to a de facto forum conveniens assessment: if Turkey is a suitable forum especially when the eventual judgment will be easily enforced against Turkish assets, a defendant’s insistence on exercising the clause must be seen as violating Turkey’s general provision on bad faith (a form of fraus omnia corrumpit).

It is also reported that the Supreme Court accepted a unilateral /asymmetric jurisdiction clause – the issues surrounding these clauses are a regular feature on this blog.

More cases for the comparative law class! (At least if and when I get hold of an English translation).

Geert.

 

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Sinocore International Co Ltd v RBRG Trading: The commercial court on fraus, ordre public and arbitration.

Fraus omnia corrumpit (fraud corrupts all; alternatively formulated as ex turpi causa non oritur actio) is not easily applied in conflict of laws. See an earlier post here.  In Sinocore International Co Ltd v RBRG Trading , the Commercial Court granted permission for the enforcement of a foreign arbitral award despite allegations that the transaction in question had been “tainted” by fraud: this is how the case is summarised by Mayer Brown and I am happy broadly to refer to their overview and analysis.

The Commercial Court’s relaxed attitude is another sign of strong support of the English courts for the New York Convention and its narrow application of ordre public.

An interesting case for comparative conflicts /arbitration classes.

Geert.

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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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Fraus omnia corrumpit or accidental oversight? New South Wales Supreme Court goes full throttle in Proactive Building Solutions

Fraus omnia corrumpit (fraud corrupts all) is not easily applied in conflict of laws.  Both forum shopping and choice of law ought not prima facie to be regarded with much suspicion, especially in a B2B context. States typically employ mandatory law provisions, sometimes restricted to ‘overriding mandatory law’ (such as in the EU’s Rome I Regulation for choice of law in contracts) to ring-fence parts of national law not capable of being avoided by choice of law in purely domestic situations, and ‘public order’ provisions to trump choice for foreign law even in not purely domestic contexts, but then only for the most essential parts of a State’s legal fabric.

In Proactive Building Solutions, McDougall J held ex tempore that a choice of court and choice of law clause in favour of the English courts cq English law, was void in its entirety for it negated the working of a provision of the New South Wales Building and Construction Industry (Security of Payment) Act 1999 (NSW) (SOP Act). The object of this Act is to ensure that any person who undertakes to carry out construction work (or who undertakes to supply related goods and services) under a construction contract is entitled to receive, and is able to recover, progress payments in relation to the carrying out of that work and the supplying of those goods and services.

Section 34 of that Act reads

34 No contracting out

(1) The provisions of this Act have effect despite any provision to the contrary in any contract.

(2) A provision of any agreement (whether in writing or not):

(a) under which the operation of this Act is, or is purported to be, excluded, modified or restricted (or that has the effect of excluding, modifying or restricting the operation of this Act), or

(b) that may reasonably be construed as an attempt to deter a person from taking action under this Act, is void.

Section 7(1) of the Act, not referred to in judgment, reads

Subject to this section, this Act applies to any construction contract, whether written or oral, or partly written and partly oral, and so applies even if the contract is expressed to be governed by the law of a jurisdiction other than New South Wales.

As pointed out by Leigh Duthie and his colleagues,  while Section 7(1) may have normally allowed the Court to void only the SOP relevant aspects of choice of law, the trouble in the current case was that the contract had thrown choice of court and choice of law into one clause (a very common contractual occurrence), with a foreign court adjudicating.  McDougall J found it highly unlikely that the English courts would uphold the provisions of the SOP Act, hence giving the NSWSC no choice but making the clause void in its entirety. Consequently the whole contractual arrangement became subject to choice of court and choice of law as if no express clause had been inserted, even if the workings of the SOP Act would have had only a minor impact on parties’ contractual relations.

An obvious remedy is to lift SOP relevant parts of the contract out of the choice of court clause, however even in such case some uncertainty persists: for the recalcitrant party, suing in NSW in spite of a choice of court elsewhere, could attempt to raise the SOP flag if only to delay proceedings.

An interesting case for comparative conflicts classes.

Geert.

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