Bringing it Home

The ISDA Master Agreement is the most widely accepted standard form of documentation for derivative transactions. It is a framework agreement between two parties under which individual derivatives transactions may be carried out. By entering into such an agreement, the parties need only agree the specific commercial terms for each transaction. Not only does it save time in negotiating and drafting transactions, but judicial consideration (and market discussion) of the documentation increases certainty of its interpretation.

Recent Developments
Two recent cases have required the English courts to consider jurisdiction clauses in ISDA Master Agreements. In both cases, the parties challenging jurisdiction relied on Article 22(2) of the Brussels Convention, which states that the courts of the Member State in which a company has its seat will have exclusive jurisdiction where proceedings have, as their object, the validity of the company’s decisions.

In Berliner Verkehrsbetriebe (BVG) Anstalt des Offentlichen Rechts (“Berliner”) v JP Morgan Chase (“JPM”), Berliner, a German transport operator, entered into a transaction with JPM with the intention of providing protection against the risks of cross-border leasing arrangements. The contractual documentation included an ISDA Master Agreement with an agreed English jurisdiction clause.

The transaction included a swap, pursuant to which Berliner sold to JPM, in return for a net premium, protection against the credit risk of 150 companies. During the economic crisis some of those risks, including Lehman Brothers and three Icelandic Banks, materialised. Initially JPM brought a claim for a declaration that the swap was valid, binding and enforceable. The pleading was later amended to include a monetary claim for approximately USD112million pursuant to the terms of the swap.

Berliner argued that its board’s decision to enter into the swap was ultra vires (beyond their powers), which meant that, despite the agreed jurisdiction clause, the German Courts had jurisdiction under Article 22(2) to hear the claim. The Commercial Court held that the English Courts did have jurisdiction to hear the claim. It found that the proceedings did not “have as their object” the ultra vires issue, which meant that Article 22(2) did not apply. Berliner appealed to the Court of Appeal, which upheld the first instance decision. The Court of Appeal held that a court must make an “overall judgment” of the issues to determine whether proceedings are “principally concerned” with matters falling within Article 22(2). On the facts, Article 22(2) issues were an important part of the dispute but were not the focus of the proceedings as a whole, English courts retained jurisdiction.

Berliner was quickly followed by Depfa Bank v Provincia di Pisa (“PdiP”). PdiP, an Italian local authority, had hedged its interest rate risk on bonds it had issued. Again, the ISDA Master Agreement gave English Courts exclusive jurisdiction. PdiP sought to revoke its resolutions to perform swaps on the grounds that it did not have the requisite capacity. Depfa issued proceedings in the Commercial Court in London to enforce the swaps, but PdiP argued that the Italian Courts had jurisdiction because the claims concerned the validity of its internal decisions, and, thus, Article 22(2) applied. The Court rejected PdiP’s challenge, applying Berliner. It found that the proceedings were not so sufficiently closely connected with PdiP’s internal decision-making that they had to be heard in Italy. The capacity issue was unlikely to be the sole ground on which the swaps were challenged.

The future
These decisions represent good news for the industry in that they confirm that a counter-party cannot force a dispute into its home courts simply by alleging that its internal decision to enter into the transaction was void. This is especially important when the alternative is that proceeding are heard in a foreign jurisdiction that has very different procedures (Germany), or can take years to reach a conclusion (Italy).

A practical approach was adopted – conferring exclusive jurisdiction must be justified, especially where there is a conflicting jurisdiction agreement. The Courts have ensured that the terms of ISDA Master Agreements can withstand legal challenges of this nature so that parties can be certain of the effect of entering into such agreements. This certainty is, after all, a major advantage of using standard ISDA documentation.

There is, of course, greater value in the Court of Appeal judgment as it will now take a reference to the Supreme Court to overturn it. In the meantime, all lower courts with be bound by it, which will make raising it as a means to challenge jurisdiction a very long-term strategy.

The role of the ISDA Master Agreement as a robust document, which can be relied on with certainty, has been reinforced by these decisions.

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