Judgments - So Far This Year (Financial Markets Disputes and Regulatory Update - Summer 2015)

Jurisdiction for claims in relation to bearer bonds

Kolassa v. Barclays Bank plc C375/13

This was a judgment of the European Court of Justice (ECJ). Mr Kolassa, who is domiciled in Austria, invested in certificates issued by Barclays in the form of bearer bonds. Barclays produced a prospectus in relation to the certificates, which was published in Austria. The certificates were then issued to institutional investors including DAB Bank, and sold to an Austrian subsidiary, which in turn sold an interest in the certificates on to Mr Kolassa. The certificates were, at all times, owned by the banks. The value of the certificates was directly referable to the performance of a portfolio, and as a result of its poor performance, the certificates lost the entirety of their value. Mr Kolassa sued Barclays in the Austrian courts. Barclays disputed both the underlying claim and the jurisdiction of the Austrian court, on which point the court made a reference to the ECJ.

Article 5 of the Regulation states that: "A person domiciled in a Member State may, in another Member State, be sued: 1. (a) in matters relating to a contract, in the courts for the place of performance of the obligation in question; ... 3. in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur". However, under Articles 15 and 16, a consumer acting "for a purpose which can be regarded as being outside his trade or profession" can start proceedings either in the home court of the other party, or in his own home court (in this case the courts of Austria), if certain conditions are met. In most cases, such conditions include the consumer having entered into a contract with a professional counterparty.

The ECJ concluded that:

the provisions of Article 15 did not apply in this case. Because the certificates were in bearer form, and Mr Kolassa was never the bearer, the ECJ held that he had not entered into a contract with Barclays, and that Article 15 could not, therefore, be invoked; in order for Article 5(1) to be used in order to found jurisdiction, there did not need to be a contract subsisting between the issuer of and the investor in the certificates, but the issuer did need to have freely consented to some legal obligation to that investor. This would be a matter for national courts to consider, but in the context of this case, the ECJ held that Barclays had not assumed obligations to Mr Kolassa as a purchaser in the secondary market; and as Austria was the place where Mr Kolassa had suffered loss, the Austrian court had jurisdiction to hear his claims in relation to Barclays's provision of misleading information in its prospectus under Article 5(3), provided such claims could not be characterised as arising out of a contract. It is likely that the last of these three conclusions will provide some further scope for argument in specific cases, but, in general, the judgment should be reassuring for issuers. Had the decision been otherwise, they could have faced numerous (and potentially conflicting) judgments in the courts of different European states.

Exercise of contractual rights by purchaser of notes in the secondary market

Secure Capital SA v. Credit Suisse AG [2015] EWHC 388 (Comm)

Credit Suisse's Nassau office issued various notes (governed by English law, and treated collectively for present purposes) which were linked to life insurance policies, such that the amount payable under them depended on the mortality of a set of "reference lives". Credit Suisse agreed in the terms applicable to the notes that it had taken reasonable care to ensure that information in the pricing supplements was accurate, and that there were no material facts the omission of which would make the statements misleading. Secure Capital alleged that Credit Suisse had breached those terms by failing to disclose an anticipated change to the calculation of life expectancy of the reference lives.

The notes were in bearer form, and held by BNY Mellon, which was the bearer of the notes, as common depositary for Clearstream. Subsequent transactions took place by way of book entries by members of Clearstream, who had recourse only against Clearstream in relation to non-payment. Secure Capital held the notes through such a member, RBS Global Banking (Luxembourg) SA (RBSL).

By the provisions of Luxembourg law, the owner of assets in a Clearstream account (here Secure Capital) has an intangible right in rem to securities of the same type (and the rights attaching to them) in the account of the account holder (here RBSL). Such right is only exercisable against the account holder. The same law provides that, if the account holder produces a certificate attesting to the owner's holding, the owner can exercise any corporate rights provided for in the securities, or rights attaching to the holding of the securities linked to the possession of the securities. In this case, RBSL had provided Secure Capital with such a certificate, and Secure Capital sought to rely on this provision of Luxembourg law to sue Credit Suisse directly in relation to the allegedly misleading content of the pricing supplements. Credit Suisse applied for summary judgment, alternatively to strike out the claim.

Secure Capital's position was that it was entitled in its own name, by operation of the Luxembourg law, to assert the same rights as the bearer of the notes. In making this assertion, it had to convince the court that the law of Luxembourg was the appropriate governing law, notwithstanding that the notes were governed by English law. The judge said that: "It is artificial to seek to treat the issue as being who is entitled to be the holder of the Notes. This is not a case where there is a dispute between two parties as to who is entitled to be the holder. It is accepted that BNYM is the holder. The argument is that Secure Capital is entitled to be treated as an additional holder. It is also artificial to seek to divorce that question from the rights which Secure Capital is seeking to enforce which are clearly (and admittedly) contractual rights."

On that basis, he held that the Luxembourg law had no application in this case, and that it could not, in any case, create new rights in an English law contract. In deciding the application in Credit Suisse's favour, the judge noted in some detail its argument (and the authorities supporting it) that: "any other conclusion would fly in the face of market practice and the unanimous...