Exclusive jurisdiction clauses and insolvency disputes

Exclusive jurisdiction clauses and insolvency disputes

In Black Diamond v Fomento De Construcciones Y contratas Asplin J upheld an exclusive jurisdiction clause in favour of the English courts despite submissions that an English judgment would then be used for collateral purposes in foreign insolvency proceedings.

Practical implications

Jurisdiction agreements

In this case there were two sets of proceedings involving the English defendant, those in England and those in Spain. However, the issue of jurisdiction agreements was not relevant as the Spanish proceedings were freestanding proceedings to deal with restructuring of a debt and were not brought under an agreement between the parties which was subject to a jurisdiction clause. There were therefore no competing jurisdiction clauses to consider. The fact that a decision in the English court might be used for collateral purposes within the Spanish proceedings was not a good reason for the court to ignore an exclusive jurisdiction agreement between the parties.

Granting a stay

The authorities are very clear that the English common law will enforce an exclusive English jurisdiction clause 'unless there is a strong or compelling reason not to do so and that a case management stay required rare and compelling circumstances'. Issues considered in this case which militated against such a stay were:

  • there was no evidence of any prejudice if a stay was not granted
  • the other proceedings in question were not the subject of an agreement between the parties
  • the fact that the English court decision might be used for a collateral purpose in the other proceedings in Barcelona was not a reason to grant a stay
  • the English court proceedings would give certainty

Facts

FCC, a Spanish company, has two main types of debt:

  • Notes—€450m at 6.5 per cent unsecured convertible note which is subject to English law and exclusive English court jurisdiction (at [10])
  • Syndicated Finance Agreement—for €4.5bn which is subject to Spanish law and the jurisdiction of the Madrid courts (at [11]). The loan under the agreement was split into two tranches with Tranche B for €1.35bn being the one under consideration for the purposes of these proceedings

The claimants consist of Creditors and seven other claimants:

  • Creditors—holders of Notes and holders of Tranche B debt
  • the other seven claimants—holders of Tranche B debt

All the claimants were, through the Tranche B debt, senior creditors of FCC under the Syndicated Finance Agreement. They disagreed with the restructuring of the Tranche B debt by FCC which was being pursued through proceedings in the courts in Barcelona known as the Homologation Proceedings. The claimants disagreed with the restructure on the basis it involved a disproportionate sacrifice by Tranche B holders. They were also of the view that the Barcelona proceedings triggered an Event of Default under the Notes so entitling them to accelerate their Notes.

The claimants issued a Part 8 claim in the English courts for declarations that an Event of Default had occurred under the Notes as a result of the Homologation Proceedings. The other seven claimants then filed notices of discontinuance as they were not Note holders. FCC gave notice of its intention to dispute the English courts' jurisdiction under CPR 11. Its position being that there had not been an Event of Default.

Note: Homologation Proceedings are proceedings to obtain a court-sanctioned collective refinancing agreement. For more detailed information, Lexis®PSL subscribers can see question 10 in Getting the Deal Through dealing with insolvency in Spain: Court Homologations. Click here for a free trial.

Did the English court have jurisdiction?

Asplin J held that the English court had jurisdiction to hear the matter and the rule 11 challenge therefore failed. Asplin J focussed on the intention of the parties to the agreements when considered in light of the transaction as a whole. In this case, the Note contract contained the exclusive English jurisdiction clause and the question of the Event of Default which was the basis of the Part 8 claim fell naturally under the Note contract; rather than the Syndicated Finance Agreement. Further, any consideration as to whether the Notes could be accelerated under the Syndicated Finance Agreement in relation to the Tranche B debt was, on the facts, peripheral.

Asplin J also noted that:

  • there was no dispute that the Notes contained an English court jurisdiction clause
  • the issue of an Event of Default under the English court proceedings was not being considered under the Syndicated Financing Agreement and therefore Madrid court jurisdiction did not apply. The authorities inUBS and Credit Suisse did not apply as the issue of the Event of Default could not be determined under both agreements and therefore there were no competing jurisdiction clauses
  • the Homologation Proceedings being held in Barcelona were not bought pursuant to the Syndicated Financing Agreement; the agreement which provided for Madrid court jurisdiction. The Homologation Proceedings were in fact not the subject of any agreement between the parties and were 'free-standing'.
  • an Event of Default, if found, might possibly be used to challenge a Homologation order. However, there was no competing jurisdiction clause in relation to the Homologation Proceedings and so the English court declaration could not be said to be subverting a jurisdiction clause for those proceedings
  • the issues in the Homologation Proceedings addressing the Tranche B debt were separate to those arising out of the Notes
  • even if an Event of Default was considered in the Homologation Proceedings there was no evidence before the court that any conclusion would be binding on FCC and the Noteholders

Should the English proceedings be stayed pending the Homologation Proceedings?

Asplin J held that a stay was not appropriate.

The difficulty in arguing for a stay was the existence of the exclusive jurisdiction clause in favour of the English courts; a very strong reason is therefore required to grant a stay.

The issues taken into account where:

  • the claimants were not seeking to subvert a contractual agreement to submit to the Madrid courts. The Event in Default arose out of the Notes
  • the fact that an English court decision on the Event in Default might be used for a collateral purpose in the Homologation Proceedings did not detract from the fact that the central agreement in issue was the Note contract. It also did not mean that the Creditors had no real interest in the Part 8 claim
  • the Syndicated Financing Agreement, the only other agreement between the parties, did not govern the Homologation Proceedings
  • the English court proceedings will provide the Creditors was certainty as to their rights under the Notes contract and enable them to take a commercial decision as to whether to accelerate the debt
  • in the facts it was not possible to conclude that a real interest did not exist; there being a ready market in the Notes
  • allowing the English court proceedings to continue was more likely to avoid the risk of inconsistent decisions as the English Court was able to decide the issue in accordance with English Law and that might provide assistance to the court in Barcelona
  • there was no evidence before the court of any prejudice FCC would suffer if the stay was not granted. The creditors would be prejudiced in that there would be a delay in determining their rights under the Notes

It could be said that FCC in seeking a declaration that the English courts do not have jurisdiction were in fact seeking to subvert the contractual agreement they had entered into in relation to the Notes. Even though the stay sought was temporary rather than permanent it still affected the contractual agreement for English court jurisdiction.

Court details

Court: Chancery Division, High Court

Judge: Mrs Justice Asplin

Date of judgment: 9 March 2015

The report as published in LexisPSL provides tables with references to the authorities relied on for the different issues in the case which include synopsis of the salient issues for each authority. Click here for a free trial.

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About the author:

Janna is a dispute resolution lawyer. She deals primarily with cross border issues and is active in the work being undertaken in relation to the implications of Brexit for Dispute Resolution lawyers. Janna also heads up a LexisNexis costs team bringing together expertise from across the company to deal with the costs issues facing the profession.