Lehman Brothers—when should a stay be granted?

How should the courts determine whether proceedings have been commenced within the meaning of the Lugano Convention, art 27? Laura Newton, barrister at 11 Stone Buildings, examines the issue in relation to conciliation requests submitted in Switzerland and England.

Original news

Lehman Brothers Finance AG (in liquidation) v Klaus Tschira Stiftung GmbH and another company [2014] EWHC 2782 (Ch), [2014] All ER (D) 42 (Aug)

Following a dispute arising from the automatic termination of an International Swaps and Derivatives Association (ISDA) Master Agreement (after the insolvency of Lehman Brothers Inc) the defendants submitted requests for conciliation to the conciliation authority in Zurich and the claimant issued proceedings in England. The defendants sought a stay of the English proceedings. However, their Swiss proceedings were subsequently dismissed. The Chancery Division held the initiating of conciliation proceedings by the lodging of a written request for conciliation fell within the Lugano Convention, art 30. Were it not for the fact that the Swiss proceedings had been dismissed, a stay of the English proceedings would have been granted.

What was the case about?

This case concerned when foreign proceedings will fall within the Lugano Convention, art 27 so as to require a stay of subsequent English proceedings. The defendants applied for a stay of English proceedings under the Lugano Convention, art 27 on the basis that proceedings between the same parties involving the same cause of action had been commenced in the Swiss courts prior to issue of the English proceedings.

The issue was whether the procedure initiated in Switzerland—namely ‘an attempt at conciliation before a conciliation authority’—constituted proceedings before a court within the meaning of the Lugano Convention, art 27(1).

The dispute arose out of an ISDA Master Agreement between the defendants and Lehman Brothers Finance AG (LBF), a Swiss subsidiary of Lehman Brothers Holdings Inc (LBHI). The agreement was automatically terminated upon the insolvency of LBHI. Upon termination, the defendants were required to calculate loss (as defined) under the agreements. The dispute concerned the amount of such loss—the defendants contended they were owed approximately €411m, whereas the liquidators of LBF contended LBF was owed approximately €186m.

On 18 March 2013, LBF’s solicitors sent a letter of claim to the defendants seeking payment of the amount said to be owed to it. Upon receipt of that letter, on 25 March 2013 the defendants submitted requests for conciliation to the conciliation authority in Zurich regarding their claim for negative declarations and claims for the sums which they alleged to be due to them. On 2 April 2013 LBF issued a claim form in the English proceedings. On 23 May 2013 a conciliation meeting was held in the Swiss proceedings, at which no settlement was reached and the defendants were granted permission to file a complaint with the competent court. The defendants filed a complaint with the District Court of Zurich, but it declined to hear the claim on the basis that jurisdiction lay with the Commercial Court of Zurich. The defendants appealed and the Supreme Court of Zurich dismissed their appeal.

Accordingly, at the time of this hearing there were no proceedings on foot in Switzerland. However, the defendants intended to appeal to the Swiss Federal Tribunal and to seek a suspension of proceedings pending that appeal. The English court was therefore asked to deliver judgment notwithstanding the dismissal of the Swiss proceedings.

What did the court decide?

In a nutshell, Mr Justice David Richards held that the initiation of conciliation proceedings in Switzerland by the lodging of a written request for conciliation fell within the Lugano Convention, art 30, such that the English proceedings would have been stayed were it not for the fact that the Swiss proceedings had been dismissed.

In reaching this conclusion, Mr Justice David Richards gave detailed consideration to the relevant provisions of Swiss procedural law. In particular, it was relevant that as of 1 January 2011, participation in a conciliation procedure was mandatory under Swiss civil procedure law. Further, it was not open to a claimant in adjudicative proceedings to introduce a claim that had not been the subject of a conciliation procedure. The court also noted that under Swiss law, the commencement of a conciliation procedure was sufficient to establish a lis pendens—the case became pending at the time of the first procedural act necessary to introduce the action.

In the context of the Lugano Convention, the issue for the court’s determination was whether written request for a conciliation procedure amounted to a document issuing proceedings before a court within arts 27 and 30 of the Convention.

Mr Justice David Richards held at para [63] that LBF’s arguments that the conciliation procedure did not fall within art 27, amounted to an attempt to isolate the conciliation procedure and to view it as a standalone process. In fact, the conciliation authority was an integral part of Swiss civil proceedings and indeed was a mandatory first step in the resolution of civil and commercial disputes by the courts. While it was not determinative that under Swiss law the commencement of conciliation proceedings gave rise to a lis pendens, it was clearly significant.

Looking at the overall purpose of the Lugano Convention (namely to avoid the ‘twin mischiefs’ of parallel proceedings and inconsistent judgments), he held it would be contrary to those purposes if the Swiss conciliation proceedings did not fall within art 27. It would be unrealistic to regard them otherwise where those proceedings would or may lead to an enforceable judgment.

The court declined to refer the matter to the Court of Justice of the European Union for a preliminary ruling.

Would the decision have been different if the proceedings in Switzerland had not been dismissed?

As explained at para [72] of the judgment, by the time this matter came to be heard by the English court, the Swiss proceedings stood dismissed. No proceedings were on foot, unless any appeal against their dismissal was allowed by the Swiss Federal Tribunal.

If this were not the case, the court would have stayed the English proceedings pending determination of the Swiss proceedings (see para 72 of the judgment).

What does this mean in practice?

This case offers useful insight into the approach that will be adopted by the English court in determining whether proceedings have been commenced within the meaning of art 27. This question falls necessarily to be dealt with on a case-by-case basis, taking into account the nature of the foreign proceedings or procedure commenced and its implications for the parties. Significant factors may include whether a procedure is a mandatory pre-cursor to adjudicative proceedings in the foreign jurisdiction and whether the procedure constitutes a lis pendens under the relevant foreign law.

Further reading

If you are a LexisPSL Subscriber, click the link below for further information on the Lugano Convention:

Enforcement of English judgments in foreign courts (Subscriber access only)

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Interviewed by Rachel Moloney.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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