The appellant German company (DWG) appealed against a decision
([20071 EWHC 72 (Comm), [2007] I.L.Pr. 17) refusing to grant a
declaration that the court had no jurisdiction in respect of claims brought
against it by the respondent company (FKI) (claimant in the English
proceedings). The main question was whether Article 6(1) of Regulation
94/2001 (the Brussels Regulation) permitted DWG to be sued in England
because the claim against it was so closely connected with the claim
against its parent English company (DWL) that it was expedient to hear
and determine the claims together to avoid the risk of irreconcilable
judgments resulting from separate proceedings. FKI had sold its shares
in DWG to DWL under an agreement whereby DWL was to indemnify
FKI against all losses arising out of performance bonds and guarantees
given by DWL. FKI subsequently made a payment under one of the
guarantees, but OWL failed to reimburse it. DWG issued proceedings
against FKI in Germany alleging failure to pay sums due under capital
reserve agreements, and that certain payments made to FKI were
contrary to German company law. Just prior to the issue of the German
proceedings, FKI had commenced an action in England against DWL
and DWG claiming declarations that it was not liable in respect of those
claims, and damages from DWL for breach of the share sale agreement
for failing to supply financial information (the „anchor claim“) contingent
on the disputed liability of FKI to DWG arising out of an alleged breach
of contract (the contingent claim). FKI contended that the court had
jurisdiction to entertain the claims against DWG under Article 6(1) of
the Brussels 1 Regulation because, even though DWG was domiciled in
Germany, the claims against DWG and OWL were so closely connected
that it was expedient to hear and determine them together to avoid
the risk of irreconcilable judgments. DWG applied for a declaration that
the court had no such jurisdiction because the claim against it was not
closely connected with the claim against DWL and that, in any event,
the claims had no real prospect of success. The judge found that the
contingent claim against DWG would involve the same issues that arose
in the German proceedings, and that, as it raised issues which had to be
fully examined, it was of sufficient merit to represent a valid claim for the
purposes of Article 6(1). DWG contended that a contingent claim did not
fall within the scope of Article 6(1) and that such a claim had to await a
finding of liability on which it was premised before it could properly fall
under the Regulation. DWG's appeal was dismissed.
JUDGMENT TUCKEY L.J.:
This is another jurisdiction dispute. The main question is whether Article
6 of the Judgments Regulation 44/2001 permits the appellant, De Wind
GMBH, a German company (DWG) to be sued here because the claim
against it is so. closely connected with the claim against its English parent
company De Wind Holdings Limited (DWL) that it is expedient to hear
and determine the claims together to avoid the risk of irreconcilable
judgments resulting from separate proceedings. David Steel J. held
that it did but gave DWG permission to appeal. DWG contends that the
judge's decision was wrong because the claim against it was not closely
connected with the claim against DWL and because DWL's claim does not
pass the merits threshold.
DWG designs and manufactures wind turbines. Before July 4, 2005, it was
wholly owned by the first claimant, part of an engineering group whose
parent was the second claimant. Nothing turns on the separate identities
of the claimant companies, whom I shall simply call FKI. DWG has always
been loss making. To maintain its solvency FKI had among other things
entered into a series of capital reserve agreements (CRAs) with DWG
under which it agreed to make a number of substantial payments.
By an agreement made between FKI and DWL dated July 4, 2005, FKI
agreed to sell its entire interest in DWG to DWL on terms which reflected
the fact that DWG was loss making. Completion of the sale and purchase
of the shares was conditional upon DWG having EUR 3,278.000 of cash
in its bank accounts and upon repayment of all intra-group indebtedness.
Net tangible assets of DWG were forecast to be EUR 27.778.000. After
completion a balance sheet was to be agreed or settled by expert
determination and payment was to be made of any difference between
the forecast and actual values of the net tangible assets. DWL also agreed
to indemnify FKI against any liabilities which it incurred under a number
of identified performance bonds and guarantees which DWG's bankers had
given on its behalf.
Following completion of the sale the parties failed to agree a completion
balance statement. The dispute was resolved by expert determination
which required FKI to pay DWL EUR 339.000. By this time, however,
FKI had paid EUR 1,649.716 to DWG's bankers in respect of payments
which had been made under the performance bonds and guarantees
to which I have referred. FKI sought repayment of this amount from
DWL under the indemnity and, when it failed to pay, issued a statutory
demand. This resulted in correspondence between solicitors, in the course
of which DWL's solicitors indicated that DWG had claims against FKI which
would be pursued in Germany. In due course FKI were sent a copy of
draft proceedings, prepared by German lawyers, which formulated these
claims. Those proceedings were issued in Germany on July 20, 2006, but
these English proceedings had been started a fortnight earlier.
In the English proceedings the first claim against DWL was for the EUR
1,649.716 plus interest under the indemnity. Nothing turns upon this
claim, for which the English court obviously has jurisdiction.
It is FKI's second claim against DWL which it relies on as what has been
called „the anchor claim“ for its claim against DWG. This, so far as it is
relevant, is a claim for damages for breach of contract. The claim against
DWG is for declarations that FM is not liable upon the claims made in the
German proceedings.
FKI's second claim against DWL, described in its particulars of claim as
a „contingent claim“, is made on the premise, which is denied, that it is
liable for the claims made in the German proceedings. The particulars
of claim set out the nature of the two claims made in the German
proceedings: the first, a claim for payment of EUR 25.6 million, allegedly
still due under the CRAs; the second is a claim for repayment of EUR
32.56 million allegedly paid by DWG to FKI in breach of German company
law. The pleading then explains why FKI says that it is not liable for
either claim. It had paid the amounts due under the CRAs in full, in cash
or by crediting DWG's loan accounts on dates and amounts which are
particularized. Its defense to the company law claim does not matter
for present purposes. These particulars led to the claim for the negative
declaration against DWG. Paragraph 39 of the pleading then says that if,
contrary to its case, FKI was liable to DWG as alleged, amounts due under
loans made by FKI to DWG would be revived so as to extinguish any such
liability.
The so-called contingent claim followed, insofar as it is material,
in paragraph 42 to 48. Here FKI relied on a term of the share sale
agreement, which at paragraph 8 of pt. 2 of Sch. 7 said:
„The buyer shall provide the Seller with such access to the... accounts,
working papers and other financial information of the Buyer as is
reasonably necessary for the purposes of this Agreement.“
The purposes of the agreement included the preparation of the completion
balance statement which was to include the amount of DWG's net tangible
assets so as to determine what adjustment to the consideration for the
transaction needed to be made.
Paragraphs 47 and 48 allege:
„In breach of its obligations under paragraphs of Particle 2 of Schedule
7 to the Share Sale Agreement [DWL] failed to provide to [FKI] financial
information reasonably necessary for the purposes of the Agreement,
namely that [DWL] and [DWG] were in the process of preparing a claim
against [FKI] (which, on the hypothesis of [FKI]'s contingent claim against
[DWL] was valid) for EUR 57.167.751 and/or that [DWG] was entitled to
payment of that sum from [FKI].
In consequence of [DWL]'s breach of its obligations under paragraph 8 of
Particle 2 of Schedule 7 of the Share Sale Agreement, the Completion Net
Tangible Assets of [DWG] were under-stated by EUR 57.167.751 in the
Draft Completion Balance Sheet and in the Completion Balance Sheet as
determined by [the expert], and [FKI] has suffered loss and damage in
that sum.“
At the end of the pleading the claim for damages for breach of contract
against DWL is made „pursuant to paragraph 48“.
The EUR 57 million figure is the total of both claims made in the German
proceedings, At the hearing before the judge FKI conceded that it could
not recover the amount of the claim for breach of German company law
(EUR 32.6 million) on the basis pleaded in paragraph 47 and 48 because
this amount could not have been included in DWG's net tangible assets
even if FKI had known about the claim. I shall have to return to the
reason for this later.
So much for the facts. The objects of the Judgments Regulation are well
known.
Preamble II says that:
„The rules of jurisdiction must be highly predictable and founded on the
principle that jurisdiction is generally based on the defendant's domicile
and jurisdiction must always be available on this ground save in a few
well-defined situations in which the subject matter of the litigation or the
autonomy of the parties warrants a different linking factor.“
Article 6 contains a number of those exceptions. Article 6(1) provides:
„A person domiciled in a member state may also be sued... where he is
one of a number of defendants, in the courts for the place where any one
of them is domiciled, provided the claims are so closely connected that
it is expedient to hear and determine them together to avoid the risk of
irreconcilable judgments resulting from separate proceedings.“
Mr. Samek for DWG made a number of submissions about the meaning
and effect of Article 6(1) which I must deal with at the outset. First he
says that a claim for the purposes of Article 6(1) must be one which can
properly be brought in the domestic court. As a general proposition, 1
would accept this, although Mr. Samek referred us to a recent decision
of the European Court of Justice (ECJ) in Reisch Montage AG v. Kiesel
Baumaschinen Handels GmbH (C-103/05) [2006] E.C.R. 1-6827; [2007]
I.L.Pr. 10, which casts some doubt upon this proposition. In that case
proceedings had been brought by the creditor of a bankrupt in the court
of his domicile and, relying on Article 6(1), his guarantor domiciled in
another member state. The claim against the bankrupt was time-barred
but the ECJ held that nevertheless the claim against the guarantor could
proceed under Article 6(1) which was not affected by a procedural bar
contained in a national provision.
Leading on from his first submission Mr. Samek submits that a contingent
claim is not a claim and cannot be made either in domestic law or as an
„anchor“ claim under Article 6(1). Any such claim, he says, which, like the
claim in the present case, is put „in the alternative if, which it is denied,
the claimant is liable to X then the defendant is liable to the claimant“ is
contingent in this sense and so must await the finding of liability upon
which it is premised before it can properly be made.
In support of this surprising submission, Mr. Samek relied on an English
case Competitive Insurance Co Ltd v. Davis Investments Ltd [1975]
W.L.R. 1240, but was unable to point to or rely on any European case
which supported his submissions about the meaning of the word „claim“
in Article 6(1). I do not accept these submissions. The Competitive
Insurance (cited above) case is not authority for the wide proposition for
which Mr. Samek contended. Gough J. had to decide whether a liquidator
—who was defending his decision to reject a proof of debt in the course
of the winding up—could be sued personally for breach of fiduciary duty
if his defense (the merits of which had not been decided) was successful.
The judge struck out the claim on the basis that it disclosed no reasonable
cause of action and was vexatious or an abuse of process. One of his
reasons for doing so was that the claim was premature, but I do not see
that this case provides any precedent for the instant case which is a claim
for breach of contract subject to rules of procedure, which are different
from those in force 30 years ago. The fact is that alternative claims of
the kind I have described are commonplace in domestic litigation and are
not confined to straightforward claims for contribution, to which different
considerations may apply. They are claims, even though premise upon a
finding of liability which is denied. There is nothing to indicate either that
the meaning of the word „claim“ in Article 6(1) should be given any such
restricted meaning.
Mr. Samek's third submission is that (assuming there is a claim here)
when one comes to consider whether it is closely connected with another
claim, one must compare the claims and not any contingency which
might connect them. Here the anchor claim is for breach of the share sale
agreement; the claim against DWG arises under the CRAs. Those claims
are not closely connected, Mr. Samek submits, although FKI's anchor
claim is contingent upon its liability to DWG. I do not think this is the
right approach. Article 6(1) requires one to identify the anchor claim and
then the claim against the person domiciled in another member state and
see whether they are so closely connected so as to make it expedient
to determine them together. The claim in each case must be the whole
claim; so a claim for breach of contract involves consideration of the
breach relied on, causation and loss. It is not enough simply to look at
the contract itself and see whether it is closely connected with the subject
matter of the claim against the non-domiciled party.
With these considerations in mind I turn to the facts of this case. What
is the anchor claim made by FRI? It is a claim for breach of the share
sale agreement for failing to provide financial information. The cause
of action has already arisen as Mr. Samek conceded. There is nothing
contingent about it. The loss is claimed on the basis that, but for the
breach, the EUR 25.6 million which FIG. owed to DWG would have been
shown as an asset among the net tangible assets which appeared in the
completion statement in which case, DWL would have had to pay this
amount to FKI. Damages of this amount are claimed, but no assessment
of such damages is possible without deciding whether or not DWG's claim
for the E25.6 million is valid. That is the question raised by the claim
against DWG for a negative declaration. Exactly the same question is
raised by DWG in its claim in the German proceedings. The claims are,
it seems to me, inextricably linked, and so it must be expedient to hear
them together to avoid the risk of irreconcilable judgments. No question
of forum convenience arises when one is applying the provisions of the
Judgment's Regulation.
Accordingly, this court has jurisdiction to hear the claim against DWG
under Article 6(1) and its jurisdiction challenge must, I think, fail. This
was the judge's conclusion which he expressed shortly and I agree with it.
It is common ground that in considering such a challenge to jurisdiction
the court must look at the merits of the anchor claim. The standard to
be applied is that of serious issue to be tried or real prospect of success,
which I take to mean the same. Before the judge Mr. Samek made seven
points which he identified as insurmountable hurdles to FKI's claim. The
judge rejected each of them. DWG appeal his conclusion on hurdles 4,5
and 6. It is perhaps worth noting that, if valid, these points could have
been deployed by OWL as grounds for obtaining summary judgment
against FKI, but this was not the way in which the matter proceeded,
although OWL and DWG have the same English legal representation.
Hurdle 4 raises a short point. What Mr Samek submits is that because FKI
accepted that its claim for the E32.6 million would fail, it should for the
same reasons have accepted (or the judge should have decided) that its
other claim for EUR 25.6 million would fail. In support of this submission,
Mr. Samek relies on FKI's expert accountant's report prepared for the
purposes of these proceedings. In his conclusion about the E31.6 million
claim, the accountant said:
„3.12 In relation to the EUR 31.6 million claim, if the terms of reference
and parties instructed the independent accountant to assess the facts as
they existed as at the date of the Completion Balance Sheet, and to apply
a UK GAAP to the question of whether an asset should be recognized,
then no recognition of the contingent asset amount would be made in
the Completion Balance Sheet, unless the independent accountant was
convinced that recovery of the amount claimed was virtually certain
(which is very unlikely given the early status of the legal action under
German law).“
But the conclusion about the other claim was expressed in the preceding
subparagraph of the report as follows:
„In relation to the EUR 25.6 million claim, the overall effect of the
accounting adjustments required to reflect the existence of any valid debt
of EUR 25.6 million due from FKI Ltd to DW GmbH would be to increase
Net Tangible Assets by 25.6 million.“
Mr. Samek argues that this latter conclusion was not supported by earlier
passages in the report.
The judge dealt with this point by saying:
„39. In fact the claim for payment of EUR 25.6 million was, on the
Claimants' case, quite distinct from the claim for repayment, the latter
depending by virtue of German law on insolvency. In short the recovery
of the EUR 31.6 million was not 'virtually certain' but a mere claim. In
contrast there was a dispute between the experts retained by each side as
to whether the EUR 25.6 million claim should be treated as a valid debt.
This is not an issue that I can summarily determine.“
I agree with the judge's conclusion about this. FKI's expert clearly
distinguished the two claims. If his reasons for doing so were not cogent;
that gives scope for cross-examination but it is not the stuff for summary
judgment.
Hurdle 5 is based upon what FKI plead in paragraph 39 of its particulars
of claim, to which I have referred. What is said is that, if, as is contended,
FKI's liability for DWG's claim revives DWG's liability to repay loans, any
increase in the net asset value to take account of the former would be
matched by a corresponding decrease in value to take account of the
liability involved in the latter. So it is said that the anchor claim fails for
circuity on FKI's own case.
The judge rejected this argument by saying:
„... what is described as a logical difficulty by DWG is in fact a proposition
which is denied by them. The position of DWG appears to be that the
previous loans would not revive, as it was a condition of the [Share Sales
Agreement] that all outstanding group indebtedness had to be repaid.
This is an issue that cannot decide summarily,“
So what the judge is saying is that it was not open to DWG on behalf of
DWA to take up wholly inconsistent stances. The evidence of its German
law expert was that the proposition that the debt would revive was „a
non-point because it was a condition that all outstanding intra-group
indebtedness had to be repaid“. In any event the anchor claim was
pleaded on the basis that the point made in paragraph 39 had failed. If it
succeeds the anchor claim does not arise. All in all I do not think that the
point raised by hurdle 5 was fit for summary determination.
Hurdle 6 arises out of the fact that paragraph 10.1 of Sch. 7 pt. 2 of the
share sales agreement provides:
„The Completion Balance Sheet shall be produced using the same bases,
principles and assumptions employed in producing the management
accounts of the Seller known as the MRs („MRs“) and UK GAAP and shall
be consistent with earlier MRs...“
Mr. Samek's point is that as the management accounts were based on
the assumption that the CRAs had been fully performed, it would not
have been proper to make any adjustment to the net realizable assets
contained in the completion statement to reflect the fact that those
agreements had not been fully performed.
The judge dealt with this point at [43] in his judgment, where he said:
„The answer, as put forward by the Claimants, is that no want of
consistent treatment is involved. The payments under the CRAs were
treated as an investment in both the management accounts and group
accounts. This is clearly a triable issue.“
FKI's management accounts were prepared on the basis that debts due
were recorded as assets. Preparation of the completion statement on the
same basis would require it to show that debts due to DWG should also be
treated as assets. No inconsistency of treatment would be involved. But
if the management accounts were wrong, and were wrong to the tune of
EUR 25.6 million, it would be absurd to suggest that this provision in the
share sales agreement required the completion statement to be prepared
in a way which perpetuated the error. I think the judge was obviously
right to say that this point raised a triable issue.
So for the reasons I have given I reject both of DWG's challenges to the
judge's decision and would dismiss this appeal. This makes it unnecessary
to consider the point raised in the respondent's notice upon which we
heard no argument.
TOULSON L.J.:
I agree. Mr Samek argued that as a matter of English law, PKI's
„contingent claims“ against DWL were premature and therefore
improperly brought. In support of that proposition he relied, as my Lord
has indicated, on some observations of Gott J. in Competitive Insurance
Ltd at 1245, which he said established that when a claim is premised
on a finding of fact which the claimant opposes, it is to be regarded as
premature and improperly brought. I am not persuaded that Gott J.'s
observations, which have to be seen in the context of the facts of that
particular case, establish any such universal rule; and Mr. Samek was not
able to cite any more recent authority to suggest that there is any such
universal rule of practice today. I am satisfied that there is not. Rejecting
the argument based on prematurity, David Steel J. observed that it could
not be said that no cause of action had accrued. Mr. Samek accepted that
he could not quarrel with that statement, and that concession, properly
made, is in my judgment a simple and complete answer to the allegation
that the claim was improperly brought.
Mr. Samek also argued that whenever anybody advances a claim against
two persons in the alternative, one of which is dependent on the failure
of the other claim, the claim against the second defendant is not a claim
within the meaning of Article 6. He was not able to cite any authority
to support that construction of Article 6, nor to advance any persuasive
reason why it should be so construed. To apply such a limitation into
Article 6 would militate against the objective spelled out in paragraph 15
of the preamble;
„In the interests of the harmonious administration of justice it is
necessary to minimize the possibility of concurrent proceedings and to
ensure that irreconcilable judgments will not be given in two Member
States. There must be a clear and effective mechanism for resolving cases
of lis pendens and related actions and for obviating problems flowing from
national differences as to the determination of the time when a case is
regarded as pending.“
Take a simple case involving a contract for the sale of goods by A to B and
a contemporaneous sub sale by 13 to C. The goods are delivered by A to
C, C fails to pay. After repeated demands B sues C for the price. C raises
a defense that the goods were defective. B is skeptical of this defense
but for safety's sake he seeks to join A as second defendant on the basis
that if the goods were defective it would follow that A was in breach of
contract. Mr. Samek accepts that on his construction of Article 6, B could
not rely on that Article to join A as a party to the action, because, on his
submissions, B would not have a claim against A. This construction would
defeat the plain purpose spelled out in paragraph 15 of the preamble.
On the issue of whether on the facts FKI's claim against DWL raises a
sufficiently triable case on the merits, I agree with all that Tuckey LI has
said and have nothing to add.
SIR JOHN CHADWICK:
I agree that the appeal should be dismissed for the reasons which my
Lords have given. Order: Appeal dismissed.