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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> UBS AG, London Branch & Anor v Kommunale Wasserwerke Leipzig GmbH  EWHC 2566 (Comm) (15 October 2010)
Cite as:  Bus LR D15,  EWHC 2566 (Comm),  2 CLC 499
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QUEEN'S BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| UBS AG, LONDON BRANCH
UBS GLOBAL ASSET MANAGEMENT (UK) LIMITED
|- and -
|KOMMUNALE WASSERWERKE LEIPZIG GMBH
(instructed by Mayer Brown International LLP) for the Claimant/Respondent
Mr. Tim Lord QC and Ms Sarah Abram
(instructed by Quinn Emanuel Urquhart & Sullivan UK LLP) for the Defendant/Applicant
Hearing dates: 13/14 July 2010; further submissions received 23 August – 1 September 2010
Crown Copyright ©
The Hon Mrs Justice Gloster DBE:
i) the German court has exclusive jurisdiction under Article 22.2 of Council Regulation (EC) 44/2001, namely the Jurisdiction and Judgments Regulation ("the Regulation"), because the proceedings"… have as their object … the validity of the decisions of [the] organs"of KWL, as set out in that article; or, in the alternative,
ii) pursuant to Articles 27, 28 and 30 of the Regulation, the German court was first seised of proceedings involving the same cause of action and between the same parties, or alternatively a related action.
i) KWL purchasing credit protection for the equity defeasance risk in respect of each bond or PUA from UBS AG,
ii) KWL selling credit protection to UBS AG or, in the case of the Subsequent Swaps, to other banks, and
iii) KWL entering into a Portfolio Management Agreement with UBS AM, as manager of the "reference portfolio", to which I refer below.
Governing law and jurisdiction clauses
"13. Governing Law and Jurisdiction
a) Governing Law. This Agreement will be governed by and construed in accordance with the law specified in the Schedule. [This was English law.]
b) Jurisdiction. With respect to any suit, action or proceedings relating to this Agreement ("Proceedings"), each party irrevocably:-
i) submits to the jurisdiction of the English courts, if this Agreement is expressed to be governed by English law,
ii) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction (outside, if this Agreement is expressed to be governed by English law, the Contracting States, as defined in Section 1(3) of the Civil Jurisdiction and Judgments Act 1982 or any modification, extension or re-enactment thereof for the time being in force) …"
"23 GOVERNING LAW
This Agreement (and any dispute, controversy, proceeding or claim of whatever nature arising out of or in any way relating to this Agreement or its formation) shall be governed by, and shall be construed in accordance with, English law.
24. JURISDICTION AND SERVICE OF PROCESS
With respect to any suit, action or proceedings relating to this Agreement (Proceedings), each party irrevocably submits to the jurisdiction of the English courts and waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings had been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party. Nothing in this Agreement precludes either party from bringing Proceedings in any other jurisdiction nor will the bringing of Proceedings in any one or more jurisdictions preclude the bringing of Proceedings in any other jurisdiction."
Events leading to the service of the English proceedings
i) that, in response to the Notice, Klaus Heininger and Andreas Schirmer, managing directors of KWL at the time of the Transactions, had been sent on "administrative leave" by KWL in connection with their role in the Transactions, and that criminal charges were being filed against them by LVV;
ii) that Mr. Heininger and Mr. Schirmer entered into "secret highly speculative transactions" with UBS which were not recorded in KWL's books or accounts and that they had assured UBS "that they had the approval of the supervisory board and shareholders, which was not true.";
iii) that (in contradiction to ii) above) Mr. Heininger informed the KWL supervisory board of his plans during a meeting in September 2006;
iv) that the articles of incorporation of "the municipal enterprise" prohibited such deals;
v) that it was unclear whether Mr. Heininger and Mr. Schirmer were aware of the "poor quality" of the portfolios or whether UBS AG "bamboozled them";
vi) that KWL would attempt to limit the damage by pointing out possible errors on the part of UBS, the banks and the arrangers, for example violations of disclosure obligations regarding CDO risks;
vii) that UBS were "financial jugglers of all kinds … who made the miraculous multiplication of cash through the bank's London branch office sound appealing";
viii) that UBS was "entitled to a significantly larger share in the profits than KWL";
ix) that the reference portfolios were comprised by UBS "packaging its bad securities in portfolios, with which KWL allowed itself to be bamboozled";
x) that KWL wanted to do its utmost to collect compensatory damages from (among others) the arrangers of what were described as "secret" transactions;
xi) that the Transactions had been examined by Saxony's anti-corruption unit.
i) declarations as to the validity and enforceability of the June 2006 Swap;
ii) declarations that prior to and/or upon entering the June 2006 Swap, KWL made its own independent decision to enter into that transaction, that the transaction was appropriate or proper for KWL, and that KWL did not rely on any oral or written communication of UBS as investment advice or as a recommendation to enter that transaction;
iii) declarations that prior to, or upon, entering into the June 2006 Swap, the defendant was capable of assessing the merits of and understood (on its own behalf or through independent professional advice) and accepted the terms, conditions and risks of that transaction;
iv) a declaration that UBS AG did not act as a fiduciary for or as an adviser to KWL in respect of the June 2006 Swap; and
v) a declaration that the June 2006 Swap and the PMAs are governed by English law.
i) declarations as to the validity and enforceability of the PMAs;
ii) similar declarations in relation to the PMAs, as those sought in relation to the June 2006 Swap set out at subparagraphs 25 ii) – iii) above;
iii) a declaration that UBS AM had properly performed its duties as portfolio manager and that it did not (and was not required to) act in any capacity other than portfolio manager; and
iv) a declaration that the PMAs are governed by English law.
The German Proceedings
UBS AG's application to amend the English Proceedings
Proceedings in the Leipzig Landgericht subsequent to the hearing in the Commercial Court
"Order of the President as of 16.08.2010
1) It is pointed out to the claimant that, based on the current status of the factual allegations, the Chamber cannot accept jurisdiction over any of the respondents for the reliefs sought.
Already after the submission of the claim, there is no reason to believe that the requirements of Article 22 point 2 of the European Jurisdiction and Enforcement Regulation (EJAER) or those of Article 16 point 2 of the Lugano Convention are met. The scope of application of these provisions is obviously not established. Nor is it apparent that the German courts have international jurisdiction over the action brought against the respondents 1.) [UBS AG] and 3.) [Depfa Bank] under other legal aspects.
In respect to the respondent 1.), [UBS AG] the proceedings would be stayed until the London High Court of Justice reaches its decision insofar as, as set out by the latter in detail, the declaratory action filed there in opposition in the sense of Article 27 section 1 and Article 30 of the EJAER has been instituted before the local action. If the High Court of Justice accepts jurisdiction, the action filed against respondent 1.) would be dismissed as inadmissible. In this respect, the claimant is asked to take a position regarding the time of the submission and service of the complaint before the Court in London, as plead by the respondent 1.).
The territorial jurisdiction of the Regional Court in Leipzig, as far as we can tell, has not been established for the claim against the respondent 2.). The Chamber again refers to the order of the President as of 08.03.2010, with respect to which the claimant has not taken a position in spite of the fact that a deadline has been set for this purpose. The claimant may state if, alternatively, it will apply for removal and referral to the possibly competent Regional Court of Stuttgart.
The claimant gets an opportunity to take a position with respect to the respondents' claim of lack of jurisdiction by 09.09.2010. In the meantime, a reply in the case is not required. Where required and possible after the claimant has stated its position, the Chamber would conduct a separate hearing about the admissibility of the claim pursuant § 280 section 1 of the Code of Civil Procedure (ZPO, Zivilprozessordnung).
2.) Item) to Party V, KlV with written submissions of the respondents 1.) -.3.) as of 09.08.2010
3.) Resubmission with FA."
The passages emphasised in bold above are those relied upon by UBS in support of its contention that, although KWL has an opportunity to provide further submissions to the Leipzig Landgericht on the jurisdiction point, the Leipzig Landgericht is clearly of the view, on the basis of the factual allegations before it in KWL's existing complaint, that it does not have jurisdiction.
The first issue:
Does the Leipzig Landgericht have exclusive jurisdiction over the claims made in the English Proceedings by virtue of Article 22.2 of the Regulation?
"The following courts shall have exclusive jurisdiction regardless of domicile:
2. In proceedings which have as their object the validity of the Constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the Member State in which the company, legal person or Association has its seat."
"Where a court of a Member State is seised of a claim which is principally concerned with the matter over which the courts of another Member State have exclusive jurisdiction by virtue of Article 22, it shall declare of its own motion that it has no jurisdiction."
The Court's approach to this application
i) For Article 22.2 to be engaged, the question is whether or not the action is "principally concerned with" an Article 22.2 issue. The words "…. proceedings which have as their object…." in Article 22.2 should be interpreted as "proceedings which are principally concerned with".
ii) An action is not "principally concerned" with an Article 22.2 issue simply because an Article 22.2 issue is raised. Because Article 22.2 is one of the articles on jurisdiction which creates an exception to the general rule of jurisdiction set out in the Regulation, it must not be given an interpretation that is broader than necessary to fulfil its objective (viz. of ensuring that the sound administration of justice is achieved by giving exclusive jurisdiction to the courts of the State concerned with the land, company, public registers, patents and so forth). Thus:"… it is not axiomatic that any proceedings that raise an issue about the validity of the constitution of any company or the validity of a decision of its organ must be most soundly dealt with by the court of the state where the company has its seat, particularly if the parties have chosen another jurisdiction to solve their disputes. The validity issue may be one of many other issues which had nothing to do with the validity of the company or the validity of decisions of its organs and those other issues may have to be decided by a different applicable law and may concern facts which are unrelated to the state where the company has its seat. In such a case the sound administration of justice could well require the courts of another state to determine the issues. That is even more so when the parties have agreed the jurisdiction of the resolution of disputes."
iii) The mere fact that proceedings raise a number of issues and one of them is within the terms of Article 22.2 and the resolution of that issue may be "dispositive" of the proceedings as a whole, or could have a "decisive influence" on the outcome is not enough to make the proceedings "principally concerned with" that issue.
iv) What Article 22.2 calls for is an exercise in "overall classification" and the making of an "overall judgment" to assess what is the principal concern of the proceedings overall and whether the proceedings are "principally concerned" with one of the matters set out in Article 22.2.
v) This exercise in "overall classification" involves consideration of the question as to whether it is clear that, granting jurisdiction to the courts of the relevant state (i.e. where the land is; where the company has its seat; etc) will result in the sound administration of justice. It is only necessary to displace the general rule as to jurisdiction or the parties' own agreed jurisdictional choice if,"… overall, the proceedings are so closely connected with matters of local company law and internal corporate decision-making in respect of the company that the proceedings should not be tried anywhere but in the courts of the state where the company has its seat."
vi) In considering whether or not Article 22.2 issues are raised, the court must consider the nature of both the claim and any defences.
"… the court should be alive to the risk of applicants displaying only part of their hand in order to wrest jurisdiction away from the contractually chosen forum in favour of their home court."
"The court's task is to assess as best it can on the material before it whether the proceedings are likely to be " principally concerned" with an Article 22.2 issue."
I agree with both those comments.
The expert evidence of the German lawyers
i) that there was (at the very least) a good arguable case that there were substantial issues of law and fact as to the validity of the Balaba CDO; and
ii) that there was (at the very least) a good arguable case that the validity issues raised in such evidence were questions as to the validity of the decisions of KWL's organs within Article 22.2.
i) in circumstances where representative power is allocated by statute law to another organ of the company, in particular to the shareholders' assembly; for example the power of appointing or removing managing directors or amending the articles of association in particular respects which, pursuant to statute law, are allocated to shareholders;
ii) in cases involving fundamental decisions that affect the company's corporate structure and constitution, where statute law (as opposed to limitations in the company's articles of association, or internal limitations) makes the managing director's (external) power of representation contingent upon the prior (internal) approval by the shareholders' assembly; for example, changing the corporate form of the GmbH or selling all the company's assets and property, which by statutory provision are allocated to the shareholders' assembly; and
iii) in circumstances where there has been an abuse by the managing director of his power of representation, because he has exceeded the internal restrictions on the exercise of his power of representation, and the third-party knew, or could not have failed to realise, that the agent had acted beyond his internal limitations.
i) Concept (1): It was common ground, as between both experts, that, in the case of a company incorporated under German public law, legal transactions, which are effected by the statutory representatives or agents of a corporate body incorporated under German public law, and which fall outside the public corporate body's functions and sphere of activity, as defined by law or charter, are null and void.However, Professor Eidenmüller contended that this concept also applied to private companies (GmbH), such as KWL, which were owned by municipal companies or companies in public ownership. He argues that transactions such as the CDOs accordingly fell outside KWL's functions and sphere of activity, which were limited to the provision of water facilities and disposal of waste water in the Leipzig district, and accordingly were ultra vires and therefore invalid, notwithstanding KWL's private status as a GmbH. He referred to a case, Hauptgeschäftsstelle Fischwirtschaft, decided in 1956 by the German Federal Court of Justice (Bundesgerichtshof or "BGH"), where the question was expressly left open.Professor Elsing, on the other hand, stated that, as a matter of German law, the public law concept of ultra vires (i.e. acts beyond the legal capacity of an entity) was inapplicable to a private company such as KWL, incorporated under private law as a GmbH, notwithstanding that it pursued a public law purpose (viz. the supply of water and disposal of waste water). He stated that a private company could be incorporated for any lawful purpose, and that the objects (or purposes) stated in the GmbH's articles of association do not limit the legal capacity of the company. He put forward a number of powerful arguments to support his contention, including reference to the requirements of European Company Law. In relation to the Hauptgeschäftsstelle Fischwirtschaft case, he referred to two recent decisions, decided in 2005 and 2008, relating to swap transactions entered into by municipal GmbHs, where the validity of the swaps was upheld, respectively by the Higher Regional Court of Naumberg and the District Court, and Higher Regional Court, of Würtzburg, notwithstanding challenges to their validity.
ii) Concept (2): Professor Eidenmüller argues that the CDO Transactions were null and void, on the grounds that:"While single acts outside the company's objects are fully valid, such agreements which amount to a material change of the company's line of business are not in the powers of the directors."In other words, Professor Eidenmüller seeks to argue that concluding the agreements required an express resolution of KWL' s shareholders, because it operated to change the purpose of the company as specified in the articles of association, and therefore fell within the proposition set out at paragraphs 47(i) and/or (ii) above. In support he relied upon a Federal Supreme Court decision about directors who entered into an intercompany agreement to submit their company to the direction and control of another company.Professor Elsing's response is that the conclusion of the CDO Transactions cannot be said to have done anything to change KWL's articles or constitute a fundamental decision affecting the corporate structure or constitution of KWL. In entering into the transactions, KWL's managing directors simply entered into a contractual relationship with UBS on behalf of KWL. Nor could it be said that the conclusion of such transactions violated the power of representation of another organ even if it were the case factually that the managing directors entered into the transactions without any prior approval from the Supervisory Board or shareholders. The case cited by Professor Eidenmüller referred to a transaction of totally different character - an organisation agreement under corporate law, which altered the corporate structure of the company in a manner that could otherwise only be achieved through an amendment of its articles of association, not a contract under the law of obligations, as are the swap transactions in the instant case.
iii) Concept (3): As stated above, the experts were largely in agreement that, in circumstances where there had been an abuse by the managing director of his power of representation, because, in entering into a particular transaction, he had exceeded the internal restrictions on the exercise of his power of representation, and the third-party knew, or could not have failed to realise, that the agent had acted beyond his internal limitations, the transaction would either be null and void, or invalid (a distinction which is not material for present purposes). Concept (3) addressed this principle of "an abuse of power of representation". There was some disagreement between the experts as to whether the concept was a corporate law, or a private law concept, but this was not a material point. As Professor Elsing pointed out, in order to find such an abuse, one must not only determine whether the managing directors exceeded their internal authority vis-a-vis the company (the objective criterion), but also one must establish what were the intentions and the knowledge of the persons acting on both sides of the transaction (the subjective criterion).
Both experts took the view, on the limited facts available to each of them, that, as a matter of law and on the construction of KWL's articles of association, KWL's managing directors would have (in the case of Professor Eidenmüller), or probably would have (in the case of Professor Elsing), exceeded the internal restrictions on the exercise of their power of representation, if the approval of the supervisory board and/or shareholders approval had not been obtained (in other words, that the objective criterion necessary to constitute "an abuse of the power of representation" was satisfied).
Although Professor Eidenmüller purported to express the view that the subjective criterion was also satisfied, namely that UBS knew, or could not have failed to realise, that the managing directors had acted beyond their internal limitations, I agree with Professor Elsing's approach, and with Mr. Hapgood's submission, that this issue is essentially a matter of fact regarding the state of UBS' knowledge, and not one of German law. Whether or not this criterion is satisfied will depend on all the relevant evidence surrounding the Balaba Swap, including the circumstances relating to the advice given by Freshfields. Indeed, even in relation to the objective criterion, it seems to me from the evidence that there are likely to be a number of factual issues relating to the knowledge or approval of KWL's supervisory board and shareholders in relation to the Transactions. Thus, in general terms, the experts are agreed as to the constituent legal elements involved in Concept (3).
KWL's submissions in relation to the first issue
i) The question of the validity of the Balaba CDO lies at the heart of the litigation. The issue comes very close to being a dispositive matter: if the Balaba CDO is invalid, all of UBS AG's claims in relation to it will fall away. Whilst the invalidity of the Balaba CDO will not strictly dispose of the claims for declarations in respect of the PMAs, these are clearly intended to be parasitic on the CDO transactions. If or to the extent that the CDO transactions are invalid for the reasons in Concepts (1) – (3), there is no practical reason why the declaratory relief proceedings regarding the PMAs should continue.
ii) The validity issues are logically the first issues which fall to be determined. This underlines their prominence. Mr. Hapgood, in the course of his oral arguments, accepted that serious issues arise in relation to all three concepts.
iii) "KWL readily accepts that these proceedings will raise issues other than the questions of validity of the Balaba CDO. KWL is still investigating the relevant facts, in particular those relating to the background against which the Balaba CDO was concluded. KWL fully reserves its rights in relation to any particular defences or counterclaims, which it may advance, in addition to that regarding validity. However, KWL does accept that the other issues in the proceedings may include certain other matters identified in Mr. McDonald's first witness statement." In his oral submissions in reply, Mr. Lord stated that KWL had no present intention to make claims of mis-selling, or for breach of a duty of care, but that it did not disavow the possibility of such claims being made in the future. However such submission (not unjustifiably) was made in heavily caveated terms. Indeed, Mr. Lord indicated that KWL might well make a claim for misrepresentation by omission.
iv) Questions as to UBS' subjective understanding of how the Balaba CDO worked or whether the transaction was of the type which KWL could lawfully enter into and had properly authorised are important issues which on any view will be raised in these proceedings. Accordingly "questions which are relevant to the validity issues are therefore likely to be intimately enmeshed with key points on the substance of the claim: this emphasises the extent to which matters relating to validity form the lynchpin of these proceedings and why the proceedings are "principally concerned with" validity. Because the issues of validity in this case raise questions of what was done to authorise the Balaba CDO, what UBS knew (actually or constructively) and the interaction between UBS and KWL, the factual points relevant to the Article 22.2 claim are likely to permeate the remainder of the issues in the claim to a much greater extent than was recognised to be the case in BVG or Depfa v Pisa.
v) Moreover Mr. Hapgood accepted in argument that all three German law Concepts raise serious issues to be tried .
vi) Many of the so-called issues which Mr. Hapgood submitted were issues that would arise in the proceedings were fanciful and amounted to a smokescreen. The issues referred to in the German press articles were unlikely to surface in the English Proceedings. The German Proceedings brought by KWL were clearly limited to validity issues. Moreover, many of the factual issues referred to by Mr. Hapgood were in reality factual issues that were relevant to Concept (3).
vii) Accordingly the court should be satisfied that these proceedings are "principally concerned" with questions of the validity of the Balaba CDO, that Article 22.2 is engaged and that the German courts have exclusive jurisdiction.
viii) Moreover, recognising the exclusive jurisdiction of the German court would result in the sound administration of justice for the following reasons in particular:a) the issues of validity raise real and substantial questions of German law which the German courts would be far better placed to determine than this Court; these questions includei) whether the ultra vires doctrine applies to private companies in public ownership and performing exclusively public functions (Concept (1)), described by Professor Eidenmüller "as a question of fundamental importance to the further development of German law"; andii) whether Concept (2) is applicable in circumstances where the directors of a company purport to commit to a transaction which would in effect change its objects.b) These proceedings raise precisely the sort of issues of "local company law and internal corporate decision-making" which the Court of Appeal found in BVG should probably be considered by the courts of a company's home state of incorporation, in the interests of the sound administration of justice.c) In Depfa, Hamblen J found that the sound administration of justice did not require that the Italian courts should have exclusive jurisdiction, because the case would not demand an enquiry into the internal decision-making procedures of the defendant entity. However the present case is quite different in this regard: Concepts (2) and (3) in particular will demand a detailed enquiry into how the Balaba CDO was actually internally approved by KWL and, in contrast, what steps should be taken by virtue of German law and KWL's constitution in order for KWL to enter into such a transaction.d) The presence of the English exclusive jurisdiction clause is irrelevant to the consideration of the issue of the sound administration of justice. Article 23 (5) of the Regulation provides expressly that exclusive jurisdiction and Article 22.2 trump a jurisdiction clause.e) The fact that the Balaba CDO and the PMAs are governed by English law and may raise some questions of the law of agency is irrelevant. It is inevitable in the present case that wherever it is tried, the court will have to grapple with issues of foreign law.
UBS' submissions in relation to the first issue
i) The case could not sensibly be distinguished from the facts of BVG. In both cases, the defendants' attempt to escape their contractual obligations on the basis of highly technical points about capacity were but one of numerous issues in a much wider piece of litigation.
ii) In the present case the non-Article 22.2 issues went far wider than they did even in the BVG case.
iii) There were a whole range of issues relating to the contractual enforceability of the Balaba CDO and the PMAs which had nothing to do with the validity of the decision-making process of KWL's managing directors and which were likely to assume the greatest importance in the litigation. These issues, both factual and legal, were identified not only in Mr. McDonald's witness statement but also could be discerned from the various allegations which had been made against UBS in the German press. During the course of the hearing, Mr. Hapgood produced an extensive list of such issues.
iv) As Aikens LJ pointed out in the BVG case, a substantial issue would arise as to how the Balaba CDO and the Subsequent Transactions worked according to their terms. This would not only necessitate the court looking at the Transactions themselves, all of which were subject to English contractual documentation, based upon common law principles and standard English financial market terms, but the court would also need to have an understanding as to how the previous transactions, namely the original CBLs and the four corporate Bonds worked. In the light of the allegations of contractual misconduct that inevitably would be made by KWL against UBS, it would be necessary for evidence to be adduced to explain the commercial risks to which KWL was exposed under these transactions, and to explain what, commercially, was the purpose of the Balaba CDO and the Subsequent Transactions and whether they were designed to achieve, or did achieve, diversification of risk in circumstances where, so UBS alleges, KWL was locked into a long-term investment structure, with only four counterparties.
v) In the light of KWL's reservation of all its rights as to what it might allege by way of defence and counterclaim, and the fact that it was still conducting enquiries into the circumstances surrounding the transactions, it was highly probable that the kind of allegations, which had featured in the German press, would form the basis of complaints against UBS AG of mis-selling, negligent advice, breach of duty (both of care and fiduciary) and misrepresentation. These no doubt would form the basis of KWL' s defence or counterclaim that the Balaba CDO was not enforceable as against it, and/or alternatively that any liability of KWL was matched by the quantum of its counterclaim as against UBS AG. This was an issue that was very much in the public arena, since, in a decision dated 24 March 2005, the Naumberg Higher Regional Court had dismissed allegations that a municipal GmbH lacked capacity to enter into a swap type transaction, but had gone on to hold the bank liable for negligent advice. Indeed this was an authority addressed by Freshfields in its opinion on capacity provided to UBS dated 7 June 2006.
vi) Furthermore the issues raised as against UBS AM by KWL, in respect of the former's role in constructing and managing the portfolios, have nothing to do with the capacity issue. These include allegations that the four Financial Institutions with whom KWL had entered into the Bonds should not have been included in the reference portfolios and that UBS AM managed the portfolios during the currency of the Transactions in a sub-standard manner. The requests by SAM for monthly and quarterly reports and information about the flow of funds under the Transactions strongly suggest that issues in the English Proceedings will include criticisms of UBS AM's management over a period exceeding three years.
vii) In addition, the press reports suggest that other serious allegations will be made against UBS AM, not least for misrepresentation, the inclusion of the Financial Institutions in the reference portfolios and serious self-dealing breaches of fiduciary duties. These are all issues that arise in the context of UBS' English Proceedings.
viii) Moreover, even when one addressed the so-called "capacity" issues, as raised under Professor Eidenmüller's three concepts, the reality was that any such dispute would centre on a factual enquiry as to whether UBS AG knew, or could not have failed to recognise that the relevant acts were outside the managing directors' authority of representation. There was very little, if any, disagreement as between the experts as to the constituent legal elements of Concept (3). Although UBS accepted, for present purposes, that Concepts (1) and (2) raised serious issues to be tried, the reality was that Professor Eidenmüller's arguments in relation to these points were not based on any sound authority and were "adventurous". The English court was better placed than the German court to conduct an enquiry into the state of UBS' knowledge, since the transaction took place at UBS' London branch and the documents were all in English. Moreover, the relevant evidence in relation to this issue will overlap with the issues of mis-selling and failure to advise, since matters such as UBS' perception of the risk profile of the Swaps, and UBS' perception of KWL's motivations for entering into the Swaps will be relevant on the former issue as well.
ix) The sound administration of justice did not require jurisdiction to be granted to the German court. The proceedings were not so closely connected with matters of internal decision-making by the relevant entity that they should not be tried anywhere but in the courts of the State of its seat. Moreover the following points supported UBS' administration of justice arguments:a) Under both the ISDA Master Agreements and the PMAs, the parties have agreed that English law should determine the disputes between them. The sound administration of justice required that appropriate weight should be given to the contractual wishes of the parties.b) It was very likely, if the English proceedings were stayed, that the German Proceedings would ultimately raise all of the same issues that would have been raised in England. It was not consistent with the sound administration of justice that KWL should be able to wrest jurisdiction from the contractually chosen forum on one basis, and then be in a position to expand its German proceedings to include all its allegations which would not fall within Article 22.2. That was especially so in circumstances where KWL accepts that the issues raised in the English proceedings (apart from "capacity") are live issues, had specifically stated that its enquiries were ongoing and had reserved its position as to what defences and counter claims it might raise.c) UBS AM is not a party to the German proceedings. The English court is the only court presently seised of the issues as between KWL and UBS AM. UBS AM is one remove from any issue regarding KWL's capacity to enter into the Balaba CDO.
Determination of the question "with what will the English Proceedings be principally concerned?"
i) How did the June 2006 Swap, including the Balaba CDO, work according to its terms?
ii) What was the nature of the relationship between KWL and UBS AG and, in particular, whether that relationship imposed any duty of care on UBS AG to advise KWL with respect to the June 2006 Swap, the Balaba CDO and the PMAs etc. or to ensure that the transaction was appropriate and suitable for KWL's needs?
iii) As a matter of law, was UBS entitled to rely upon and/or was KWL contractually bound or estopped by, the various representations made by KWL in the numerous contractual documents relating to the Transactions; for example: KWL's letter of authority; KWL's "objectives" letter dated 24 May 2006; the fact that identified Risk Factors were disclosed to KWL; KWL's Answers to UBS' Due Diligence Questions; KWL's letter of representation, warranty and acknowledgement dated 24 May 2006; the representations made by KWL in the added Section 15 of the ISDA Master Agreement; and the representations made by KWL in clause 15.1 of the PMAs?
iv) In particular, was KWL precluded from asserting any duty of care on the part of UBS AG to advise or any fiduciary duty on its part?
v) Did UBS AG in fact advise KWL in relation to the June 2006 Swap and, if so, what was the nature of that advice?
vi) If any duty of care and/or fiduciary duty did arise, what was its scope and did UBS AG discharge any such duty? This, in turn will involve consideration of inter alia the following issues:a) What was KWL's risk exposure under the CBLs and/or the bonds or PUAs entered into with the Financial Institutions?b) In what respects did the June 2006 Swap or the Subsequent Swaps change that risk exposure, either in relation to the scale of risk or its nature?c) Could KWL have entered into the Balaba CDS (under which it bought protection) on the same terms as to premium without also entering into the CDS of the CDO portfolio (under which it sold protection)?d) Whether UBS AG failed adequately to disclose any risks associated with the June 2006 Swap to KWL?e) Did UBS AG take steps to ensure that the June 2006 Swap was brought before the KWL's supervisory board and did this satisfy its duty of care?f) What was the role of Value Partners and what advice did it give pursuant to the terms of its retainer?g) What was the degree of risk in relation to the reference entities in the PMAs and the likelihood of a relevant number of defaults in the context of those agreements?h) Was there any reason not to include the names of the four Financial Institutions, in relation to which KWL had an existing exposure under the Bonds, as entities in the reference portfolio?
vii) Whether UBS AG made any misrepresentations to KWL prior to its entry into the June 2006 Swap and, if so, whether KWL relied on such statements in entering into the transaction?
viii) If UBS AG did breach any duty to KWL or make any misrepresentations, whether KWL suffered any loss as a result? This is likely to involve consideration of whether:a) KWL would have entered into the June 2006 Swap in any event, given the advice it received from Value Partners and/or Freshfields;b) KWL would have entered into a different, potentially lower risk transaction instead; andc) whether KWL would be required to repay the large premiums it received for entering into the June 2006 Swap and the Subsequent Swaps;
ix) Whether the June 2006 Swap was void and/or invalid because it:a) was ultra vires the corporate capacity of KWL under Concept (1);b) was outside the power of representation of KWL's managing directors because statute law required the approval of the supervisory board and/or its shareholders assembly, in that the June 2006 Swap involved a fundamental decision that affected the company's corporate structure or effectively disposed of all the company's assets and property, under Concept (2); and/orc) was an abuse by the KWL managing directors of their power of representation, because they had exceeded the internal restrictions on the exercise of their power of representation, and UBS AG knew, or could not have failed to realise, that they had done so, under Concept (3)?
x) Whether KWL is liable to pay UBS AG the sum of £99,811,724.44 and/or any other sum between now and trial pursuant to the terms of the June 2006 Swap?
xi) Whether UBS AM owed any duties to KWL to advise in relation to the Transactions, or of care ? (This will involve an analysis of how the PMAs worked according to their terms, and of the effect of the English law contractual documentation bearing upon that question.)
xii) What was the scope of any duties which UBS AM owed to KWL in relation to the construction of the Portfolios?
xiii) To the extent that UBS AM owed any such duties, did it discharge them?
xiv) Whether UBS AM complied with its obligations of ongoing portfolio management after the execution of the PMAs? (This will require consideration of the duties/standards of care set out in the PMAS and the management of the portfolios by UBS AM over the period since execution of the Transactions.)
xv) If UBS AM did breach its duties, the extent to which this caused KWL any loss?
i) The ultra vires/capacity issues arise in the context of a commercial contract or series of contracts between UBS AG, KWL and UBS AM which, by their terms are governed by English law and exclusive, or non-exclusive, English jurisdiction clauses. That is a factor which has to be given appropriate weight, in considering what is required by the concept of "the sound administration of justice".
ii) On my assessment of the expert evidence, the most significant issue on capacity will be the application of Concept (3), where there is no real dispute between the experts as to German company law. The dispute will be focused on the factual issue of UBS' state of knowledge and what the supervisory board and/or the shareholders were told about the Transactions. The relevant evidence on this issue is likely to overlap with allegations of mis-selling and failure to advise. I am not convinced that Concept (1) will give rise to any difficulty of determination, given the current state of the authorities which are fully rehearsed in the experts' existing reports. Nor does it seem to me that the experts' difference of opinion in relation to Concept (2) requires that only the German courts should resolve all the issues that are likely to arise in any proceedings between UBS AG, UBS AM and KWL.
iii) The other issues or likely issues in the English Proceedings are not within Article 22.2. The policy underlying Article 22.2 does not require those other issues to be tried in the German court. It is not consistent with the sound administration of justice that KWL should be entitled to rely on the limited Article 22.2 issue for the purpose of ensuring a transfer from the contractually chosen forum to Germany, and then be at liberty to include in the German Proceedings all the other allegations, which it is likely to raise and which do not fall within Article 22.2.
iv) UBS AM is not a party to the German proceedings, yet KWL's application seeks a stay of the entire English Proceedings, including the claims for declaratory relief made by UBS AM, on the grounds that the German court has exclusive jurisdiction. Again, the underlying policy of Article 22.2 does not require such an extreme course.
v) This is not a case where large number of shareholders or bondholders are going to be affected by the outcome of the ultra vires/capacity issues. The relevant parties to the litigation are limited to KWL, UBS AG and UBS AM. Whilst the decision may economically affect the shareholders in KWL, they are not in any sense parties to the proceedings.
vi) All the relevant contractual and related documentation appears to be in English and subject to English law. Although no doubt there will be internal KWL documents in the German language, the commercial context is an English swap transaction, conducted in London, on English market ISDA terms with the London branch of a Swiss bank, with English solicitors acting for KWL.
The second issue: which court was first seised?
" Section 9
Lis pendens – related actions
1. Where proceedings involving the same cause of action and between the same parties are brought in the courts of different Member States, any court other than the court first seised shall of its own motion stay proceedings until such time as the jurisdiction of the court first seised is established.
2. Where the jurisdiction of the court first seised is established, any court other than the court first seised shall decline jurisdiction in favour of that court.
1. Where related actions are pending in the courts of different Member States, any court other than the court first seised may stay its proceedings.
2. Where these actions are pending at first instance, any court other than the court first seised may also, on the application of one of the parties, decline jurisdiction if the court first seised has jurisdiction over the actions in question and its law permits the consolidation thereof.
3. For the purposes of this Article, actions are deemed to be related where they 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.
For the purposes of this Section, the court shall be deemed to be seised:
1. At the time when the document instituting the proceedings or an equivalent document is lodged with the court, provided that the plaintiff has not subsequently failed to take the steps he was required to take to have service effected on the defendant …."
i) The wording of Article 30.1 made it clear that service of a claim cannot be postponed indefinitely without the claim losing priority.
ii) As far as KWL knew there was no decided European or English case which dealt specifically with the question whether deliberate delay by a party in effecting service may amount to a failure to take the necessary steps within the meaning of Article 30.1. In some English cases, it appeared to have been assumed (without the question actually being decided), that the English court was seised upon issue of the claim form, even if service does not happen some time until after a related claim has been launched in another jurisdiction. Mr. Lord referred to a number of authorities including JP Morgan v Primacom and Royal and Sun Alliance v MK Digital FZE.
iii) Mr. Lord also prayed in aid the decision of Tugendhat J in Debt Collection London Limited v S K Slavia Praha-Fotbal AS and the Commission's Explanatory Memorandum for what became the Regulation.  This latter stated:"Article 30 … reconciles the various procedural systems while ensuring both that applicants will all be on an equal footing and that there can be no abuse of procedures"
iv) KWL's argument was that, by delaying service of its claim form, UBS clearly intended to obtain the advantage from the Regulation rules of reserving its forum of choice, whilst keeping its options open as to whether and when to pursue its claim and seeking to pre-empt any rival claim by KWL. UBS was in substance engaging in forum shopping, which the proviso to Article 30.1 was designed to avoid. The European abuse of law principle therefore lent further support to KWL's suggested interpretation of Article 30.1.
"… the appropriate course is ordinarily to refer the issue to the Court of Justice unless the national court can with complete confidence resolve the issue itself."
Note 1  EWCA Civ 390. [Back] Note 2  EWHC 1148 (Comm). [Back] Note 3 International Swaps and Derivatives Association. [Back] Note 4 With whom Pill and Everton LJJ agreed. [Back] Note 5  of Aikens LJ’s judgment. [Back] Note 6  ibid. [Back] Note 7 ,  ibid. [Back] Note 8 ,  ibid. [Back] Note 9 ibid. [Back] Note 10  ibid. [Back] Note 11 Supra  EWHC 1148 (Comm) at . [Back] Note 12 ibid. [Back] Note 13 Under Section 37(2) of the German Limited Liability Companies Act [Back] Note 14 Paragraphs 24 – 27 of the first Eidenmüller Report. [Back] Note 15 Hauptgeschäftsstelle Fischwirtschaft, Federal Court of Justice, judgment dated 28 February 1956, case 1 ZR 84/54, NJW 1956, 746 at 748. [Back] Note 16 Paragraphs (18) to (66) of the Elsing Report. [Back] Note 17 For the detail, see paragraphs (59) to (66) of the Elsing Report. [Back] Note 18 Paragraph 49 of the first Eidenmüller Report. [Back] Note 19 Paragraphs (76) –(89) of the Elsing Report. [Back] Note 20 Paragraphs (85) –(88) of the Elsing Report. [Back] Note 21 See paragraphs 8-10 and 26-28 of the first witness statement of Ian James McDonald, a partner in Mayer Brown. [Back] Note 22 See paragraphs (111) - (116) of the Elsing Report. [Back] Note 23 See paragraph 34 of the supplemental Eidenmüller Report. [Back] Note 24  EWHC 1148 (Comm) paragraph 65. [Back] Note 25 At . [Back] Note 26 See paragraphs 74-75 of Mr. McDonald’s witness statement. [Back] Note 27 See JP Morgan v Primacom  CWA 508 (Comm), paragraphs 35 - 38. [Back] Note 28 Case C-406/92 I-5439, paragraph 52. [Back] Note 29 Supra at paragraph 33. [Back] Note 30  EWHC 1408 (Comm),  2 Ll Rep 679, paragraphs 64 - 65. [Back] Note 31  EWHC 2726 (QB);  I L PR 7. [Back] Note 32 Proposal for a Council Regulation (EC) on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters 14 July 1999 99/0154 (CNS). [Back] Note 33 R v International Stock Exchange, ex p Else  QB 534 at 545. [Back]
Note 1  EWCA Civ 390. [Back]
Note 2  EWHC 1148 (Comm). [Back]
Note 3 International Swaps and Derivatives Association. [Back]
Note 4 With whom Pill and Everton LJJ agreed. [Back]
Note 5  of Aikens LJ’s judgment. [Back]
Note 6  ibid. [Back]
Note 7 ,  ibid. [Back]
Note 8 ,  ibid. [Back]
Note 9 ibid. [Back]
Note 10  ibid. [Back]
Note 11 Supra  EWHC 1148 (Comm) at . [Back]
Note 12 ibid. [Back]
Note 13 Under Section 37(2) of the German Limited Liability Companies Act [Back]
Note 14 Paragraphs 24 – 27 of the first Eidenmüller Report. [Back]
Note 15 Hauptgeschäftsstelle Fischwirtschaft, Federal Court of Justice, judgment dated 28 February 1956, case 1 ZR 84/54, NJW 1956, 746 at 748. [Back]
Note 16 Paragraphs (18) to (66) of the Elsing Report. [Back]
Note 17 For the detail, see paragraphs (59) to (66) of the Elsing Report. [Back]
Note 18 Paragraph 49 of the first Eidenmüller Report. [Back]
Note 19 Paragraphs (76) –(89) of the Elsing Report. [Back]
Note 20 Paragraphs (85) –(88) of the Elsing Report. [Back]
Note 21 See paragraphs 8-10 and 26-28 of the first witness statement of Ian James McDonald, a partner in Mayer Brown. [Back]
Note 22 See paragraphs (111) - (116) of the Elsing Report. [Back]
Note 23 See paragraph 34 of the supplemental Eidenmüller Report. [Back]
Note 24  EWHC 1148 (Comm) paragraph 65. [Back]
Note 25 At . [Back]
Note 26 See paragraphs 74-75 of Mr. McDonald’s witness statement. [Back]
Note 27 See JP Morgan v Primacom  CWA 508 (Comm), paragraphs 35 - 38. [Back]
Note 28 Case C-406/92 I-5439, paragraph 52. [Back]
Note 29 Supra at paragraph 33. [Back]
Note 30  EWHC 1408 (Comm),  2 Ll Rep 679, paragraphs 64 - 65. [Back]
Note 31  EWHC 2726 (QB);  I L PR 7. [Back]
Note 32 Proposal for a Council Regulation (EC) on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters 14 July 1999 99/0154 (CNS). [Back]
Note 33 R v International Stock Exchange, ex p Else  QB 534 at 545. [Back]