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Commercial Court rules on claim for declaratory relief in context of ongoing foreign proceedings

11.09.20

In an important judgment handed down today (reported at [2020] EWHC 2436 (Comm)), the Hon Mrs Justice Cockerill ruled on BNP Paribas SA’s claims for declaratory relief arising out of an interest rate hedging arrangement (Swap) entered into between BNP Paribas SA (the bank) and Trattamento Rifiuti Metropolitani SPA (TRM) in connection with TRM’s borrowings from the bank under a Financing Agreement (the FA) governed by Italian law. The Swap itself was on standard ISDA terms, subject to English law, but with a bespoke schedule referencing inter alia the FA.

Part of the context for the case was an ongoing action brought by TRM in the Tribunale di Torino claiming compensation against the bank under the FA and, inter alia, on the basis of other Italian law provisions.

This case will be of particular interest for practitioners as it is believed to be the only case where a Swaps claim for negative declaratory relief intended to be deployed in foreign proceedings has proceeded to a fully-contested trial. While case-law has demonstrated the willingness of the English courts to take an expansive view of their jurisdiction in Swaps disputes, this judgment shows that a claimant should not assume, just because the English Court has determined that it has jurisdiction for the claims for negative declaratory relief, that it will in fact grant any or all of such relief following a trial.

Importance of the judgment to practitioners

The judgment will be of interest particularly to:

• defendants facing claims in the English court for declaratory relief;
• foreign defendants considering resisting the English court’s jurisdiction for claims for declaratory relief against a backdrop of ongoing or contemplated foreign proceedings; and,
• foreign defendants choosing or being compelled to fight such declaratory relief claims on their merits before the English courts (assuming no or a lost jurisdictional contest). In that last regard, the judgment is important because it makes clear that:
  • In general findings and conclusions reached by a court hearing jurisdiction challenges to the English court determining a claim does not give rise to any issue estoppel at the trial of the merits of the claim (on the basis that the jurisdiction challenge failed).
  • The grant of declaratory relief is a discretionary exercise governed by a discrete set of principles of English law.
  • A defendant to an English law contract, particularly a banking/financial contract such as in ISDA form, will (assuming there are no other bars to the grant of relief) generally be unable to persuade the court not to grant declaratory relief in a form which tracks, directly or indirectly, express provisions in such contract.
  • However, the court will scrutinise with care declarations, particularly negative declarations as to liability, which are not tracking declarations, focussing on their utility and justice to the parties.

Background

This action, commenced by the bank before the Commercial Court, was first in time. About a month later, TRM started proceedings in Italy, in Turin. In the Italian action, TRM alleges (among other things) that the bank breached contractual obligations (said to arise under the FA, an implied advisory contract and certain Articles of the Italian Civil Code) and non-contractual obligations (said to arise under certain provisions of the Italian Civil Code, and Italian statutory and regulatory provisions) owed to TRM. The action also proceeded under the Shorter Trials Scheme, with neither side calling any evidence and the Court taking the factual background almost completely from the agreed Case Memorandum.

Did the judgments on jurisdiction give rise to issue estoppels binding TRM?

In this case, the bank argued that that the jurisdiction decisions of Knowles J (reported at [2018] EWHC 1670 (Comm)) and of the Court of Appeal (reported at [2019] EWCA Civ 768) were binding determinations of all of the issues before the court whereas. By contrast TRM accepted that there were res judicata as to, first, the construction by the English court of the jurisdiction clause in the ISDA and, secondly, as to the claim for declarations falling within that jurisdiction clause. It contended that no other res judicata arose.

The judge upheld TRM’s argument, ruling that:

• the question of issue estoppel is one which is to be approached with caution;
• a court should be slow to find an issue estoppel arising out of a jurisdictional determination;
• in general – unless expressly stated to the contrary – courts involved in jurisdictional challenges are concerned only with an evaluation of the questions which are relevant to the decision on founding jurisdiction;
• so “even the decision as regards serious issue … is one taken in relation to a different question. Serious issue to be tried is an assessment of merits which is distinct from the question of existence of an issue for the purposes of the grant of declaratory relief.”

So far as the bank’s further submission that TRM pursuit of matters relating to the merits was an abuse of process, the judge ruled that the question of jurisdiction was a preliminary question, and that it generally could not be abusive for the matter then to be considered on the merits.

In the result, the judge ruled that whilst the judgments of Knowles J CBE and the Court of Appeal on jurisdiction could not “simply be put to one side and ignored” since the case before her was where what was in issue was declaratory relief based on contractual construction issues which had arisen on those jurisdiction hearings, nevertheless it was open to her to reach a conclusion which diverged from the analysis of those other courts.

Should the court grant all the declarations sought by the bank?

Turning to that analysis, Cockerill J held that there was on analysis and given the narrow compass of TRM’s defence (which expressly eschewed putting in issue any matters which were subject to Italian law and subject to the jurisdiction of the Italian courts) no serious objection to the grant of relief which tracked express provisions in the ISDA or which plainly were as a matter of English law the consequence of those provisions.

However, it was a different matter in the case of the other, and wider, declarations which the bank sought.

As Cockerill J held, “the single most contentious declaration” before her was one which the bank submitted flowed from the declarations which tracked the ISDA wording and which it sought in the following terms:

“By reason of sub-paragraphs 1 (a) to 1 (f) above, the Claimant is not liable in respect of any claim relating to the Transaction, including for losses in respect of any claim, under any system of law or regulation, in contract, tort/delict, statute or otherwise, and including but not limited to claims for breach of duty of care (including without limitation, a duty to advise), breach of contract, breach of fiduciary or other duty including any duty of good faith, non­disclosure, omission, misrepresentation (whether innocent, negligent or fraudulent) or breach of statutory or regulatory obligation arising out of or in connection with the Transaction (including but not limited to its suitability, its pricing, its notional amount, its terms, its execution and the circumstances of the Defendant’s entry into it) (a Claim).”

The judge, having regard to previous case-law, set out the principles which guided her in the exercise of her own discretion:

1. 1. The touchstone is utility;
   2. The deployment of negative declarations should be scrutinised and their use rejected where it would serve no useful purpose;
   3. The prime purpose is to do justice in the particular case. “Justice” includes justice not only to the claimant, but also to the defendant;
   4. The Court must consider whether the grant of declaratory relief is the most effective way of resolving the issues raised. In answering that question, the Court should consider what other options are available to resolve the issue.
   5. This emphasis on doing justice in the particular case is reflected in the limitations which are generally applied. Thus:

a) The court will not entertain purely hypothetical questions. It will not pronounce upon legal situations which may arise, but generally upon those which have arisen.

b) There must in general, be a real and present dispute between the parties before the court as to the existence or extent of a legal right between them.

c) If the issue in dispute is not based on concrete facts the issue can still be treated as hypothetical. This can be characterised as “the missing element which makes a case hypothetical”.

d) Factors such as absence of positive evidence of utility and absence of concrete facts to ground the declarations may not be determinative. However, where there is such a lack in whole or in part the court will wish to be particularly alert to the dangers of producing something which is not only not utile, but may create confusion.

Applying those principles, the judge declined to grant the declaration holding inter alia that:

• It was in substance a negative declaration with the consequence that the court should approach it with caution;
• It did not track any wording from the ISDA (in respect of which the court had already made such declarations);
• Its focus was “essentially as an insurance against issues which may arise in future” and although “not entirely hypothetical” was “at best contingent”;
• The language of the declaration was “boilerplate” and broad and the bank had not demonstrated that it was tied to “any specific claim or argument (actual or anticipated)” in the Italian proceedings and was close to falling within the category of a dispute “divorced from the facts”;
• The declaration also contained wording such as “in respect of”; “including but not limited to” and as the judge put it “wording described by Mr Samek as “beloved of lawyers but a recipe for confusion”;
• The grant of a declaration in such terms might cause “a confusion which would not otherwise arise” and third parties would be left “to try and interpret the wording of a declaration based on submissions.”

After having rejected the bank’s claim for the declaration in 1(g), the judge also rejected its claim for a declaration for an indemnity in the event of any such claim as identified in 1(g) being brought. The same reasoning applied.

Finally, that left the bank’s claim for a declaration that any claim as TRM might issue in the English courts would be statute-barred. The bank tacitly accepted that such declaration was hypothetical. However, it argued that the fact that the relevant facts had not yet occurred was not per se a reason to refuse to grant the declaration, particularly if there were sensible practical reasons for granting a declaration. That was said to be consistent with the proposition that there is nothing in law requiring an actual or an imminent infringement of a legal right before a declaration will be made.

The judge rejected the bank’s arguments. She held that its utility had not been made out noting that it was “dubious that the question of English Law limitation can have relevance to the Italian claim and it has been made clear that TRM have no intention of commencing proceedings in England.” The judge further noted that the declaration “glosses” over particular limitation issues arising from the operation of sections 32 of the Limitation Act 1980 (amongst others).

Postscript

Finally, it is worth drawing attention to another matter which the judge expressly adverted to. In ruling as she did, Cockerill J was acutely aware of the ongoing Italian proceedings and the demarcation between the scopes of enquiry for the English and Italian courts in the context of a commercial relationship governed by both English law and Italian law agreements. In that regard, the judge stated:

“Nonetheless I make very clear that I am not purporting to decide here any point which the Italian Court may have to decide about the way that the documents in this case interact as a matter of Italian law or the existence or extent of any qualification under that law which the Italian Court will be asked to rule on – if jurisdiction is accepted. I am considering only the questions of English Law, as to the meaning of provisions of the English Law agreement.”

Charles Samek QC and James Bickford Smith acted for TRM, instructed by Collyer Bristow LLP.