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Jurisdiction interdiction

10 April 2017 by Robert Bell

Competition law: Jurisdiction interdiction - read more

Arbitration clauses can stop a claimant mounting proceedings in its preferred jurisdiction

A recent High Court case has illustrated how the presence of an arbitration clause in a contract between certain defendants can stop proceedings being brought where a number of the co-defendants are domiciled outside the jurisdiction.

This case turned on the application of complex High Court rules of procedure. However, the court’s judgment is a cautionary lesson about how important arbitration clauses in contracts can be. They can detract from the ability of the claimant to mount proceedings in its preferred jurisdiction when trying to recover damages arising out of a breach of EU competition law.

Anchor in the UK

England and Wales has become one of, if not the leading, venues in Europe for actions involving EU competition claims. Claimants are therefore anxious to ensure they anchor their proceedings as soon as possible within a relevant UK jurisdiction, before other parties might seek to establish an alternative forum.

This happened in this case. The claimant, Microsoft, brought proceedings on behalf of itself and as assignee of the rights of Nokia Corporation arising from its acquisition of Nokia’s mobile phone business.

“The claims were principally based upon breaches of competition law which are treated under English law as a tortious breach of statutory duty”

In 2001, Nokia, the buyer, and Defendant B, the seller, concluded a product purchase agreement (PPA) in relation to the sale of lithium ion batteries. The PPA stipulated that the governing law would be English law and that ‘any disputes related to this agreement or its enforcement’ should be referred to arbitration under the rules of the International Chamber of Commerce.

All parties agreed that the arbitration clause bound both Defendant B (which was the Japanese parent company of the Sony Group) and Defendant A (an English subsidiary of Defendant B).

Microsoft claimed damages for losses caused by cartel behaviour in relation to the sale of the batteries by four separate defendants. These were Defendants A and B, as well as two other companies established in South Korea. The claims were principally based upon breaches of competition law which are treated under English law as a tortious breach of statutory duty.

Domiciled defendant

In its efforts to ground the case in the UK, the claimants chose Defendant A which was domiciled in England and Wales. It obtained permission to serve the proceedings out of the jurisdiction against the remaining defendants on the basis that they were joint conspirators also liable for the infringements at issue. The matter came before the High Court.

Defendants A and B applied to the court for a stay of the action pursuant to section 9 of the Arbitration Act 1996. Under this section, parties to an agreement which contains an arbitration clause whose scope covers the dispute in question can apply to the court. The court must grant a stay of any proceedings brought, unless it is satisfied that the agreement is null and void, inoperative or incapable of being performed.

“It was irrelevant that no breach of contract was pleaded. The question was whether such a case was capable of being pleaded”

The court upheld claims made by Defendant A and B, staying the proceedings, because they fell within the scope of an arbitration clause. Having considered the pleadings, Mr Justice Marcus Smith concluded that the claim triggered allegations that the good faith clause included in the contract had been breached. He held it was irrelevant that no breach of contract was pleaded. The question was whether such a case was capable of being pleaded.

Therefore, despite the fact the action was tortious in nature, the case potentially gave rise to related claims for breach of contract and fell within the scope of the arbitration clause.

Outside the jurisdiction

In addition, certain other defendants applied to set aside the permission to serve out of the jurisdiction.

In this case the Recast Brussels Regulation, the legislation which underpins the EU jurisdictional regime, did not apply as the relevant defendants were domiciled outside the EU. Therefore the claimant had to obtain the court’s permission to serve proceedings out of the jurisdiction.

The court will grant permission if:

  • There is a serious issue to be tried on the merits
  • There is a good arguable case which fell within the relevant court rules, namely that the defendants were necessary and proper parties to the proceedings, and/or that the claimant could establish damage had been caused in England and Wales
  • England and Wales is the proper forum for the trial of the claims.

The court held that the question of whether permission should be granted was to be judged as at the date when permission was originally granted. The parties agreed that the court should proceed on the basis that there was a serious issue to be tried on the merits.

The court then had to consider whether the claimant had established a good arguable case in relation to the claims. To do this the court had to consider the following tests. It held the claimants had not established that the foreign defendants outside the jurisdiction were ‘necessary or proper parties’. Defendant A had been added as anchor defendant to give the claimant the ability to commence proceedings before the English courts. Accordingly there was no other connection to the jurisdiction other than the participation of Defendant A.

“It was necessary to establish substantial damage had been occasioned in relation to each claim, and that such damage was direct”

The test was whether the foreign defendants could, if within the jurisdiction, properly have been joined to the proceedings under court rules. However, as the proceedings against Defendant A had been stayed pursuant to section 9 of the Act there was no issue between the claimant and Defendant A for the English courts to try. Therefore this condition was not satisfied.

Damage in the jurisdiction

The next question was whether the claimant could establish that any damage which was the subject of the proceedings was sustained in the jurisdiction. The evidence in the case showed that locating the jurisdiction in which the damage occurred was not straightforward.

To establish whether damage had been sustained within the jurisdiction, it was necessary to establish substantial damage had been occasioned in relation to each claim, and that such damage was direct – not indirect or consequential.

Furthermore, the jurisdictional rules must be applied by reference to the original claims brought and not those assigned to the claimants by Nokia. Having considered the evidence in this case the court held that the claimant had not established that damage had occurred in the jurisdiction.

Therefore as the claimants had not proved there was a good arguable case to be tried, then the court would not give permission to serve outside the jurisdiction. In any event, the judge added that, on the facts, he would have decided England and Wales was not the proper forum for this case.

Having regard to the fact that much of the relevant conduct took place in South Korea, the location of witnesses and documents were to a large extent outside England and Wales and in that event the proceedings were best held elsewhere.

Robert Bell is a Partner at Bryan Cave LLP

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