The English High Court has decided1 that, in determining whether it has jurisdiction to hear claims about economic loss, the focus must be on where the loss manifested itself (i.e. its crystallisation) rather than on the transaction that led to the loss.
The Facts
In 2013, the first claimant decided to invest US$3bn in Haitong, a listed Chinese financial institution. The investment was structured in a complex manner, with part of the investment price being funded by UBS London. As security for the loan, UBS London held the claimant’s shares in Haitong in an account in London which was governed by English law and jurisdiction. Following a dramatic drop in the share price of Haitong, UBS London was entitled to and did demand a mandatory prepayment of the loan. When no prepayment was made, UBS London exercised its security by selling the shares.
The claimants made a claim for negligent misstatement, namely that UBS made false and misleading representations as to the financing supplied and how it would act in relation thereto (for example, not demanding a mandatory prepayment of the loan or providing time for the claimants to make such payments), which were relied upon when entering into the investment. Whilst the representations were made by UBS Hong Kong, they concerned the approach of UBS London to the loan.
The claimants sought damages in the region of US$495m. UBS challenged the jurisdiction of the English courts and argued that the claim should be determined by the Swiss courts, as Switzerland was the place of its domicile.
The Decision
As UBS is domiciled in Switzerland, which is a Convention State, the jurisdiction issue fell to be determined under the Lugano Convention 2007.2 Whilst the general rule is that a defendant should be sued in its state of domicile, there are exceptions. Such exceptions include where there is a “particularly close connecting factor”3 between the dispute and the courts in another jurisdiction. Specifically in this case, the English court had to decide whether it had jurisdiction based on (i) the harmful event occurring in the jurisdiction, or (ii) the dispute arising out of the operations of a branch, agency or other establishment in the jurisdiction.
The manifestation of damage
Both the court and the parties acknowledged that in cases of pure economic loss such as this, identifying the place where damage occurs can be challenging.
UBS argued, amongst other things, that losses were suffered as a result of the claimants entering into an investment agreement in China, and that the torts were committed in China in respect of investments into a Chinese company. Further, UBS relied on a string of case law which provided that the place where the misstatement is received and relied upon is likely to be the place where the damage occurs. On the other hand, the claimants argued that the damage in question “actually manifested” when the shares were liquidated and that this occurred directly in the account in London.
The court held that when determining the place of damage, it is the manifestation of the damage (which is likely to be associated with its crystallisation) which is relevant, not the transaction that led to such loss. In this case, that would be where and when the shares were liquidated by UBS i.e. London. This is where the funds that had been invested by the claimants were depleted.
Finally, as a “cross-check” to the manifestation test, the court may consider whether it was foreseeable that a claim would be brought in the jurisdiction. Given that all of the contractual documents UBS entered into (with the exception of one transaction) were to be in English and governed by English law, it was entirely predictable and foreseeable that the parties might sue or be sued in London in relation to the investment. Accordingly, the English court confirmed that the harmful event had occurred in London, and it had jurisdiction to hear the case.
Operations of a branch
In light of the above conclusion, it was not necessary for the court to consider other arguments as to whether it had jurisdiction, although it chose to do so for completeness. The court therefore assessed whether it had jurisdiction by virtue of the dispute arising out of the operations of a “branch, agency or other establishment” which was situated in the jurisdiction.4
It was common ground that UBS London was a “branch, agency or other establishment”, but the key issue was whether the dispute arose out of its “operations”.
The court held that the UBS London branch was a critical part of the deal structure, and that it sufficiently and significantly participated in several elements of the causes of action forming the claims. Further, the activities and conduct of the London branch led to the claimants’ loss. Jurisdiction could still be engaged in England despite the concurrent involvement of UBS Hong Kong.
Conclusion
Determining where damage occurs in economic loss cases can often be complicated. The English court has now provided clarity on the approach to be taken in considering whether any exceptions apply to the default rule under the Lugano Convention (and also the Brussels Recast Regulation)5 that defendants are to be sued in the courts of their domicile.
The authors are grateful to Maddie Drabble, Trainee Solicitor in London, for her valuable contribution to this OnPoint.
Footnotes
1) (1) Kwok Ho Wan, (2) Ace Decade Holdings Limited, (3) Dawn State Limited v UBS AG (London Branch) [2022] EWHC 245 (Comm) (9 February 2022)
2) Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters signed at Lugano on 30 October 2007
3) Article 5, Lugano Convention 2007
4) Article 5(5), Lugano Convention 2007
5) Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast)
