The economic downturn has prompted a flurry of claims by banks seeking to enforce swap arrangements against recalcitrant counterparties. Many concern credit default swaps, whereby creditors hedge the risk of default by their debtors by purchasing protection against potential losses from banks and other financial institutions. Many such purchasers now doubt the wisdom of such transactions, as the risks involved become clear, and have sought to escape their commitments. Particularly exposed are those purchasers which bought protection by cross-protecting seemingly innocuous parcels of the selling bank's default risk, and now face substantial claims as the bank's debtors default.

Such cases generally involve banks and counterparties from different countries and, as invariably with multi-state disputes, the outcome depends not on securing final judgment, but on winning a preliminary battle over jurisdiction. This inevitably means a challenge by the counterparty to the effectiveness of a contractual jurisdiction clause in the documentation (often one in favour of the exclusive jurisdiction of the English courts, given London's prominence in the swap market). Given their robustness, most such provisions are hard to evade. One fashionable escape route, available to those established in EU states, involved exploiting Article 22(2) of EC Regulation No 44/2001 (the Brussels I Regulation). This confers exclusive jurisdiction on the courts of a corporation's home state in proceedings having as their object the validity of the corporation's decisions. By alleging that they never had the power to conclude the transaction, counterparties sought to characterize the dispute as one concerning corporate capacity, so ensuring that any proceedings were heard exclusively in their home state pursuant to Article 22(2). More importantly, they hoped to trump any jurisdiction conferred on another court by the jurisdiction agreement. Agreed jurisdiction is exclusive under Article 23, but in the hierarchy of the Regulation's norms Article 23(5) ensures that jurisdiction derived from Article 22 trumps any derived from Article 23.

This argument was advanced especially by municipalities and public utilities, who had bought default cover but whose power to conclude risky transactions, unlike that of an ordinary business, was often uncertain. Often the intention was to relocate proceedings to courts employing a more consumer-friendly regime than the agreed court, or those in which public policy might invalidate onerous or asymmetric obligations. But the Article 22 gambit was never primarily intended to secure a favourable outcome on the merits. It was designed to ‘torpedo’ proceedings in the agreed court, thereby ensuring victory in the battle for venue by compelling a bank to litigate elsewhere than in its preferred court, so encouraging settlement on better terms for the counterparty.

In Berliner Verkehrsbetriebe (BVG), Anstalt des Offentlichen Rechts v. JP Morgan Chase Bank NA [2011] All ER (D) 192 (May), the CJEU has blocked the escape route offered by Article 22(2). As part of a complex transaction intended to offset the risk of default by some of its own debtors, BVG, a German public transport authority, provided default protection to JP Morgan (JPM). BVG underwrote JPM's exposure to several banks, Lehman Brothers and three Icelandic banks included, which subsequently collapsed. When BVG declined to meet JPM's losses of US$ 112 million, JPM sued in England under Article 23, the contract being subject to the English court's exclusive jurisdiction. BVG ran the Article 22(2) argument, but was rebuffed at first instance, and on appeal. The Supreme Court subsequently referred the issue to the CJEU, but BVG had already opened a second front in Germany, by seeking declarations from a Berlin court that the contract was ultra vires its constitution, and that the German courts had exclusive jurisdiction under Article 22(2).

On a reference from the Kammergericht Berlin, the CJEU held that Article 22(2) does not confer exclusive jurisdiction on the courts at a corporation's seat merely because infringement of the corporation's constitution is alleged. Reflecting Article 22's status as an exceptional ground of jurisdiction, and to ensure certainty and predictability, it should be narrowly construed. Significantly, this was also necessary to promote party autonomy under Article 23. Article 22(2) therefore engages only if the principal object of the proceedings is the validity of a corporation's decisions. But contractual disputes such as those in BVG have as their principal object the intrinsic validity, interpretation, and enforceability of contractual obligations. The legitimacy of the decision to contract is merely ancillary. The situation differed from that in Case C-4/03 GAT v. Luk [2006] ECR I-6509, where the Court previously held that what is now Article 22(4) requires a patent's validity to be determined exclusively where it is registered, preventing infringement proceedings elsewhere if validity is disputed. A patent's validity is always central to infringement actions but incapacity is never central to contractual disputes. This conclusion reflected Article 22's purpose, which is to allocate exclusive jurisdiction to courts having the strongest connection with particular proceedings (like those concerning a corporation's constitution, where that is the only issue), not to regulate contractual disputes which might be heard anywhere. Given that most contractual disputes with a corporation might inspire allegations of incapacity it also avoids the absurdity that all disputes where this occurs would have to be heard at the corporation's seat.

The underlying problem of tactical forum-shopping may have gone unnoticed in BVG. But the ‘ultra vires torpedo’ is nonetheless disarmed. The decision deprives defendants of an excuse for evading their contractual obligation to litigate as agreed. It denies them the tactical advantage which a jurisdictional victory brings, removing a means to relocate proceedings to their home court, with the prospect of forcing claimants to settle or desist rather than litigate in an inconvenient forum. And it plays its part in reducing transaction costs, as any decision must which ensures compliance with a contract's agreed terms. All in a judgment of particular clarity, offering counterparties scant room to manouevre in later cases, in which the reasoning is pragmatic, and the importance of upholding contractual jurisdiction agreements is explicitly signaled. This makes BVG that rare thing, a decision of the CJEU on the Regulation which commercial lawyers and their clients can readily applaud.