01 October 2008

The effects of fraud on a claim under contract


Deutsche Bank AG & ors v Asia Pacific Broadband Wireless Communications Inc & anr [2008] EWHC 918 (Comm)

The effects of fraud on a claim under a contract were starkly illustrated when the English High Court has refused to accept jurisdiction for alternative claims that are contingent upon the defendant succeeding in showing that the original contract, and its jurisdiction agreement, were procured by fraud.

Background

A group of banks funded a Taiwanese company under a Finance Agreement. The Agreement operated normally until the company’s Chairman and his family were indicted for fraud in the Criminal Court of Taiwan. The company defaulted on the Finance Agreement and the agent for the banks, Deutsche Bank, issued proceedings in the Commercial Court of England as permitted by the Agreement’s jurisdiction clause.

In its defence, the Taiwanese company, under new management, alleged that the Finance Agreement was void as the Chairman had had no authority to sign the agreement and any board minutes purporting to authorise the Agreement were themselves procured by his fraud. The Finance Agreement was itself a part of the fraud perpetrated on the company by the Chairman and his family.

Although the Bank was doubtful that the defence would succeed, it clearly posed a serious risk to the recovery of the US$175m being claimed under the Agreement. In order to provide an alternative to the claim under contract, the Bank sought permission from the Commercial Court to add two alternative claims, both based on the premise that the defence succeeded and the Finance Agreement was void. First, the Bank wanted to claim that the company was liable in damages for the misrepresentations made by the Chairman as to his authority and the authority of the board and, alternatively, the Bank claimed it should be entitled to restitution of the monies paid to the company either under a mistake of law, or fact, or for the total failure of consideration under the Agreement.

The issue for the court

The proceedings had been started in England because the jurisdiction clause in the Agreement provided that they could. In contrast, the two new claims were based on the assumption that the Finance Agreement, and its jurisdiction clause, were void. The issue for the English court to decide, therefore, was whether it had any jurisdiction to hear these two additional claims – did the jurisdiction clause cover these additional claims?

As the Bank was based in Germany, the EU Regulation on civil jurisdiction and judgments applied. This meant that the English court could only claim jurisdiction in accordance with the Regulation. The only basis on which it could was if the jurisdiction clause satisfied Article 23(1) of the Regulation. That provides that a party can bring a claim before the court of a member state, which was not a state in which it was domiciled, if the parties had agreed, in writing, to confer jurisdiction on that court. Once the Finance Agreement was found to be void, then there was, as the company alleged, no evidence of any agreement between the parties to confer jurisdiction on England.

The decision

European law has decided that Article 23 must be construed strictly. The Commercial Court agreed with the company that if the Chairman had no authority to enter into the Finance Agreement, then nor did he have authority to agree jurisdiction in relation to disputes relating to or connected with the Finance Agreement.

As a jurisdiction agreement is always sought to be invoked in relation to a particular dispute, there was no case for considering the jurisdiction clause as a stand alone or separate agreement. This contrasts under English law with the position of an arbitration clause within an agreement. An arbitration clause can be regarded as an entirely separate agreement because Section 7 of the Arbitration Act 1996 provides that it would be so treated.

On a secondary point, the Commercial Court did agree with the Bank that, had the jurisdiction clause remained effective then it could be construed broadly and would cover claims arising out of or in connection with the Finance Agreement, which would include claims for restitution or misrepresentation.

On the primary issue though the Bank had failed to establish a good arguable case that the jurisdiction agreement was still valid and binding. The English Court could not therefore claim jurisdiction over the alternative claims that the Bank wished to bring. If the case goes to trial and the defence succeeds in proving the Finance Agreement to be void, the Bank will have to seek an alternative route to recovery in an alternative jurisdiction.

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Category: Article