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01 November 2016
Based on the general rule of the Recast Brussels Regulation, a party must be summoned in the court of the member state in which it resides (Article 4). There are several exceptions to this main rule, such as alternative competence in accordance with a claim based on an unlawful act: in these circumstances the court of the place where the harmful event occurred has competence (Article 7(2) of the Brussels Regulation).(1)
Determining the place where the harmful event occurred can also lead to disputes, as happened in the recent Universal Music case before the European Court of Justice (ECJ) (C-12/15). The parties argued as to whether the harmful event had occurred in the Netherlands or in the Czech Republic. The Dutch court could hear the case only if this was found to be the Netherlands.
Universal Music Holding BV planned to buy a 30% equity interest in a Czech record company and Czech lawyers drafted a share option agreement to this end. However, the formula for calculating the share purchase price was not amended as Universal had requested. Consequently, the share purchase price amounted to €31 million instead of €313,770, which was the intended amount. The shareholders claimed the higher amount from Universal Music. Universal Music was unwilling to pay and the parties commenced arbitration in the Czech Republic. Eventually, Universal Music was ordered to pay €2.6 million for the shares.
Seeking compensation for damages, Universal Music lodged a claim in the Netherlands against the Czech lawyers. Universal Music claimed that the Dutch court was competent based on Article 7(2) of the Recast Brussels Regulation, since it claimed that the damage had occurred in the Netherlands.
The parties' dispute over competence made its way to the Supreme Court, which requested the ECJ to decide on this matter. The questions referred to the ECJ included whether Article 7(2) of the Recast Brussels Regulation is applicable in the event of pure financial loss which occurs in one member state resulting from an unlawful act in another member state.
Where did the harmful event occur?
The ECJ emphasised that the jurisdiction of the courts at the place where the harmful event occurred is a rule of special jurisdiction which must be interpreted independently and strictly.
According to settled case law, the rule of special jurisdiction laid down in Article 7(2) is based on the existence of a particularly close connecting factor between the dispute and the courts at the place where the harmful event occurred or may occur, which justifies the attribution of jurisdiction to those courts to ensure the sound administration of justice and the efficacious conduct of proceedings.
With regard to the wording "the place where the harmful event occurred or may occur" in Article 7(2), the ECJ held that this is intended to cover both the place where the damage occurred and the place of the event giving rise to it.
In this case it was common ground between the parties that the Czech Republic was the place of the event giving rise to the damage. However, they disagreed as regards the determination of the place where the damage occurred.
To this end, the ECJ held that the settlement agreement was concluded in the Czech Republic. From that moment Universal Music knew of the share purchase price, its obligation to pay and the financial damage connected therewith. As a result of these circumstances, the ECJ ruled that the loss of assets had manifested itself in the Czech Republic and the damage had occurred there. The fact that Universal Music had used its Dutch bank account to pay the share price was irrelevant.
Restrictions to applicability of Kolassa judgment
In its arguments regarding its bank account, Universal Music referred to Kolassa (C-375/13), in which the ECJ found the Austrian court competent in a matter regarding the prospectus liability of a UK-based bank. An aggrieved Austrian investor argued that the damage had occurred in Austria, since this was where his bank account was based. Based on the circumstances of the case – the prospectus had been published in Austria and the securities had been resold by an Austrian bank – the ECJ agreed.
However, in Universal Music the ECJ held that the Kolassa approach cannot be interpreted as a general rule:
"the term 'place where the harmful event occurred' may not be construed so extensively as to encompass any place where the adverse consequences of an event, which has already caused damage actually arising elsewhere, can be felt."
The ECJ has thus made clear that additional connecting factors are necessary to justify the special jurisdiction of Article 7(2) of the Recast Brussels Regulation in the event of pure financial damage which results directly from a bank account and is the direct result of an unlawful act committed in another member state.
The ECJ regarded the conclusion of the settlement agreement in the Czech Republic as of significant relevance to the question of where the damage occurred. It further emphasised that the place where the bank account was held, by itself, was of no relevance in ruling on jurisdiction. In such case additional connecting factors are necessary to justify the competence of the court.
Given the ECJ's line of reasoning, Universal Music might have succeeded had the settlement agreement been concluded - and thus the harmful act occurred - in the Netherlands. This, combined with the payment through the Dutch bank account, would probably have been considered sufficient connecting factors for the jurisdiction of the Dutch court.
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