Case C-12/15, Universal Music Holding – initial financial damage and jurisdiction [judgment 2016, ECLI:EU:C:2016:449]
A Czech law firm made an error that cost a Dutch record company a couple of million euro. The question is whether the Dutch company can open up litigation in the Dutch courts and sue people who are in other Member States for the ‘initial financial damage’ to the company’s assets. The answer depends on the correct interpretation being given to Article 5(3) of the EU’s ‘jurisdiction’ Regulation 44/2001.
Background
Universal Music is a record company. In 1998, it not only bought a large volume of shares in a Czech record company but also agreed to buy the remainder of the shares five years later.
The share option contract was drawn up by a Czech law firm, and the law applicable to the agreement was Czech law. However, the Czech law firm messed up: it included one of Universal Music’s proposed terms into the final document. The effect was to increase the purchase price fivefold above the initially-intended price.
Five years later, in 2003, Universal Music obtained the remainder of the shares but it paid only the initially-intended purchase price of €300 000. This did not please the Czech record company’s shareholders, who had expected €31 million. The ensuing dispute was taken to Czech arbitration where it was decided that the Dutch company would pay two and half million euro. This amount was paid from Universal Music’s assets in Holland.
However, the arbitration award did not end the matter for the Dutch company. It then sought to recover the two and a half million euro harm to its Dutch assets from various people who were living in Canada and Romania in respect of the error made by the employee of the Czech law firm.
The Dutch record company elected to launch these legal proceedings in its local Dutch court. The claim was for damages, the claim had two heads: one related to the losses incurred in respect of the intended-purchase price; the other, concerned the costs of the arbitration.
At first instance, the Utrecht District Court declined to hear the case on the basis that it had no jurisdiction. In its view, this was a case of pure property damage that was the direct (initial) consequence of the harmful event. The relevant place was that of the harmful event, which was not Holland. Nothing had happened in Holland that would create the requisite degree of connection with the Dutch courts. Consequently, it was not open to the Dutch court to ascribe itself jurisdiction on the basis of the EU’s rules on international or ‘special jurisdiction’.
The judgment of the Utrecht District Court was subsequently upheld by the Arnhem-Leeuwarden Court of Appeal. It too took the view that pure property damage was insufficient to create international or special jurisdiction. Since the appellate court did not have jurisdiction, it did not need to make a finding in respect of the claimant’s claim that this was a case involving direct ‘initial’ damage. The case went to the Dutch Supreme Court.
At the Dutch Supreme Court
The Dutch Supreme Court looked at the relevant legislation, the EU’s ‘jurisdiction’ Regulation 44/2001. The fundamental principle of the Regulation is that a defendant should be sued in the country where they are domiciled.
There are exceptions to the rule, however, for ‘special jurisdiction’. These depend on the nature of the claim (tort or property damage), or acts which happen in one place but where the harm occurs in another.
In this case, the relevant provision was the exception in Article 5(3) which provides:
A person domiciled in a Member State may, in another Member State, be sued:
… in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur.
It is an exception in the Regulation encrusted with CJEU case law. The CJEU’s recent judgments include: Case C-387/12, Hi Hotel ECLI:EU:C:2014:215; Case C-228/11, Melzer ECLI:EU:C:2013:305; and Case C-360/12, Coty Prestige Lancaster Group ECLI:EU:C:2014:131.
Nevertheless, that case law did not seem to apply; or at least, if it did, then it was not clear to the Dutch Supreme Court how it should be applied to Universal Music’s case.
For whereas Article 5(3) talks of ‘the place where the harmful event occurred’, it is also EU law that jurisdiction cannot be based on Article 5(3) if the court is faced with a claim which is exclusively about property damage which results from harm that has already happened in another Member State.
In any event, that case law did not seem to cover the present situation in which only property damage had occurred but where the damage was the direct consequence of tortious behaviour which had occurred in another Member State. Thus, the harm is not the result of damage which has occurred in that other Member State.
With almost wry wistfulness, the Dutch Supreme Court recalled that it had asked the CJEU about this sort of situation a few years earlier. However, the CJEU had refused to answer that question in Case C-189/08, Zuid-Chemie ECLI:EU:C:2009:475 on the grounds that the CJEU had thought the question purely hypothetical.
Now though, there was reasonable doubt as to whether paying the arbitration award and the arbitration costs from the Dutch company’s assets constituted initial financial damage such that it could be capable of giving the Dutch courts special jurisdiction to hear the case.
But if the Dutch courts were to have special jurisdiction under Article 5(3), what then? Which criteria had to be applied to determine the place where the property damage had occurred or which criteria could be used to deem where the damage had occurred. The CJEU’s case law to date provided no criteria on this point.
There was one further issue which troubled the Dutch Supreme Court. It concerned what should properly be taken into account when the judge was deciding whether the court had jurisdiction under the EU’s Regulation?
Namely, should the judge proceed on the basis of the applicant’s submissions about why a particular court should enjoy jurisdiction (as for example the CJEU’s “Hi Hotel” judgment would seem to suggest), or must the judge also take into account the arguments advanced by the respondent that refute any suggestion that the court has jurisdiction?
The core of the problem is Article 24 of the Regulation, which provides:
Apart from jurisdiction derived from other provisions of this Regulation, a court of a Member State before which a defendant enters an appearance shall have jurisdiction. This rule shall not apply where appearance was entered to contest the jurisdiction, or where another court has exclusive jurisdiction by virtue of Article 22.
Now in this case the defendants had indeed made representations to the Dutch courts contesting the Dutch courts’ jurisdiction. In that context, the Dutch Supreme Court also flagged up the Opinion of the Advocate General in Case C-375/13, Kolassa ECLI:EU:C:2014:2135. What should the approach of judge be?
Questions Referred
According to the Eurlex website, the Dutch Supreme Court has asked
1 Must Article 5(3) of Regulation (EC) No 44/2001 […] be interpreted as meaning that the ‘place where the harmful event occurred’ can be construed as being the place in a Member State where the damage occurred, if that damage consists exclusively of financial damage which is the direct result of unlawful conduct which occurred in another Member State?
2 If the answer to Question 1 is in the affirmative:
2a What criterion or what perspectives should the national court apply, when assessing its jurisdiction on the basis of Article 5(3) of Regulation (EC) No 44/2001, in order to determine whether in the present case there has been financial damage which is the direct result of unlawful conduct (‘initial financial damage’ or ‘direct financial damage’) or whether there has been financial damage which is the result of initial damage which occurred elsewhere or damage which has resulted from damage which occurred elsewhere (‘consequential damage’ or ‘derived financial damage’)?2b What criterion or what perspectives should the national court apply, when assessing its jurisdiction on the basis of Article 5(3) of Regulation (EC) No 44/2001, in order to determine where, in the present case, the financial damage — whether it be direct or derived financial damage — occurred or is deemed to have occurred?
3. If the answer to Question 1 is in the affirmative: must Regulation (EC) No 44/2001 be interpreted as meaning that the national court which is required to determine whether it has jurisdiction pursuant to that regulation in the present case is obliged, when making its determination, to proceed on the basis of the relevant submissions of the claimant or applicant in that regard, or is it obliged also to take into account the arguments put forward by the defendant to refute those submissions?
Outcome. On 16 June 2016 the Court ruled (ECLI:EU:C:2016:449) that purely financial damage which materialises directly in the claimant’s bank account cannot, by itself, anchor jurisdiction as the “place where the harmful event occurred” under Article 5(3) of Brussels I — otherwise the claimant’s bank would become a forum. Universal Music had to litigate its Czech drafting error elsewhere.
Comment
The Dutch Supreme Court’s reference not only bandies around the names of the CJEU’s case law but it also makes incomplete quotations from them. Further, the Dutch Supreme Court fails to identify which particular paragraphs the quotes come from.
This is regrettable. The CJEU’s judgments often house compromises, contradictions, ambiguities and obiters which can affect the understanding of what the CJEU appears to say in any particular judgment.
The style of the Dutch Supreme Court’s order of reference is in contrast to that adopted by its Advocate General, Mr Vlas, who does identify which paragraphs of a CJEU judgment he is looking at any one particular point in time.
His Opinion also explains that it is not clear what constitutes the phrase initial harm: is it the losses that arise from the increased share price, which rose on the back of the share option agreement being signed? Or is it the costs relating to the arbitration? If it is the first scenario, then the mistake of the Czech law firm, and the effect on the cost of the shares was in the Czech Republic so there is no difference in the place where the event occurred and the place where the consequences were felt. If it is the latter scenario, involving paying the costs of the arbitration, then the effect is felt in Holland.
Advocate General Vlas of the Dutch Supreme Court also explains that the legal literature which he has looked at is divided on what is encompassed by the scope of Article 5(3). That is to say, there is a narrow interpretation to the concept of ‘the place where the harm takes place’, and it covers only physical harm to a person or company. However, there is also a more expansive interpretation of the provision which would cover all forms of direct ‘initial’ harm, thereby including damage to assets. That said, he pointed out that there were several disadvantages to adopting the latter approach. One of them was its arbitrary effect: there are bank accounts all over the EU so there is a risk of a multiplicity of courts potentially gaining competence under such an interpretation of Article 5(3) of the Regulation.
As a result of the legal uncertainty surrounding the scope of Article 5(3), he advised the Dutch Supreme Court to make a preliminary reference to the CJEU and he proposed a simple question. In contrast, the Dutch Supreme Court has decided to ask slightly more nuanced questions.