In Kwok Ho Wan and Ace Decade Holdings Ltd v. UBS AG (London Branch) [2023] EWCA Civ 222 the Court of Appeal confirmed that the English courts had jurisdiction over claims brought against the London branch of the Swiss-domiciled investment bank UBS. The decision analysed where financial damage is suffered in complex, multinational, investment transactions involving branches of international banks.
Jurisdiction here fell to be determined under the Lugano Convention. This convention no longer applies to proceedings brought in England & Wales following the end of the Brexit transition period. However, Practice Direction 6B of the Civil Procedure Rules contains provisions in equivalent terms to those considered in this decision. Accordingly, this judgment is likely to be a good indication of the approach that the Courts would take when applying those provisions in future cases.
Background Facts and Claims Against UBS
The factual background to the claims is complex. Please see the drop down section below for the full details, but in short, the claimants allege that false representations were made by UBS in Hong Kong to induce the claimants to make an investment which subsequently collapsed, causing the claimants to suffer US$495m of damage.
However, the claimants' position is that this loss was caused specifically by the sale of the underlying asset in the investment, the "H-Shares" by the London branch of UBS (UBS London): The H-Shares had been used as security for a loan granted by UBS London to finance their purchase, and were sold by UBS London to pay off this loan. Accordingly, it is UBS London that the claim has been brought against.
The Investment Structure
- The investment concerned the purchase of shares in a Chinese securities firm, Haitong, listed on the Hong Kong Stock Exchange, known at the "H-shares". This investment was made in China.
- For regulatory reasons the claimants did not want to acquire a direct interest in the H-shares. The investments were therefore structured as a co-investment with: (i) a Chinese Investment Manager, Haixa; and (ii) a BVI subsidiary of Haixa called Dawn State.
- The H-shares were purchased by Dawn State.
- Pursuant to a letter of agreement, the claimants made a "monetary contribution" of US$500m to Dawn State for which they acquired a right to call for the entire issued share capital of that company. The co-investment agreement and letter of agreement were made in China and governed by Hong Kong law.
- Dawn State's subscription to the H-shares was also funded by a US$750m loan from UBS London under a facility agreement which was secured by a charge over the H-shares. The facility agreement and security agreement were both governed by English law and provided for English jurisdiction.
- The claimants say that, in response to concerns they raised about the provisions of the facility agreement, UBS made representations that, should Dawn State default under the facility agreement, UBS London had a policy that it would not demand additional collateral and would allow Dawn State additional time to make any payments. The claimants say that they relied on these representations in proceeding with the investment.
- In July 2015, the price of the H-shares fell sharply. In response, UBS London demanded repayment from Dawn State, and, when no repayment was made, sold the H-shares. After repayment of the loan, less than US$5m of the sales proceeds remained.
Jurisdiction Challenge
Proceedings were issued against UBS on 28 May 2020, i.e. between the UK's withdrawal from the EU on 31 January 2020 and the end of the "implementation period" on 31 December 2020. Therefore jurisdiction over a Swiss domiciled defendant fell to be determined under the Lugano Convention.
The claimants relied on the special jurisdiction rules contained in articles 5(3) and 5(5) of the Lugano Convention to establish that the English courts had jurisdiction to hear the claims. These articles provide that:
a party may be sued in tort "in the courts for the place where the harmful event occurred or may occur" (Article 5(3)); and that
in disputes arising out of the operations of a branch, the party may be sued "in the courts for the place where the branch […] is situated" (Article 5(5)).
UBS, however, challenged the High Court's jurisdiction. It argued that it should be sued in Switzerland pursuant to the general rule, contained in Article 2 of the Lugano Convention, that a defendant domiciled in a convention state must be sued in that state.
The Appeal
At first instance Mrs Justice Cockerill dismissed the jurisdiction challenge and confirmed the High Court's jurisdiction under articles 5(3) and 5(5).
UBS appealed, contending that:
- As to Article 5(3), the place where a claimant suffers financial damage is, as a general rule, either: (i) the place at which the claimant entered into or committed to the transaction (in this case Hong Kong), or, alternatively, (ii) the location of the bank account from which the funds were applied to the transaction. UBS argued that in this case neither of these were London; and
- As to Article 5(5), UBS London had not sufficiently and significantly participated in several elements of the causes of action: in particular, it was not alleged that anyone at UBS London made the alleged misstatements or acted negligently. Additionally, the claimants' losses occurred when the underlying investment agreement was entered into, which took place in Hong Kong, before UBS London became involved in the investment.
The Decision
The appeal was unanimously dismissed by the Court of Appeal.
In relation to article 5(3) and the place where the damage occurred, the Court of Appeal held that the conclusion that the damage occurred in England was "the only one that could sensibly have been reached" for the following reasons:
- The substantive damages only manifested when the H-shares were sold in London. Prior to that point, the claimants would not have had any claim against UBS.
- Although the claimants had only an indirect interest in Dawn State, because of the way the transaction was structured their loss still manifested itself in London: once the H-shares were sold, they lost whatever interest they had in the value of those shares.
- From the start of the transaction, it was entirely foreseeable to all the parties and to UBS London that proceedings were likely to be brought in London if things went wrong: the H-shares were to be held in London; the facility and security agreements were founded in London; and any real loss to the H-shares was always likely to be suffered in London.
- UBS's own domicile, Switzerland, had no connection whatever with the transaction, such that article 5(3) could displace the general rule under the Lugano Convention.
In relation to article 5(5) and whether the dispute arises "out of the operations" of the London branch of UBS, the Court of Appeal accepted that it was UBS London's conduct which created the actionable loss claimed: UBS London entered into the facility and security agreements so that the claimants could acquire their indirect interests in the H-shares, and the US$495m claimed was only lost when the H-shares were sold by UBS London. Moreover, the reassurance that had been sought, and the alleged misstatements made, were about UBS London's policies.
Key Takeaway
The Lugano Convention provisions considered in this case are no longer applicable in proceedings brought before the English courts (although the UK has sought to join the convention in its own right, and may yet be able to do so).
However, complex issues around the location in which damage is suffered and other such jurisdictional questions will continue to apply to international disputes such as this, whether the parties are located in Europe or not.
Given the similarities in the provisions of the English common law regime, as set out in the Civil Procedure Rules, to those in the Lugano Convention, this case will undoubtedly be a useful reference as to how the Courts will approach these questions in the future.