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I have reported before on the jurisdictional consequences of CJEU Vereniging van Effectenbezitters v BP. In this post for the European Association of Private International Law, I give my views on the impact for applicable law.

Geert.

Blogged.

My view on applicable law in cases of purely economic damage, following #CJEU Vereniging voor Effectenbezitters. https://t.co/U8lijC8sGB

— Geert Van Calster (@GAVClaw) June 23, 2021

This is the third post of an online symposium on the recent judgment of the CJEU in Vereniging van Effectenbezitters v. BP after the posts of Matthias Lehmann and of Laura van Bochove and Matthias Haentjens.

The author of this post is Prof. Geert van Calster, who teaches at and is Head of the department of European and International Law of the University of Leuven (Belgium), and an independent legal practitioner at the Brussels Bar.

Leiden University’s Round Table on the consequences of CJEU Vereniging van Effectenbezitters v BP (VvE) provided me with an opportunity not just to talk on the consequences of the ruling for applicable law, but also to discuss those views with an excellent group of scholars. That afternoon’s discussion no doubt has had an impact on some of what I write below, however clearly this post is my own responsibility.

Contractual or non-contractual obligations?

Clearly a first element of note is that the applicable law picture looks entirely different depending on whether one is looking at a contractual (triggering application of the Rome I-Regulation) or non-contractual (meaning Rome II will apply) relationship. The general assumption is that in a case like VvE, Rome II is engaged.

This results firstly from parties claiming jurisdiction on the basis of Brussels IA’s tort gateway, Article 7(2). The suggested parallel between the Brussels Ia and Rome Regulations then indicates that where jurisdiction goes, applicable law needs to follow (below I talk more about that parallel).

Further, there is CJEU case-law making a contractual jurisdictional basis unlikely. In CJEU C-366/13 Profit Investment Sim, the Court held that a choice of court contained in a prospectus produced by the bond issuer concerning the issue of bonds may be relied on against a third party who acquired those bonds from a financial intermediary under quite narrow circumstances only. These circumstances include considerations of applicable national law. In CJEU C-375/13 Kolassa the Court held that, on the facts of the case, there were no indications that there was a contract under either the consumer title or the general Article 7(1) gateway, between the holder of a securities account and Barclays, the issuer of certificates held in that account.

On the other hand, following the CJEU’s much stretched notion of ‘contract’ in C-337/17 Feniks and follow-up case-law, I do not think that the existence of a ‘contract’ between the issuer of the financial instruments and the (very) downstream investor can be entirely ruled out.

In the remainder of this post however I shall assume the majority’s intuition that the applicable law analysis be pursued under the Rome II Regulation.

A reminder: the general rule of Article 4(1) Rome II

The standard applicable law rule to purely economic loss, is included in Article 4(1) Rome II and holds that the applicable law is the

‘law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur’

There is no specific rule for purely economic loss as such. However, there may be circumstances in which purely economic loss may be covered by one or two of the specific categories included in Rome II. I am thinking in particular of the product liability rules (with discussions on whether financial instruments may be qualified as a ‘product’ under same), and the rules on unfair competition and infringement of competition law.

Further variations to the rule exist in Article 4 itself, and via the scope of applications, which excepts a number of non-contractual obligations hence giving space for residual, national private international law to take over.

Need for absolute parallel between Rome II and Brussels Ia?

To the degree one assumes that Article 7(2) Brussels Ia’s tort jurisdictional gateway, and Rome II’s rules on applicable law for non-contractual obligations need to be applied in synchronicity, clearly a judgment like VvE will have an important impact on the application of Article 4 Rome II’s general rule.

However the CJEU itself is ambivalent on the need for such parallel. In Kainz, the CJEU specifically rejected the need for consistency between Brussels Ia and Rome II, while in other cases the recital’s encouragement of consistency has had an impact on the court’s rulings.

Once must tread with caution therefore in extending the VvE findings to the applicable law discussion. Those with an interest in doing so will find support in the authorities to talk down the impact of VvE on applicable law.

Echoes of an exception, and a tailor-made lex causae not achieved

First the Finnish and then the UK delegation to the Rome II Committee, actually (unsuccessfully) suggested an exclusion from the scope of application for financial instruments. The UK proposal to that effect would have added to Rome II’s exclusions from the scope of application

“Non-contractual obligations arising out of transactions, such as issuing, admission to trading, offering or marketing, relating to financial instruments, including transferable securities, moneymarket instruments, units in collective investment undertakings, options, futures and other derivatives instruments“

In that discussion reference was also made to the fall-back lex contractus rule for certain financial instruments in Article (4)(1)h of the Rome I Regulation.

When it transpired that the proposal for this exception had the support of neither the EC nor enough Member States, the UK suggested singularity of lex causae by introducing a specific heading for financial instruments in which either the lex loci incorporationis (of the issuer) or the law of the place where the issuer has its primary listing, would be applicable to non-contractual loss.

The former suggestion echoed somewhat the difficulties in establishing the exact scope of Rome II’s corporate law exception (Article 1(2)d Rome II). CJEU Kolassa (a 1980 Rome Convention case) unfortunately failed to bring much clarity on this point.

 National case-law: Petrobas

In Petrobas Rotterdam, the Dutch court identified the locus damni in an investor suit as

the location of the market(s) where the financial instruments are listed and traded.

It emphasised predictability and it conceded a Mozaik effect, including of course application of non-EU laws (in the case at issue, viz the Brazilian and Argentinian investors). This finding might in fact chime with the CJEU in VvE where as other posts on this blog clarify, the

place of statutory duties of information

was upheld as locus damni. This synergy between the finding at the applicable law level in Petrobas, and the jurisdictional criterion in VvE, only applies of course provided all places of listing and trading are subject to such duties.

If one were to apply the ‘law of the place of statutory duties of information’, however, rather like at the jurisdictional level, this would raise the mental twister that this criterion is more akin to locus delicti commissi than locus damni, as Matthias Lehmann has pointed out.

Moreover, like in VvE, such criterion does not help us for unlisted financial instruments.

Finally, Article 4(3)’s ‘manifestly more closely connected’ variation to the lex loci damni rule clearly will give a judge some (but not much: the Article needs to be applied restrictively) room for manoeuvre to identify a different law with more, and intense, affinity to the case.

Help on the horizon? Pending case before the CJEU

As was helpfully pointed out by Tomas Arons at the aforementioned Round Table, in the pending case C-498/20 ZK , in his capacity as liquidator in the bankruptcy of BMA Nederland BV v BMA Braunschweigische Maschinenbauanstalt AG, locus damni considerations in Rome II in a case of purely economic loss (alleged breach of duty of care by a mother holding for allegedly failing to provide its daughter company with adequate financing) are currently sub judice before the CJEU. The judgment in that case will undoubtedly feature VvE and will hopefully clarify the application of Rome II to cases of purely economic loss.

This is the second post of an online symposium on the recent judgment of the CJEU in Vereniging van Effectenbezitters v. BP after the post of Matthias Lehmann. 

The authors of this post are Dr. Laura van Bochove (Assistant Professor at Leiden University) and Prof Dr Matthias Haentjens (Professor of Private Law at Leiden University)

On 3 June 2021, Leiden University hosted a seminar with international experts from the judiciary, law firms, civil service and academia to discuss the recent CJEU judgement in Vereniging van Effectenbezitters v. BP. The discussion clearly showed that the judgment may be interpreted differently. Some experts, including Matthias Lehmann (see here), argued that in VEB/BP, the CJEU refused to localise the Erfolgsort at the place of an investment account and, instead, localised damage at the place of listing. We see some merit in attributing jurisdiction to the court of the place of listing, but we do not think the CJEU has chosen such a radical departure from existing case law. Rather, we believe the CJEU continues to (try to) localize the Erfolgsort, also in cases of financial loss, and may continue to consider as connecting factors in that context the investment account, possibly next to the place of listing.

We believe VEB/BP represents another change in direction. We see that the CJEU introduced ‘foreseeability’ as a relevant consideration when having to determine the place where losses have materialized. This clearly derogates from previous CJEU case law and raises new questions.

Connecting factor #1: bank account

One of the participants to our seminar, Dorine Verheij, once said that when a Dutchman rides his bike on the Champs-Elysees and gets hit by a 2CV, it is clear in which jurisdiction the damage was caused and also where it materialized. This is not so for financial loss. Financial loss, by its very nature, is immaterial and therefore as a matter of logic, not localizable. However, the CJEU has continued to (try to) localize the Erfolgsort in several financial loss cases, including Kronhofer, Kolassa, Universal Music and Löber. This case law has been fiercely criticized in legal literature. In his Opinion in VEB/BP, Advocate General Campos Sánchez-Bordona sided with this critique and suggested to abandon the Erfolgsort in financial loss cases. The CJEU did not follow suit, and we believe this is a strong indication the Court continues to (try to) localize the Erfolgsort, also in cases of financial loss. Moreover, the Court did not explicitly depart from the case law just referred to (ie Kronhofer, Kolassa, Universal Music and Löber). In these cases, the court considered as relevant connecting factors the applicant’s “bank account” (Kolassa, Löber, Universal) as well as “other specific circumstances of that situation” (Löber). In VEB/BP, the Court specifically considered the “investment account” as a possible connecting factor, whilst that it held that this factor was insufficient to attribute jurisdiction in this case.

As one of us has written elsewhere, we believe that when securities have lost value or have become worthless, possibly as a result of misleading information from the issuer of the securities, any losses suffered by the owner of the securities concern those securities specifically. Thus, it is the relevant securities account in which those securities are credited, that is the ‘place’ where the financial loss materializes (wherever that may be), rather than in any bank account from out of which these securities were initially purchased. We therefore believe it is welcome that the Court has now clarified that it is the ‘investment account’ (rather than the bank account) that may be of relevance as a connecting factor when having to determine where to localize financial loss. However, and as we have also argued elsewhere, the localization of an investment account (which we thus understand to be the relevant securities account) is dogmatically and logically impossible, since securities accounts have no physical location. This fact makes a securities account or ‘investment account’ unsuitable for any attribution of jurisdiction.

In the VEB/BP case, however, the Court concluded for other reasons that the ‘investment account’ was not adequate as a connecting factor to attribute jurisdiction to the court of the Member State where the account is held, as it held that as a connecting factor, an investment account could not ‘ensure’ the ‘objective of foreseeability’. Before we turn to discuss foreseeability as a connecting factor, first we will pay attention to the ‘place of listing’, which the Court introduced in VEB/BP as a possible connecting factor.

Connecting factor #2: the place of listing

Which factors should be considered relevant or decisive so as to attribute jurisdiction in a specific case, remains elusive. In Kronhofer, the Court held that the place of the applicant’s domicile may not be sufficient if the relevant investment account is located in another jurisdiction. This judgment did not say, however, which connecting factor would suffice to attribute jurisdiction. When the place of the applicant’s domicile coincides with the relevant investment account, this may suffice, the Court held in Kolassa and Löber. But in Universal Music, the Court dismissed this combination of connecting factors on the ground that the other case law concerned a “specific context” (yet without explaining what the element of distinction was), so that “the ‘place where the harmful event occurred’ may not be construed as being, failing any other connecting factors, the place in a Member State where the damage occurred, when that damage consists exclusively of financial damage which materialises directly in the bank account of the applicant and is the direct result of an unlawful act committed in another Member State.” Arguably, in VEB/BP, the Court found such ‘other connecting factor’ in the place of listing.

More specifically, in paragraph 35 the CJEU held:

“It follows that, in the case of a listed company such as that at issue in the main proceedings, only the jurisdiction of the courts of the Member States in which that company has complied, for the purposes of its listing on the stock exchange, with the statutory reporting obligations can be established on the basis of the place where the damage occurred. It is only in those Member States that such a company can reasonably foresee the existence of an investment market and incur liability.”

In isolation, this paragraph appears to provide for a clear jurisdiction rule, attributing jurisdiction on the basis of the place where the damage occurred to the courts of the Member State in which the listed company has complied, for the purposes of its listing on the stock exchange, with the statutory reporting obligations (the place of listing). However, this paragraph [35] must not be considered in isolation, as indicated by the introductory words “[i]t follows that”. These words refer to the previous paragraph [34], where the CJEU held that in the present case, the applicant’s domicile and the place of its investment account would not ensure the objective of foreseeability. In other words, the CJEU held in paragraph [34] that the combination of connecting factors that were considered sufficient for attribution of jurisdiction in Löber and Kolassa, proved inadequate in the present case, as it would not guarantee that the defendant would be able to reasonably foresee where it could be sued.

We think the Court has been most persuasive where it held that in financial loss cases such as VEB/BP, the location of the applicant’s investment account is arbitrary and not reasonably foreseeable for the defendant, ie the issuer of the relevant securities. However, this does not mean that the place of listing can logically be considered as a ‘place where the damage occurred’, as the Court seems to suggest. Neither should this be interpreted to mean that the place of listing suffices, in and by itself, as a connecting factor that can attribute jurisdiction, because the Court gives no indication that it departed from earlier case law.

First, the place of listing is a place where securities are traded. This place has no, if only indirect relevance for the localization of the place “where the alleged damage actually manifests itself” (Löber, cited in VEB/BP, para. 31), ie the place “where the applicant has suffered financial consequences” (VEB/BP, para. 29). An investor commonly orders his investment firm (ie bank or broker), to acquire or sell certain financial instruments. The investment firm may proceed to acquire those instruments, for that investor, on a regulated exchange, but these can also be acquired on other official trading venues such as multilateral trading facilities, organized trading facilities, or even internally settled on the books of the investment firm. This practical reality shows, we think, that the investor does not “suffer financial consequences” on the place of listing (possibly with the exception of the rare instance where the investor itself is an admitted member of an exchange). We therefore think the place of listing may be a relevant connecting factor, but logically in most cases it cannot qualify as an Erfolgsort.

Second, the Court introduced the place of listing only in the context of foreseeability of damage. It did not explicitly (or implicitly) depart from its earlier case law, where other connecting factors were considered adequate as discussed above. Therefore, we consider it likely (but the Court does not make this explicit), that the Court may continue to consider the investment account as the place where financial damage ‘actually manifests itself’, but that this connecting factor was not deemed sufficient in the present case for reasons of foreseeability only. Rather, the Court seemed to imply that the place of the investment account may be considered foreseeable for the defendant only if that defendant’s securities are listed in the same Member State. If anything, this interpretation would accord (better) with Kolassa and Löber.

Relevant circumstance: foreseeability

Whilst we welcome the Court’s dismissal of the investment account as a sole connecting factor in the present case, the CJEU’s introduction of and reliance on ‘reasonable foreseeability’ as a relevant circumstance is not unproblematic, as the CJEU’s interpretation of ‘reasonable foreseeability’ in VEB/BP seems to deviate from its previous case law. In that earlier case law, the threshold for foreseeability is often low, as illustrated in the ‘Dieselgate’ case VKI/Volkswagen. In that case, the CJEU attributed jurisdiction to the courts of the place where the applicants bought their cars from a third party. This third party virtually never was the same as the defendant that equipped the cars with manipulative software. Here, the CJEU held that that the manufacturer ‘by knowingly contravening the statutory requirements imposed on it’ may reasonably expect to be sued in the courts of the place where the car was purchased by the final purchaser, even though this could potentially lead to the jurisdiction of the courts of all EU member states, since the purchases of second-hand or imported cars were not excluded. Similarly, in eDate Advertising, the CJEU readily assumed the foreseeability of the place of damage in case of online infringement of personality rights, which could be anywhere where the content on the website was accessible.

Thus, in VEB/BP the CJEU seemed to have interpreted ‘reasonable foreseeability’ more restrictively and as a ground to deny jurisdiction, whilst in VKI/Volkswagen and eDate Advertising the Court used reasonable foreseeability more liberally and as a ground to attribute jurisdiction. Put differently, on the basis of VKI/Volkswagen and eDate Advertising, one could have expected the CJEU to attribute jurisdiction in VEB/BP to the courts of the Netherlands, as BP directs its activities and communications to investors worldwide. But we would think that the Court’s relatively strict interpretation of ‘foreseeability’ in VEB/BP accords better with the objectives of Brussels Ibis, ie ensuring legal certainty by preventing a multiplicity of courts having jurisdiction. Whether the CJEU will use a similar, strict interpretation of reasonable foreseeability in future cases remains to be seen.

VEB/BP and future case law

The VEB/BP case was eagerly awaited, especially by Dutch investors, multinationals and their lawyers. Should the CJEU have attributed jurisdiction to the Netherlands, this would have allowed other collective actions for investment losses to be opened in the Netherlands, making the Dutch courts an attractive go-to jurisdiction for the recovery of investment losses. This now seems to have been limited to cases where the financial losses were ‘reasonably foreseeable’ to have materialised in the Netherlands. Consequently, the CJEU’s judgment in VEB/BP will also have implications for other pending cases, including VEB’s pending collective action in the Amsterdam court against Volkswagen for misleading information in relation to ‘Dieselgate’.

We believe VEB/BP is to be applauded in view of the objectives of the Brussel Ibis Regulation, as the Court has dismissed the investment account which has always been highly unreliable a connecting factor. However, the Court’s reasoning gives rise to several new questions which does not seem helpful for applicants or defendants, including: has the investment account been permanently dismissed as a connecting factor? (we think not); is the place of listing to be considered as the sole connecting factor in cases concerning listed securities? (we think not); is reasonable foreseeability now to be interpreted strictly? (we are doubtful). It is to be hoped that the CJEU answers these questions in future cases, which will be as eagerly awaited as VEB/BP.

Georgia acceded on 31 May 2021 to the Hague Convention of 15 November 1965 on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters and the Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters. The first one will enter into force for Georgia on 1 January 2022, subject to the Article 28 procedure. The second one will enter into force for Georgia on 30 July 2021.

Source: https://www.hcch.net/en/news-archive/details/?varevent=803

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