CJEU confirms when jurisdiction clauses in bond prospectuses will bind purchasers on the secondary market


Last month the Court of Justice of the European Union (CJEU) published its preliminary ruling in Profit Investment Sim SpA, in liquidation v Stefano Ossi and others. The case considered the circumstances in which a party purchasing a bond on the secondary market would be bound by an exclusive jurisdiction clause included in the issuer's prospectus.

The CJEU ultimately held that a secondary market purchaser would not necessarily be bound by a jurisdiction clause in a prospectus. As such the decision is of some significance to banks and financial institutions who, if they wish to have a particular court have exclusive jurisdiction over a dispute arising under any agreement, will need to ensure that it complies with the requirements set out in the Judgment, including that express reference is made to the jurisdiction clause in agreements between the issuer and primary subscriber, and that secondary purchasers are also expressly bound by that clause.

Profit Investment Sim SpA, in liquidation v Stefano Ossi and others

In this case a German bank issued bonds pursuant to a prospectus which included an exclusive jurisdiction clause in favour of the English Courts. A UK company subscribed to all of the issued bonds before selling some of those credit-linked bonds to Profit, an Italian company, on the secondary market.

The bonds which Profit purchased were cancelled as a result of the entity to which the bonds were credit-linked failing to make a scheduled interest payment. As a result of the cancellation, Profit entered compulsory administrative liquidation and proceedings were commenced in Italy against the German bank which had issued the bonds and others. The issuer relied, inter alia, on the exclusive jurisdiction clause in the prospectus in contending that the Italian courts lacked jurisdiction. The case was referred to the CJEU for a preliminary ruling on the interpretation of the Brussels Regulation.

Article 23(1) of the Brussels Regulation

Article 23(1) of the Brussels Regulation provides that: 

"If the parties, one or more of whom is domiciled in a Member State, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise. Such an agreement conferring jurisdiction shall be either:

  1. in writing or evidenced in writing; or
  2. in a form which accords with practices which the parties have established between themselves; or
  3. in international trade or commerce, in a form which accords with a usage of which the parties are or ought to have been aware and which in such trade or commerce is widely known to, and regularly observed by, parties to contracts of the type involved in the particular trade or commerce concerned."

The Brussels Regulation (Recast) which replaced the Brussels Regulation and is currently in force, includes an identical provision at Article 25(1).  As such the CJEU's ruling on Article 23(1) will continue to have relevance to bonds issued today.

The Judgment of the CJEU: What does Article 23(1) of the Brussels Regulation mean?

In interpreting Article 23(1) the CJEU held that where a jurisdiction clause is included in an issuing prospectus, the ‘in writing’ requirement laid down in Article 23(1)(a) of the Brussels Regulation will only be satisfied if the contract signed between the issuer and primary purchasers either (i) expressly mentions the acceptance of that clause or (ii) contains an express reference to the prospectus.

The CJEU further held that a jurisdiction clause contained in a prospectus may be relied on against a third party who acquires those bonds from a financial intermediary (i.e. a secondary purchaser) if: (i) the jurisdiction clause is valid between the parties under the relevant law; (ii) the third party acquiring those bonds on the secondary market succeeded to the financial intermediary’s rights and obligations attached to those bonds, and (iii) the third party had the opportunity to acquaint himself with the prospectus containing the jurisdiction clause.

Finally, the CJEU considered Article 23(1)(c), holding that the inclusion of a jurisdiction clause in a prospectus concerning the issue of bonds may be regarded as a "form which accords with a usage in international trade or commerce", thereby allowing the consent of the person against whom it is relied (i.e. the third party purchaser) to be presumed, provided (i) that such conduct is generally and regularly followed by the operators in the particular trade or commerce concerned when contracts of that type are concluded and (ii) either that the parties had previously had commercial or trade relations between themselves or with other parties operating in the sector in question, or that the conduct in question is sufficiently well known to be considered an established practice.

What it means for parties in the bond market and beyond

For bond issuers which have sought to rely on a jurisdiction clause in a prospectus without including the same in the underlying bond documents, this ruling introduces a degree of uncertainty as to which courts they may be sued in. Although those issuers may previously have taken comfort in relying on a jurisdiction clause in a carefully drafted prospectus they may find themselves subject to proceedings from purchasers in the secondary market (with whom they had no direct relationship) in jurisdictions other than that which they had provided for in the original prospectus.

The judgment highlights the importance of including jurisdiction clauses in agreements between issuers and primary subscribers, a practice which is now widely adopted and included in standard form documentation. The agreement with the primary subscriber should also make clear that any secondary purchaser will be bound by the jurisdiction clause should they purchase the bonds. Taking as many steps as possible to comply with the CJEU's ruling on interpretation will limit the risks bond issuers may face of being sued in jurisdictions that, for whatever reason, they are keen to avoid. The simplest way to do so is to include jurisdiction clauses in the agreements between issuer and primary subscriber.

Of wider application, the ruling once again highlights the benefits contracting parties will obtain from including clear, express jurisdiction clauses in all agreements they enter into in order to avoid questions of this nature arising in jurisdictional disputes which can be time consuming and expensive.

If you have any questions in relation to this case please contact James Carter, Partner or Sean McGuiness, Associate, both of the Litigation and Arbitration team in London.