UBS AG & UBS Securities LLC v HSH Nordbank AG
|England & Wales
|Ward LJ,Toulson LJ,Lord Collins of Mapesbury
|18 June 2009
| EWCA Civ 585
|Court of Appeal (Civil Division)
|Case No: A3/2008/1888
|18 June 2009
 EWCA Civ 585
Lord Justice Ward
Lord Collins Of Mapesbury
Lord Justice Toulson and
Case No: A3/2008/1888
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
MR JUSTICE WALKER
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr David Railton QC and Ms Sonia Tolaney (instructed by Simmons & Simmons) for the Appellants
Mr Jonathan Sumption QC, Ms S Prevezer QC and Mr Andrew Henshaw (instructed by Quinn Emanuel) for the Respondents
Hearing dates : April 1 and 2, 2009
Lord Collins of Mapesbury:
This appeal turns on the construction of a jurisdiction clause. This is yet another case in which an action for a negative declaration has been used as a means of seeking to have a dispute litigated in what is perceived as a favourable forum: see e.g. s ; , . The principal issue is whether the English jurisdiction clause in one of the documents recording the complex transaction between the parties (a 1 page document among 500 pages of other documents constituting the overall deal) applies to the claims in the action in England for the negative declaration.
This case concerns derivatives in relation to the property market, or Collateralised Debt Obligations (“CDOs”). The contractual documentation in this matter consists of more than 500 pages and its size and complexity, which is no doubt duplicated in many other transactions, make it easier to understand, if not to excuse, why senior banking figures (but not necessarily in this case) had little understanding of this market and of the risks their institutions were undertaking.
HSH Nordbank AG (“HSH”) is a commercial bank incorporated in Germany with dual headquarters in Hamburg and Kiel in Germany. It was established in June 2003 as the result of a merger between two regional German banks, Landesbank Schleswig-Holstein Girozentrale (“LB Kiel”) and Hamburgische Landesbank. The first claimant, UBS AG, is an investment bank created in July 1998 by the merger between Union Bank of Switzerland and Swiss Bank Corporation. UBS AG is incorporated in Switzerland, where it has its head office, and has substantial offices worldwide, including New York and London. The second claimant, UBS Securities LLC (“UBS LLC”), business in the United States. It will not normally be necessary to distinguish between them, and I will generally refer to either or both of them as UBS.
The transactions which are the subject matter of the actions took place in 2002/2003 between UBS and LB Kiel. HSH has assumed all material assets, rights and obligations of LB Kiel, and it is in that capacity that HSH has sued UBS in New York, and is being sued by UBS in England. HSH is domiciled in Germany for the purposes of Council Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (“the Brussels I Regulation”).
The action for seeking negative declaratory relief against HSH was instituted on February 25, 2008, in anticipation of proceedings which were going to be instituted by HSH against UBS in New York. The New York proceedings were commenced later the same day in the New York state court. HSH alleged mis-selling and mismanagement of the securities which were the subject of the complex arrangements between the parties. The complaint relied on these causes of action: breach of contract; fraud; negligent misrepresentation; breach of fiduciary duty; breach of an implied covenant of good faith and fair dealing; unjust enrichment; constructive trust.
The only possible basis for the jurisdiction of the English court is the jurisdiction clause in one of the agreements in the CDO transaction. HSH applied in the English proceedings for an order that the English court had no jurisdiction to try UBS's claim in the English proceedings. In the alternative HSH asked the court to decline to exercise jurisdiction on forum non conveniens grounds. Walker J decided that the English court did not have jurisdiction in respect of the claims made in the English proceedings, and that it was unnecessary to decide on the alternative application for a stay.
A distinctive feature of this case is that the only point of the English proceedings is to pre–empt any decision of the New York court in the proceedings brought there by the defendants in the English proceedings. It is accepted that if the relevant claims (for fraudulent and negligent misrepresentation) in the New York proceedings do not stand, there will be no point in the English proceedings. UBS filed a motion in New York for an order dismissing the New York complaint on substantive grounds, alternatively dismissing or staying the action on jurisdictional grounds.
After Walker J's judgment, the New York judge acceded in part to UBS's motion to dismiss, but HSH has revived some of the relevant claims in an amended complaint, which is itself the subject of a further motion to dismiss by UBS on the ground that they are precluded by the res judicata effect of the New York court's judgment. That motion has been heard but not yet decided.
II Collateralised Debt Obligations
The background to the claim is that LB Kiel wished to invest in real estate related credit and asset backed securities which, at the time of the transaction in March 2002, were seen in the market as having outperformed similarly ratedetic CDO.
A CDO is a financial structure at the centre of which a special purpose vehicle (“SPV”) issues tranches of debt securities, the performance of which is linked to a portfolio of assets. The SPV may either hold the underlying assets (a “cash CDO”) or take exposure to assets such as corporate bonds or asset-backed securities via a credit default swap with a financial counterparty (a “synthetic CDO”). The performance of CDOs is linked or “referenced” to the pool of underlying bonds or securities, the “Reference Pool”.
In the case of a synthetic CDO the issuer may (as in the present case) invest the proceeds of issue of the CDOs in a portfolio of high quality, typically AAA-rated assets (“collateral”); those collateral assets are used to generate income to make coupon (interest) payments on the CDOs and, in the case of a default of any of the Reference Pool to which the SPV is exposed, to pay the financial counterparty the loss due under the credit default swap. On each occasion on which one of the assets in the Reference Pool defaults or is subject to some other “credit event” (such as a downgrading of its credit rating), then a payment becomes due from the SPV to the financial institution under the credit default swap. At the same time, the principal and interest due from the SPV to the CDO noteholder is correspondingly reduced. The usual practice is for CDO notes to be issued in different classes, whereby the losses are allocated sequentially commencing with the most “junior” tranche of notes until the original principal amount of such class of notes are written down to zero, and then losses are allocated to the next “higher” tranche of notes, until the entire capital structure is exhausted or the maturity date of the CDO notes occurs. As a consequence junior notes suffer as a result of earlier Reference Pool defaults/other credit events and the less risky “senior” tranches suffer loss only after the underlying classes of CDO notes have been reduced to zero principal value.
A common feature of actively managed CDOs is that one of the parties to the transaction has the right to alter the composition of the Reference Pool. Such a right potentially increases the risk for the holder of the CDO note, particularly if the party with the right to alter the composition of the Reference Pool has an economic interest in the transaction, as in the present case.
III The facts
In this case the SPV was set up by UBS, which was the financial institution under the credit default swap, and LB Kiel was the original holder of the CDO Notes issued by the SPV. The SPV used for the issue of the credit linked notes was a Cayman Islands company set up by UBS called North Street Referenced Linked Notes, 2002–4 Ltd (“NS4”).
NS4 issued notes which were denominated in United States dollars classified in three categories. The first category comprised $500 million of floating rate notes of classes A to D (“the NS4 Notes”). They were issued to and purchased by UBS so that UBS could sell them to LB Kiel as part of the transaction. The second and third categories comprised $25 million floating rate notes of class E (“the Class E NS4 Notes”) and $49 million fixed rate income notes (“the NS4 Income Notes”). They also were issued to UBS but were not involved in the transaction.
LB Kiel received the NS4 Notes which provided credit protection to UBS against certain credit risks in relation to the Reference Pool, which was a pool of international assets with an emphasis on U.S. commercial and residential real estate backed bonds and other asset-backed securities, selected by UBS.
The credit default swap with NS4 gave UBS the right to alter the Reference Pool within certain parameters. If UBS chose asset-backed securities of high quality and stability, LB Kiel would receive a steady stream of income based on performance of assets in the Reference Pool. In return UBS was to receive “credit protection payments” upon the happening of certain “credit events” to...
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