Short Reads

Universal Music: Locating purely financial damage

Universal Music: Locating purely financial damage

Universal Music: Locating purely financial damage

26.07.2016 NL law

Case C-12/15 of 16 June 2016, ​ECLI:EU:C:2016:449, Universal Music International Holding BV v Michael Tétreault Schilling and Others On 16 June 2016, the European Court of Justice (“ECJ“) ruled that in tort cases, in the absence of other connecting factors, jurisdiction cannot be attributed to the court of the Member State where purely financial damage occurred.

ECLI:EU:C:2016:449

International jurisdiction in civil and commercial matters

The guiding principle of the Brussels I Regulation is that the courts of the Member State in which the defendant is domiciled has jurisdiction. However, there are exceptions to this. In the case above, the relevant provision that could confer a special jurisdiction was Article 5(3) (Article 7(2) of the Brussels I Recast Regulation), which provides that in matters relating to tort the defendant may be sued in the courts of the place where the harmful event occurred or may occur. Following EU case law, this covers both the place where the damage has occurred (Erfolgsort) and the place of the event giving rise to it (Handlungsort).

In case of purely financial loss, it can be rather complicated to determine the place where the harmful event occurred or may occur. In Universal Music the parties involved disagreed on the determination of the place where the damage occurred.

The facts

Universal Music agreed to purchase the Czech record company B&M in 1998 following negotiations with B&M’s shareholders. The main features of the transaction were set out in a letter of intent. The parties agreed upon the purchase of 70% of the shares of B&M and concluded a share option agreement for the remaining 30%. When Universal Music bought the remaining 30% of the shares in 2003, the formula included in the share option agreement to calculate the purchase price resulted in a much higher price than originally intended.

The case was taken before a Czech arbitration board and the parties settled their dispute for a price five times higher than Universal Music’s intended purchase price. Universal Music brought proceedings before a District Court in the Netherlands seeking to hold the Czech law firm that drafted the share option agreement liable for the difference in costs between the intended price of the shares and the settlement amount plus the costs for the arbitration proceedings and the settlement.

Preliminary questions

Universal Music argued that the Dutch courts had jurisdiction as it paid the settlement amount and the costs associated with the arbitration and settlement out of its assets in the Netherlands, where it is established. The District Court and the Court of Appeal ruled that the Dutch courts did not have jurisdiction. The Supreme Court decided to refer questions to the ECJ for a preliminary ruling.

The first question was whether the ‘place where the harmful event occurred’ (Erfolgsort) 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.

The ECJ first emphasized that the rule of special jurisdiction must be interpreted independently and strictly. According to settled case law, the rule is based on the existence of a particularly close connecting factor between the dispute and the courts for the place where the harmful event occurred.

Subsequently, the ECJ reiterated that the rights and obligations of the parties, including the obligation for Universal Music to pay a greater amount than intended, were established in the Czech Republic. The damage resulting therefrom became certain in the course of the settlement agreed between the parties before the arbitration board in the Czech Republic. According to the ECJ, the loss of some assets happened in the Czech Republic as the damage occurred there. The mere fact that Universal Music paid the financial settlement by a transfer from a bank account held in the Netherlands, did not confer jurisdiction on the Dutch courts.

After referring to previous case law, such as Kronhofer (ECLI:EU:C:2004:364) and Kolassa (ECLI:EU:C:2015:37), the ECJ concluded that it is only where the other circumstances specific to the case also contribute to attributing jurisdiction to the court for the place where purely financial damage occurred, that such damage could confer jurisdiction on the courts for that place. Unfortunately, the ECJ did not provide further guidelines and it remains uncertain what those other circumstances might be.

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