Dutch court rules that investors suffer investment loss in the market where securities are listed and traded

EU Law

On 29 January 2020, the Rotterdam District Court ruled on the question of which laws are applicable to the tort claims brought by (former) Petrobras investors against Petrobras (ECLI:NL:RBROT:2020:614). The Court applied the main rule of EU Regulation Rome II (the “Rome II Regulation”), which stipulates that the law applicable to claims in tort is the law of the country in which the harm suffered by the victim as a result of the tort occurs.

In applying that rule, the Court held that the investment loss suffered by individual investors should be located in the country of the market where the securities held by that investor were listed and traded. As the relevant Petrobras securities were traded in Brazil, Argentina, Germany and Luxembourg, it are the laws of these countries that govern the underlying tort claims – and not, as Petrobras c.s. had argued, the laws of over 150 countries, across which individual investors are domiciled.

The Petrobras collective action

The judgment was rendered in a collective action initiated by the Petrobras Compensation Foundation (the “Foundation”) against Brazilian oil company Petrobras, some of its (Dutch) subsidiaries, and former officers. The Foundation claims to represent the interests of investors who invested in Petrobras securities outside the United States before 28 July 2015. In the proceedings, the Foundation requested that the Rotterdam District Court declare that Petrobras, and several of its subsidiaries and former officers, acted unlawfully vis-a-vis its former investors. According to the Foundation, the defendants participated in a bribery scheme and published information that was misleading to its investors. The Foundation claims that the investors suffered investment losses as a result of the alleged fraud and the misleading information, as the share price of Petrobras dropped significantly once the alleged fraud became known to the public.

In September 2018, the Court ruled it had jurisdiction to rule on most of the claims brought forward by the Foundation (see our post regarding this judgment here). The main question addressed by the present judgment is which legal systems apply to the claims of the investors whose interests the Foundation seeks to represent.

Court analysis regarding applicable law

The alleged tortious acts took place between 2004 and 2014. Since the Rome II Regulation only covers acts committed after 11 January 2009, the Court held that the applicable law for claims concerning acts committed before that date must be determined in accordance with the rules of the Dutch act that preceded the Rome II Regulation (the Wet conflictenrecht onrechtmatige daad).

Applicable law under the Rome II Regulation

Article 4(1) of the Rome II Regulation stipulates that the law applicable to a non-contractual obligation arising out of a tort shall be “the law of the country in which the damage occurs ... irrespective of the country or countries in which the indirect consequences of that event occur”. Thus, the location of the ‘direct’ damage resulting from the (alleged) tort determines the law that is applicable to the claim (the “locus damni”). In cases involving (alleged) pure economic loss, litigants frequently disagree on where the direct loss is located. Petrobras c.s. argued that any loss suffered by individual investors occurred in the place where those investors had their bank accounts or investment accounts. Since the investors whose interests the Foundation seeks to represent are domiciled all over the world, Petrobras’ argumentation implied that the investors’ claims would likely be governed by over 150 legal systems.

Loss occurs on market where securities are listed and traded

The Rotterdam Court disagreed with Petrobras c.s. In the Court’s view, the initial loss suffered by investors consisted of the depreciation of the market value of the relevant securities, and this depreciation occurred in the location of the market where the affected securities were listed and traded. Consequently, claims for compensation of the loss suffered in relation to those securities are governed by the laws of the place where an individual investor’s securities were listed and traded.

Place where investor held bank account not in itself determinative

The Court thus rejected Petrobras’ argument that the laws of the country in which an individual investor had his or her bank account should apply to their claims for compensation of their investment losses. In reaching this outcome, the Court cited case law from the Court of Justice of the European Union (“CJEU”) regarding jurisdiction under Article 7(2) of the Brussels I Regulation (Recast), starting with Kronhofer (2005), Kolassa (2015), and cumulating in Universal Music (2016). This case law is relevant, as its concerns the same criterion as used in Rome II (‘country in which the damage occurs’). In addition, the recitals of Rome II stipulate that similar provisions in the two regulations must be interpreted consistently with one another. The case law of the CJEU clarifies that the fact that a bank (or investment) account is held in a certain place can be a relevant circumstance in determining where a victim suffered (financial) loss. In the Universal Music judgment however, the CJEU held that in the absence of other factors pointing to that location, the fact that a bank account was located in a particular location did not justify the finding that the alleged victim of a tort resulting in financial loss had suffered loss in that same location (see our post regarding Universal Music, here).

Referring to this case law, the Rotterdam Court ruled that the place where the bank account of an investor was located was not in itself a determinative factor for establishing that loss was suffered there for the purpose of Rome II. The Court reasoned that, absent other connecting factors, the relevant loss cannot be said to have occurred in an investor’s bank account, as the location of that bank account would not necessarily have any connection to the relevant facts of the case.

Foreseeability of the applicable law

Moreover, the Court reasoned that the place where an investor held their bank account depends on coincidental circumstances, which could be influenced unilaterally by the investor and which might differ over time (as an investor may switch bank accounts). Therefore, the Court observed that this place, and therefore the applicable law, would not be foreseeable for Petrobras. By contrast, the location of the markets on which the securities were listed and traded, could be presumed to be known by both Petrobras and the investors, and would therefore be foreseeable for those involved. Overall, the Court found that its solution served both the interests of legal certainty (foreseeability of applicable law) and the predictability of court verdicts; both objectives pursued by the Rome II Regulation.

In conclusion, the Court found that the law of those countries in which Petrobras securities were listed and traded was applicable to the investors’ claims concerning the period after 11 January 2009. This means the law of Brazil, Argentina, Germany and Luxembourg (and possibly other jurisdictions in which Petrobras securities were traded).

Applicable law regarding claims that pre-date 11 January 2009

Regarding the claims that were subject to the Dutch act on applicable law (the Wet conflictenrecht onrechtmatige daad), the Court applied Article 3 of that Act. According to this provision, the applicable law on a claim in tort is the law of the place where the tortious act was committed (the “locus delicti (commissi)”). Since most of the alleged fraud took place in Brazil, the Court found that Brazilian law applies to the claims resulting from torts committed before 11 January 2009.

Assessment of the Court’s ruling

Deciding where investors suffered an alleged loss – and, more generally, where pure economic loss has occurred – is a difficult task. This difficulty mainly stems from the fact that financial loss rarely has a clear ‘location’. In contrast to injury or damage to property, precisely where harm to financial assets has occurred cannot be easily determined.

Arguably, the Rotterdam District Court’s approach meets one of the key objectives of the Rome II Regulation: providing legal certainty by allowing parties to foresee which legal system(s) will be applicable to their conduct. The location of the market on which the securities were listed and traded is foreseeable both for investors (potential victims) and listed companies (potential tortfeasors). Furthermore, in rejecting the notion that the location of the investor’s individual bank account should be a determinative factor, the Rotterdam Court avoided a situation which would allow investors to unilaterally influence which law governed their claims, by choosing to open bank or investment accounts in jurisdictions that may be perceived as ‘claimant-friendly’ but that do not otherwise have a close connection to the conduct that is at issue.

The Rotterdam Court rejected the investors’ bank accounts as a relevant connecting factor, and opted for the ‘market approach’, with reference to the case law of the CJEU on article 7(2) of the Brussels I Regulation (Recast), specifically the CJEU’s judgment in Universal Music (2016). Meanwhile, further CJEU case law on jurisdiction in cases concerning pure economic loss can be expected. In September 2019, the Dutch Supreme Court referred preliminary questions to the CJEU in the case of VEB/BP (the reference judgment can be found here). The Supreme Court asked whether Dutch courts can assume jurisdiction on the basis of article 7(2) of the Brussel I Regulation (Recast) over claims for compensation of investment losses suffered in relation to securities purchased on foreign stock markets, based on (allegedly) misleading statements by the listed company whose securities are traded (only) on those foreign markets.