Finance Brief - 1 October 2013
- Upcoming changes to the Consumer Credit Regulation Regime
- Does a lender have to disclose commission paid to broker?
- When is default interest penal?
- Jurisdiction clauses: can the lender have it both ways?
- A Chink in the Corporate Veil?
- A Guide to Corporate Jet Finance
The typical jurisdiction clause in a loan agreement contains an exclusive submission to the jurisdiction of the English courts, but for the benefit of the lender (or finance parties), and on the basis that the lender may waive it and take proceedings in any other court or courts having jurisdiction. The clause is therefore deliberately asymmetrical, the commercial intention being that the lender should be able to take proceedings against borrowers or security providers in any jurisdiction in which they have assets (if that court accepts jurisdiction), while they should not be entitled to make life difficult for a lender seeking to recover what it has advanced by requiring it to take proceedings in a jurisdiction that is unduly "borrower friendly".
Concerns about the effectiveness of such provisions arose from a decision of the French Cour de cassation in Mme X v Rothschild in September 2012, which ruled that the unilateral nature of a one-sided jurisdiction clause meant that it did not meet the requirements of the Brussels I Regulation, and as a result was entirely ineffective. The Loan Market Association reported the decision to flag the possible risk for lenders.
Fortunately, that decision is not binding in England, and in a recent case the English court declined to follow it. The case involved a loan agreement originally subject to Mauritian law, but subsequently amended and restated under an agreement containing a typical one-sided English law jurisdiction provision. The borrower and guarantor argued that the provision, which was in substantially the form found in the LMA forms of loan agreement and widely used in loan documentation, was ineffective.
The court held that the amended and restated loan agreement was indeed subject to English law, meaning that the position under Mauritian law was irrelevant. The Rome I Regulation allows the parties to change the governing law of an agreement. Moreover, in this case the particular terms of the amendment and restatement resulted in a new loan agreement under English law, which replaced the old one.
Having decided that, the court had no problem with the provision under English law. It operated as a clear agreement to submit to the jurisdiction of the English courts, while preserving the lender's right to take proceedings in any court having jurisdiction. It did not purport to allow the lender to take proceedings in any court whatsoever. There was no reason under English law not to give effect to it. The court also cited with approval academic comment that such clauses are both commonplace and commercially reasonable. They contribute to the willingness of banks to lend and reduce the cost of finance, by minimising the risk that a debtor's obligations will be unenforceable.
Mauritius Commercial Bank Limited v Hestia Holdings Limited and another  EWHC 1328 (Comm).
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