England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
On appeal from Master Moncaster

		Claimants / Respondents Defendants / Appellants
		25 July 2007

1. This is an appeal from the Judgment of Master Moncaster who on the 14^th March 2007 dismissed an application by the various defendants to set aside service on them in Germany and Switzerland respectively of proceedings claiming damages for breach of contract and misrepresentation.
2. The issue for determination by the Master was whether (i) a warranty given by a third party to a purchaser of intellectual property rights as to the nature of those rights could be an obligation with a place of performance within Article 5(1) of the Lugano Convention and the Judgments Regulation; and (ii) whether the place where damage was sustained as a result of misrepresentation was the place where the contract induced by the misrepresentation was executed and/or completed under Article 5(3) of the Conventions.

The underlying facts can be shortly stated.

The Facts:

3. By an Agreement dated the 23^rd June 2000 the first claimant agreed to acquire a catalogue of musical sound recordings, master-tapes, information relating to the recordings, intellectual property, various trade marks and licences and some debts ("the Transferred Assets") from the administrative receivers of Point Classic (UK) Limited. The second claimant took an assignment of the benefit of the Agreement on 1^st November 2000.
4. Neither the administrative receivers nor Point Classic gave any warranties in relation to the property sold under the Agreement. However, by clause 7 of the Agreement for consideration the second to fifth defendants provided a number of warranties to the vendors and the Purchaser, including warranties that

i. The authorisation contracts for the recordings are valid and there are no collateral agreements relating to rights of the performers capable of being detrimental

ii. The licence agreements granting third parties rights in the Catalogue are valid ...

iii. The Mastertapes have been kept in proper custody and are in a physical condition which did not impair the reproduction quality ....

iv. Schedule 2 to the Agreement is a true and complete list of all the Licences and their principle terms. ....

5. Completion took place on 23^rd June 2000, the same date as the Agreement was executed at the offices of the Receiver's Solicitors (in London), on which date it was provided that

"the Company shall [inter alia]

i. deliver to the Purchaser those Transferred Assets title to which is capable of transfer by delivery save for the Mastertapes;

ii. Hold all other Transferred Assets on trust for the purchaser absolutely pending their assignment;

iii. Execute and deliver an assignment in the Agreed Form of the Intellectual Property;

iv. Deliver to the Purchaser a release executed by the Bank of the Transferred Assets from the Security.

6. As regards Mr Mittrich, he was required

"within 7 days of Completion to deliver to the Purchaser a letter from C&T Studio ^[1] confirming that it holds the Mastertapes in its possession and that it shall not release such Mastertapes to anyone other than the Purchaser".

Alleged Breaches:

7. It is alleged in the Particulars of Claim that from about 2004 the second claimant has discovered the existence of agreements, licences and/or sub-licences whose existence constitutes a breach of the various warranties, particularly that in paragraph 4 iv above. The warranties are said to be of vital importance to the claimants because the subject matter of these warranties was determinative of the commercial value of the Transferred Assets; so, for example, if there existed other rights in the Catalogue other than those disclosed, the value of the Catalogue would be lower in consequence. The second claimant therefore was bringing the action for damages for breach of contract; it was also alleging that the warranties were also misrepresentations which induced the contract and were later incorporated into it; it therefore also claims damages for misrepresentation.

THE CONVENTIONS:

8. The Lugano Convention governs service out of the jurisdiction of England & Wales of proceedings against the second and third defendants who are domiciled in Switzerland. The Judgments Regulations govern service on the fourth and fifth Defendants who are domiciled in Germany. The terms of each are virtually identical. For convenience I shall refer only to the relevant terms of the Lugano Convention.
9. The basic rule is that persons are to be sued in the Courts of the State in which they are domiciled. By way of derogation from the basic rule there are two exceptions with which the present case is concerned:

i. By Article 5(1) ["A person domiciled in a Contracting State may, in another Contracting State, be sued] in matters relating to a contract, in the courts for the place of performance of the obligation in question".

ii. By Article 5(3) ["A person domiciled in a Contracting State may, in another Contracting State, be sued] in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred".

10. Service was effected on the defendants out of the jurisdiction. Each then applied to the Master for a declaration that the court had no jurisdiction over the claims and for an order that the proceedings be set aside or stayed.
11. The basis of these applications was that, as regards the contractual claim, the defendants' warranties were statements and promises as to a state of affairs existing at the time when the parties entered into the Agreement; that these statements or promises did not impose any contractual obligation capable of 'performance', that is to say, they were not, and did not create, obligations that carried with them a performance obligation. Accordingly, England was not and could not be "the place of performance of the obligation in question".
12. As regards the claim in tort, the defendants contended that the harmful event did not occur within the jurisdiction. The misrepresentation was made at the time when, and place where, Mr Mittrich signed the document containing the alleged misrepresentation; this event occurred in Spain. The damage consisted of damage to the intellectual property rights in consequence of the breach of warranty; those rights subsisted worldwide; to the extent that they were damaged, the damage was sustained in every country of the world and not just (or predominantly) within the jurisdiction. Accordingly, England could not be "the place where the harmful event occurred" for the purposes of Article 5(3).
13. The application came before Master Moncaster on 14^th March 2007: he dismissed the application. In a short but reasoned judgment he held (i) that the obligation under the warranties came into effect upon the making of the Agreement in London and therefore London was the place of performance of the warranties; (ii) that the loss by reason of the misrepresentation having been made occurred when the claimants paid money and entered into the Agreement, which they did in London. He gave permission to appeal. The appeal is of course one to which Part 52.11 applies and therefore is one which proceeds by way of review rather than rehearing, though in a case like this where the issue is one of pure law the difference may be immaterial.

The defendants' case:

14. The defendants say that Master Moncaster misdirected himself in the following respects: (i) as regards the contractual claim, in finding that the Convention and the Regulations do not contemplate obligations without a place of performance and that the warranties given by the defendants were capable of having a place of performance when, on the contrary as here, a warranty as to a state of affairs does not imply an obligation to perform anything; and (ii) in failing to identify the place (rather than the time) of performance and the fact that where, as here, the claimants had acquired 'damaged' intellectual property rights subsisting worldwide, the damage was suffered worldwide and not in England.

THE PROPER APPROACH TO THE CONVENTION:

15. The following general principles of law were set out in the Skeleton Submission of Mr Charles Samek, who appeared for the claimants/respondents, were stated to be uncontroversial, and were agreed to be correct by Mr Gregory Banner for the defendants/appellants.

i) The threshold for establishing jurisdiction under the Conventions

a. The second claimant is required to establish only that it has a "good arguable case" that one of the special jurisdictional provisions applies: a lower threshold than on the balance of probabilities: Canada Trust Co. v Stolzenberg (No. 2) [2002] 1 AC, 13 E-H.

b. So far as the threshold for the merits of the underlying claim is concerned, the second claimant must show only a serious issue to be tried: ET Plus SA v Welter [2006] EWHC 2115 (Comm.) para. 59 (iii). There is no dispute on the evidence that the second claimant can pass this threshold.

ii) Article 5(1) Lugano Convention / Article 5.1(a) Judgments Regulation ^[2]

c. "Matters relating to a contract" is an expression which has an 'autonomous' meaning: Martin Peters Bauunternehmung GmbH v Zuid Nederlanse Aannemers Vereniging (Case 34/82), [1983] ECR 987.

d. A matter cannot relate to a contract if it is not "an undertaking freely entered into by one party in relation to another": Jakob Handte & Co GmbH v Soc. Traitements Meano-Chimiques des Surfaces (Case 26/91), [1992] ECR I-3967.

e. The "obligation in question" refers to "the contractual obligation forming the basis of the legal proceedings" or "the obligation . . . which arises under the contract and the non-performance of which is relied upon to support [the claim]": De Bloos Sprl v Bouyer SA (Case 14/76) [1976] ECR I-1497 at p. 1508, paragraph 11.

f. Where there is more than one obligation which is being sued on, the court will be guided by the maxim accessorium sequitur principale, so that the principal obligation (of those in question) will determine jurisdiction: Shenavai v Kreischer (Case 266/85) [1987] ECR 239, para. 19 and followed by the CA in Royal & Sun Alliance Ins v MK Digital FKE [2006] 1 Lloyd's Law Reports 110 at paras. 92 – 93. ^[3]

g. The obligation in question is the obligation to perform rather than the later obligation to pay money for failure to perform, ie. it is the obligation the breach of which gives rise to compensation which must be identified: De Bloos supra.

h. In determining the place for performance, the applicable law of the contract must be applied: Industrie Tessili Como v Dunlop AG [1976] ECR 1473 (repeatedly affirmed by the European Court – see Briggs & Rees 4^th ed. para. 2.137).

16. The Contractual Claim:

Although there was express agreement as to the principles as recorded above, there appeared to me to remain underlying disagreement as to the meaning, for the purposes of Article 5, of the term "obligation" and in particular "obligation to perform".

17. It is fair to say that a lawyer whose legal education and practice has been steeped in the common law would find that the ordinary canons of construction would appear to demand that the words "place for performance of the obligation in question" imply a state of affairs where the defendant in question has undertaken to do something which has not yet been done.
18. Mr Banner drew my attention to Viskase Ltd v Paul Kieffel [1999] 1 WLR 1305 where the Court of Appeal had to determine the 'place of performance' of a contract to supply machines. The machinery had been manufactured by the defendants in Germany for installation and use in a factory in the United Kingdom. The obligation in question was an express and/or implied condition that each machine and its associated equipment would be reasonably fit for the purpose for which they were purchased. The defendants argued that its obligation to supply machines which were reasonably fit for the purpose was performed at the defendant's factory in Germany, the place of delivery being stated in the contract to be "ex works". The claimants, on the other hand, had argued that performance of the contractual obligation was "the place where the obligation was in substance to be performed – that is to say in Sedgfield in England; and that the implied condition was a continuing warranty effective for the commercial life of the machine".
19. In his dissenting judgment in which he accepted the claimants' submission, Evans LJ drew attention to the

"conceptual difficulty in ascribing a place of performance to an obligation which does not require any act of performance by the contracting party, but is rather an acceptance of responsibility upon the occurrence or non-occurrence of an event. But this has to be done for the purposes of article 5(1), and in my judgment the alleged undertaking by the defendant that its machines would achieve certain production levels and efficiencies at the plaintiffs' factory in England can properly be regarded as a contractual obligation whose place of performance was in England. It is akin to a performance guarantee which in my judgment is "performed" or broken where the subject matter is situated at the relevant time.

Morritt LJ disagreed. But he did

"agree with Evans LJ that, regarded in isolation it is difficult, if not impossible, to ascribe any place for the performance of that obligation for, in isolation, it does not require Paul Kiefel to do anything. But if no place for performance can be ascertained then article 5(1) does not provide for any jurisdiction alternative to that of the domicile of the defendants and the appeal should be allowed on that ground alone."

However, he concluded that it was not appropriate to analyse the warranty in isolation from the other terms of the contract; it had to be construed with the other terms. He therefore agreed with Chadwick LJ, who took the view that there was only one answer to the question and said

"The obligation is to supply a machine which is reasonably fit for the known purpose. That obligation has to be performed at the time when the machine is supplied. … If the obligation has to be performed at the time when the machine is supplied, then the place at which it has to be performed is the place of delivery under the contract".

20. In their submissions to me the defendants relied heavily on the "conceptual difficulty" which Evans LJ had identified; and on the observation of Morritt LJ that "taken in isolation it is difficult if not impossible to ascribe a place of performance" to the warranty in question. They submitted that, in the instant case, it really was appropriate to look at the warranty in isolation because, by way of contrast to the position of the defendants in Viskase, these defendants were not the vendors of the intellectual property; they were responsible only for a warranty as to the existence of a state of affairs in relation to the rights sold; they had no obligations which they had to perform.
21. Mr Samek however urges me to conclude otherwise on the ground that the word 'obligation' and 'performance' in European jurisprudence have a subtly different meaning. He drew my attention to De Bloos Sprl v Bouyer SA (op. cit.) where the defendant company in France granted De Bloos Sprl in Belgium the exclusive right to distribute their products bearing the 'Bouyer' mark in Belgium. De Bloos complained of a unilateral breach of contract by Bouyer on the ground that it had infringed the exclusive concession by entering into negotiations in Belgium with another undertaking concerning the distribution of its products.
22. Now, the 'exclusive right' in De Bloos imported two obligations on Bouyer; one was to supply goods to De Bloos for sale in Belgium; the other was not to supply such goods to anyone else in Belgium, which Bouyer allegedly breached by entering into negotiations with another supplier. There was no discussion in the case whether there was an obligation (which there clearly was) which was capable of performance, even though it could be said to be performed only so long as Bouyer did not do anything positive to breach it.
23. He also drew my attention to Besix SA v Wasserreinigungsbau Kretzsschmar GmbH & Co KG (Wabag) and Anor [2003] 1 WLR 1113 where the European Court of Justice had to consider a covenant by parties to a consortium (consisting of the claimant Belgian company and the defendant German companies) that they would "act exclusively and not … commit themselves to other partners". When the German companies joined another consortium, the Belgian company attempted to bring an action for damages against them in the Belgian court, relying on Article 5(1). The Belgian courts held that it was the clear intention of the parties that the obligation should be honoured throughout the world, with the result that the places for its performance were particularly numerous. Since a single place of performance for the obligation in question must be identified for the purpose of Article 5(1), jurisdiction could not be assumed by the Belgian courts.
24. From these and other cases it seems to me to be the position that once a relevant "obligation", having contractual effect on which the claimant is entitled to rely and for breach of which he is entitled to claim relief in contract, is found to exist, the place of performance of the obligation in question is the place where,

i. if it is executory, the obligation is to be performed;

ii. if it is negative, the obligation is to be honoured;

iii. if it is a warranty as to an existing condition or state of affairs, the condition or state of affairs is required by the contract to exist.

25. If this is correct, it seems to me that there is no conceptual difficulty about there being a place of performance of a pure warranty as to the existence of a state of affairs appertaining, for example, to goods or other property which is being sold by a person other than the vendor. The only question is where the place of performance might be according to the law applicable to the contract.
26. It seems to me that one should look first to the terms of the contract to see whether that place has been specified. Failing which one must seek to extract from the contract as a whole such indications which point to the answer to the questions whether there is a place where compliance with the warranty is required by the contract, that is to say where the warranted state of affairs is required to exist.
27. It is at this point that it seems to me that a conceptual problem occurs where, as here, the property being transferred consists of intellectual property rights which, being intangible and incorporeal, might be regarded (in contrast to the machinery in Viskase) as difficult to 'locate'.
28. Mr Banner argued that one should not confuse the time for performance with the place for performance; and that in the case of intellectual property rights, even if the time for compliance with a warranty was on completion, the place of performance was in each location worldwide where the rights subsisted: if there were non-compliance because the rights transferred under the contract in, let us say, India and South America, were less than warranted, the non-performance must be regarded as being in India and South America where the rights subsisted and not in London where the assignment of the rights took place.
29. In the Agreement in question, the intellectual property rights were to be transferred by assignment at the time of completion. The claimants say that the place for compliance with the warranty was at the place of completion, which was in London.
30. It seems to me that where, as in the present case, the essence of the contract is the transfer of intellectual property rights, owned by a company registered in London and lodged as security with an English Bank, and the essence of the warranty is that the rights being transferred by assignment on completion are characterised by a specified level of licensing but no more, there is at the least a "good arguable case" that compliance with the warranty is required at the time and place where the transfer of the assets is effected, that is to say in London.
31. In these circumstances, I reject the submission that the Master misdirected himself as to the place of performance of the obligation. His conclusion was in my judgment correct.
32. The Tort Claim:

The following principles set out in Mr Samek's Skeleton Submission were also not in dispute:

(iii) Article 5(3) Lugano Convention / Article 5.3 Judgments Regulation

(1) In considering whether a claim concerns a matter "relating to tort, delict or quasi-delict" ("tort"), which has an autonomous meaning, there is to be excluded all claims that properly fall under Art. 5(1): Kalfelis v Bankhaus Schröder Münchmeyer Hengst & Co (Case 189/87), [1988] ECR 5565, paras. 15 – 18.

(2) Although a claim for misrepresentation is necessarily related to a contract it does not follow that it is a "matter relating to a contract" within the autonomous meaning in Art. 5(1): it depends upon the remedy which is sought. If the remedy sought is damages (as opposed to rescission), then the claim can be brought under Art. 5.3: Alfred Dunhill Ltd v Diffusion Internationale de Maroquinerie de Prestige SARL [2002] 1 All ER (Comm) 950, 965 a- h.

(3) The expression "where the harmful event occurred" covers two matters in respect of which a claimant need only satisfy one: (i) where the damage occurred; or (ii) where the event giving rise to the damage occurred: Handelswekerij GJ Bier NV v SA Mines de Potasse d'Alsace (Case 21/76) [1976] ECR 1735, 1746 – 1747, [1978] 1 QB 708, para. 19 & see Domicrest Ltd. v Swiss Bank Corp. [1998] 3 AER 577 at 589 f – g.

(4) "Damage" means damage in the direct sense and not financial loss consequent on the initial damage arising elsewhere: Marinari v Lloyds Bank plc [1996] 1 QB 217, paras. 14 – 15. See also London Helicopters Ltd. v Heliportugal [2006] 1 AER (Comm) 595 para. 20 & Raiffeisen Zentral Bank v Tranos [2001] I.L.Pr. 85.

(5) In a case of misrepresentation or misstatement:

i. the damage is likely to occur at the place where the misstatement or misrepresentation is received and relied upon: see London Helicopters at para. 25;

ii. the event giving rise to the damage is quite likely to be where the misstatement or misrepresentation originates: see Domicrest supra at 594 b – g (approved by the CA in ABCI v Banque Franco-Tunisienne [2003] 2 Lloyds Rep 146).

33. It is agreed that in order to establish jurisdiction it is necessary to prove that the "harmful event" occurred within England and Wales and for this purpose in the present case we are concerned with where the damage occurred. The defendants' principal submission is that the damage suffered by the claimants as a result of the misrepresentation was the transfer to them of damaged rights; since the intellectual property rights subsist worldwide, the damage which occurred was an impairment in the extent and value of those rights in each country in which such rights subsisted.
34. In my judgment the defendants' submission is incorrect. The point is this: the intellectual property rights were not damaged by the misrepresentation. In the Agreement the vendors were purporting to sell such rights as they retained in the intellectual property. If what the claimants allege in the Particulars of Claim is correct, it has transpired that they were able to transfer rather less than the defendants warranted. If one does choose to say - as the defendants appear to say - that the value of the rights they in fact transferred was impaired, damaged or devalued, one ought to be scrupulous about noting that the impairment, damage or devaluation was a consequence of antecedent lawful transactions, that is to say by the sale or grant of further licences or under-licences than had been disclosed to the defendants in Schedule 2 to the Agreement.
35. The alleged misrepresentations did not cause the impairment of, damage to or diminution in the value of the transferred rights. The misrepresentations allegedly induced the claimants to enter into the Agreement and, on completion, to take a transfer of the Transferred Assets. If this allegation is made out, the misrepresentations caused the claimants to suffer loss and damage at the time they entered into the obligation to take the transfer of the property at the agreed price which presumably was greater than the price which would have been agreed had the parties known the true facts.
36. The papers disclose that the parties entered into the Agreement on 23^rd June 2000 at the offices of the Receivers' solicitors in London and that Completion of the Agreement occurred at the same time and place. The terms of the Agreement, which presumably was performed, imposed on the claimants the obligation to make payment of the agreed price and take the Transferred Assets by delivery and/or execution and delivery of an assignment in the Agreed Form. On this basis it was their entry into the Agreement that both caused them to suffer and constituted their loss.
37. In my judgment therefore the Master did not misdirect himself on this issue as it applies to Article 5(3) and his conclusion is both unappealable and absolutely correct.
38. In these circumstances the defendants have failed on both limbs of their appeal from the decision of the Master and their appeal must therefore be dismissed with costs.

Note 1    Which were located in Amsterdam. Neither party argued that this was the “place of performance”.    [Back]

Note 2    The decided cases show no difference of approach between the Lugano Convention and the Judgments Regulation in relation to the application of the articles.    [Back]

Note 3    Cs should for the sake of completeness refer to Leathertex Divisione Sintetici SpA v Bodetex BVBA [1999] ECR 1I-6747 where it was held that there was special jurisdiction only over that part of the claim which arose from the obligation which was to be performed in the territory of the referring Court. This has been described as a “procedurally disastrous ruling” and judicial and academic preference is for the principal / accessory approach referred to in Shenavai. See also Dicey & Morris 14th ed. para. 11-291.    [Back]