Issuers and investors beware: CJEU fails to locate financial losses

Issuers and investors beware: CJEU fails to locate financial losses

In its Kolassa/Barclays Bank decision, the Court of Justice of the European Union failed to clarify the existing uncertainties regarding the location of financial losses and might even have exacerbated them.

If a car crash happens in Paris, it is not exactly rocket science to conclude that the damage to the car has occurred in Paris. But establishing the location of the place where damage occurred is more difficult in cases that involve financial losses. Yet in litigation, this is critical for the determination of the competent court and the applicable law. In Kolassa/Barclays Bank, the CJEU has given a preliminary ruling on the location of financial losses.

Harald Kolassa (domiciled in Austria) invested in certificates issued by Barclays Bank plc (registered in the United Kingdom) through his online bank direktanlage.at (established in Austria). When the certificates transpired to be worthless, Kolassa brought proceedings against Barclays Bank in Austria claiming damages for his losses. The question arose whether the Austrian courts had jurisdiction under the Brussels I Regulation (establishing grounds for special jurisdiction in matters relating to tort). Accordingly, Kolassa’s financial losses needed to be located. The CJEU held that ‘the courts where the applicant is domiciled’ (i.e. the Austrian courts) have jurisdiction as the loss occurred ‘directly in the applicant’s bank account held with a bank established within the area of jurisdiction of those courts.’ The CJEU argued that this rule would strengthen the legal protection of both applicant and defendant.

In our opinion, Kolassa/Barclays Bank achieved the opposite: the CJEU failed to clarify and might have even exacerbated the existing uncertainties regarding the location of financial losses. First, the CJEU refers to the vague term ‘bank account’ and fails to specify whether it meant to refer to Kolassa’s cash account or to Kolassa’s securities account (we believe in the current case losses have been suffered in Kolassa’s securities rather than his cash account). In Kolassa/Barclays Bank, these accounts were held in the same place. However, it is conceivable that these accounts are separate and held with different entities. Therefore, it is problematic that the CJEU omits to indicate which connecting factor is of overriding importance. Second, the decision is at odds with the rationale of the Brussels I Regulation and with the traditionally reluctant stance of the CJEU to accept jurisdiction of the court of the claimant’s domicile. In that vein, any derogation from the principle that defendants should be sued in the courts of their own domicile should be based on a close connection between the court seised and the action. Such connection should avoid the defendant being sued in a place he could not have reasonably foreseen. In contrast, the location of a ‘bank account’ could be accidental, as it would depend on incidental factual circumstances (such as the place of the relevant financial institution’s back office), on the applicable (private international) law (which still differs from country to country), and could be influenced by the holder of the account. Therefore, the CJEU’s choice to use the relevant ‘bank account’ as connecting factor does not necessarily entail a close connection between the court seised and the action, while the defendant cannot reasonably foresee in which place he might be sued.

In the meanwhile, the Dutch Supreme Court has referred to the CJEU for another preliminary ruling on the location of financial losses in Universal Music International Holding BV/X. In light of the current state of affairs, one can only hope that the CJEU sees reason to reconsider or, at least, to clarify the decision on the location of financial losses that it rendered in Kolassa/Barclays Bank. This would be to the benefit of issuers and investors alike.

Want to know more? In our article “Waar zijn de effecten? Lokaliseren van vermogensschade na Kolassa” (AV&S 2015, nr. 5) we further explain earlier case law of the CJEU and how jurisdiction must be determined under the Brussel I Regulation.”