A narrow interpretation

Author: | Published: 11 Jul 2011

Since the collapse of several large financial institutions from 2008 onward, derivative counterparties have attempted to challenge a derivative contract and avoid losses by arguing the contract is ultra vires because the counterparty did not have legal capacity to enter the contract in the first place.

By raising this argument, foreign counterparties to an English law-governed derivative contract have also sought to invoke an EU regulation challenging the jurisdiction clause and seeking to have the proceedings heard in its home jurisdiction potentially on more favourable terms.

Article 22(2) of the Council Regulation (EC) No 44/2001 provides that in proceedings which have as their object the validity of the decisions of the organs of a company or legal person, the courts of the member state where the company or legal person has its seat have exclusive jurisdiction.

The European Court of Justice (ECJ) has recently considered this issue in an...