Judgment - Kleinwort Benson Limited v. City of Glasgow District Council   continued

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Article 5(3)

      Before the Appellate Committee, Mr. Pollock Q.C. for Kleinwort advanced a brief argument to the effect that Article 5(3), which is concerned with "matters relating to tort, delict or quasi-delict" and places jurisdiction in the courts for the place "where the harmful event occurred or in the case of a threatened wrong is likely to occur" applied in cases of unjust enrichment, and was therefore applicable in the present case. This argument is impossible to reconcile with the words of Article 5(3), if only because a claim based on unjust enrichment does not, apart from exceptional circumstances, presuppose either a harmful event or a threatened wrong. The argument was based on a misreading of paragraph 2(a) of the Ruling of the Court of Justice in Kalfelis v. Schröder Case 189/87 [1988] E.C.R. 5565, 5587, a misreading which is plainly inconsistent with paragraph 2(b) of the same Ruling (which I have referred to earlier in this opinion). There is, in my opinion, no substance in the point, which was rightly rejected by Leggatt L.J. in the Court of Appeal.


      May I by way of postscript express my indebtedness to the Written Observations of Germany to the Court of Justice in the present case, prepared by Professor Dr. Christof Böhmer. These Observations are of particular relevance because, as appears from the Jenard Report, the wording of Article 5(1) of the Convention was influenced by German law. It is of significance that, as Dr. Böhmer records, the unanimous view in German case law and literature has hitherto been that Article 5(1) does not cover claims based on unjust enrichment. He does not however specifically consider the case where money has been paid under a valid contract, and it is sought to recover such money on the ground of failure of consideration, following upon a breach of contract by the defendant.


      For the reasons I have given, I find myself to be in agreement with the conclusion reached by Hirst J., and by Leggatt L.J. in his dissenting judgment in the Court of Appeal. I would, therefore, allow the appeal, with costs before your Lordships' House and below, and restore the order of Hirst J.


My Lords,

      I have read the speech which will be delivered by my noble and learned friend, Lord Nicholls of Birkenhead. I agree with it, and have nothing to add.


My Lords,

      This appeal raises the question whether a restitutionary claim in respect of money paid in purported performance of a contract, subsequently found to be null and void because of the lack of capacity of one party, is within article 5(1) of the Brussels Convention on jurisdiction and the enforcement of judgments in civil and commercial matters (as modified for allocation of jurisdiction within the United Kingdom by schedule 4 to the Civil Jurisdiction and Judgments Act 1982). It is a short but teasing question of construction.

      The proper approach to the interpretation of the Convention is well established. The basic jurisdictional provision is article 2: persons shall be sued in the courts of the contracting state where they are domiciled. Article 5, like other articles conferring a special jurisdiction, is a derogation from the basic provision and should be construed restrictively. The rationale of article 5 is the existence, in "certain clearly defined situations", of a particularly close connecting factor between a dispute and the court called upon to hear it. In those situations the plaintiff may opt to choose the special jurisdiction, with a view to the efficacious conduct of the proceedings: see Bier v. Mines de Potasse d'Alsace, Case 21/76, paragraphs 10-11, [1976] E.C.R. 1735, 1745-46, and Peters v. ZNAV, Case 34/82, paragraph 11, [1983] E.C.R. 987, 1002. In the case of contractual matters, the place of performance of the obligation in question usually constitutes the closest connecting factor between the dispute and the court having jurisdiction over it: hence the terms of article 5(1). When more than one contractual obligation is in issue, the principal issue determines the jurisdiction: see Shenavai v. Kreischer, Case 266/85, paragraphs 18-19, [1987] E.C.R. 239, 256.

      The phrase "matters relating to a contract" in article 5(1) is an independent Convention concept, but the European Court has not yet given any basic definition of the concept or its scope. The article itself gives little guidance. The second limb of article 5(1) identifies the close connecting factor in these terms: " . . . in the courts for the place of performance of the obligation in question". Bearing in mind the need to construe the ambit of this special jurisdiction restrictively, this wording might suggest that, despite the apparent width of the concept, to be within article 5(1) the dispute must relate solely to the performance of a contractual obligation, and that other contractual disputes are not within the special jurisdiction because they would lack any connection with the place of performance.

      This beguilingly simple approach cannot withstand even the most superficial examination. Not only would it cut down the ambit of article 5(1) by removing from its scope many disputes normally regarded as contractual matters: for instance, a dispute over whether a contract complied with prescribed formalities, such as the need for writing. This construction would also produce capricious practical results inconsistent with the underlying aims of the Convention and with the pragmatic interpretation given to it by the European Court of Justice. The court has emphasised the importance of certainty. In Custom Made Commercial v. Stawa Metallbau, paragraph 15, Case C-288/92, [1994] E.C.R. I-2913, 2956, the court said:

     "The place of performance of the obligation was chosen as the criterion of jurisdiction because, being precise and clear, it fits into the general aim of the Convention, which is to establish rules guaranteeing certainty as to the allocation of jurisdiction among the various national courts before which proceedings in matters relating to a contract may be brought."

The Court has also drawn attention to the desirability of the whole of a single dispute being resolved by one court. In the Peters case, at paragraph 17, the European Court observed:

     "It should be noted that multiplication of the bases of jurisdiction in one and the same type of case is not likely to encourage legal certainty and effective protection throughout the territory of the Community. The provisions of the Convention should therefore be interpreted in such a way that the court seised is not required to declare that it has jurisdiction to adjudicate upon certain applications but has no jurisdiction to hear certain other applications, even though they are closely related."

      Not surprisingly, the European Court has rejected the narrowest interpretation of article 5(1). Article 5(1) is not confined to the determination of disputes relating strictly to a performance obligation. The jurisdiction is wider than this, because the jurisdiction under article 5(1) is not ousted by a dispute between the parties over the existence of the contract sought to be enforced: see Effer v. Kantner, Case 38/81, [1982] E.C.R. 825.

      This decision shows that, at least for the purpose of establishing jurisdiction, the court of the place of performance of a contractual obligation can also decide a dispute relating to the existence of a contract even though this may raise issues having no particular connection with the place of performance. Disputes over the existence of a contract cover an exceedingly wide range: whether the parties were ad idem, whether there was an intention to create legal relations, whether the parties had legal capacity, whether apparent agreement was vitiated by mistake or misrepresentation or undue influence, whether the making of the contract was illegal. These issues on the formation of a contract do not necessarily have a connection with the place of performance of the contractual obligation being sued upon by the plaintiff. Nevertheless, for reasons of obvious good sense and convenience, these issues may fall within the competence of the court of the place of performance as much as a dispute focused more narrowly on failure of performance.

      Against this background I approach the question of construction arising in the present case. I say at once that the feature which ultimately has weighed heavily with me is the unattractive practical difficulties which would result from the narrow interpretation urged by the appellant local authority. I can illustrate these difficulties most easily by taking a simple case where D agrees to carry out work for P. P makes part payments in advance. Subsequently D asserts that the agreement was ultra vires because he lacked legal capacity to enter into such a contract. He declines to carry out the work and he refuses to return the part payments. Clearly, if P sues D for damages for non-performance, article 5(1) would apply. The jurisdiction of the court of the place where the work was to be done would not be displaced by the ultra vires dispute. The court would determine the ultra vires issue.

      Suppose next that P, anxious to dispose of this dispute once and for all, adds an alternative claim. He wishes to recover the money he has already paid, should the court uphold the ultra vires defence. So, as an alternative to damages for breach of contract, he seeks repayment of the part payments on the footing that there is no legally-binding contract. This alternative claim is not based on any term of the contract: the contract is a nullity. The claim is a restitutionary claim.

      To my mind it is really unthinkable that such an alternative claim should lie outside article 5(1). The Convention is concerned to promote the efficacious conduct of proceedings and to avoid multiplicity of closely related proceedings in different contracting states. It would be surprising and unfortunate if, having decided that the contract is null and void, the same court cannot proceed to decide on the restitutionary consequences following directly from this. What matters is not whether the consequential relief is classified by English or Scottish law or the law of some other contracting state as part of its national law of contract or part of its national law of restitution. What matters is that, however labelled, the relief is no more than part of the effective determination of a dispute relating to a contract. It is one facet of a single dispute.

      The application of article 5(1) in this situation would not take the article beyond its underlying rationale. Contracts are consensual arrangements. Part payments made in advance in purported performance of a contractual obligation are likewise made and accepted on an agreed, consensual basis. They are made on the terms of that contract, and they are explicable only by reference to those terms. This remains so, even if subsequently the contract if found to be void in law. As Millett L.J. observed in the Court of Appeal ( [1996] 2 A.E.R. 257, 274), when parties act pursuant to such a contract, the intended place of performance is no less a relevant connecting factor because the contract is afterwards found to be void.

      The next step in this line of examples is to assume that P reverses the order in which he makes his two claims in the proceedings. D is constantly prevaricating, sometimes saying there is a contract, sometimes not. The primary claim brought by P is for restitution on the footing that there is no binding contract. His alternative claim is for damages for breach of contract. Here again, to my mind it would be surprising if this reversal of the order of presentation of the alternative claims affected the application of article 5(1), so that the dispute would be within the article if the claims were formulated in one order in the proceedings but not if the identical claims were presented in a different order.

      The penultimate step in this sequence is to consider whether the outcome would be different if, in the previous example, the alternative claim for damages for breach were omitted. The answer must surely be no. If a claim for restitutionary relief in respect of payments made in purported performance of a contract is a matter relating to a contract within the meaning of article 5(1), this must be so irrespective of whether there is also an alternative claim based on the existence of the contract.

      In this series of simple examples there can be no sound distinction between one example and another. The repayment claim falls within article 5(1) in all the examples or in none. If none, there will be considerable practical inconvenience in some cases in seeking to separate a claim based on breach of contract from a claim for repayment of money paid in purported performance of a contract. Further, in practice the positions of parties often shift as cases proceed and the issues change. Courts and parties could find themselves hamstrung after a case has been properly and reasonably started in one country in reliance on the article 5(1) jurisdiction. The narrow view would obstruct rather than advance the Convention objectives of promoting certainty and finality.

      This is not surprising. At root the narrow view seeks to draw a line between cases where relief is sought for non-performance of a contractual term and all other cases. This would mean that when the existence of the contract is disputed, a claim for damages for breach of contract is within the article but not a claim for relief consequential upon a successful defence that the contract is void or ought to be set aside. This, in turn, means that the narrow interpretation ascribes to the court an incomplete role in what is a common enough situation.

      This is unattractive. It is not a conclusion compelled either by the language of the article or, more importantly, by its underlying rationale. As to the language, all that need be said is to repeat that a dispute over the existence of a contract is one of the commonest types of disputes relating to contracts. Claims to set aside contracts are also of everyday occurrence. Such disputes would fall naturally within the words used in article 5 when defining its ambit: "matters relating to a contract". Claims for consequential relief are an integral and unexceptional part of the resolution of such disputes by the court. In short, a dispute over the existence of a contract and, if it is held to be void, over the consequences for payments already made under the contract, is as much a dispute "relating to a contract" as a dispute over the existence of a contract and, if it is held to be valid, over the consequences of non-performance.

      The application of the second limb of article 5(1) in such cases is not quite so obvious because the repayment claim is not based on a contractual obligation. In such cases, however, where the existence of the contract is in dispute, the "obligation in question" can be read, without undue straining of language, as a reference to the obligation whose existence is in dispute.

      In argument before your Lordships' House much reliance was placed on observations repeatedly made by the European Court to the effect that the obligation referred to in article 5(1) is the contractual obligation which forms the actual basis of the legal proceedings. These observations, however, were directed at a different point. In de Bloos v. Bouyer, Case 14/76, [1976] E.C.R. 1497, and also in Shenavai v. Kreischer, Case 266/85, [1987] E.C.R. 239, the question was which contractual obligation was the relevant one for the purposes of the article. Custom Made Commercial v. Stawa Metallbau, Case C-288/92, [1994] E.C.R. I-2913, concerned identification of the place of performance of an obligation. These observations cannot be read as indicative of the thinking of the European Court on the altogether different issue now under consideration. That would be a misuse of authority.

      Nor is the narrow interpretation compelled by the rationale underlying the article. I have already touched upon this. I add only that it is, of course, true that the issues arising on claims for consequential restitutionary relief may have little or no particular connection with the place of performance of the contractual obligation whose existence was disputed. However, as noted above, it is now established that the issues coming before the court identified in article 5(1) can include issues falling outside the connecting factor upon which that article fastens.

      One final step remains to be taken, having regard to the unusual facts of the present case. After P has paid D in purported performance of the contract, the nullity of the contract is established in other proceedings. Thereafter there is no dispute between the parties over the nullity of the contract. The dispute between the parties is confined to the consequences directly flowing from the nullity. P claims to be entitled to repayment, by way of restitution. D denies this. I find it difficult to see on what basis this reduction in the ambit of the dispute can have the consequence of taking outside article 5(1) a dispute otherwise within the article. If the whole is within the article, so should be a part of that whole. There can be no justification for distinguishing between repayment claims where nullity is disputed and repayment claims where nullity is no longer in dispute.