Prospectus Liability: Determining the Competent Court and the Applicable Law in the EU

The recent Kolassa ruling by the Court of Justice of the European Union (‘CJEU’) is of great significance. For the first time, the court has decided on the competent court in prospectus liability disputes under the Brussels I Regulation. The decision has implications for a large number of cases.  Potentially, it could also impact the determination of the applicable law to prospectus liability under the Rome II Regulation.

The CJEU has chosen an unconventional approach in deciding the place where prospectus liability suits can be brought. It has held that the courts at the investor’s place of domicile will have jurisdiction provided that the bank managing the investor’s account is established there. Although the ruling answers some questions, it raises many more. In my paper, I try to analyse the various ambiguities of the decision.

First, I highlight that the CJEU has not clarified how the place of establishment of the bank is to be determined. Furthermore, the court makes the determination of jurisdiction subject to the caveat that the parties have not entered into a contract. In the view of the Court of Justice, this depends on the particularities of the holding system in which the securities are administered. This means that judges in Member States will from now on have to embark on a meticulous analysis of the different types of securities holding systems when determining their jurisdiction.

I criticize this result because it gives the holding system a much too prominent role. I argue instead that prospectus liability never falls under the consumer provisions or the contractual head of jurisdiction in the Brussels I Regulation (Recast) because such liability is delictual in nature. Contrary to the CJEU’s assumption, the particularities of the securities holding system do not play any role in the determination of the competent court.

Prospectus liability suits should be exclusively treated as tort cases for purposes of determining jurisdiction under the Brussels Ia Regulation. This means that Art 7(2) of the Regulation applies. The Kolassa decision’s most important part concerns this head of jurisdiction. In line with the famous precedent Bier v Mines de potasse d’Alsace, tort jurisdiction lies both at the place where the damage occurred and the place of the event giving rise to the damage, ie the place of conduct. With regard to identification of the place of conduct, the court in Kolassa hesitates between four different locations: the place where the decisions for the proposed investments were taken; the place at which the content of the relevant prospectuses was determined; the place in which the prospectuses were originally drafted; and the place where they were originally distributed. However, the relationships between these factors remains unclear. With regard to the place where the damage was suffered, the court’s mixing up of the place of domicile of the investor and the location of the bank that manages his account is unsatisfying and leads to problems. In particular, the court fails to elucidate how jurisdiction would be determined in case where the place of establishment of the bank is different from the place of the investor’s domicile.

The CJEU’s decision in Kolassa may also affect the law governing prospectus liability cases. Art 4(1) Rome II Regulation determines the applicable law by referring to the ‘law of the country in which the damage occurs’. This formula corresponds to the second prong of the Bier v Mines de potasse d’Alsace ruling, based on which the Kolassa decision localises financial loss at the domicile of the victim and the place where his bank account is located. If one were to transfer this interpretation to the Rome II Regulation, this would result in an atomization of the applicable law to prospectus liability cases. I consider these consequences of the Kolassa ruling as being even more important than those of the jurisdictional part. They are so drastic as to necessitate a reform of the Regulation itself. In this context, I draw a comparison to the US, which after Morrison v National Australia Bank helpfully restricted the extraterritorial applicability of its laws. The EU would be well advised to take some inspiration from this more modest attitude.

Matthias Lehmann is a Professor and the Director of the Institute for International Private and Comparative Law at the University of Bonn, Germany.