On 4 October 2018 the European Court of Justice (ECJ) rendered a landmark judgment(1) on the jurisdiction for avoidance claims (actio pauliana) subsequent to a seizure of assets (ie, not in an insolvency context). The ECJ held that a party that enters into an allegedly avoidable transaction with a debtor can be sued by the debtor's creditor to avoid such transaction at the place of performance of the contract concluded between the debtor and its creditor.
Although ECJ decisions do not directly apply in Switzerland, the recast EU Brussels Regulation provisions on which this decision is based are similar to those of the Lugano Convention on Jurisdiction and Recognition and Enforcement of Judgments in Civil and Commercial Matters (dated 30 October 2007) (Lugano Convention).
Therefore, it is likely that the ECJ's opinion may be adopted by Swiss legal doctrine and precedent. As a result, parties domiciled in Switzerland may be targeted by avoidance claims in another signatory state of the Lugano Convention based on a contract to which they were not a party but that was merely concluded between the debtor and a creditor.
A Polish court requested a preliminary ruling from the ECJ as to whether the jurisdiction of an avoidance claim against a third party can be based on the contractual place of performance of a contract to which the defendant was not a party to under Article 7(1)(a) of the recast EU Brussels Regulation.
The ECJ held that the case at hand fell within the scope of the recast EU Brussels Regulation because the enforcement proceeding against the insolvent general contractor was terminated due to the lack of assets. Therefore, the avoidance claim did not derive directly from a bankruptcy or winding-up proceeding and was not closely connected with the proceedings for the liquidation of assets. For this reason, it was not excluded from the scope of the recast EU Brussels Regulation.
The ECJ further recalled the general principles of predictability and restrictive interpretation of jurisdictional provisions that deviate from the jurisdiction at the defendant's domicile pursuant to Article 4(1) of the recast EU Brussels Regulation. As an exception to this general rule, Article 7(1)(a) of the recast EU Brussels Regulation provides that in case of "matters relating to a contract", a person domiciled in an EU member state may be sued in the courts of another member state at the place of performance of the contract in question.
In the case at hand, the ECJ held that the avoidance claim raised by the claimant against the defendant originated from a breach of the contract between the claimant and the claimant's debtor (the general contractor). The ECJ opined that an avoidance action brought in connection with such a contract – even if it is directed against a third party who is not a party to this contract – constitutes a "matter relating to the contract" pursuant to Article 7(1)(a) of the recast EU Brussels Regulation. Therefore, this provision may establish jurisdiction for an avoidance action against a third party at the place of performance of the contract between a claimant and its debtor (the general contractor). In other words, the ECJ held that a person can be sued for the avoidance of a transaction at the place of performance of a contract to which it was not a party (and of which it was potentially not even aware) only because the party with which it entered into an allegedly avoidable transaction was party to such contract with its creditor.
As Switzerland is not an EU member state, persons domiciled in Switzerland are not subject to the recast EU Brussels Regulation. Instead, Switzerland, the European Union, Denmark, Iceland and Norway signed and ratified the Lugano Convention. Because the wording of the Lugano Convention is almost identical to that of the recast EU Brussels Regulation, Swiss scholars and courts often refer to ECJ case law when interpreting the Lugano Convention. As a result, ECJ case law on the recast EU Brussels Regulation is widely considered by Swiss legal doctrine and frequently followed by the Swiss courts.(2) Therefore, it will likely be argued that the ECJ's considerations in the case at hand would apply to the respective provision in the Lugano Convention.
Arguably, it is questionable whether the ECJ's considerations align with the principle of foreseeability of jurisdiction, which also applies in Switzerland. In the case at hand, it may not have been entirely unforeseeable for the Spanish defendant that it may be sued for avoidance claims in the state of the purchased property. However, if the claim's jurisdiction is based on the place of performance of a contract between the debtor and a third-party creditor (to which the defendant of the avoidance claim is not a party), it may frequently be difficult, if not impossible, for the defendant to anticipate where such claim may be brought.
That said, like the recast EU Brussels Regulation, the Lugano Convention does not apply to bankruptcy and similar proceedings aimed at liquidating all of a debtor's assets (Article 1(2)(b) of the Lugano Convention) and any proceedings arising therefrom. With respect to avoidance claims, the Lugano Convention applies only if the claim has not been triggered by the bankruptcy proceeding itself (eg, if an avoidance claim can be brought in other cases, such as in a seizure).
In addition to the Lugano Convention, the Swiss Debt Enforcement Act (DEBA) also deals with jurisdiction for avoidance claims. According to the DEBA, jurisdiction for avoidance claims against persons domiciled in Switzerland lies with the court at their domicile. If the defendant in an avoidance action is domiciled abroad, the DEBA provides for jurisdiction at the place of bankruptcy or seizure. If the defendant is not domiciled in Switzerland but in another Lugano Convention member state and the claim was not closely connected with the proceedings for the liquidation of assets, the Lugano Convention supersedes the DEBA. In this case, Swiss scholars suggest that the jurisdiction lies with either:
- the courts at the claimant's domicile (Article 2 of the Lugano Convention);
- the place where the harmful event occurred (Article 5(3) of the Lugano Convention); or
- the place of enforcement (Article 22(5) of the Lugano Convention).
The potential impact of the ECJ's findings on the jurisdiction for avoidance claims under Swiss law is that a defendant in an avoidance action may become subject to the jurisdiction at the place of performance of a contract between the debtor and its creditor regardless of the fact that the defendant was not a party to that contract. To date, this option has not been discussed among Swiss scholars. Rather, the jurisdiction at the place of performance was considered relevant for only the parties to the contract in question. Only in exceptional circumstances, if the contract was extended to third parties, the jurisdiction at the place of performance of such contract could also become relevant for such third parties.
In view of the ECJ's decision, a person domiciled in Switzerland could in principle be subject to the jurisdiction of a court in a Lugano Convention member state for an avoidance action at the place of performance of a contract between the debtor and its creditor. At the same time, the claimant-creditor of an avoidance action against a foreign third party could attempt to seize the jurisdiction of the Swiss courts if the place of performance of the contract between such claimant-creditor and the debtor lies in Switzerland.
While from a Swiss perspective this appears striking, it is doubtful how often this situation could arise in reality. As mentioned, the Lugano Convention does not apply to avoidance claims that were triggered by bankruptcy proceedings, which includes the vast majority of avoidance claims in Switzerland. In these cases, Article 289 of the DEBA prevails over the Lugano Convention and the jurisdiction remains at the plaintiff's domicile or the place of bankruptcy in Switzerland. The only scenario in which an avoidance action could be brought at the place of performance of the contract between the debtor and its creditors is a seizure of assets for which avoidance actions relatively seldom occur in Switzerland.
In light of the ECJ's decision, a person domiciled in Switzerland can no longer assume that an avoidance action may be brought only in foreseeable jurisdictions. Rather, a Swiss-domiciled party must assume that it could become subject to the jurisdiction of any Lugano Convention member state based on the place of performance under contracts between its contracting party and this party's creditors (of which in most cases it is not even aware).
Endnotes
(1) ECJ decision dated 4 October 2018, Feniks Sp zoo v Azteca Products & Services SL, Case C-337/17.
(2) For example, the Federal Supreme Court in BGE 138 III 386, cons 2.6, 391 et seq.
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