ROME II – Opportunities And Risks For The Financial Sector

This alert reports a French case that relates to a hedge fund registered in the Cayman Islands, the investment agreement of which was governed by Cayman law, and where the actions complained about (withdrawing from the fund) were arguably strongly connected with the Cayman Islands. Yet, applying Rome II, the Paris Court of Appeal held that the law applicable to the action was French law because the damage resulted from orders given in France and damage was suffered by a French entity.

The EU Rome II Regulation1 on the law applicable to torts has been in force for close to five years. Appellate jurisdictions in the EU are just starting to grapple with the core principles contained in it. The decision of the Paris Court of Appeal,2 involving claims totalling €60 million brought by an investment fund and a fund manager against a bank, demonstrates the importance of understanding how Rome II operates and how it may impact on financial structures in the EU.

ROME II

Applying Rome II, since 11 January 2009, EU courts (excluding Denmark) have been applying the same set of rules to determine the law that governs non-contractual obligations. Rome II marked a change of approach in most EU countries compared with the applicable laws in force prior to its introduction.

Pursuant to Rome II, the general rule (art 4(1)) is that the law applicable to a tort (a wrongful act) will be the law of the country in which the damage occurs. Prior to Rome II, the place where the tort took place (lex loci delicti) was the relevant touchstone for most EU jurisdictions. The Rome II formulation is generally viewed as being favourable to the victim of an alleged cross-border tort. Rome II offers greater prospect of foreign tort laws being applied to domestic acts, where foreign interests are adversely affected by such acts. This is of particular concern to UK-based entities where the loss in question is pure economic loss, as is typically the case when financial structures are in issue. Under English law, pure economic loss is not readily recoverable in tort. But such losses may well be recoverable where foreign tort law applies.

The Paris Court of Appeal Decision

Within a complex financial structure, a Cayman Islands-based master fund (Maximus) and its French-based fund manager (Anakena) brought a claim against Natixis, a well-known French bank. The claim arose in the wake of the Lehman Brothers' liquidation in 2008. Natixis was a shareholder in two Cayman Islands hedge...