The blurred lines of contract: the actio pauliana is a ‘matter relating to a contract’ within the meaning of the Brussels I Regulation Recast, Article 7(1)

Guest blogger Michiel Poesen on CJEU’s recent decision in C-337/17 Feniks

This blogpost focusses on the CJEU’s recent decision in C-337/17 Feniks, ECLI:EU:C:2018:805. In this decision, the Court entertained the question as to whether jurisdiction over an avoidance action – a so-called actio pauliana – should be determined under Article 7(1) of Regulation 1215/2012, commonly referred to as the Brussels I Regulation Recast.

As AG Bobek put it, the notion of actio pauliana generally refers to a remedy that allows a creditor to have an act declared ineffective, because said act was carried out by a debtor with the purpose of diminishing its assets by passing them on to a third party (Opinion in Case C-337/17 Feniks, ECLI:EU:C:2018:487, 35).

In older case law, the CJEU held that the actio pauliana cannot be characterised as an action in tort within the meaning of Article 7(2) of the Brussels I Regulation Recast. This in turn means that the court of the place where the creditor’s damage occurred cannot assert jurisdiction (Case C-261/90 Reichert II, ECLI:EU:C:1992:149). Prior to Feniks, however, the question as to whether the actio pauliana should be characterised as a ‘matter relating to a contract’ had not been referred to the Court.

Article 7(1) of the Brussels I Regulation Recast lays down the rules on forum contractus. It allows a defendant to be sued in the ‘place of performance’ of the contentious obligation, provided that the action concerns ‘matters relating to a contract’. The recent decision in Feniks clarified the outstanding issue as to whether an actio pauliana can too be brought in the forum contractus.

Facts of the case

The facts of the case can be summarised as follows. A Polish investor – Feniks – had concluded a construction contract with a Polish contractor – Coliseum. The contractor became insolvent, and as a result of joint liability under Polish law, the investor was liable to cover the contractor’s debts towards the subcontractors. Consequently, the contractor became indebted towards the investor for the amounts the latter paid to the subcontractors. In the meantime, the contractor sold immovable property located in Spain to a Spanish company called Azteca. The investor challenged the transaction as it had a detrimental effect on its chances to recover its claim. It brought an actio pauliana in the Polish courts against the Spanish company with a view to rendering ineffective the sale of immovable assets.

Decision: the actio pauliana is a matter relating to a contract

The decision first analysed whether the actio pauliana is at all included in the Brussels I Regulation Recast’s scope of application. Pursuant to Article 1(2)(b) of the Brussels I Regulation Recast, the Regulation does not apply to ‘bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings’. If that provision applies, Regulation 1346/2000 (colloquially called the Insolvency Regulation) would apply instead (at 30). In Feniks, the actio pauliana did not appear to be linked to any insolvency proceedings involving Coliseum, although that is for the referring court to further determine. The avoidance action therefore seemed to fall within the scope of application of the Brussels I Regulation Recast (at 31-33).

The Court then entertained the applicability of Article 7(1) of the Brussels I Regulation Recast. The decision observed that the actio pauliana ‘is based on the creditor’s personal claim against the debtor and seeks to protect whatever security he may have over the debtor’s estate’ (at 40). It was added that ‘it thus preserves the interests of the creditor with a view in particular to a subsequent enforcement of the debtor’s obligations’ (at 41).

From this general definition, the decision deduced that the actio pauliana seeks to establish that ‘the transfer of assets by the debtor to a third party has caused detriment to the creditor’s rights deriving from the binding nature of the contract and which correspond with the obligations freely consented to by the debtor’ (at 43). As a consequence, the cause of the action lies essentially in the breach by a third party of the obligations to which the debtor agreed. Based on that observation, the decision categorically characterised the actio pauliana as a ‘matter relating to contract’ within the meaning of Article 7(1) of the Brussels I Regulation Recast. The decision was further substantiated by a reference to the objectives of the Brussels I Regulation Recast. It was observed that the contractual characterisation meets the objectives of legal certainty and foreseeability, and the aim to facilitate the sound administration of justice (at 44).

The Court added that ‘were it otherwise, the creditor would be forced to bring proceedings before the court of the place where the defendant is domiciled, that forum, as prescribed by Article 4(1) of [the Brussels I Regulation Recast], possibly having no link to the place of performance of the obligations of the debtor with regard to his creditor’ (at 45). At the same time, the decision located the ‘place of performance’ within the meaning of Article 7(1)(b) in the place of performance of the contract between the creditor and the debtor (at 46). The Court held that a professional such as the defendant in the main proceedings may reasonably foresee to be sued in that forum (at 47).

The cause of action vs predictability of the forum

The decision’s confirms that for the characterisation of a claim as a matter relating to contract, the cause of action underlying the claim is decisive (Joined Cases C‑274/16, C‑448/16 and C‑447/16 Flightright, ECLI:EU:C:2018:160; Case C-249/16 Kareda, ECLI:EU:C:2017:472). Whether claimant and defendant are linked by a direct contractual relationship is irrelevant.

However, the decision creates a tension between the focus on cause of action and the ability of a third party to a contract to predict where he can be sued. The decision essentially entails that the actio pauliana’s cause of action is a breach of the contract that exist between the creditor and the debtor, and that the defendant can therefore be sued in the place of performance of that contract. Yet can a defendant to an actio pauliana reasonably foresee that he can be sued in the place of performance of the contract between the creditor and the debtor? This is doubtful. As AG Bobek opined, this connection is ‘too tenuous and too remote’ (at 65).

Things might be different if the defendant was aware of the detrimental effect of his acts or entered into a transaction to harm the creditor intentionally. In that case, the defendant was aware of his behaviour’s impact on contract between the creditor and the debtor. This would make the case for predictability of the forum stronger. However, the decision does notleave room to take into account the knowledge or intention of the defendant. As it stands in Feniks, the characterisation of the actio pauliana as contractual in nature is categorical.

One can only hope that future case law will provide for an approach to the demarcation of Article 7(1) of the Brussels I Regulation Recast that is more considerate of the predictability of the forum. As for now, it appears that every third party – however remotely involved in the contractual dealings of others – is at risk of being sued in the forum contractus, when the cause of action is in contract (Opinion in Case C-337/17 Feniks, ECLI:EU:C:2018:487, 65).

Michiel Poesen
PhD candidate, KU Leuven

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