KMG International NV v Chen & Anor

The rule against reflective loss is a substantive rule governing the recoverability of loss, rather than a procedural rule. Under the Rome II Regulation, it falls within Article 15 and is not excluded by Article 1(3). It is therefore governed by the law applicable to the non-contractual obligation.

The rule is not an overriding mandatory provision under Article 16. Nor would applying foreign law permitting recovery of reflective loss be manifestly incompatible with English public policy under Article 26. The rule is important English substantive law, but it is not a fundamental principle of the legal order for these purposes.

KMG International NV brought tort claims against Melanie Chen and Chipper Management Ltd. KMG alleged that the defendants had caused the diminution of assets available to satisfy an arbitration award against DP Holding SA.

The English-law claims were adjourned because the Supreme Court was considering the scope of the rule against reflective loss. The judgment concerned whether the rule barred KMG’s alternative Dutch-law claims. The defendants sought strike out or summary judgment, arguing that the English rule applied as a procedural rule, an overriding mandatory rule, or a matter of public policy.

1. Applications. The defendants’ applications to strike out the Dutch-law claims and for summary judgment failed. KMG succeeded on the issues determined in the judgment.
2. Rome II classification. The rule against reflective loss falls within Article 15 of the Rome II Regulation, particularly Article 15(f), which concerns persons entitled to compensation for damage sustained personally. It also relates to the extent and limitation of liability under Article 15(a) and (b), and to the recoverability of a particular head of loss under Article 15(c).
3. Article 15 should be construed broadly to promote certainty in cross-border disputes, while the exclusion of evidence and procedure in Article 1(3) should be construed narrowly. The reflective-loss rule is not an indispensable feature of the forum’s framework for resolving disputes. It affects substantive rights and remedies, rather than merely regulating the admissibility or conduct of proceedings.
4. The reasoning concerning procedural conditions for declarations of non-infringement in Actavis v Eli Lilly [2015] Bus LR 1068 was distinguishable. Those conditions were formal preconditions to bringing an action; the reflective-loss rule bars recovery of a particular type of loss after a cause of action exists.
5. Even if the rule fell outside Rome II, it would be substantive under English common law. The distinction is between the kinds of damage recoverable, which are substantive, and the assessment or quantification of compensation, which is procedural.
6. Article 16. The rule is not an overriding mandatory provision. A rule may be mandatory in the sense that the court has no discretion to disapply it without being overriding. Article 16 is exceptional and concerns provisions regarded as crucial to safeguarding the political, social or economic organisation of the forum.
7. Article 26. Applying Dutch law so as to permit recovery of reflective loss would not be manifestly incompatible with English public policy. The rule is not equivalent to a fundamental right or fundamental principle of the legal order. Nor would applying the lex causae discriminate on grounds of nationality or constitute an arbitrary derogation.

The judgment was a first-instance decision. The English-law claims had been adjourned pending the Supreme Court’s consideration of the rule against reflective loss.