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Kea Investments Ltd v Wikeley Family Trustee Limited: the good arguable case applied to jurisdiction agreements

In a recent post, I reported that the High Court had granted an interim anti-enforcement injunction in relation to a default judgment from Kentucky in Kea Investments Ltd v Wikeley Family Trustee Limited [2022] NZHC 2881. Kea Investments Ltd (Kea), a British Virgin Islands company, alleges that the US default judgment is based on fabricated claims intended to defraud Kea. It claims that the defendants – a New Zealand company, an Australian resident with a long business history in New Zealand, and a New Zealand citizen – have committed a tortious conspiracy against it and seek a declaration that the Kentucky judgment is not recognised or enforceable in New Zealand. In my post, I also noted that two of the defendants – Wikeley Family Trustee Limited and Mr Wikeley – had since protested the Court’s jurisdiction. The Court set aside the protest to jurisdiction in Kea Investments Ltd v Wikeley Family Trustee Limited [2023] NZHC 466, and I want to explore this decision in more detail here.

The defendants’ protest to jurisdiction focused on two main points: that Kea was bound by a US jurisdiction clause and that New Zealand was not the appropriate forum to determine Kea’s claims. The defendants did not focus on challenging the appropriateness of the anti-enforcement injunction. Considering the nature of Kea’s allegations of fraud, and the tenor of Gault J’s earlier judgment, this might have seemed like too much of an uphill battle. Still, it is a little surprising that the defendants did not make more of the potential comity concerns associated with the granting of an anti-enforcement injunction.

The Court rejected both of the defendants’ arguments. The jurisdiction clause was unenforceable by virtue of the allegations of fraud and conspiracy, and in any case its scope did not extend to Kea’s claims. New Zealand was also the appropriate forum to determine Kea’s claims. In substance, the dispute was whether the defendants were perpetuating a fraud against Kea (at [82]). In these circumstances, it was doubtful whether Kentucky was an available forum for Kea’s claims (at [83]), and the New Zealand Court had a greater interest in regulating the conduct of the defendant (at [84]).

In this post, I want to focus on the role of the jurisdiction agreement, rather than the question of appropriate forum.

Before I do so, however, it is useful to make a preliminary comment about the nature of the defendants’ application, which was based on a misunderstanding of the rules of personal jurisdiction. The defendants sought a dismissal of Kea’s claims under r 5.49 of the High Court Rules on the basis that the Court had no jurisdiction to determine the claim. However, because the defendants had been served with the claim as of right (at [32]), there could be no question of the Court lacking personal jurisdiction in this case. The right question to ask was whether the Court should exercise its jurisdiction. The misconceived basis of the defendants’ jurisdictional argument makes the judgment a little difficult to follow, but Gault J did clarify that the defendants were unable to challenge the existence of the Court’s jurisdiction and that rr 6.27 and 6.28 of the High Court Rules were, therefore, irrelevant (at [31]-[32], [43], [44]). Gault J said that the question was one of the assumption of jurisdiction (at [31]), although the term assumption – as opposed to “exercise” – is apt to confuse here, given that r 6.29 refers to the court’s discretion to “assume” jurisdiction in service out cases.

The standard of proof for establishing the US jurisdiction agreement

The defendants argued that the proceeding should be dismissed or stayed because the parties had selected a foreign forum, the US, to determine any dispute between them. Kea argued that the contract that contained the jurisdiction clause was a forgery and the result of fraud, and that the jurisdiction clause was therefore unenforceable.

In order to determine the effect of the jurisdiction clause, the Court first had to work out to what extent it could – at this interim stage of the proceeding – engage with the merits of Kea’s case and assess the fraud and forgery allegations. There seemed to be two distinct questions, although the Court did not treat them as such. First, were the allegations relevant to the jurisdiction clause at all or was the clause separable from the substantive contract (see CLNZ at 2.407-2.408)? Second, if the allegations were relevant, what was the standard of proof to determine the validity of the allegations?

On the first question, the plaintiff referred to the case of Credit Suisse First Boston (Europe) Ltd v Seagate Trading Co Ltd [1999] CLC 600, where the Court held that an allegation of fraud in a US proceeding affected not just the substantive contract but also its English jurisdiction clause, with the result that the clause was unenforceable. Gault J agreed that the allegations impugned the existence of the contract as a whole (at [63]).

On the second question, the Court relied on the test in Four Seasons Holding Inc v Brownlie [2017] UKSC 80, which sets out the good arguable case standard applicable to “jurisdictional facts” that form the basis for an application to serve proceedings outside of the forum (for a more detailed discussion of this standard, see this previous post here). Gault J considered that, even though the test in Four Seasons was concerned with the different scenario of a plaintiff seeking to establish jurisdictional facts to support an assumption of jurisdiction by the forum court, it was appropriate to apply the test by analogy to the defendants’ application for a stay or dismissal of the New Zealand proceeding by virtue of the US jurisdiction clause (at [44]).

This point is a useful clarification of the law. Where a court is concerned with “jurisdictional facts” in the context of the “gateways” or heads of jurisdiction in r 6.27, the question is whether there is a sufficient connection to New Zealand for the court to assume jurisdiction. The question has been described as a “threshold” question, which has to be determined before the court goes on to ask whether it should assume jurisdiction (Wing Hung Printing Co v Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754 (CA) at [32]-[35]). A New Zealand jurisdiction clause is one of the gateways of r 6.27. However, even in service out cases, jurisdiction agreements – whether New Zealand or foreign – will be more definitively relevant under the second stage of the jurisdictional inquiry. In fact, the effect of a jurisdiction agreement is largely the same whether it falls to be determined under the second stage of the jurisdictional inquiry in service out cases or in the context of an application to stay or dismiss a proceeding that has been brought as of right.

What Gault J’s judgment seems to confirm is that the evidential standard that must be applied to establish the agreement is the same across all three scenarios: where the agreement is a New Zealand agreement that is a gateway or head of jurisdiction under r 6.27; where it is relied upon to argue that the New Zealand court should – or should not – assume jurisdiction under r 6.29; and where it is relied upon to argue that the New Zealand court should – or should not – exercise the jurisdiction that it has, in cases where the defendant has been served as of right (as in the present case). This makes sense, to the extent that the broad issue in the three scenarios is the same: namely, whether the court is able to give effect to a contested jurisdiction agreement, at a point in the proceeding where the court’s ability to make factual findings is necessarily limited The assessment of the jurisdiction agreement should not descend into a predetermination of the merits. In other words, the court should not have to resolve the parties’ substantive dispute in order to determine whether it has, or should exercise, jurisdiction over the dispute (for a contrary view, however, see Stephen Pitel and Jonathan de Vries “The Standard of Proof for Jurisdiction Clauses” (2008) 46 Canadian Business Law Journal 66).

There is one aspect of the Judge’s reasoning, however, that raises further questions. The good arguable case test is especially difficult to apply in cases where the court is unable “to form a decided conclusion on the evidence before it and is therefore unable to say who has the better argument” (at Kaefer Aislamientos SA de CV v AMS Drilling Mexico SA de CV [2019] EWCA Civ 10, [2019] WLR 3514 at [79]). In such cases, the good arguable case inquiry is no longer a relative inquiry, and all that is needed is a plausible (albeit contested) evidential basis. This is probably fine where the plaintiff is seeking to establish a head of jurisdiction; but the approach may cause unfairness where a party wants rely on a jurisdiction agreement more definitively, to argue that the New Zealand court should/should not assume or exercise jurisdiction. The reason this approach may cause unfairness is that it would require the court to decide on the effect of the jurisdiction agreement even though it is unable to say who has the better argument (see Kaefer at [80]).

Of particular relevance in these circumstances will be the question who is the party who is merely required to show a plausible evidential basis. Is it always the plaintiff, or is it the party seeking to enforce the jurisdiction agreement? The latter view seems to be the view adopted by Dicey, Morris and Collins on the Conflict of Laws at 12-093. Gault J, however, adopted the former view, and applied the evidential standard to the question whether the contract was a forgery (or the result of fraud), as opposed to the question whether there was a contract (executed by Kea). Thus, Gault J considered that Kea had to show “a plausible evidential basis” for its argument that there was no jurisdiction clause: “[t]he test is whether there is a plausible (albeit contested) evidential basis for the claimant’s case in relation to the jurisdiction clause (by analogy with the application of the relevant gateway). It is not whether the defendants have a plausible (albeit contested) evidential basis for their position that the Coal Agreement was executed by Kea” (at [60], see also [63]).

It is likely that Gault J’s approach can at least to some extent be explained by reference to the peculiar facts of the case. However, if his approach were adopted more generally, the result would be that in cases of evidential uncertainty that cannot be resolved, the good arguable case inquiry necessarily favours plaintiffs over defendants, and New Zealand jurisdiction agreements over foreign jurisdiction agreements.  This would not be a desirable outcome. Having said that, the concern might be more theoretical than real. In practice, a court is always likely to engage in some form of relative inquiry in practice, reaching the best conclusion it can, even though it is technically unable to form “a decided conclusion on the evidence”.

Determining the exclusive or non-exclusive nature of the jurisdiction agreement: applicable law and standard of proof

Despite the Court’s conclusion that the jurisdiction agreement was unenforceable, it nevertheless continued to determine two issues of interpretation: whether the agreement would have had exclusive or non-exclusive effect, and whether it would have extended to cover Kea’s claims. The alleged jurisdiction agreement stated that the parties had “agreed that the jurisdiction shall be the USA” (at [65]).

The Court concluded that the law governing the interpretation of the jurisdiction agreement was the law of Kentucky, as the proper law of the contract. In relation to the first issue, the issue of exclusivity, the Court was presented with conflicting evidence on US law, and the Court considered that there was “at least a plausible evidential basis for Kea’s case that the jurisdiction clause is permissive rather than exclusive” (at [70]). In relation to the second issue, the Court concluded that the clause did not cover Kea’s claims, pointing to the “non-expansive wording” of the clause and the fact that Kea’s claims included matters that were unrelated to the contract (at [74]).

There are two interesting points here. The first is that the Court applied the good arguable case test to the interpretation of the jurisdiction agreement, again resolving the question of evidential certainty in favour of the plaintiff. There is a good argument, however, that any evidential matters that are directed only at the jurisdiction agreement – and that are irrelevant to the merits of the claim – should be resolved at the time of the court’s decision on jurisdiction. In other words, it is not clear that the good arguable case standard should have applied here at all (cf CLNZ at 2.155 in the context of r 6.27). This is for two reasons. First, the evidence in question here, concerning the exclusive or non-exclusive nature of the jurisdiction agreement, was solely relevant to the question of jurisdiction. Therefore, the Court would not have risked predetermining the substance of the dispute by forming a conclusive assessment of this evidence. Second, the source of the uncertainty was a question of (US) law. It is true, of course, that questions of foreign law are treated as matters of fact, but it is difficult to see how a conflict of expert evidence on US law could only be properly resolved at trial (at which point, in any case, the question would have necessarily been moot).

The second point is that the Court applied the proper law of the contract, not New Zealand law, to determine the question of exclusivity. To the extent the question involved an interpretation of the agreement based on general principles of the law of contract, there is little doubt that this was the correct approach (see Mary Keyes “Jurisdiction clauses in New Zealand law” (2019) 50 VUWLR 631 at 636). Nevertheless, the question of exclusivity occupies an awkward spot as far as matters of choice of law are concerned. That is because rules of interpretation that are specific to the conflict of laws would only ordinarily apply if they form part of New Zealand law as the law of the forum (see CLNZ at 2.410). An obvious example would be a rule that jurisdiction agreements are presumed to be exclusive (see Hague Choice of Court Convention, Art 3(b)). But at what point does an application of the general rules of interpretation to a jurisdiction agreement turn into a specific rule of the conflict of laws? This is an interesting question that the Court did not need to ponder in this case, because the jurisdiction agreement would have also been treated as non-exclusive under New Zealand law (at [71]).

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