February 12, 2019

English Court of Appeal Confirms Three-Part Test for Jurisdiction Disputes

Claimants must satisfy a three-part test to establish the jurisdiction of the English Courts, according to the decision in Kaefer Aislamientos SA de CV v AMS Drilling Mexico SA de CV and others [2019] EWCA Civ 10, a case decided by the English Court of Appeal about the test the English Courts should apply when deciding on a challenge to their jurisdiction.

In many international disputes, one of the first questions to arise is whose countries’ courts should hear the dispute. The answer to this question can have important consequences.

Being sued in a “wrong” jurisdiction can quickly become fraught with difficulty. For instance, local counsel may be unknown, the costs of litigation higher or the procedural litigation rules unfamiliar. Conversely, being able to commence a claim in the jurisdiction of choice can place a party on the front foot in litigation.

What the Law Says

To obtain permission from the English Courts to serve proceedings on a foreign defendant, a claimant must show the Court that:

i) There is a serious issue to be tried and that the claim has a real, as opposed to fanciful, prospect of success.
ii) There is a “good arguable case” (remember these words!) that the claim falls within one of the prescribed jurisdictional gateways, e.g. that English law governs the contract in dispute or that the overseas defendant is a necessary or proper party to a claim brought in England.
iii) England is the most appropriate forum to hear the claim. 

Background to the Kaefer Decision

Kaefer sought to recover sums allegedly owed under a contract (that contained an English jurisdiction clause) for the refurbishments of a rig. Proceedings were issued in the English High Court, against a total of four defendants: (1) AMS Mexico, (2) AMS, (3) Atlantic Tiburon and (4) Ezion.

Atlantic Tiburon and Ezion contested the jurisdiction of the English Courts by arguing that neither of them was a party to the contract with Kaefer and that therefore no English jurisdiction clause would bind them. In turn, Atlantic Tiburon and Ezion argued that absent an English jurisdiction clause no jurisdictional gateway was applicable and the second part of the above test was therefore not satisfied.

Kaefer disagreed and argued that AMS Mexico and AMS had acted as agents for Atlantic Tiburon and Ezion. This would make Atlantic Tiburon and Ezion parties to the contract with Kaefer by virtue of being undisclosed principals, meaning that the English jurisdiction clause applied, and a jurisdictional gateway present.

The hearing was concerned with the second part of the test: whether Kaefer could prove that it had a “good arguable case” that Atlantic Tiburon and Ezion were parties to the contract with Kaefer and therefore would be bound by the contract’s English jurisdiction clause.

The High Court’s Decision

At first instance, Kaefer was denied a declaration that the English High Court had jurisdiction over Atlantic Tiburon and Ezion. The High Court found that Kaefer had failed to satisfy the relevant test, which the High Court formulated in the following two discrete parts: Kaefer had failed to demonstrate that it had (i) a good arguable case, and (ii) much the better argument (than Atlantic Tiburon and Ezion).

Kaefer then appealed the High Court’s decision, arguing that the High Court judge had not only erred in the evaluation of the evidence, but had also applied the wrong legal test in determining whether the English Courts have jurisdiction over Atlantic Tiburon and Ezion.

The Court of Appeal’s Decision

The Court of Appeal dismissed Kaefer’s appeal, stating that the High Court judge had arrived at the correct conclusion, even though he had incorrectly formulated the relevant legal test on establishing jurisdiction.

Considering the Supreme Court authorities in Brownlie (2017) and Goldman Sachs (2018), the Court of Appeal clarified that the correct formulation of the test for jurisdiction is the following three-part test:

i) The claimant must supply a plausible evidential basis for the application of a relevant gateway.
ii) If there is an issue of fact about it, or some other reason for doubting whether it applies, the Court must take a view on the material available if it can reliably do so.
iii) But if the nature of the issue and the limitations of the material available at the interlocutory stage are such that no reliable assessment can be made, there will be a good arguable cause for the gateway application if there is a plausible (albeit contested) evidential basis for it.

Apart from formulating the correct test, the Court attempted to provide much-needed guidance on its application. In respect of part i), the Court made clear that this is a relative test: “[P]lausible evidential basis” means that the claimant must show that it has the better argument. Notably, there is no mention of “much” better argument.

Part ii) is an instruction to the Courts to use judicial common sense and pragmatism. The Courts should overcome evidential difficulties whenever it can still “reliably” arrive at a conclusion. Finally, part iii) deals with a scenario where the Courts are unable to conclude on the relative merits of each party’s case. If this is the case, the Court is awarded a degree of flexibility in finding a jurisdictional gateway if the claimant can show a sufficiently plausible evidential basis.

Key Highlights to Remember

In relation to the “good arguable case” element, the Court of Appeal’s decision in Kaefer confirms that the old two-part test of “good arguable case” and “much the better argument” has been laid to rest. This case also highlights the importance of instructing local counsel early on in international disputes.

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