Out-Law News 2 min. read

Company had to expressly agree to foreign court's jurisdiction, rule senior judges


A company or individual must expressly agree to a foreign court having jurisdiction over it, according to some of the UK's most senior judges.

The Judicial Committee of the Privy Council, which acts as the highest appeal court for several Commonwealth countries, had been asked to decide whether trustee Irving Picard could recover money from Vizcaya Partners Ltd in a dispute arising from the fraudulent Ponzi scheme operated by disgraced US financier Bernard Madoff.

The judges ruled that Vizcaya, an investment fund registered in the British Virgin Islands (BVI), had not submitted to the jurisdiction of the New York Bankruptcy Court. This meant that the trustee was unable to enforce the New York judgment against Vizcaya in the Gibraltar courts, despite its argument that Vizcaya had effectively submitted to the jurisdiction of the bankruptcy court by entering into a contract which took place in New York and was governed by US law.

"This is a decision of international importance, because very many commercial contracts will provide for foreign law - or, as here, state that the contract is to be treated as made in the foreign country," said Craig Connal QC, a disputes expert at Pinsent Masons, the law firm behind Out-Law.com. "The decision clearly states that this will not be enough to create jurisdiction based on agreement."

"Critically, the Privy Council found that 'agreement' could not be implied from making a contract in the foreign country; or agreeing that the country's law governed the agreement, that the contract was to be performed there or even - as was said to be the case in New York where this claim originated - that New York law held that agreeing to New York law meant 'agreeing' jurisdiction. The result was that recovery in Gibraltar was refused," he said.

Irving Picard was appointed as trustee of Bernard L Madoff Investment Securities LLC (BLMIS) when the company was liquidated by the US courts after Madoff's fraud came to light in 2008. Since then, the trustee has been pursuing various BLMIS investors who were repaid before the fraud was discovered, under anti-avoidance provisions included in the US Bankruptcy Code.

Vizcaya invested about $328 million in BLMIS between January 2002 and December 2008, but was repaid $180m before the fraud was discovered. Irving Picard obtained a judgment against Vizcaya and its shareholders in the US courts. It attempted to enforce this judgment against $74m of the $180m which was said to be held in bank accounts in Gibraltar, on the grounds that either Vizcaya was present in New York when the proceedings began or that it had agreed to submit to the jurisdiction of the New York courts.

In a judgment given by Lord Collins, the Privy Council said that this was not enough to give the New York courts jurisdiction over Vizcaya. Although finding that there was a "division of authority" in the case law in relation to the issue, the most recent cases and legal textbooks made it clear that any agreement to submit to the jurisdiction of a foreign court "must be express: it cannot be implied".

"The real question is whether the judgment debtor consented in advance to the jurisdiction of the foreign court," said Lord Collins.

In the immediate case, there was "no basis in the evidence for the assertion that there was a contractual term that Vizcaya submitted to the New York jurisdiction", he said. The trustee would have "formidable difficulties" arguing that Vizcaya was subject to the New York court's jurisdiction with reference to the case law, he said.

Irving Picard and Vizcaya had actually settled their dispute after the Privy Council had heard their appeal, but before it had handed down its advice. However, the court remained entitled to deliver a judgment as the case raised issues of "general importance", which were also of "international importance in other common law countries", it said.

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