This appeal arose out of the litigation fallout from the Bernard Madoff Ponzi scheme. In the appeal, the Privy Council considered whether, at common law, an agreement to submit to jurisdiction must be express or whether it could be implied or inferred. The Board of the Privy Council found that an agreement to submit to jurisdiction need not be express but could be implied or inferred. In this instance the appellant was able to show that it had not agreed to submit to the jurisdiction of the New York bankruptcy court, whether expressly or by implication.
Bernard Madoff: the fallout continues
The respondent in the appeal was Irving Picard who was appointed trustee by the New York bankruptcy court in the Bernard L Madoff Investment Securities LLC (“BLMIS”) liquidation. The appellant was Vizcaya Partners Limited (“Vizcaya”), which carried on business as an investment fund and invested about US$328m with BLMIS, of which US$180m was repaid before the fraud was discovered.
The contractual documents governing the relationship between BLMIS and Vizcaya included, amongst other things, an Agency Agreement where BLMIS acted as Vizcaya’s agent in New York and a Customer Agreement, clause 10 of which provided that the agreement was “made in the state of New York and shall be construed, and the rights and liabilities of the parties determined, in accordance with the laws of the state of New York”.
The trustee brought proceedings under the anti-avoidance provisions in the US Bankruptcy Code to recover the US$180m. In the New York bankruptcy court, the trustee obtained a default judgment against Vizcaya and its shareholders who had failed to appear. The judgment included US$74m of funds transferred to accounts of Vizcaya in Gibraltar.
Common law principles and Dicey’s Fourth Case
The trustee sought to enforce the bankruptcy court judgement against Vizcaya in Gibraltar. The appeal was concerned with the content and scope of the rule set out in Dicey’s Fourth Case that a foreign default judgment is enforceable at common law against a judgement debtor who agreed to submit to the jurisdiction of the foreign court. The question for consideration was whether Vizcaya had agreed to submit to the jurisdiction of the New York bankruptcy court: (i) before the bankruptcy court entered the default judgement against Vizcaya; and (ii) whether an agreement to submit to jurisdiction must be express or it can be implied or inferred. (It should be noted that while this was a proceeding before the Privy Council, the judgment is important because enforcement at common law is the regime which applies to enforcement of judgments for a number of important jurisdictions, including the USA, China and Japan.)
The decision of the Gibraltar Court of Appeal held that New York law governed the Customer Agreement and that under the terms of the Customer Agreement (construed according to New York law), Vizcaya had agreed to submit to the jurisdiction of the New York bankruptcy court and the default judgment was enforceable.
On its appeal to the Privy Council, Vizcaya argued that whether there is submission to jurisdiction in the contract is a question of contractual interpretation. Vizcaya submitted that an agreement to submit to jurisdiction must be express and cannot be implied by: (i) the governing law; (ii) the place of performance of the contract; (iii) where the contract is made; and/or (iv) that the foreign law confers jurisdiction on the foreign court.
The question of whether an agreement to submit to jurisdiction of the foreign court can be implied, and, if so, how the implication can arise has divided the authorities. Case law has produced conflicting judgments on this question with some senior judges deciding that, unless expressed, submission to jurisdiction could not be implied but others deciding, for example Diplock J, in Blohn v Desser that “to submit to the forum in which the judgment was obtained, may be express or implied”. Dicey’s Conflict of Laws (which has markedly influenced case law) has itself also been inconsistent on this question, with Dicey’s first edition stating that submission could be express or implied and then later in the ninth edition (after the decision in Vogel v RA Kohnstamm Ltd) stating that it must be express, and cannot be implied.
In his judgment, Lord Collins set out the two classes of implied term under English law. The first class, being terms implied as a matter of fact, consists of terms implied from the circumstances in order to give effect to the intention of the parties. The second class, being terms implied by law, are implied as a necessary incident of the contractual relationship and include, for example, confidentiality obligations in banking contracts.
The Privy Council heard evidence on New York law submitted by the trustee. The evidence submitted that “it is well-settled under New York law that by agreeing to a contract governed by New York law, involving the transaction of business in New York by an agent, a party submits to the ‘specific jurisdiction’ of New York courts….” and that “under New York law, specific jurisdiction is established over a non-domiciliary who, in person or through an agent: (1) transacts any business within the state….New York Civil Practice Law and Rule para 302 (the “CPLR”)”. It was submitted that Vizcaya agreed to the jurisdiction of the New York courts by agreeing to the Agency and Customer Agreements (which established an agency relationship) and by carrying on business in New York.
The Board disagreed with the submission and could not find any terms in the Agency or Customer Agreements which implied as a matter of fact or as a matter of law that Vizcaya had submitted to the jurisdiction of the New York bankruptcy court. The Board found that “by agreeing to New York as the governing law and by transacting business in New York say no more than that these factors justified the assumption [emphasis added] of jurisdiction under New York CPLR, para 302”.
Vizcaya’s appeal was upheld as the Board did not find any evidence that there was a contractual term whereby Vizcaya submitted to the jurisdiction of the New York courts. The judgment is a useful reminder of the importance of including a jurisdiction clause in contracts to avoid any uncertainty arising on this point.
  2 QB 116
  QB 133