February 2009

02 Dec 2009

International Business Disputes: Your Place or Mine?

The internet allows people and businesses to connect with a world wide market that is potentially more accessible and far larger than might previously have been thought possible. This ability to connect and transact business with people all around the world can also lead to questions about how to resolve disputes that may arise from those transactions. 

When all parties to a contract are based in New Zealand, typically the contract will be governed by New Zealand law and any disputes would be dealt with in New Zealand courts. However, with online transactions, it would not be unusual for one of the parties to be based off-shore and potentially two systems of law might govern the transaction: the laws of the supplier's jurisdiction or the laws of the purchaser's jurisdiction. 

With an international element the question of which law will govern a contract can quickly become complex. This can best be illustrated by an example. Let's take a fictional company called "universal-exports.com". A New Zealand business buys gadgets from universal-exports.com over the internet, based on representations made about those gadgets on the website. The gadgets arrive, but do not live up to the claims made by the supplier. If universal-exports.com is a UK based company (with its website server and distribution warehouse in the UK), but with an established customer base in New Zealand, then there could potentially be a conflict as to whether UK or New Zealand law should apply and govern the contract. There is also the question of where the dispute will be heard and how a judgment will be enforced. The situation becomes much more complex if, for example, universal-exports.com is based in the UK, but the website server is based in Australia and the warehouse that distributes the goods is located in China. In this case, the contract could be governed potentially by UK, New Zealand, Australian or Chinese law!

When a New Zealand Court is faced with a contractual dispute such as the one above, it will consider the following issues:

1. Does it have jurisdiction to hear the dispute?
2. What is the governing law of the dispute?
3. Can the judgment be enforced?

Which Country Has Jurisdiction to Hear the Dispute? 

Before a case can be brought before a New Zealand Court it must first be established that the Court has the necessary jurisdiction to hear the dispute. The New Zealand courts can exercise jurisdiction over a dispute where a party has:

1. been validly served with proceedings under New Zealand law; or
2. submitted to the jurisdiction of the New Zealand courts.

Proceedings to be heard in a New Zealand Court can only be served on a party outside New Zealand without the leave of the Court in certain circumstances - these are recorded in High Court Rule 6.27 and include (amongst others) claims relating to a contract that was made or entered into in New Zealand, was made by or through an agent trading or residing within New Zealand, was wholly or part performed in New Zealand, or was to be governed by New Zealand law. 

If a party does not fall within rule 6.27, proceedings can only be served outside New Zealand with the leave of the Court obtained under High Court Rule 6.28. Leave will only be granted if it can be established that the claim has a real and substantial connection with New Zealand, there is a serious issue to be tried on the merits, New Zealand is the appropriate forum for the trial, and there are other relevant circumstances that support an assumption of jurisdiction.

The workings of these rules can often be complex, and a litigant can easily incur significant costs just determining whether the New Zealand Courts have jurisdiction to hear the dispute.

Under New Zealand law, a party may submit to the jurisdiction of the Court where the Court would not otherwise have had jurisdiction to hear and determine a proceeding against that party, or where the Court might otherwise decline jurisdiction. This can be done if that party:

1. takes a step in the proceeding which is necessary or useful only if the Court has jurisdiction (for instance filing a statement of defence); or
2. has agreed by contract to submit to the jurisdiction of the Court to determine a dispute; or
3. commences proceedings in a New Zealand Court.

A person served with proceedings outside New Zealand under rule 6.27 or 6.28 may directly challenge the jurisdiction of the New Zealand Court under High Court Rule 5.49[1]. As part of this enquiry, the Court will consider whether New Zealand is the most appropriate jurisdiction, or whether there is another foreign court that also has jurisdiction and, in the interests of justice, that other jurisdiction is the most appropriate place for the trial. This can result in an international tug of war between the parties and can be costly and time consuming.

What is the Governing Law of the Dispute?

A New Zealand Court can ascertain the governing law (or proper law) of a contract in a number of ways.

If the governing law is stipulated by an express term in the contract, the courts will generally accept this provided that the governing law clause is bona fide and legal and not against public policy. In fact, even if the parties select a legal system with which the contract has no real connection, or in order to evade the provisions of the legal system with which the contract is objectively connected, there is comment to suggest that that choice will probably be effective.[2]

If an express choice of law clause does not appear in the contract, the courts must determine the proper law of the contract by examining the contract and the surrounding circumstances. 

In Australia and the UK, Courts approaching this task usually first try and infer an implied choice from the contract and the surrounding circumstances. If this cannot be done, then the proper law will be the system of law with which the transaction has the closest and most real connection. It is unclear whether the courts in New Zealand would follow the overseas courts and split this enquiry into two separate stages.

Instead, it has been argued that in the absence of an express choice of law clause, the courts in New Zealand will determine that the proper law of the contract will be that system of law with which the transaction has the closest and most real connection. This is determined on an objective basis, having regard to the facts in existence when the contract was entered into. The court will weigh all of the factors linking the contract to the different legal systems (the "connecting factors") as well as the individual circumstances of each case.

Can the Judgment be Enforced?

After a Court has decided on jurisdiction, the choice of law and a judgment has been given, that judgment will have to be enforced by the successful party. If the losing party is not resident in the country where the judgment has been given, the judgment needs to be enforced in the foreign country in which the losing party is resident to allow the successful party to recover its award. Often this means a New Zealand company will need to bring separate proceedings overseas to enforce that judgment in the correct jurisdiction and this may be difficult and costly as New Zealand only has reciprocal enforcement of judgment arrangements with a limited number of countries. 

Parties can strategically issue proceedings in the defendant's country so they do not have to go through the extra step of enforcing any judgment given in a foreign country. The flipside to this is that the cost of commencing proceedings in a foreign country (considering that witnesses, lawyers and evidence may have to be relocated to this foreign country) can be immense.

Summary

In any contract, it is worth considering what will happen if there is a dispute. Most businesses will give consideration to provisions such as limitation of liability clauses, dispute resolution processes and warranty clauses. Often less attention is given to an express choice of law clause. This may be because when both parties are in New Zealand it is assumed that New Zealand law will apply. However, with contracts entered into via the internet, there is always the potential for an international element as well. 

Working through conflict of law issues in a dispute can be quite complex, and can result in very high litigation costs for both parties. The simplest way to avoid the conflict of laws minefield, is to insert clear, unambiguous express choice of law and jurisdiction clauses in all contracts.

[1] A step taken in objecting to jurisdiction does not operate as a submission to the jurisdiction of the court.

[2] When a New Zealand statute expresses a policy applicable to the case before the Court, then that statute may have to be applied irrespective of the proper law, whether or not expressly chosen by the parties. 

Authors

Karen Ngan

Partner - Corporate & Commercial

DDI: +64 9 977 5080

Mobile: +64 21 648 977

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Richard Watts

Partner - Intellectual Property

DDI: +64 9 977 5182

Mobile: +64 21 895 931

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