Service out of the jurisdiction where agreements are concluded by email with overseas counterparties

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8 min read

A recent case offers a salient reminder regarding service out provisions. If in doubt, adopt a dispute resolution clause.

Ditto Ltd v Drive-Thru Records LLC and War Road Music Inc concerned an application to set aside an order granting permission for service of a claim out of the jurisdiction. It is of interest as it considered the contract jurisdiction gateway in respect of agreements entered into by email exchange which did not contain a dispute resolution or governing law clause. There are problems with the traditional approach to contracts made by instantaneous exchanges – eg by telephone or by email – which are not neatly reconciled under the existing wording of the contract jurisdiction gateways under paragraph 3.1(6) of CPR PD6B. The Deputy Master found that agreements entered into through the exchange of emails between England and California were held to have been made in both places for jurisdictional purposes. 

The case also provided a useful illustration of when parties rely on the ‘tort jurisdiction gateway’ under paragraph 3.1(9) of CPR PD6B and how the courts will apply the Spiliada principles when seeking to establish the most appropriate forum for where a dispute should be heard.

Background

The case concerned a claim brought by an English company (Ditto) in England against two Californian incorporated entities (the defendants). The claimant, Ditto, is a global distributor of music. The defendants are two record labels which own portfolios of music works by artists and bands. 

In July 2019, Ditto and the defendants entered into two short form agreements to permit Ditto the right to exploit and distribute portfolios of music and videos owned by the defendants. The two agreements did not contain a dispute resolution clause or a governing law clause. Negotiation of the agreements was concluded and Ditto emailed the agreements to the defendants to sign in California. The defendants signed the agreements and sent them back to Ditto by email to sign in England.

A dispute arose about whether the defendants had provided Ditto with access to the music portfolios and whether they had used funds advanced by Ditto for the purposes specified in the agreements. Ditto sought to terminate the agreements. The defendants alleged that Ditto had failed to perform certain obligations under the agreements and that Ditto had wrongfully terminated the agreements. 

The parties attempted to mediate their dispute in New York in September 2020 but were unsuccessful.  Prior to the mediation, Ditto had commenced proceedings against the defendants in the English courts.  The defendants had also commenced proceedings against Ditto in the New York courts. It appears the parties did not know each had sued the other until after the mediation. After the mediation failed, Ditto issued a without notice application for permission under CPR 6.36 to serve the defendants out of the jurisdiction. Permission was granted by Master Teverson in December 2020. The defendants applied to the English courts to set aside the service out order.

Issues to be determined

The parties accepted that in order for the service out order not to be set aside, Ditto had to satisfy the court that:

  1. there is a serious issue to be tried on the merits of the claim in respect of each cause of action in relation to which permission is sought
  2. there is a good arguable case that the case falls within one or more of the jurisdiction gateways under paragraph 3.1 of CPR PD6B
  3. in all the circumstances England is clearly or distinctly the appropriate forum for the trial of the dispute.

That test was outlined by the Privy Council in Altimo Holdings and Investment Ltd v Kyrgyz Mobile Tel Ltd and subsequently cited with approval by the Court of Appeal in VTB Capital Plc v Nutritek International Corp.

Having been satisfied under the first limb that there was a serious issue to be tried on the merits of the claim, Deputy Master Francis proceeded to consider the second and third limbs of the test.

Second limb: the jurisdiction gateways

Ditto principally relied on the gateways under paragraph 3.1(6) and (9) (the contract and tort gateways). They also relied upon the gateway under paragraph 3.1(11) of CPR PD6B, the ‘property within the jurisdiction’ gateway.

Contract gateway

Ditto asserted that the contract was made in England and therefore the English courts have jurisdiction.  Paragraph 3.1(6) of the CPR PD6B provides that jurisdiction can be established where:

“(6) A claim is made in respect of a contract where the contract –

(a) was made within the jurisdiction;

(b) was made by or through an agent trading or residing within the jurisdiction or

(c) is governed by English law.”

Claim made within the jurisdiction: The Deputy Master considered the gateway under subparagraph (a) and the cases of Apple Corps Ltd v Apple Computer Inc and Conductive Inkjet Technology Ltd v Uni-Pixel Displays Inc

Apple Corps concerned a dispute between an English and US party under an agreement concluded over the telephone. The judge in that case found that there was an arguable case that the contract had been concluded in England on an offer and acceptance analysis. However, the judge said that in the alternative he would have found the contract had been made in both jurisdictions at the same time as they were concluded by telephone. 

Conductive Inkjet meanwhile concerned a contract between an English and US party where the parties had agreed the written terms by email. The judge in that case endorsed the judge’s alternative finding in Apple Corps that the contract had been made in both jurisdictions at the same time by email.

The Deputy Master in this case followed the analysis in Conductive Inkjet and determined that Ditto had a good arguable case that the contract was made in both England and California given that it had been agreed by email between the respective parties with signature versions being sent by email. It would be artificial to determine the place that the contract was made on the happenstance of the order in which the agreements had been signed. As the contract had been signed in both California and England, it had effectively been made in both jurisdictions.

Contract governed by English law: The Deputy Master also considered the gateway under subparagraph (c). It was common ground that the court had to determine what law governed the agreements by reference to Article 4 of the Rome I Regulation (which remains part of English law as retained EU law). The Deputy Master accepted that this was a case where both parties had obligations to perform in different jurisdictions. However, the defendants’ obligations were primarily to be performed in California whilst Ditto’s obligations were to be performed outside as well as within the UK. On this basis, the Deputy Master found that the agreements were most closely connected with California and that therefore it was likely that Californian law should govern them.

Tort gateway

In respect of the tort gateway, Ditto relied on claims for misrepresentations by the defendants which they stated were made in California and received by Ditto in England.  Paragraph 3.1(9) of CPR PD6B provides that jurisdiction can be established where:

“(9) A claim is made in tort where –

(a) damage was sustained, or will be sustained, within the jurisdiction; or

(b) damage which has been or will be sustained results from an act committed, or likely to be committed, within the jurisdiction.”

Damage resulting from act within the jurisdiction: Addressing the gateway in subparagraph (b) first, the Deputy Master rejected the argument that the defendants’ acts (ie their misrepresentations) had been performed in England as a result of them being received by Ditto in England. He relied upon Newsat Holdings Ltd v Zani where David Steel J determined that the relevant act for establishing whether the tort gateway for a fraudulent misrepresentation was engaged is the place where the act was made rather than where it was received.

Damage sustained within the jurisdiction: However, Ditto succeeded on the gateway at subparagraph (a) in circumstances where Ditto had paid monies to the defendants from its English bank account – ie it had a good arguable case it had suffered harm in England.

Third limb: was England clearly or distinctly the appropriate forum to determine the dispute?

The Deputy Master noted that if he was not satisfied that England was clearly and distinctly the appropriate forum, he must set aside the original order granting permission (as per Lord Mance in VTB v Nutritek). The principles a court must apply when answering this question are well established under the test in Spiliada Maritime Corporation v Cansulex per Lord Goff at pp 478E-482A in which a court should evaluate “the forum in which the dispute could be most suitably be tried for the interests of all the parties and for the ends of justice”.

Assessing that test, the Deputy Master concluded that the natural forum for the trial of the dispute between the parties and the place with which it has the most real and substantial connection is the State of California.  The Deputy Master reached that determination on the basis that:

  1. the defendants are based in and carry-on business in California
  2. the disputes primarily centre upon the defendants’ conduct which was performed in California
  3. the defendants’ damages claims are closely connected with their place of business in California (whilst “it is rather less clear” whether Ditto’s claims to exploit the defendants’ portfolio works was to be globally rather than just in England)
  4. the governing law of the two agreements is likely to be that of California

The Deputy Master interestingly found the fact that the defendants’ witnesses were based in the US, and the fact that Ditto had issued its claim first in England, were of little weight when considering the issues.

The Deputy Master then considered what impact the fact that the defendants had issued proceedings in New York rather than California had on his decision. He found that in respect of this application, it was Ditto’s burden to establish that the English courts were the appropriate forum. No obligation fell on the defendants to establish that New York was the correct forum. Therefore, it was irrelevant that the defendants had issued in New York rather than California. He stated that may be a matter for the New York courts to grapple with later.

The outcome

Accordingly, whilst Ditto had satisfied the first two limbs of the test outlined in Altimo Holdings, Ditto failed on the third limb and therefore the Deputy Master set aside the alternative service order.

Takeaways

The case is a useful reminder for those that have commercial dealings with entities overseas and especially where contracts are concluded electronically. It is imperative that parties should provide a dispute resolution clause stating where they want their disputes to be heard. Otherwise, as this case illustrates, protracted and costly satellite litigation can result even before the parties have passed the starting line.

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