Overseas defendants and the long (jurisdictional) arm of the law

Tuesday 14 February 2012

Author: Simon Ladd

First published in NZ Lawyer 10 February 2012, Issue 177.

Commerce Commission v Deutsche Bahn AG & Ors (High Court, Auckland, CIV-2010-404-005479, 12 October 2011, Justice Venning) represents the latest challenge by an overseas defendant to the jurisdiction of New Zealand courts over alleged anti-competitive conduct occurring overseas.

The judgment concerned a protest to the jurisdiction by Swiss freight forwarder Kuehne + Nagel International AG (Kuehne + Nagel) in proceedings brought by the Commerce Commission (the Commission) under the Commerce Act 1986 (the Act). The Commission alleged that Kuehne + Nagel entered into and gave effect to seven cartel agreements in breach of section 27(1) and (2) of the Act:

  • WRS 2001 agreement – an agreement to pass on security surcharges imposed on freight forwarders by airlines;

  • United Kingdom NES agreement, Italian SAF agreement, (United States) Air AMS agreement, (Canadian) ACI agreement and Swiss SFA agreement – agreements to impose a surcharge to recover costs related to additional security measures required by the relevant national authorities; and

  • Chinese CAF agreement – an agreement to insulate freight forwarders from the impact of the revaluation of the Chinese currency by the People's Bank of China.

As the proceedings were served out of New Zealand without leave and Kuehne + Nagel protested jurisdiction under rule 5.49 of the High Court Rules, the Court had discretion whether to assume jurisdiction under rule 6.29(1). Under that rule, the Commission was required to show a good arguable case – a sufficiently plausible foundation but less than a prima facie case – that an act to which the claim relates was done in New Zealand, or that any loss or damage to which the claim relates was sustained in New Zealand. If the Commission could satisfy that threshold test, then the Court must consider whether to assume jurisdiction, in particular whether there is a serious issue to be tried on the merits, whether New Zealand is the appropriate forum for the trial, and any other relevant circumstances supporting an assumption of jurisdiction.

The Court began by noting that rule 6.29 requires separate consideration of each cause of action.

The s 27(1) allegations – "Entering into..."

In relation to the allegations that Kuehne + Nagel entered into the cartel agreements, its protest to jurisdiction was upheld. The "immediate difficulty" for the Commission with its claims under section 27(1) was that all of the agreements in issue were entered into outside New Zealand. As a result, section 4(1) of the Act applied:

    This Act extends to engaging in conduct outside New Zealand by any person only where that person is resident or carrying on business in New Zealand and to the extent that such conduct affects a market in New Zealand.

The Court applied the Supreme Court's approach in Poynter v Commerce Commission [2010] 3 NZLR 300 that "To the extent that the Act is not explicitly extended to conduct outside New Zealand by s 4, it does not apply." The fundamental issue was therefore whether it could be said that Kuehne + Nagel, a Swiss company, carries on business in New Zealand.

The Court referred to Bomac Laboratories Ltd v F Hoffman-La Roche Ltd (2002) 7 NZBLC 103,627 where Harrison J similarly was faced with an overseas defendant alleged to have engaged in contravening conduct in New Zealand. In determining whether it could be said that the overseas defendants were carrying on business in New Zealand through their local subsidiaries, Harrison J noted that two avenues might support such a finding: agency or piercing the corporate veil.

However, in this case, the weight of evidence showed that the New Zealand subsidiary, Kuehne + Nagel Limited (Kuehne + Nagel NZ), operated as a separate legal entity from Kuehne + Nagel International AG and did not suggest an agency relationship, so the Court concluded that Kuehne + Nagel did not carry on business in New Zealand either directly or via its wholly owned New Zealand subsidiary. Nor was there any basis (for example, that corporate structures were a sham) to lift the corporate veil. The Commission therefore could not establish that entry into the alleged agreements came within the jurisdictional limits in section 4 of the Act. Consequently, the Court declined jurisdiction.

The s 27(2) allegations – "Giving effect to..."

Notwithstanding its conclusion that it did not have jurisdiction over the "entry into" causes of action, the Court then considered the more difficult question of whether Kuehne + Nagel had given effect to the provisions of the various agreements in New Zealand.

The Court again considered Bomac where Harrison J accepted that, while the international defendants could not be said to be carrying on business in New Zealand through their New Zealand subsidiaries, there was a parallel agency relationship pursuant to which the international defendants used their New Zealand subsidiaries to give effect to agreements settled overseas but designed to affect, inter alia, the New Zealand market.

In the present case, the Commission similarly sought to attribute conduct in New Zealand (such that the section 4 requirements would not apply) to the international defendants. That argument rested on section 90(2)(b) of the Act, which provides for attribution of the conduct of a person "at the direction of or with the consent or agreement (whether express or implied) of a director, servant or agent of the body corporate ... " to the body corporate. The Commission was therefore required to establish a good arguable case that Kuehne + Nagel NZ gave effect to the proscribed agreements on behalf of Kuehne + Nagel at the direction or with the consent or agreement of an agent of Kuehne + Nagel.

Kuehne + Nagel's protest to jurisdiction was rejected for five of the seven alleged cartel agreements. The High Court accepted that the implementation of overseas agreements in New Zealand by Kuehne + Nagel via Kuehne + Nagel NZ was, in principle, arguable. There was a sufficient factual basis for the Commission's allegations that the cartel agreements were given effect to in New Zealand by Kuehne + Nagel NZ at the direction, or with the consent or agreement of, an agent of Kuehne + Nagel. The picture painted by the evidence was of agreements entered into by the group internationally being implemented in New Zealand through direction from overseas regional offices and the head office in Switzerland. The Court also considered that the nature of the freight forwarding industry, where at least three quarters of freight is paid for at destination (i.e., in most cases a number of members within the Kuehne + Nagel group were required to be involved to implement the agreements) was a relevant factor.

However, Kuehne + Nagel's protest in respect of the two remaining agreements was upheld because there was insufficient evidence that the agreements were in fact implemented in New Zealand.

This nuanced judgment represents a further evolution of the Court's approach to jurisdiction under the Act and High Court Rules – and further confirmation that overseas defendants will not avoid the jurisdiction of the New Zealand Courts simply because they are operating outside New Zealand's territorial boundaries. Leave to appeal the decision has been granted.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Simon Ladd

    Partner Auckland
Related areas of expertise
  • Competition