Commercial Disputes

Filing deadlines - the CAT pounces

Thu, 26 Mar 2026 10:34:00 Z

It also highlighted the disruptive nature of the practice of leaving it to the last minute before the expiry of a deadline to seek an extension of time, "in expectation of receiving the documents by the required time, the Registry staff will usually have made arrangements, often outside normal working hours, for the immediate processing and onward transmission of those documents to Tribunal members, who themselves will usually be working to a tight timetable". With budgets tight the CAT is seemingly reluctant to incur any unnecessary overtime costs.

Promising to keep "a close watch on these matters", it suggested that in some cases the tribunal may require a senior member of the relevant legal team to explain in writing why the "situation" has arisen.

Two recent decisions bear out this new harder line approach to deadlines.

CAT finds no justification for the delay for late entities opting-in after the deadline

In early March, the tribunal made a ruling in the Commercial and Interregional Card Claims (interchange fees) collective proceedings[1] in favour of Visa and Mastercard in relation to their application challenging the inclusion of various legal entities named in the opt-in class register.

In the application, the tribunal was asked, by the class representative, in relation to any entities the tribunal considered had not validly opted in, to provide permission for those potential class members to opt in late under Rule 82(2) of the Tribunal Rules. In a unanimous decision, it declined to do so.

Some entities had missed the deadline by only a few hours or due to an administrative error but then waited months to bring an application for permission under Rule 82.

Regarding the applications to opt in late, the tribunal noted that these applications were not made promptly, with there being no good reason for the delay. The tribunal also repeatedly referred to the fact that there was no witness evidence about the reason for failing to opt in properly or the delay.

"Compliance with any Tribunal deadline is mandatory, not discretionary. That is all the more so for the important process of identifying the class for the purpose of opt-in collective proceedings. The process to specify a fixed date for opting in serves the important purposes of creating certainty in the proceedings and providing the defendant with an understanding of its legal exposure. It cannot be approached with the casualness displayed in the process in these proceedings."

The tribunal focused on the impact on the integrity of the opt-in regime which would be undermined if parties do not take the opt-in deadline seriously and if they do not feel obliged to seek to address any problems promptly and with proper explanations of the reasons for the problem.

No "exceptional" circumstances to allow grant of extension of time in CAT

In Aramark v CAT (Case: 1766/4/12/26), a decision handed down on 10 March 2026, the applicant Aramark was refused its request for an extension of time under Rule 25(3) of the Competition Appeal Tribunal Rules 2015. The result is that the Competition and Markets Authority's (CMA) order, for Aramark to divest its 90% stake in Entier, stands.

By way of background, in January 2025 Aramark acquired 90% of the issued share capital of Entier. In response, the CMA, launched a merger inquiry into the transaction. Following its investigation the CMA decided, in its final report, that the acquisition had created a relevant merger situation that has resulted or may result in a substantial lessening of competition. The remedy, it concluded, was the divestment of Entier.

In January and February of 2026 Aramark advised the CMA that it was considering and then intended to appeal this decision. In error, Aramark's legal team worked to an appeal deadline of 5pm on 13 February 2026. The CMA's deadline, under the CAT Rules and Tribunal's Guide, for filing an application for review under s120 of the Enterprise Act 2002 was 5pm on 12 February 2026.

Despite Aramark's legal team's apparent good faith misinterpretation of the rules, it was the tribunal's decision that it had no power to grant an extension of time under Rule 25(3) unless it was satisfied that the circumstances were exceptional. It reasoned – this was a retrospective application, intended to cure a failure to comply with the statutory time limit – an obvious first question was why the applicant had not met the deadline. The tribunal noted that no full, specific and acceptable account of the factual position, supported by a statement of truth, was provided in support of the application.

Despite the applicant advancing several arguments justifying an extension of time – including the lack of prejudice suffered by the CMA, the severity of the consequences for Aramark, and the fact that the error was caused by the solicitors, not Aramark, the tribunal did not find that there were truly "exceptional" circumstances.

Key takeaway

Per paragraph 2. of guidance note 1/2025: "When the Tribunal sets a filing deadline… it expects that deadline to be met."

[1] Commercial and Interregional Card Claims I Ltd. (CICC I) v. Mastercard Inc. and others, Commercial and Interregional Card Claims II Ltd. (CICC II) v. Mastercard Inc. and others, Commercial and Interregional Card Claims I Ltd. (CICC I) v. Visa Inc. and others, and Commercial and Interregional Card Claims II Ltd. (CICC II) v. Visa Inc. and others, case numbers 1441/7/7/22, 1442/7/7/22, 1443/7/7/22 and 1444/7/7/22

A penalty shoot-out? Not for default interest rates

Fri, 05 Dec 2025 14:42:00 Z

Background

The case concerned a bridging loan of £1.881 million secured over a portfolio of residential properties. There were two interest rates: a standard rate of 1% per month, and a default rate of 4% per month compounding monthly which was triggered by various events of default.

The borrowers challenged the enforceability of the default rate, arguing that it was a penalty. The High Court originally agreed that it was a penalty because the rate applied to events of default which it considered did not increase the lender’s risk. Following an appeal on this issue[1], the High Court was asked by the Court of Appeal to reconsider its decision.

Penalty clauses

Following the Supreme Court’s decision in Cavendish Square Holdings BV v Makdessi [2015] UKSC 67, the court must consider three questions to determine whether a clause is an unenforceable penalty:

First, whether the operation of the clause is triggered by a breach of contract. The rule prohibiting penalty clauses only applies to secondary obligations, those arising upon breach, not to primary obligations.
Second, whether the clause protects a legitimate interest in the performance of a primary obligation.
Third, whether the clause imposes a detriment which is out of all proportion to the legitimate interest being protected by the enforcement of the primary obligation. If the parties to the agreement are properly advised and of equal bargaining power there is a strong initial presumption that what they agreed was appropriate.

If there is more than one primary obligation being protected by the clause, the proportionality of imposing the detriment must be tested by reference to each of them. If the detriment is disproportionate in relation to one obligation, the clause is a penalty and is unenforceable in its entirety.

The court considers the position at the time the contract was made, not when the breach occurs. Its focus is on substance over form; a clause labelled "liquidated damages" may still be a penalty.

The Court's decision in Houssein

Was the obligation to pay the default rate a secondary obligation?

In Houssein, the default rate applied when an event of default arose and so it was a secondary obligation.

Did the default rate protect the lenders' legitimate interests?

The court recognised that there were several legitimate interests the lender was seeking to protect by imposing the default rate when an event of default occurred. The events of default included:

Non-payment: This protected the lender’s core interest in the timely repayment of its loan.
Inaccuracy of the borrower's representations and warranties: The lender had advanced the loan on the basis these were correct.
Events occurring which impact the security for the loan, such as the destruction of secured property: The lender had an interest in ensuring its security was intact and realisable.
The borrower residing in the secured properties: The regulations governing residential mortgages prohibited the lender from lending to individuals where the security was the borrower's primary residence. Breaches of those regulations carry penalties for the lender including imprisonment, so it was in its interest to ensure that the borrower did not occupy the secured property. Whilst the borrower in this case was a corporate entity, it was argued the lending arrangements were a sham and the loan was effectively made to individuals, so the lender still had an interest in mitigating this risk.
The borrower's default on other lending or its failure to pay an unappealable judgment debt of over £20,000. The lender had an interest in protecting the borrower's creditworthiness and its ability to repay its debt to the lender when it becomes due.

Was the default rate proportionate?

The presumption that properly advised parties of equal bargaining power could determine whether the rate was reasonable applied. The court noted that the borrower had advice from solicitors and a broker and had various refinancing options open to it; this lending was not "the only show in town".

The court received expert evidence that 4% was above the range of market rates but was not unreasonable. There was also evidence that dynamic rates were available in the market, with breaches of more significant obligations attracting the imposition of higher interest rates. However, the court had not received any evidence explaining the basis and rationale for the imposition of the default rate in this particular facility.

The court decided that the rate was proportionate in so far as it applied on non-payment of the loan, a change to the security portfolio, the inaccuracy of representations and warranties and breach of the non-residence provisions. These provisions all protected the core interests of the lender in ensuring it was repaid, had secured lending, was provided with accurate information at the outset of the lending, and did not face significant penalties by lending in breach of mortgage regulations.

The court had more difficulty with the proportionality of applying the rate in circumstances where the borrower failed to pay an unappealable judgment debt. The court considered that defaulting on unrelated debts did not necessarily increase the risk of the borrower defaulting on the loan. There may be good reason for not paying another debt, for example if the borrower considered it had a defence to the claim. In this case the lender knew that the borrower had an unpaid county court judgment before it agreed to the lending, but that (and other factors) only caused it to increase the standard interest rate on the loan by 0.3%. It therefore appeared incoherent that a judgment arising after the lending had been agreed triggered an event of default and a default rate of 4%.

Before the Court of Appeal's decision, the High Court had decided that the default rate was disproportionate because the lender was already protected from the borrower's credit issues by its security and the standard rate. It therefore decided it was a penalty and unenforceable in its entirety, even in respect of more serious events of default. The Court of Appeal ordered the High Court to reconsider its decision as it had not correctly considered whether the lender had a legitimate interest in applying the default rate or the proportionality of that rate.

Considering the matter again, the High Court decided the rate was proportionate. It heard evidence that the lender's preferred method of exiting the lending, assuming it was not repaid, was through refinancing rather than enforcing its security. It was therefore in the lender's interest that the borrower remained creditworthy and able to refinance on commercial terms. There was evidence that another lender known for being flexible had declined to refinance the portfolio, and that even a minor change to a lender's view of the borrower's creditworthiness could seriously impact the terms of a refinance. The lender therefore had a good reason to impose a default rate which would deter the borrower from taking any action to harm its creditworthiness. Accordingly, the default rate was not a penalty.

Conclusion

Whilst the High Court ultimately decided that the default rate was enforceable, the decision was finely balanced. The court will scrutinise default interest rates where they apply to ostensibly minor or technical breaches, and carefully assess whether they are proportionate to the interest which is being protected. Evidence of the rationale for imposing the rate to the lending in question, as well as market practice, will be critical.

[1] [2024] EWCA Civ 721

Mind the Gap: the Competition Appeal Tribunal rules on the approach to allocation of unclaimed settlement funds

Wed, 19 Nov 2025 10:53:00 Z

The application arose from a series of opt-out collective actions brought by class representative Justin Gutmann (the CR) against several train operators, including SSWT, First MTR South Western Trains, London South Eastern Railway Limited, and Govia Thameslink Railway Limited. The claims were case managed together and each alleged that the defendants abused dominant positions in the passenger rail service markets, causing aggregate losses to consumers.

SSWT settled its claim, agreeing to make up to £25 million available for class members (the Settlement Funds), alongside £4.75 million in “Ringfenced Costs” and £750,000 for distribution costs. A further agreement was reached between the parties (after settlement) to make a charitable donation of up to £4 million to the Access to Justice Foundation from a portion of the pool of Settlement Funds, less any amount distributed to class members, such that class members and the Foundation would receive a combined total of £4 million.

The settlement terms provided that in the event class members claimed less than £10.2 million of the Settlement Funds, the CR could apply to the Tribunal for the remainder of that £10.2 million pot to be paid towards his costs, legal fees and disbursements (the stakeholder distribution). Once the charitable payment had been made, the funds available for stakeholder distribution were reduced to £6.2 million (Non‑Ringfenced Costs). The balance of the unclaimed Settlement Funds would revert to SSWT.

Despite the significant settlement sum, validated claims by class members totalled only £216,485 – less than 1% of the Settlement Funds. The CR accordingly applied to the Tribunal for allocation of the Non-Ringfenced Costs to the appropriate stakeholders, with that application including competing claims from the funder, ATE insurers, and legal representatives (the Application).

Key Guiding Principles Identified by the Tribunal

The Tribunal’s judgment on the Application identifies a number of guiding principles for the distribution of unclaimed settlement funds in collective proceedings.

1. Allocation principles and avoiding 'material disadvantage'

In reaching its decision on allocation, the Tribunal balanced the following considerations:

The interests of each of the stakeholders (i.e. the funder, ATE insurers and legal representatives) in the case;
The need for the stakeholders to make returns where appropriate;
The interests of the collective actions regime as a whole;
The sums actually available;
The poor outcome in this case in terms of the disappointingly low take-up by class members; and
The undesirability of outcomes whereby the beneficiaries of settlements are predominantly if not overwhelmingly the stakeholders rather than the class for whose benefit the proceedings were brought in the first place.

The Tribunal necessarily took a "rough and ready" approach to allocation and blended competing approaches proposed by the parties to inform its allocation of the Non-Ringfenced Costs. It sought to avoid materially disadvantaging any particular stakeholder while acknowledging that likely everyone would be unhappy because it was very clear that not all contractual entitlements could be met due to the limited pool of funds. It had particular regard to the lack of success of the settlement when considering the various entitlements, and concluded that as a result, each stakeholder should make only a modest return on its outlay.

2. Prioritising Distribution to Class Members

The Tribunal stressed that the primary purpose of opt-out collective actions is to benefit class members. Settlements should not be regarded as a success if class member take-up is poor. In this case, the Tribunal found the take-up "extremely disappointing" and emphasised that future class representatives and practitioners must learn lessons and maximise the amount distributed to class members in such situations. In a noteworthy departure from previous guidance, the Tribunal warned that distribution concerns should be addressed much earlier in proceedings, including at the certification stage.

3. Supervisory role and discretion of the Tribunal

The Tribunal retains discretion to allocate costs, fees and disbursements fairly and proportionately, regardless of the contractual arrangements agreed by the parties. It held that contractual funding arrangements set the parameters for distribution of funds between the stakeholders, not outcomes. The Tribunal emphasised that the collective proceedings regime stands on a "three-legged stool" comprising the class representative, the lawyers and the funder/ATE insurers and that "if any single leg is removed or unsupported the entire structure collapses." As such, the Tribunal has an interest in ensuring that the ultimate allocation between those parties does not disincentivise any of them from participating in the regime.

The Tribunal's discretionary oversight is particularly important where the pot of funds available for allocation amongst stakeholders is clearly insufficient to meet the competing contractual entitlements. While recognising the sophistication of the parties involved and their ability to agree contractual terms, the Tribunal exercised its supervisory authority (which had been expressly provided for in the LFA) to ensure a fair allocation between stakeholders, cutting through detail where necessary to arrive at just conclusions.

4. Level of return for Funders and Insurers

Whilst funders and ATE insurers are entitled to a commercial return for their (necessary) outlay in opt-out collective actions, in this case the Tribunal expressed that they should not expect more than a modest rate of return, given the low take-up by class members.

When analysing the appropriate level of return to this category of stakeholder, the Tribunal calculated returns using the Multiple on Invested Capital (MOIC) metric, and capped the funder's and ATE insurers' returns at a MOIC of approximately 2.34. In reaching this conclusion, the Tribunal balanced existing contractual entitlements against the interests of all stakeholders and the limited funds available, making it clear that the level of contractual entitlement is not determinative of what the stakeholders may expect to return from a Tribunal-approved distribution.

5. Approach to unclaimed funds and charitable donations

The judgment gave strong endorsement to the approach of donating unclaimed Settlement Funds to charity. It considered the parties' agreement to make a charitable donation to the Access to Justice Foundation to be a "redeeming feature", particularly in light of the extremely low take-up of the Settlement Funds. The Tribunal however refused to order that any portion of the charitable donation be taken from the funds to be reverted to SSWT, as this would have required a rewrite of the settlement agreement to the detriment of SSWT. The Tribunal emphasised that the agreed settlement terms should be respected.

Practical Takeaways for Legal Professionals

The Tribunal's judgment on the Application sets a useful guide for the distribution of settlement funds in opt-out proceedings, with a clear focus on maximising benefits for class members and ensuring fairness among stakeholders. There are a number of key practical takeaways from this judgment:

The judgment was coloured by the "very poor" take up by class members, of less than 1%. More than half of the claims submitted to the claims administrators were rejected, although it is not clear whether this resulted from a high volume of fraudulent activity, or whether the class members failed to comply with the necessary evidential requirements. Either way, there was a clear failing at the distribution phase.

Class representatives must address distribution mechanisms much earlier than previously has been required (and as early as the certification stage), to ensure they are maximising the amount of money that ends up with class members. Low take-up rates will be considered by the Tribunal when it determines the appropriate return for the funder, in particular, so there is a clear causal link between the efficacy of distribution to the class and the returns stakeholders can reasonably expect following a settlement.

Although the level of contractual entitlement was one of the key factors considered by the Tribunal when deciding stakeholder allocations, it was not determinative. Legal teams should prepare for the Tribunal’s active supervisory role and anticipate that pre‑agreed contractual entitlements may be subject to adjustment by the Tribunal in the interests of fairness.

The final apportionments were necessarily rough and ready, and the Tribunal was prepared to cut through detail with a broad axe to arrive at conclusions it perceived to be fair, proportionate, and in accordance with the interests of justice.

Funders, insurers and legal stakeholders are all essential to the operation of the collective proceedings regime. In this case, the funder and ATE insurers received a return of 2.34x in circumstances where there "clearly" wasn't enough money to go around, and the legal stakeholders were awarded a nominal success fee. The Tribunal noted, however, "an air of unreality" in the positions taken by all of the stakeholders in their respective views as to what sums would have been reasonable and proportionate for each of them to have been awarded.

In cases with low take-up by the class, in particular, charitable donations will be viewed favourably by the Tribunal.

The Court considers "greater practical experience" of expert witnesses crucial in assessing applications for the disclosure of documents restricted by foreign law

Fri, 14 Nov 2025 11:11:00 Z

Background

The main proceedings involve a shareholder class action brought by investors against Glencore and others, under s90 and s90A of the Financial Services and Markets Act 2000 in connection with alleged bribery and corruption in the business activities of certain subsidiaries within the Glencore Group.

As part of their disclosure obligations in the proceedings, the Defendants were required to disclose certain documents relating to investigations in a number of jurisdictions.

Two of the Defendants, Glencore and Ivan Glasenberg, applied to vary the disclosure order to allow them to withhold certain documents from disclosure relating to investigations by the Dutch Public Prosecutors Office ("DPPO") on the grounds that disclosure would constitute a criminal offence under the Dutch Criminal Code ("DCC"). The Claimants opposed the applications.

As is often the case, the parties' respective Dutch law experts took opposing views on the questions of whether (i) disclosure would constitute an offence under Dutch law, and (ii) there was a real risk of prosecution.

The principles

Parties seeking to derogate from their disclosure obligations on these grounds must satisfy the three-stage test derived from Bank Mellat v HM Treasury [1]:

Stage 1: Would or might compliance with the order breach foreign criminal law?
Stage 2: If so, is there a real (i.e. actual) risk of prosecution in the foreign state?
Stage 3: If stage 1 and 2 are satisfied, a balancing exercise is carried out to weigh the risk of prosecution in the foreign state against the importance of the documents for inspection in the English Proceedings.

Expert evidence regarding the foreign law relied upon will often be key in determining these questions – particularly at Stages 1 and 2. The scope of foreign law expert evidence, as emphasised by the Court in this case[2], includes:

Informing the court of the relevant contents of the foreign law;
Identifying judgments or other authorities, explaining their status as sources; and
Where there is no authority directly in point, assisting the English judge in making a finding as to what the foreign court's ruling would be if the issue were to arise for decision there.

The decision

The Court dismissed both applications, determining that they failed each stage of the Bank Mellat test.

The Court reached this decision largely accepting the evidence of the Claimants' Dutch law expert, over that of the Defendants' expert. The Court found the experience of the Claimants' Dutch law expert to be crucially important - particularly in relation to real world aspects of their evidence and their opinion evidence as to the actual risk of prosecution. The Court noted the Claimants' expert's "greater practical experience of the application of the DCC and of dealing with the DPPO, in terms of how the DPPO operates and makes decisions whether to prosecute or not, as well as factors and matters likely to be considered by the DPPO in coming to that decision".

The Court also accepted the Claimants' argument that the firming up of the Defendants' expert's opinions between his first and second reports, without sufficient explanation, called into question the reliability of that evidence.

On the issue of risk of prosecution, the Court highlighted that no evidence of any prior prosecutions under the relevant provisions of the DCC had been adduced. The Court emphasised the importance of demonstrating that the foreign law provision is not just the text of an "empty vessel" but is regularly enforced so that the threat of prosecution is real.

The Court also noted that, whilst the DPPO did not consent to disclosure of the relevant documents in correspondence with the Claimant's solicitors on the basis that it would "risk damage to the criminal case", the DPPO did not actually state that it considered that disclosure would breach the DCC or that Glencore or anyone associated with it would be prosecuted.

The Court went on to state that, whilst the relevant risk to consider at Stage 2 of Bank Mellat test is the risk of prosecution, the risk of sanction can be relevant at Stages 2 and 3. In particular, at Stage 2, the potential sanction is likely to be an operative factor considered by a prosecuting authority in deciding whether to prosecute.

The Court held that it "defied belief" that there was a real risk of prosecution given the likely sanction, the uncertainty as to whether an offence had been committed, and the possibility of convincing defences which would result in a discreet fine if the prosecution succeeded.

When considering the balancing exercise at Stage 3, the Court rejected Glencore's suggestion that the limited number of documents (three in total) justified their non-disclosure. The Court made clear that "an individual document can, in of itself, be important", particularly a document generated by an investigating authority. However, the Court ordered that a confidentiality club be imposed to address concerns that the disclosure would impede the Dutch criminal investigation.

Takeaways

The Court's judgment makes it clear that to succeed in such an application there are several aspects regarding evidence that parties should be mindful of. This includes:

Instructing experts with appropriate and practical experience. Parties should seek experts who have actual experience working with the prosecuting authority, understand how it functions, how it reaches decisions and what factors are relevant in reaching those decisions.
Providing clear, concrete examples of enforcement of the relevant statute and sanctions applied.
Ensuring that experts who develop or adjust their opinions in a reply report clearly explain the basis for doing so.
Correspondence with relevant authorities can be helpful but will not be determinative.
Arguments surrounding the number of documents to withheld from disclosure are unlikely to be persuasive either way.
Considering whether the client's objectives can be achieved through the use of appropriate confidentiality arrangements.

The judgment demonstrates the high threshold that applicants seeking permission to withhold disclosure must overcome and the importance of parties' expert selections.

[1] Bank Mellat v HM Treasury [2019] EWCA Civ 449

[2] The Court applied the guidance set out in the Court of Appeal's decision in MCC Proceeds Inc v Bishopsgate Investment Trust plc [1999] CLC 417 at [23]-[24].

Improving transparency: new rules on public access to documents in proceedings

Fri, 31 Oct 2025 14:49:00 Z

The new Practice Direction does not change the general common law position that documents become public once mentioned in open Court, but will make it much easier for members of the public to obtain those documents as legal representatives will be required to file what are known as 'Public Domain Documents' at Court within a specified timeframe after hearings.

What does it mean in practice?

From 1 January 2026, the following categories of documents will fall within the scope of "Public Domain Documents":

Skeleton arguments;
written opening and closing submissions (and any other submissions provided to a judge);
witness statements and affidavits, excluding exhibits;
expert reports, along with their appendices and annexes (including those for trial and those relied upon in relation to an interim application);
any other document or documents critical to the understanding of the hearing ordered by the judge at the hearing to be a Public Domain Document; and
any documents agreed by the parties to be Public Domain Documents.

Once a document becomes a Public Domain Document, it must be filed at Court (irrespective of whether that document has already been filed). Skeleton arguments and other written submissions must be filed two clear days after the start of the hearing at which the document is relied upon. All other Public Domain Documents must be filed by 4pm 14 days after the document is referred to or used in a hearing (or earlier if the parties agree or ordered by the Court). Unless otherwise ordered, once filed a Public Domain Document will be available to members of the public from the Court's file.

The Court will have the power to restrict or waive the requirement for Public Domain Documents to be filed, extend or otherwise amend the filing period, or make an order that a non-party may not obtain a copy of a document that would otherwise become a Public Domain Document. These orders will be known as Filing Modification Orders (or "FMOs").

The impact of the new pilot scheme

Whilst the pilot scheme could be viewed as a predominantly administrative change enabling greater public access to documents referred to at hearings, the new rules will inevitably impact various aspects of the litigation process:

Case management: in light of the new rules, parties to litigation may wish to seek to agree a set of documents that become Public Domain Documents in advance of a hearing, including any that are "critical to the understanding" of a hearing, rather than taking up court time on this. Further, whilst it is intended that the procedure for FMOs be relatively informal under the new Practice Direction, it is yet to be seen how much time will be spent by the Courts in dealing with such applications and how the Courts will approach them.
Administrative burden: the pilot scheme will put a greater administrative burden on parties in having to file Public Domain Documents within the relevant periods. For example, expert reports in complex claims often have voluminous annexes and appendices, all of which would need to be filed as Public Domain Documents. It is also not yet clear how the court will interpret the meaning of "documents critical to the understanding" of a hearing and hence it is not clear how onerous this will be.
Publicity / public scrutiny: parties to litigation also need to be prepared for the potential for increased public scrutiny of documents filed in proceedings, as well as certain Public Domain Documents (such as witness statements) being used as tools to convey a party's position to the public. Parties and their legal advisors will need to give careful consideration to the reputation and commercial implications of certain documents in proceedings becoming more easily accessible by the public.
Media access: the new rules will improve the media's access to documents referred to at hearings as, under the current rules, journalists have to rely on the parties providing them with public documents (such as skeleton arguments) or make an application to court to obtain them. However, as the filing periods do not require Public Domain Documents to be filed until several days after the hearing, it is likely that the media will still need to rely on the parties to provide documents so that reporting can be done promptly. Parties to high-profile litigation may wish to vary the filing period by agreement so that certain Public Domain Documents are filed on the same day as a hearing.
Confidentiality: there are existing tools available to parties to litigation to protect confidentiality in documents relating to proceedings and parties will need to ensure they have strategies in place to protect confidentiality in light of the new rules in advance of any hearing. For example, the Court may order that any document "critical to the understanding" of a hearing becomes a Public Domain Document and, as noted, it is not yet clear how this will be interpreted. Parties ought therefore to approach proceedings on the basis that any document within a claim may become a Public Domain Document, unless there are very compelling reasons to the contrary for that document (such as in a confidential information claim).
Settlement: The publicity risks associated with pursuing litigation under the pilot scheme may also encourage parties to alternative methods of dispute resolution (such as arbitration or mediation) or may encourage early settlement given the potential reputation and commercial implications of certain documents becoming public by default.

First of a kind: High Court grants injunction restraining enforcement of an English Court judgment

Tue, 16 Sep 2025 14:11:00 +0100

In the recent decision of Federal Government of Nigeria and another v Williams,¹the English High Court granted an interim anti-enforcement injunction (AEI) restraining a party from pursuing the enforcement of an English judgment in New York. The decision is significant for the following reasons:

It is the first reported instance of an English court granting an AEI restraining the enforcement of an English court judgment – confirming that the power of the English courts to grant AEIs is not limited to foreign judgments.
It provides guidance that, when an order for an interim anti-suit injunction (ASI) would be decisive of the forum in which the substantive dispute will be tried, an applicant must demonstrate a 'high probability' of successfully obtaining a final ASI on the merits, rather than the lower threshold test of a 'serious issue to be tried.'
It underlines the value in taking steps to address potential issues of comity in foreign proceedings when seeking AEI relief and considers how such issues apply when dealing with enforcement of an English court judgment.

Background

This recent judgment is the latest development in an ongoing dispute between Dr Williams and the Federal Government of Nigeria (FGN) and the Attorney General of the FGN (AG). The case traces back to an undercover operation in Nigeria in 1986 to identify breaches of Nigerian foreign exchange controls. As a result of this operation, Dr Williams was criminally convicted and sentenced to 10 years' imprisonment and fined, but was later pardoned in 1993. Dr Williams has since pursued a number of claims in the English courts against various Nigerian parties seeking to recover alleged losses incurred as a result of the operation. In 2016, Dr Williams commenced proceedings against the FGN and the AG. In default of acknowledgement of service, on 9 November 2018 he obtained a default judgment for c.US$15 million against FGN and the AG (the Default Judgment).

In 2020, the FGN and AG applied to set aside the Default Judgment on the basis that it was procured by fraud, alleging that Dr Williams relied on falsified documents and made false representations in support of his application for the Default Judgment. The set aside application has not reached final determination. In the meantime, in 2023, Dr Williams commenced proceedings in the US District Court for the Southern District of New York (the New York Court) to recognise and enforce the Default Judgment. The FGN and AG subsequently made an application in England for an AEI restraining Dr Williams from proceeding with the enforcement of the Default Judgment in the New York Court on the grounds that such enforcement would be vexatious and oppressive. The AEI was granted by Mr Justice Henshaw on 11 July 2025, and the written reasons for making this order were delivered in his judgment of 26 August 2025.

Granting AEIs to restrain the enforcement of English judgments

AEIs are a form of equitable relief that may be granted when the Court is satisfied that it is just and convenient to do so.³However, they are rarely granted, as applicants must displace the serious concerns of comity and/or delay which such orders engage.⁴ They are also less common than ASIs, which are sought at an earlier procedural stage to restrain the commencement or continuation of proceedings.

Despite an absence of case law considering whether AEIs may be granted in relation to English court judgments, the Court held that there was 'no principled reason' why AEIs should be limited to restraining the enforcement of foreign judgments.⁵ AEIs are an important protective mechanism in proceedings involving judgments obtained fraudulently. In these circumstances the Court considered it appropriate to grant an AEI in relation to an English court judgment in order to 'protect the integrity of the English court's own processes' and to 'prevent a risk of its own judgment being used as an instrument of fraud'.⁶

Applicable test for ASIs

Whilst the judgment concerned an application for an AEI, Henshaw J also provided guidance on the test to be met for a successful ASI application brought on the grounds that the foreign proceedings would be vexatious and oppressive. Departing from his previous dicta remarks in Investcom Global Ltd v PLC Investments Ltd [2024],⁷Henshaw J averred that the applicant will generally need to demonstrate 'a high probability that it will succeed in establishing its case for a final anti-suit injunction at trial',⁸ rather than the lower threshold test 'requiring demonstration of a serious issue to be tried' ⁹ (the American Cyanamid test). Henshaw J considered that this more stringent test will generally be more appropriate on the basis that this type of interim order 'will often be decisive of the issue by determining, in practice, where the substantive dispute is tried'.¹⁰ However, in circumstances where the interim order will not be decisive and is only sought on a temporary basis, then it may still be appropriate for the court to apply the American Cyanamid test.

Comity

This case also illustrates the procedural steps that parties can take in foreign proceedings to assuage an English court's concern that granting an ASI or AEI would offend principles of comity, which is often a challenging obstacle to overcome when seeking ASI or AEI relief. In particular, the New York Court ordered that the New York action be stayed until determination of the AEI application. The Order also stipulated that the parties will abide by the decision rendered by the English court in relation to the AEI and that if an AEI was granted, the parties agreed that no further proceedings will occur in New York unless the AEI is vacated.¹¹ Henshaw J observed that such deference to English courts illustrated that the New York Court was 'acting consistently with comity'.¹²

The Court also recognised that, as the AEI sought related to an English judgment, some of the comity sensitivities that would ordinarily be assessed in an AEI application were 'less likely to be of concern'.¹³

1.[2025] EWHC 2217 (Comm) (Williams).
2.Williams [18].
3.s37(1) Senior Courts Act 1981; Google v Tsargrad [2025] EWHC 94 (Comm) [57].
4.Google v Tsargrad [2025] EWHC 94 (Comm) [82].
5.Williams [15].
6.Williams [23].
7.Investcom Global Ltd v PLC Investments Ltd [2024] EWHC 2505 (Comm) [81].
8.Williams [18].
9.Williams [17].
10.Williams [19].
11.Williams [6] to [10].
12.Williams [23].
13.Wiliams [15].

Down and (finally) out: The Privy Council confirms the end of the Shareholder Rule exception to privilege

Tue, 26 Aug 2025 09:09:00 +0100

The Privy Council has resolutely confirmed the end of the "Shareholder Rule" exception to legal professional privilege – a decision that may have a significant impact on shareholder claims in the English courts going forward.[1]

The Shareholder Rule

The Shareholder Rule previously prevented a company from refusing to disclose legal advice it obtained, to its shareholders, on the basis of privilege, except where the advice related to litigation with that shareholder (over which litigation privilege could be maintained).

The Rule was historically justified on the basis that shareholders had a proprietary interest in the assets of the company, which paid for the advice - drawing an analogy with the relationship between trustees and beneficiaries. However, given the difficulty of reconciling this with the principle of separate corporate personality, applicants have more recently advanced it on the basis of a joint interest between the shareholder and the company.

Background

The underlying dispute in Jardine arose from the amalgamation of two companies in the Jardine Matheson group to form Jardine Strategic Limited (the Appellant), which involved the cancellation of shares in one company and triggered a statutory process under legislation in Bermuda for the purchase of shares from the shareholders who voted against the amalgamation, at fair value. A number of those shareholders (the Respondents), dissatisfied with the Appellant's offer for the shares, sought the court's determination of fair value.

In the course of the proceedings, the Respondents sought disclosure from the Appellant of the legal advice obtained by the Jardine Matheson group when it was setting the fair value, on the basis of the Shareholder Rule, which the Appellant resisted. The Shareholder Rule was applied by both the Chief Justice of Bermuda and the Court of Appeal of Bermuda, and the Appellant appealed to the Privy Council.

Decision

The Privy Council held that the Shareholder Rule was not part of the law of Bermuda and should no longer be recognised under English law.

The Privy Council considered that the original proprietary justification for the Shareholder Rule was "wholly inconsistent with the proper analysis of a registered company" and no longer supported in the authorities.

The Privy Council rejected the Respondents' arguments that there was always a joint or common interest between a company and its shareholders, or that there was an analogy, or a sufficient analogy, with the relationship between trustee and beneficiary. While the Privy Council accepted that, as long as the company is solvent, the company's interests are frequently aligned with those of its shareholders, it considered that to be a "serious oversimplification". The Privy Council noted that the interests of a company's shareholders often diverge. Further, a company must have regard not just to the interests of its shareholders, but also to those of other stakeholders, including the company's workforce and lenders. It is because of this divergence of interests that directors, in particular of "large modern sophisticated" companies, need (or would benefit from) candid and confidential legal advice on how best to make decisions, without fear of disclosure of that advice to shareholders in future litigation.

The Privy Council also rejected the availability of a narrower exception to privilege in circumstances where a shareholder could, on the facts of the case, demonstrate a sufficient joint interest in the advice sought. This would create too much uncertainty for directors and, in order for privilege to deliver its intended objective, there must be certainty.

Implications

The Privy Council's direction that Jardine should be regarded as abrogating the Shareholder Rule in England means there is no longer an automatic right for shareholders to see legal advice obtained by the company in proceedings in England and Wales. In doing so, it effectively negates the outstanding appeal of Picken J's first instance decision in Aabar Holdings SARL v Glencore plc [2024] EWHC 3046 (Comm), [2025] 2 WLR 763, that the Shareholder Rule should be abandoned.

Against a backdrop of increasing demands on directors who need to have regard to a plethora of complex and often divergent interests, this decision should be of some comfort to directors as they can now seek full and frank advice without fear of disclosure to shareholders in future litigation.

Whether Jardine will slow, or even reverse, the rise in shareholder claims, particularly unfair prejudice petitions and claims under sections 90 and 90A of the Financial Services and Markets Act 2000, remains to be seen. It is also unclear how the decision in Jardine will be applied in the context of derivative claims brought by shareholders on behalf of the company itself, including under section 260 of the Companies Act 2006. There can be no doubt though that it will be an important factor for shareholder claimants to bear in mind when considering the extent of the evidence available to prove their case against the company and/or its directors.

Going forward, it will be important for shareholders to scrutinise claims of legal advice privilege asserted by companies in litigation to ensure such claims are properly made, and to challenge them when it appears the protective powers of privilege are being exploited. Equally, companies need to ensure they are appropriately treating and labelling privileged communications so as to take advantage of this decision and ensure disclosure of legal advice can be resisted on a principled basis in future litigation.

There will of course remain instances where the disclosure of legal advice, and waiver of privilege, in proceedings is useful and even necessary. For example, to evidence that appropriate steps were taken by directors following the identification of a risk, or that directors acted and relied on legal advice in a decision made. In those circumstances, caution must be exercised to avoid the inadvertent waiver of privilege more broadly.

[1] Jardine Strategic Limited v Oasis Investments II Master Fund Ltd and 80 others [2025] UKPC 34 (Jardine)

Margin calls in times of market turbulence

Wed, 02 Jul 2025 08:21:00 +0100

Legal principles and practical guidance

In times of increased market volatility, one of the few things that is certain is an increased likelihood of margin calls. As markets fluctuate and asset values move sharply, the parties with rights to demand additional collateral under margin arrangements will often move very quickly to do so. For those caught on the wrong side of these calls, the financial consequences can be swift and severe. In any situation which is leading towards a margin call, the economic interests of the counterparties to the relevant transaction or structures are pitted against each other, and the power balance sits squarely with the party with the power to determine the margin required. This tension can lead to distorted commercial behaviour, and sometimes outright abuse.

This note outlines some of the key legal principles under English law that underpin margin calls, considers the margin call provisions in some of the most frequently used standard documentation and provides practical tips for those subjected to margin calls when considering whether to challenge them in the English courts.

Understanding the legal basis of margin calls

Margin, and margin call mechanisms, are creatures of contract. They commonly arise under the mechanics set out in the industry standard trading agreements such as ISDA Master Agreements (primarily for derivatives), Global Master Repurchase Agreements (GMRA, for repo transactions), or Global Master Stock Lending Agreements (GMSLA, for securities lending transactions). However, the mechanics may well instead be set out in non-industry standard agreements. A commonplace example being prime brokerage agreements, which are subject to bilaterally negotiated terms and conditions heavily centred on the bank’s own standard documentation. These contracts will all typically contain powers to call for variation margin when the value of a portfolio moves against the collateral provider or when credit risk increases.

There are some broad English law principles that will apply when a party is facing a margin call. To some degree, these act as constraints on the (generally very broad) contractual discretion which is given to the margin-calling party to determine when to make a margin call and what amount can be demanded. Their efficacy in redressing the inherent power imbalance should not be overstated, but they should help constrain the most egregious abuses of contractual discretion:

1. Contractual discretion must be exercised rationally and in good faith

Under English law, contractual provisions granting a party discretion to make determinations binding on the other party – such as the right to call for a margin payment – are constrained by implied duties, often called Braganza duties, after the Supreme Court’s judgment in Braganza v BP Shipping¹. These limit how discretion is exercised, requiring decisions to be made honestly, in good faith, and for proper purposes, and not arbitrarily or capriciously.

Supporting authorities – Ludgate v Citibank², Gan Insurance v Tai Ping Insurance³, and Paragon Finance v Nash⁴ – had held that discretion must be reasonable and consistent with the contract’s purpose. The Supreme Court in BT v Telefonica O2⁵ confirmed that, unless explicitly stated otherwise, the exercise of such a discretion must align with the overall contractual purpose. Braganza then expanded this duty to cover both the process and the outcome of decision-making.

2. Valuation mechanisms must be followed rigorously

Many agreements require valuation of assets or exposures according to specific contractual methodologies. The discretion conveyed to the margin calling party is limited to a power to act within the corners of those specific procedures. Departing from these methods—whether due to speed, error, or illiquidity—can open the door to challenge.

3. Notice requirements must be met

The contract provisions will generally prescribe formal notice provisions which are applicable to margin calls. A failure to comply with these could render a call invalid. Notice provisions are generally expected to be followed to the letter. The most famous example being LBIE v ExxonMobil⁶ (a notice of default case). In that case, ExxonMobil faxed a notice to a different fax number in the same Lehman office to overcome an inbound call jam on the contractually specified number. The Court held that meant the notice was invalid, but that Lehman had waived the breach because it had raised no objection at the time or indeed until 6 years later. The moral being to register objections to any technical breaches even where they seem pedantic - it may assist later.

4. Misrepresentations and market abuse

In certain cases, margin calls might be based on negligent or deliberate mis-valuations, misrepresentations, or even market manipulative conduct. These more extreme abuses of power are obviously highly fact dependent and penetrating into a proper evidential basis for pursuing such claims is a challenge. However, where an imbalance of power and financial incentives intersect, there is always temptation for abuse so keeping alert for any warning signs is always sensible.

Practical tips for contesting margin calls

The fast-moving nature of events giving rise to margin calls, the speed with which margin calls are issued and frequently repeatedly so in the face of continued volatility, and the grave consequential steps that can follow from a failure to meet even an illegitimate margin call means that delay can seriously jeopardise the legal rights of the party subjected to the margin call. Collateral providers facing the uncertainty of considering a challenge should act quickly and keep the following in mind:

• Document everything: Maintain contemporaneous records of valuations, communications, and internal decision-making processes. Press the margin-calling party for explanations and evidence to support the underlying valuations and calculations, keeping careful records of the responses. Keep contemporaneous screenshots of relevant market values if there is access to live financial data.

• Seek early legal advice: Margin commercial often turn on complex contractual language and the interpretation of technical valuation mechanics. Furthermore, what starts as a margin dispute can quickly escalate to an even more damaging termination and liquidation scenario. Pulling together the key documents which evidence the contractual framework and taking legal advice from litigation specialists experienced in the field is essential.

• Scrutinise the call: Check whether the margin call complies with contractual notice requirements, valuation methodologies, and timing. Register objections to any non-compliance, no matter how technical those may seem. Consider whether the counterparty has acted consistently with past practices or assurances and register complaints about departures if appropriate. Reserve rights and avoid acquiescence and potential waiver.
Consider injunctive relief: In urgent situations – such as those which could lead to an imminent liquidation of a portfolio – it may be possible to apply for an injunction to halt enforcement while a dispute is resolved.

• Engage strategically: In some cases, entering a constructive dialogue with the counterparty can resolve a dispute before litigation becomes necessary. But such engagement must be informed by a clear legal position.

Conclusion

Margin calls are an inherent part of leveraged trading, but they are not immune from legal challenge. In volatile markets, where valuation disputes and liquidity pressures collide, the English courts are quite prepared and well-armed to scrutinise whether margin calls have been properly made in accordance with the parties’ agreed contractual framework. Although the contractual discretion usually enjoyed by margin-calling parties means the starting point is a power imbalance in their favour, it does not provide them with a carte blanche to act as they see fit, although that is commonly the impression conveyed.

The banking and financial markets disputes team at RPC has deep experience in representing many and various clients in complex margin disputes, including institutional borrowers, derivatives counterparties, funds, brokers, and HNW investors in. Whether you are facing an unjustified margin call or preparing to challenge the liquidation of assets, our team is well-placed to provide timely, commercial, and legally robust advice.

1 [2015] UKSC 17.
2 1998] Lloyd’s Rep IR 221.
3 2001] 2 All ER (Comm) 299.
4 [2001] EWCA Civ 1466.
5 [2002] 1 WLR 685.
6 [2016] EWHC 2699 (Comm).

RPC traces the trends for LIDW25

Mon, 30 Jun 2025 14:37:00 +0100

1. International arbitration takes centre stage

International arbitration formed the backbone of LIDW25, with over 60 sessions. Discussions on whether arbitration remains meaningfully distinct from litigation offered rich perspectives on the practice's future. Panels tackled a range of jurisdictions, including the Middle East, Africa, Central Asia, the Balkans, and Turkey, with India's rising role as a global arbitral player proving a particular highlight. Developments such as the SIAC Rules 2025 featured prominently, with sessions comparing London and Singapore as key arbitration centres.

Technology and innovation, particularly AI's role in arbitration, were running themes throughout the week. Embracing technology to modernise dispute resolution, with an awareness of its ethical and regulatory questions, stirred insightful discussion. Other hot topics on the agenda were discussions of arbitration within the context of net-zero and ESG considerations, public international law and sanctions, and fraud and corruption involving state parties.

2. Fraud and asset recovery in the spotlight

Fraud and asset recovery stood out as one of the most pertinent topics at LID25, featuring a rich mix of sessions with complex and international perspectives. The integration of technology was a consistent theme of the week, from the challenges of APP fraud, crypto scams, the role of AI in fraud detection and litigation, and how to stay ahead in an increasingly digital fraud landscape.

Cross-border insolvency and restructuring received particular attention this year. Panels delved into solutions for managing insolvency challenges, reviewing many of the disputes from over the past year. Across the week, it became clear that rising economic crime and digital fraud threats are prompting a surge in fraud litigation and asset recovery innovation. It is clear that the London courts are being used as a hub of global enforcement, particularly in cases with an offshore element.

3. Geopolitics and cross-border disputes

The shifting international landscape was a notable hot topic of this year's LIDW, with cross-border trade, sanctions, and geopolitical risk standing out on the agenda. With nearly 30 sessions, there was a focus on navigating US, UK and EU sanctions, particularly amid the ongoing Russia-Ukraine conflict. Jurisdictions under the microscope included India, Africa, Russia, and the Middle East, demonstrating the growth of international commercial courts.

Investor-state dispute resolution (ISDS) was another focal point, addressing evolving the approach during elevated geopolitical volatility. The role of London courts in treaty disputes involving Latin America was highlighted, as were the growing demands on international courts as we face an uncertain global environment.

4. The rising wave of AI

Unsurprisingly, technology and AI were front and centre of LIDW25, particularly as the legal sector adapts to its rapidly evolving applications and risks. Over 20 sessions explored how AI is transforming disputes, and the approaches to their resolution. We have seen that AI is reshaping litigation workflows, including document review, evidence assessment, strategy, and client service. The sessions looked at new types of disputes emerging from AI-generated content, deepfakes, cyber-attacks, and the risks of data privacy failures.

However, a strong theme of the week was the conflict between AI innovation and ethics, with several panels raising questions about accuracy, admissibility, and transparency. At the heart of the conversation, however, was the human voice and perspective, debating key topics such as mental health and the client experience.

5. ESG and sustainability concerns are heating up

Climate, energy and sustainability disputes were significant on the LIDW agenda, with over 20 sessions demonstrating the growing position and appetite for ESG concerns in global dispute resolution. Panels explored the sector-specific challenges, from renewable and offshore disputes to the role of arbitration in resolving conflict. As increasing scrutiny is given on environmental responsibility and governance standards, greenwashing and climate-related litigation were key takeaways. The rise in ESG claims reflects a maturing legal focus on sustainability obligations, particularly in project finance and energy.

Various jurisdictions were the subject of debate, including India and the UK. However, Africa featured prominently, with multiple panels addressing ESG risk in cross border investment, mining and infrastructure. It is clear that Africa is becoming a central arena for ESG-related disputes, driven by its resource-rich landscape and increasing investment activity.

6. Group actions are gaining momentum

Finally, group litigation and collective actions are increasingly receiving attention amidst their rising role in disputes and mass litigation. With many of the sessions focusing on London, LIDW has demonstrated the UK's strategic importance as a hub of key class action cases. Discussions on settlement practices across the UK, US, and Netherlands, however, emphasised the need for cross-jurisdictional learning to effectively manage settlement.

The sessions on litigation funding, class actions and mass claims, particularly post-PACCAR, indicate an increasing accessibility to group litigation in the UK, especially in competition, data privacy and consumer harm cases. The varied conversations signalled a shift towards a more tech-orientated market, with the effect of social media also providing a fresh outlook on the influence of online discourse.

CAT approves settlement in Merricks v Mastercard

Fri, 23 May 2025 14:14:00 +0100

The CAT "fully recognise[d] the importance of litigation funding" in its judgment, and noted the "extraordinary" circumstances of the settlement, particularly in light of its unusually low value relative to the initial claim value.

Background

In 2007, the EU Commission adopted a decision that the setting by Mastercard of the EEA multilateral interchange fee (EEA MIF) amounted to an infringement of Article 101 TFEU. The CR issued a follow-on opt-out claim against Mastercard in the CAT on behalf of what was estimated to be around 46.2 million UK residents (the Class Members).

The Merricks claim was initially valued at around £14 billion, based on losses incurred by the Class Members on: (1) UK domestic transactions; and (2) EEA cross-border transactions. UK domestic transactions, to which the EEA MIF did not apply, comprised about 95% of the claim value.

A number of judgments during the course of the proceedings significantly affected the value of the claim. In particular, by the time of settlement it was common ground that approximately 95% by value of the transactions were domestic transactions to which the EEA MIF did not apply and that in order to succeed the CR would have to show, among other factors, that the relevant UK interchange fees were caused by the EEA MIFs. This affected the CR's perception of the strength of the claim in respect of UK domestic transactions, and the likely value of the claim in respect of cross-border transactions. Indeed, the judgment refers to the CR having received advice from his counsel that the claim in respect of UK domestic transactions should not be pursued at trial.

The CR and Mastercard entered into settlement negotiations. Informed by the low prospects of success on the claim concerning the UK domestic transactions, no value was given to those claims. Accordingly, and in light of the likely value of the claim in respect of the UK-EEA transactions, the CR and Mastercard agreed a settlement sum of £200 million (the Settlement Sum).

The Funder, however, argued that the Settlement Sum was too low. It also threatened to (and ultimately did) commence arbitration proceedings against the CR for alleged breaches of the applicable litigation funding agreement. As a result, the CR requested a £10 million indemnity from Mastercard to cover the CR's liabilities in respect of the threatened arbitration proceedings, which Mastercard agreed to.

Since the proceedings were conducted on an opt-out basis, the settlement agreement required approval from the CAT to ensure that the interests of the Class Members are protected. The CR and Mastercard therefore applied for the CAT's approval.

The Funder intervened, objecting to the settlement, including as to whether there should be a settlement, the Settlement Sum and the proposed distribution arrangements.

The judgment

The CAT ultimately approved the settlement, subject to amendments to the distribution arrangements put forward by the CR and Mastercard. In reaching that decision, that CAT considered the settlement application in two stages: first, whether the settlement was just and reasonable, and second, whether to approve or amend the distribution arrangements put forward.

Whether the settlement was just and reasonable

The Funder submitted that the settlement had to be just and reasonable to all involved stakeholders, including the Funder. The CAT disagreed and held that the test for approval of a settlement in opt-out collective proceedings is whether it is "just and reasonable" to the Class Members only who are not actually involved in the proceedings.
The CAT agreed with the CR and Mastercard that it was reasonable to discount the value of the claim connected to the cross-border transactions from a headline of £707 million. The discount accounted for, among other things, errors in the initial quantum calculations, a judgment against the CR on limitation in respect of certain transactions, and the likely position on pass-on of losses from merchants to the Class Members. As regards the UK domestic claims, the CAT also found that it was reasonable to exclude these. It made high-level observations as to why the CR's case was weak on those transactions.
Ultimately, the CAT weighed various factors and found that the Settlement Sum was "just and reasonable", even in circumstances where it amounted to less than 1.5% of the value of the initial claim. The CAT was not deterred by the lack of an independent counsel's opinion from the CR that the settlement was just and reasonable in the interests of the Class Members, but recognised that in other cases this may be expected.
In reaching this conclusion, the CAT confirmed that the £10 million indemnity from Mastercard did not cause a conflict of interest for the CR, in part because the CR had already decided to enter the settlement agreement before he requested the indemnity. It could not therefore have affected his decision-making process.
Notably, a factor weighing in favour of the approval was that the CR and the Funder had fallen out very publicly over the settlement, and as a result, the CAT could not see how the case could progress if it did not approve the settlement.

Distribution proposals

The CAT rejected the suggestion that it had a binary choice between accepting the settlement and accompanying distribution arrangements proposed by the parties, or rejecting the application. On the contrary, the CAT held that it was able to approve the settlement but amend the distribution arrangements.
The CAT exercised its discretion in amending the distribution arrangement put forward by the CR and Mastercard. The arrangement approved by the CAT divided the settlement into three "pots":
1. Pot 1. The first £100 million of the Settlement Sum was ring-fenced for distribution to the Class Members. Payments are to be made to Class Members who claim on a per capita basis. The per capita payment made to each Class Member will increase or decrease depending on the rate of take-up, capped at £70. If more Class Members than expected come forward, the sums payable to Class Members may be topped up by Pot 3 (see below). Any leftover unclaimed sums will go to charity alongside sums left over from Pot 3.
2. Pot 2. Pot 2 is ring-fenced to pay the Funder's costs of the claim, estimated at around £45 million. The costs include: (1) the direct costs, fees and disbursements paid by the Funder on behalf of the CR to date; (2) the Funder's own costs, such as the costs of obtaining independent advice on specific issues in the proceedings; and (3) any anticipated future costs to resolve the proceedings. Some elements of these costs are to be assessed by an independent costs Judge (paid for from Pot 3).
3. Pot 3. Pot 3 comprised the remainder of the Settlement Sum including the return to pay to the Funder. The CAT drew on case law from Australia and Canada to assist it in considering what the appropriate return to the Funder should be. It weighed factors such as the litigation risk assumed by the Funder, the adverse costs risk assumed by the Funder, the time to reach settlement, the outcome and the amount of the settlement. The conclusion the CAT reached was that the Funder should receive a return on its investment of 1.5 or £68 million (i.e. the profit element was 50% of its incurred costs). This, the CAT noted by way of cross-check, amounted to 34% of the Settlement Sum.
After paying out any miscellaneous costs of the CR, the Funder's profit element, and topping up Pot 1 as required, the remainder of Pot 3 was designated for the charitable recipient (the Access to Justice Foundation).

Key takeaways

The CAT held that a return on investment for the Funder of 1.5 was appropriate. This was significantly lower than the return the Funder had sought. However, the CAT stressed that the circumstances of this case were extraordinary.
- The Settlement Sum was less than 1.5% of the initial claim value, reflecting that the settlement reached was "very far from a success".
- The Funder had intervened very publicly, sought to oppose the settlement, and requested a very significant portion of the Settlement Sum be paid to it rather than Class Members.
- Despite this, the CAT emphasised (as it has in previous settlement decisions) the important role played by litigation funding in collective proceedings.

For the reasons above, the CAT was clear that its approach in this case "should not be regarded as a guide for more positive settlements of cases that reflect better the public policy behind the introduction of collective proceedings."

How the CAT might approach the question of distribution (including funder return) will be case specific. However, this case demonstrates that in cases where the outcome is marginal, or the settlement sum relative to costs is low, the CAT will not hesitate to adapt parties' proposals.

For practitioners, the judgment makes clear that:
- Parties are subject to a duty of full and frank disclosure when applying for settlement approval, and the CAT will expect to see arguments both for and against the settlement in the submissions put before it.
- CRs should produce full opinions from their counsel, explaining why the settlement is reasonable to the class members.
- As the CAT needs a proper opportunity to consider settlements and the related evidence and submissions, settlements "at the door of the court" are problematic and it should be recognised that the outcome of such an approach is likely to be that the trial will be adjourned and re-fixed if the settlement is not approved. To protect a trial date, ensure applications are made as early in the proceedings as possible.

Court of Appeal decision allows litigation funders to be paid first in collective proceedings

Tue, 13 May 2025 10:00:00 +0100

Two years on from the seminal 'PACCAR' judgment, the Court of Appeal has upheld the Competition Appeal Tribunal (CAT) decision in Gutmann v Apple [2024] CAT 18, that it has the power to order payment of a return to a litigation funder before any distribution of damages to members of the represented class. The CAT will need to exercise final control in each case over whether a litigation funder's return should be paid before distribution to the class, and the amount of that return.

Background

The Court of Appeal's judgment¹ arose out of opt-out collective proceedings against Apple pursued by Justin Gutmann on behalf of a class of around 26 million UK iPhone users. The claim relates to allegations surrounding issues with iPhone batteries and "throttling" of iPhone performance.

The CAT certified the collective proceedings in November 2023 subject to reviewing a revised Litigation Funding Agreement (LFA), which required amendment to take account of the Supreme Court's decision in PACCAR. However, the revised LFA contained terms which, in certain circumstances, provided for payment of a return to the funder before any distribution of damages to members of the represented class. Apple contended that the CAT had no jurisdiction under s.47C CA 1998 or the CAT rules (e.g. Rule 93) to permit the funder to be paid in priority to the class.

At first instance, the CAT rejected Apple's arguments. The CAT held that it has the power to permit payment to a funder to be made before distribution of damages to members of the class, and therefore that it is permissible for a class representative to enter into a LFA which contemplates this.

Apple appealed that decision (among other grounds), arguing that the CAT does not have the power to order that the funder's return be paid out of an award of damages prior to distribution to the class. It argued that low take-up was an accepted part of the regime and that in a situation where there was very high take up (e.g. account credits), that was a risk that Parliament had allocated to the funder.

The Court of Appeal's decision

The Court of Appeal unanimously dismissed Apple's appeal, holding that the legislation underpinning the UK's collective action regime permits payment of the funder's return from an award of damages in priority to distribution to the class. Accordingly, the Court of Appeal held that it is permissible for class representatives to enter into LFAs which contemplate this.

At the Court of Appeal, Apple accepted that the CAT is able to order payment of a funder's return before distribution of any damages to class members in both opt-in collective proceedings, and in settlements made in opt-out collective proceedings. The Court of Appeal therefore considered it would be anomalous if the CAT did not have the same power following an award of damages.

The Court of Appeal also provided guidance that payment of a funder's return might be "particularly necessary" where the take up of damages by the class might be particularly high, for example if the CAT proposes to order distribution of damages by way of an account credit to members of the represented class. This reflected the obiter comments previously made by the Court of Appeal in BT Group v Le Patourel [2022] at [99].

However, the Court of Appeal emphasised that whether it is permissible for a payment of a funder's return to be made in collective proceedings before any distribution of damages to members of the represented class, and the amount of any funder's return, will always be subject to the control of the CAT under its supervisory jurisdiction.

The Court of Appeal also made clear that the decision allows the class representative to pay other costs, such as those of the lawyers, in advance of class.

Key takeaways

Funders and lawyers backing collective actions will take significant comfort from this decision, which will provide them with greater certainty that they can safely fund claims which are likely to see high take up rates and that in the right cases, they can make an application for their return to be paid in advance of distribution if the cases are successful.

At the certification stage, litigation funders can expect that LFAs which contemplate payment of their return before the represented class are likely to be considered permissible (although each LFA will still be scrutinised on its terms).

But PCRs and funders will want to very clearly articulate why on the facts in their case this term is appropriate. Following an award of damages, litigation funders can be confident that, at least in principle, PCR's can apply for a payment of their return can come from damages before distribution.

Whether Apple seeks to appeal, and whether the Supreme Court is willing to hear any new appeals on funding collective actions, remains to be seen.

Note: The Court of Appeal is hearing the PACCAR-related appeal issues (including those arising in Neill v Sony, Apple v Kent, CICC II Ltd v Visa, CICC I v Mastercard, and a PACCAR-related ground of appeal in Gutmann v Apple) in June 2025.

¹Gutmann v Apple [2025] EWCA Civ 459

Another blow for Italian regional authorities in Italian Swaps saga judgment

Wed, 12 Mar 2025 11:15:00 Z

Shortly before Christmas, the Commercial Court handed down judgment in another one of the long line of 'Italian Swaps Cases', Dexia SA v Regione Emilia Romagna.¹ These cases concern the validity of derivative transactions between Italian regional authorities and the counterparty banks. Various Italian regions have, since the 2020 Italian Supreme Court decision in Banca Nazionale del Lavoro SpA v Comune di Cattolica (8770/2020) (Cattolica), sought to set aside derivative transactions on the basis that the regions did not have capacity under Italian law to enter into these swaps. The English High Court and Court of Appeal, in numerous recent decisions, have consistently affirmed their jurisdiction over the derivative transactions, rejected the regions' Italian law arguments and granted declaratory relief to counterparty banks – we have previously covered this topic here, here, here and here.

In the present case, Mr Justice Bryan held that the derivative transaction (the Transaction) between the claimant bank (Dexia) and Regione Emilia Romagna (Emilia Romagna) was valid and enforceable, with no applicable Italian law restrictions on Emilia Romagna. He therefore ordered the various heads of declaratory relief sought by Dexia.

This decision adds to the body of robust judgments comprehensively rejecting the Italian regional authorities' arguments. The High Court has held a firm line against attempts to repudiate contracts entered into and performed for decades on various unmeritorious technical grounds. It remains to be seen whether these issues will continue to be pursued in the Italian courts. If so, claims for declaratory relief by counterparty banks will continue.

The Transaction and Emilia Romagna's objections

In essence, the Transaction was entered into in 2004 (somewhat earlier than most Italian Swaps Cases) in order to hedge Emilia Romagna's exposure to a floating rate loan of over half a billion euros.² The Transaction was a straightforward interest rate swap, being a collar for the first five years and a swap of fixed for variable interest for the remainder. Evidence suggested that the Transaction was on the best terms available and was financially beneficial to Emilia Romagna (by comparison with an unhedged position). Emilia Romagna had performed its obligations under the Transaction without complaint in the intervening period. Emilia Romagna is also a territorial (rather than local) authority and so has more autonomy than the local authorities which have brought previous Italian Swaps Cases.

Despite this, Emilia Romagna argued, based on Cattolica, that the Transaction was invalid. There were three broad objections: (i) that Emilia Romagna lacked capacity to enter the Transaction because it was "speculative" and involved a resort to "indebtedness" otherwise than for the purpose of financing, both falling foul of Italian laws governing the capacity of regional authorities; (ii) Emilia Romagna lacked authority to enter the Transaction under Italian law, chiefly because of an alleged failure to obtain Regional Council approval; and (iii) the Transaction itself failed to comply with mandatory Italian laws governing financial transactions.

Proceeding in the absence of a party

Although it was Emilia Romagna which sought to avoid the Transaction, Dexia brought these English proceedings. Emilia Romagna challenged the validity of the Transaction by issuing proceedings in the Italian courts in 2021, seeking declarations that it was null and void for Emilia Romagna's alleged want of capacity and authority, and the Transaction's alleged want of validity under Italian law. In response, Dexia issued these proceedings against Emilia Romagna in the English High Court seeking declarations along the lines of those sought and ordered in the other Italian Swaps Cases to uphold the Transaction and recover Dexia's costs of the proceedings.

A notable feature in this case, although not unique even among Italian Swaps Cases, is that neither Emilia Romagna nor its solicitors were present at trial. Although Emilia Romagna had solicitors on the record, had filed an Acknowledgment of Service, had signed consent orders and continued to instruct its solicitors to remain on the record up to the point of trial, it did not participate substantively in the proceedings and was not present at trial. Bryan J therefore analysed the factors relevant to his decision to proceed with the trial notwithstanding Emilia Romagna's absence.

In particular, Bryan J considered Mrs Justice Cockerill's decision in Banca Nazionale del Lavoro v Provincia di Catanzaro [2023] EWHC 2706, which dealt with very similar circumstances. The court had the power to proceed with the trial in the absence of a party under CPR 39.3 and Bryan J was satisfied that in the present case Emilia Romagna had voluntarily absented itself from the trial and an adjournment would not remedy matters. He therefore exercised his discretion to proceed, as well as setting out the requirements on Dexia in these circumstances. Chief among these was ""an obligation of fair presentation which is less extensive than the duty of full and frank disclosure on a without notice application" such that they must draw to the attention of the court "points, factual or legal, that might be to the benefit of [the unrepresented defendant]"". Dexia was therefore required to adduce factual and expert evidence on the Transaction, questions of Italian law and derivative analysis, albeit these witnesses were not cross-examined.

The validity of the Transaction

Proceeding on this basis, Dexia persuaded Bryan J that it should be granted the declarations sought and that the arguments raised by Emilia Romagna in the Italian Proceedings should be rejected.

(i) Capacity

Emilia Romagna firstly argued that the Transaction was speculative as opposed to hedging and involved indebtedness that was not for the purpose of funding investments. Italian local authorities arguably lack capacity under Italian law to enter into contracts of these kinds (Dexia's Italian law expert suggested that this was wrong, but this was not pursued at the trial). Aside from these points, it is accepted that Italian public authorities have general civil law capacity.

A transaction is not speculative under Italian law where (1) it is entered into expressly to reduce the riskiness of other positions held; and (2) there is a high degree of correlation between the exposure being hedged and the hedging instrument regarding factors such as maturity and interest rate. The Transaction was plainly not speculative. It was explicitly entered into by Emilia Romagna to hedge against its interest rate exposure under its existing debt. There was also a perfect correlation in financial and technical characteristics between the exposure and the hedge (i.e. the Transaction).

Bryan J was not persuaded by the technical arguments that Emilia Romagna raised in the Italian Proceedings under this heading, which focused on the Transaction's initial negative mark-to-market value (MTM) of €1.6m, without a corresponding upfront payment. This and the other technical arguments were irrelevant to the issue at hand. The Transaction was not speculative.

Nor did the initial negative MTM, or any other feature of this unremarkable interest rate swap, cause the Transaction to be categorised as "indebtedness", as Emilia Romagna contended for. Emilia Romagna's actual underlying indebtedness (the pre-existing floating rate loan of over half a billion euros) was not modified or extinguished by the Transaction and so the second limb of Emilia Romagna's capacity argument failed.

(ii) Authority

Emilia Romagna argued that the Transaction was not approved by the Regional Council as required. The Transaction being governed by English law under standard ISDA terms, issues of authority (as distinct from the issues of capacity above), are governed by English law. This follows other High Court decisions in Italian Swaps Cases. Bryan J was amply satisfied that Emilia Romagna held out the employee who signed the resolution entering into the Transaction on its behalf as having been properly authorised, including in legal opinions provided to Dexia, and he therefore had ostensible authority under English law to bind Emilia Romagna to the Transaction. Further, Emilia Romagna had ratified the Transaction by performing their obligations under it without complaint for almost 20 years. For completeness, Bryan J also addressed the position under Italian law (which did not apply) and found that Emilia Romagna's arguments were wrong as a matter of Italian law in any event.

(iii) Invalidity

Emilia Romagna's final line of argument was that certain mandatory rules of Italian law were not complied with. This was fundamentally misconceived: the Transaction was governed by English law, none of these points went to Emilia Romagna's capacity (which was the only aspect of the Transaction to which Italian law applied), and so these Italian law principles did not apply. This was well-supported by a variety of previous decisions in Italian Swaps Cases. Even under Italian law, Emilia Romagna's contentions were found to be without merit.

Declarations

Dexia put before the Court a table setting out the declarations it sought.³ They are a synthesis of the declarations ordered in other Italian Swaps Cases, seeking confirmations of Emilia Romagna's capacity and authority to enter the Transaction and the Transaction's own validity. The declarations go beyond those strictly required under English law to determine the validity of the Transactions to include points of Italian law for Dexia to employ in the Italian proceedings if required. Dexia was also awarded indemnity costs, leading to an interim payment of approx. £476,000 being ordered in a separate judgment, Dexia SA v Regione Emilia Romagna (Re Costs) [2024] EWHC 3238 (Comm).

Conclusion

This case is perhaps one of the more straightforward of the Italian Swaps Cases. It is, however, a useful summary of the state of play and a successful model for claimant banks to adopt when faced with an Italian regional authority looking to repudiate a transaction. It remains to be seen how the Italian courts will dispose of the proceedings before them, in which Emilia Romagna is the claimant, so there remains the possibility of inconsistent judgments.

The case is also of more general application for parties faced with an opponent who fails to participate in proceedings, given its helpful summary of factors which may be taken into account when deciding whether or not a trial or hearing should go ahead and the procedure required of the attending party in such circumstances.

¹Dexia SA v Regione Emilia Romagna [2024] EWHC 3236 (Comm) (13 December 2024)

²The detailed background to the Transaction is set out in the judgment at [36] to [58].

³The declarations are annexed to the judgment.

The PCR's "heavy responsibility": CAT judgment in Riefa v Apple and Amazon emphasizes the high standards expected of a PCR

Thu, 27 Feb 2025 15:02:00 Z

Summary

The Competition Appeal Tribunal (the Tribunal) recently handed down an important judgment, refusing to certify the proposed collective proceedings in Christine Riefa Class Representative v Apple Inc. & Amazon.com, Inc.¹ After two certification hearings, the Tribunal was not satisfied that it would be just and reasonable for the Proposed Class Representative (the PCR) to bring the proceedings following concerns relating to Professor Riefa's understanding of the PCR's funding arrangements. The judgment reiterates the strict requirements and high standards expected of a PCR.

Background

The PCR, Christine Riefa Class Representative Limited, is a special purpose vehicle incorporated for the purpose of the proposed claim. The sole member and director of the PCR is Professor Christine Riefa, a Professor at the University of Reading.

The PCR's claim centred around alleged anti-completive agreements between Apple and Amazon. The PCR alleged that these agreements led to inflated prices for Apple products sold in the UK, by limiting the number of UK resellers of Apple products on Amazon. The PCR alleged that this resulted in a loss to proposed class members, through the payment of an overcharge on Apple products purchased through Amazon UK, Apple's UK website and other retail channels. The proceedings were brought in the form of an opt-out collective proceedings against the proposed defendants in July 2023.

During the first certification hearing in July 2024, the Tribunal identified concerns relating to the PCR's funding arrangements. Specifically, the Tribunal's concerns related to confidentiality provisions and provisions relating to the priority of payment following a successful outcome. The PCR was therefore provided with the opportunity to file further evidence and amend its claim form and/or funding arrangements before a further certification hearing. The proposed defendants also applied for and were granted permission to cross-examine the PCR at the second certification hearing, which took place in September 2024.

Legal framework

The relevant framework setting out the requirements for the Tribunal to make a collective proceedings order (CPO) can be found at Section 47B of the Competition Act 1998 and Rule 77 of the Competition Appeal Tribunal Rules 2015. The requirements are as follows.

The authorisation condition: The Tribunal must be satisfied that it is "just and reasonable" for the PCR to act as representative in the proceedings. The Tribunal must consider whether the PCR would "fairly and adequately act in the interests of the class members". This includes consideration of the PCR's "suitability to manage the proceedings" and the adequacy of the proposed funding arrangements.
The eligibility condition: The claims must be eligible for inclusion in collective proceedings. Specifically: (i) the claims must be brought on behalf of an identifiable class of persons; (ii) the proposed claim must raise common issues; (iii) the proposed claim must be suitable to be brought in collective proceedings².

Decision

During the second certification hearing, the Tribunal identified concerns about Professor Riefa's understanding of the terms of the PCR's funding arrangements. Those concerns centred on the fact that the litigation funding agreement (the LFA) included a success fee calculated on the basis of an uncapped multiple of the funder's costs, and an unqualified obligation to seek an order in the event of success that fees and costs (including the success fee) be paid ahead of any payment to the class. The Tribunal (chaired by Mrs Justice Bacon) was concerned both with the substance of the LFA – which appeared "inimical to the interests of the class" – but also whether Professor Riefa had fully understood, as her evidence stated that the obligation to make such an application was limited to funds remaining after distribution to the class.

Overall, the Tribunal's impression was that Professor Riefa was "extremely reliant on her legal advisors" and whilst the Tribunal recognised that Professor Riefa was entitled to obtain legal advice, the Tribunal was not convinced that Professor Riefa had properly understood the arrangements entered into, which in turn hindered her ability to protect the interests of the class. The Tribunal noted that it was not clear whether Professor Riefa alone had the experience or support required to fulfil the role of the PCR in a complex litigation of this kind.

The Tribunal also found that the PCR failed to fully address the funding concerns raised by the Tribunal at the first certification hearing. In particular, the Tribunal remained concerned that the PCR would be prevented from disclosing the terms of the PCR's funding arrangements to the class under the relevant confidentiality provisions.

The Tribunal acknowledged that it is not uncommon for a PCR to become involved in proceedings after funders have been identified by legal advisors, as was the case for Professor Riefa. However, the Tribunal made clear that a PCR "is not, and cannot be, merely a figurehead for a set of proceedings being conducted by their legal representatives". Rather, a PCR must act as an independent advocate for the class.

The Tribunal ultimately refused the application for certification, on the basis that the PCR had failed to satisfy the authorisation condition. The Tribunal was not convinced that Professor Riefa had demonstrated sufficient independence or robustness to act in the interests of the class. The Tribunal's decision was based on a cumulative assessment of both the evidence put forward by Professor Riefa, compounded by the Tribunal's concerns with the PCR's funding arrangements.

Comment

The Tribunal's judgment reiterates the strict requirements, and "heavy responsibility" placed on PCRs. Crucially, a PCR must be able to demonstrate that it acts independently in the best interests of the class. PCRs must also have a strong understanding of all issues in the case, including any funding arrangements entered into and potential implications for class members. It emphasises that where a PCR joins a case in which funding has already been arranged – which is not uncommon – the PCR must nevertheless satisfy themselves that they fully understand and are comfortable with the terms of the funding arrangements.

Whether this marks the start of PCR's being routinely cross-examined as part of the certification process remains to be seen. In Rowntree v The Performing Right Society Limited [2025] CAT 8 the Tribunal recently, in a ruling dated 31 January 2025, refused an application by the Proposed Defendants to cross-examine the PCR on issues including his funding arrangements and distribution plan, on the basis that they were properly matters for legal argument on which cross-examination would not assist.

1. Christine Riefa Class Representative v Apple Inc. & Amazon.com, Inc. & Others (Case No. 1602/7/7/23) [2025] CAT 5.

2.CAT Guide, 6.33.

Exclusive means exclusive: High Court decides that English courts have jurisdiction in Italian swaps dispute

Tue, 03 Dec 2024 16:23:00 Z

In yet another Italian swaps case to be dealt with by the English courts, the High Court found that an ISDA Master Agreement governing swaps for the Province of Trentino was valid and gave exclusive jurisdiction to the English courts (Dexia Crédit Local S.A. v Patrimonio del Trentino S.p.A. [2024] EWHC 2717 (Comm)).

Background

Patrimonio del Trentino S.p.A. ("Trentino") is an Italian joint stock company incorporated to manage the assets of the Italian Province of Trentino (the "Province").

In 2008, the Province wanted to use Trentino to build a new science museum to be funded by grants payable by the Province to Trentino over 30 years (the "Grants") and bonds to be issued by Trentino (the "Bonds"). The terms of the project provided that Trentino's liabilities under the Bonds could not exceed the sums it was due to receive under the Grants. However, the interest payable by Trentino on the Bonds was at a floating rate, whereas the Grants paid by the Province to Trentino were at a fixed rate; There was therefore a risk that the floating rate interest payable by Trentino under the Bonds might in future exceed the fixed rate it received under the Grants.

To hedge this interest rate exposure, Trentino approached Dexia about entering into derivative transactions. Thereafter, Dexia and Trentino entered into an ISDA Master Agreement in October 2010 containing a bespoke jurisdiction agreement in the following terms (the "Jurisdiction Agreement"):

Jurisdiction. With respect to any suit, action or proceedings relating to any dispute, whether contractual or non-contractual, arising out of or in connection with this Agreement (“Proceedings”), each party irrevocably

(1) submits to the exclusive jurisdiction of the English courts;

(2) waives any objection which it may have at any time to the laying of venue of any Proceedings brought in any such court, waives any claim that such Proceedings have been brought in an inconvenient forum and further waives the right to object, with respect to such Proceedings, that such court does not have any jurisdiction over such party; and

(3) agrees, notwithstanding the above and to the extent permitted by applicable law, that the bringing of Proceedings before the English courts will not preclude the bringing of Proceedings before the Italian courts.

In February 2011, several months after the ISDA Master Agreement was executed, Dexia and Trentino entered into the relevant interest rate swap transaction (the "Swap").

Trentino performed its obligations under the Swap for more than 10 years. However, in 2023, Trentino suddenly issued proceedings in the Italian Court arguing that the Swap was invalid as a matter of Italian law.

In response, Dexia issued proceedings in the English Commercial Court seeking declaratory relief (the "English Proceedings"). In serving the English Proceedings out of the jurisdiction on Trentino, Dexia relied upon CPR r.6.33(2B) which enables a party to serve out of the jurisdiction without permission where the relevant contract contains a jurisdiction clause (whether exclusive or not) in favour of the English Court.

Trentino challenged the jurisdiction of the English Court to hear Dexia's claim and argued:

(1) the ISDA Master Agreement between Dexia and Trentino was void as a matter of Italian law, such that the Jurisdiction Agreement was of no effect and Dexia had not been entitled to rely on CPR r.6.33(2B) to serve out of the jurisdiction; and

(2) Alternatively, if the ISDA Master Agreement was valid, the Jurisdiction Agreement was non-exclusive and the English Proceedings should be stayed on the grounds of forum non conveniens.

Was the Jurisdiction Agreement valid?

In arguing that the ISDA Master Agreement was void, Trentino asserted that the Swap was speculative and that, as a matter of Italian law, it lacked capacity to enter into speculative derivatives. Trentino then sought to treat the Swap and the Master Agreement as a single agreement and argued that, if the Swap was invalid, that also impugned the umbrella Master Agreement too.

The judge had no hesitation in dismissing this ambitious argument and found that, even if Trentino had lacked capacity to enter into the specific Swap, that did not mean that Trentino had also lacked capacity to enter into the Master Agreement itself. It is well established that the Master Agreement will remain valid even if some or all of the transactions governed by it are void for lack of capacity.¹

In any event, the judge also found that Dexia had a good arguable case that the Swap was not speculative; the Swap was intended to hedge Trentino's exposure to the mismatch between the fixed rate it received under the Grants and the floating rate it paid on the Bonds. Further, in separate proceedings with the Italian tax authorities, Trentino was arguing that the Swap was a hedging instrument and not speculative.

Was the Jurisdiction Agreement exclusive or non-exclusive?

Trentino's alternative case was that, as a matter of construction, the Jurisdiction Agreement was non-exclusive such that the English Court was not bound to accept jurisdiction and it was open to it to stay the English Proceedings in favour of the Italian Proceedings on forum non-conveniens grounds.

Trentino submitted that the Jurisdiction Agreement was a hybrid clause that provided for the English Court to have exclusive jurisdiction against the rest of the world apart from Italy and that the English and Italian courts had concurrent jurisdiction. In support of this argument, Trentino submitted that the default position under the standard ISDA jurisdiction clause was that the chosen court had non-exclusive jurisdiction. Trentino also submitted that sub-clause (3) of the Jurisdiction Agreement had to be given effect and that the language of sub-clause (3) of the Jurisdiction Agreement was consistent with it being a carve-out from the exclusive jurisdiction conferred in sub-clause (1).

The judge disagreed and determined that the Jurisdiction Agreement provided for the exclusive jurisdiction of the English Court. In particular, the Judge noted that the parties had agreed to modify the standard ISDA jurisdiction clauses and that, following these modifications, sub-clause (1) of the Jurisdiction Agreement expressly provided for the "exclusive" jurisdiction of the English Court. These words had to be given their ordinary meaning.

In construing the Jurisdiction Agreement, the judge found that an important part of the relevant factual matrix was the fact that, at the time the parties had entered into the Master Agreement in 2010, both England and Italy had been EU member states and subject to the jurisdictional regime contained in the Brussels Regulation. Under the Brussels Regulation, in order to ensure the English Courts had jurisdiction, as was expressly contemplated in the Jurisdiction Agreement, the Jurisdiction Agreement had to be exclusive. If the jurisdiction clause was non-exclusive and proceedings were first commenced in Italy and not England then, under the Brussels Regulation in force at the time, the Italian Court would have had jurisdiction (as the court first seised) and the English Court would have been required to decline jurisdiction. The Judge held that this was nonsensical and could not be what the parties had intended; the words of sub-clause 1 “exclusive jurisdiction” had to be given effect and their ordinary meaning.

The Judge determined that sub-clause (3) could still be read in a manner that was consistent with an exclusive jurisdiction clause in favour of the English Court. Rather than enabling substantive proceedings to be commenced in Italy, the carve-out in sub-clause (3) was intended to permit ancillary proceedings that might be brought in Italy in support of the primary English Proceedings, such as proceedings seeking provisional or protective measures.

Comment

This judgment is the latest in the long line of Italian swaps disputes and provides a useful restatement of the law regarding lack of capacity arguments in the context of the ISDA Master Agreement. It reaffirms that, even if certain transactions entered into under the Master Agreement umbrella are invalid for lack of capacity, that does not call into question the validity of the Master Agreement itself.

While the discussion around the interaction between the jurisdiction clauses in an ISDA Master Agreement and the Brussels Regulation will be of specific interest to derivatives practitioners, the judgment also contains general guidance on the construction of jurisdiction clauses that is of wider application.

The judgment also includes further judicial criticism of the proliferation of foreign law expert evidence being served in jurisdiction challenges. The court was critical of the parties for serving lengthy Italian law expert evidence without permission and found that much of the evidence was irrelevant to the jurisdiction challenge. This is not the first occasion on which the Court has criticised the extent of foreign law expert evidence served in jurisdiction applications and again emphasises the importance of parties seeking permission before adducing such evidence.²

¹See for example Banca Intesa Sanpaolo SpA v Comune di Venezia [2022] EWHC 2586 and Credit Suisse International v Stichting Vestia Groep [2014] EWHC 3103

²For further examples see Deutsche Bank AG v Comune di Savona [2018] EWCA Civ 174 and BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2018] EWHC 1670

Recent CAT rulings consider distribution concerns

Thu, 13 Jun 2024 14:30:00 +0100

With two collective settlements now approved by the UK's Competition Appeal Tribunal (CAT) and the outcome of the first substantive trial in the case of Le Patourel v BT anticipated shortly, it is an important time for the competition collective proceedings regime as the first sums start to be paid out to affected classes.

In two recent CAT rulings handed down in May 2024, the tricky issue of damages distribution was considered. We take a closer look at how the recent decisions clarified distribution issues.

1. Spottiswoode – certification ruling

In the Spottiswoode claim, the defendants had not opposed certification, choosing instead to draw the Tribunal's attention to a number of matters to consider when deciding whether to certify the claim. Distribution was not one of those matters and it is of note that the Tribunal decided of its own motion to consider the class representative's damages distribution methodology.

The Tribunal considered that there may be particular challenges to effective distribution of any damages to the class given the size of the class and given the difficulty in evidencing claims over a lengthy infringement period. Further, the affected class were not direct customers of the cartelists. Therefore, the Tribunal raised the need for the class representative to plan an effective method for the distribution of any damages or settlement. Recognising its broad case management powers, the Tribunal noted there is scope for "innovative and creative" methods of distribution to be explored. For instance, the Tribunal considered whether an account credit using electricity suppliers' records could be appropriate.

As to timing, the Tribunal did not consider it premature to have regard to a class representative's proposed distribution method at certification stage, as it was relevant to the Tribunal's assessment of the cost/benefit criteria as part of its certification assessment. In particular, concerning the "fundamental question" as to whether the collective proceedings offer a real prospect of benefit to the class members, as distinct from lawyers and funders.

The Tribunal insisted on consideration of a detailed distribution plan at the certification stage to enable the Tribunal to make a properly informed assessment of the costs/benefit analysis. It considered it would be unsatisfactory to defer the issue and explained that early sight of a distribution plan would enable consideration of the distribution proposals before the majority of the litigation costs have been incurred.

The Tribunal noted that the absence of an effective method of distribution would call into question the suitability of the claims to be brought in collective proceedings. While it certified the claim nevertheless, the Tribunal made clear that if the class representative failed to provide a distribution proposal to address its concerns within 3 months, that could lead to revocation of the collective proceedings order (CPO).

In concluding its comments on the distribution plan, the Tribunal made clear that if it approved a distribution method which did not leave any undistributed damages, such as account crediting, provision for payment to the funder would be necessary. The litigation funding agreement (LFA) in question specified that the funder would be paid from undistributed proceeds of the damages award. The Tribunal noted that it would have the power to make an order for payment to the funder out of damages awarded to the class (citing Le Patourel and Gutmann v Apple¹). The LFA in question required the class representative, if successful, to use best endeavours to obtain orders from the Tribunal that the funder's entitlement be paid.

It is an interesting case involving far more detailed scrutiny of distribution methods by the CAT and at an earlier stage in proceedings. No longer can proposed class representatives defer consideration of damages distribution methodology. Detailed distribution methodologies will likely be required in litigation plans going forward in order to secure certification of a CPO claim, particularly in cases in which distribution is likely to be a challenge.

2. Gutmann (train ticketing) – collective settlement approval ruling

In its recent collective settlement approval ruling in the Gutmann train ticketing case, the CAT scrutinised in detail the settling parties' proposed distribution plan.

It is only the second time the CAT has approved a collective settlement. It was, however, the first time the CAT was asked to approve a settlement distribution plan and a settlement structured as an 'up to' amount (in the previous collective settlement approved in McLaren, there was a fixed settlement sum and the Tribunal was not asked to approve the distribution plan).

The Tribunal raised various concerns as to the proposed settlement initially put forward by the parties (in advance of and at the hearing). The parties therefore modified the settlement to take account of the Tribunal's concerns. The Tribunal considered the revised terms "just and reasonable" and noted "it is most likely there will be sufficient compensation for class members who make valid claims."

In overview, the settlement approved involved a total settlement fund of up to £25 million allocated to 3 'pots' each with different evidential requirements for claims to be made. Pot 1 (the largest pot) requires a higher level of proof, whereas the evidential requirements for claims made to pots 2 and 3 are less onerous.

In the initial proposal, it was proposed that each journey had to be identified in order to make a claim on pot 3. However, the Tribunal required changes to be made to allow self-certification in order to make claims easier. Class members making a claim can certify the number of journeys in the relevant period (up to 6) and would be paid £5 per journey (up to £30). For claims over £30, the CAT noted that other forms of evidence other than bank statements may reasonably satisfy the administrator. The changes made by the settling parties to the requirements for pot 3 claims (and ensuring more funds were available to the pot) were key to the CAT's approval of the settlement. The CAT noted otherwise the approval application "probably would have been rejected."

In reaching its decision on whether to approve the collective settlement, the Tribunal was keen to move fast given the costs that would have been incurred by the parties, including brief fees, as trial 1 (on the issue of abuse of dominance) was due to commence very shortly afterwards, on 17 June 2024. Had there been more time prior to trial, the Tribunal commented that it would have required empirical research as to the likelihood of class members making a claim and whether such claim would be on Pot 1, 2 or 3 given the different evidential requirements. In absence of that, the Tribunal considered evidence from North America, including the Federal Trade Commission report from 2019 suggesting the take up rate could be lower than 10% figure given by the settling parties.

In future cases, the Tribunal made clear the types of information the Tribunal will expect to be given in relation to damages distribution. That includes likely take up rates so the Tribunal can assess the likely range for the total amount claimed by class members. In addition, it will expect information as to the sums likely to be ultimately made available to lawyers and funders under various scenarios, depending on take-up.

In practical terms, the changes the CAT insisted on as part of the settlement distribution, including the various evidential requirements and the ability for class members to self-certify, are of particular note. It is also a helpful ruling in clarifying what information as to damages distribution the Tribunal will expect to see in applications for collective settlement approval orders going forward. The Tribunal reiterated that it is "not a rubber stamp".

By dealing with the practicalities of damages distribution methods at an early stage, no doubt the Tribunal wishes to avoid low damages take-up rates that have been the experience in other class action regimes. Ensuring damages reach class members at sufficient levels is key to the regime's success in delivering its aim of access to justice.

With the substantive outcome in Le Patourel v BT expected shortly, distribution of the first award of aggregate damages to the affected class might well be on the cards soon. Query what form damages distribution will take if Mr Le Patourel succeeds in his claim. We continue to watch this space.

For discussion as to how Le Patourel v BT may shape the UK class action landscape, see our blog here.

¹Certain funding issues are currently on appeal to the Court of Appeal. One of the grounds of appeal is whether a funder could be paid first out of undistributed damages.

Summary judgment against persons unknown – a tale of two crypto judgments

Thu, 09 May 2024 09:30:00 +0100

Two recent crypto judgements in the High Court, Mooij v Persons Unknown (February 2024) and Boonyaem v Persons Unknown (December 2023) reached different conclusions regarding whether a summary judgment could be granted against unidentified (and unidentifiable) fraudsters, with Mooji deciding 'yes' and Boonyaem deciding 'no'.

Both judgments are considered below.

Boonyaem

In Boonyaem the claimant was fraudulently induced over a four-month period to purchase and send Tether tokens to a number of wallet addresses controlled by alleged fraudsters. On realising that she had been defrauded, she obtained freezing order relief against two categories of "persons unknown".¹ The categories corresponded with the categories of unknown person identified in the Supreme Court case Cameron v Liverpool Victoria Insurance Co Ltd [2019] UKSC 6, [2019] 1 WLR 147, namely:

unidentifiable persons (in this case the alleged fraudsters); and
unknown but identifiable individuals or entities (in this case the controllers of the wallets to which the Tether tokens had been traced).

She was also given permission to serve the defendants by way of alternative service via Facebook messenger, text message, WhatsApp, and by transferring a non-fungible token to the wallet addresses believed to be controlled by the alleged fraudsters.

The defendants failed to file acknowledgements of service or defences, and the claimant accordingly applied for summary judgment against them. The judge granted the application against the second category of persons unknown but not the first category on the basis that the first category did not "describe any identifiable person against whom judgment can properly be given".

The basis for the decision was the Supreme Court judgment in Cameron v Liverpool Victoria Insurance Co Ltd, a case involving a 'hit and run' road traffic accident caused by an unidentified and unidentifiable driver. That judgment addressed the circumstances in which such a defendant could be sued, finding on the facts that it was not possible for the claimant to sue the driver as they could not be identified. In particular the judge in Boonyaem relied upon paragraph 18 of Cameron:

"[...] One does not […] identify an unknown person simply by referring to something that he has done in the past […] The impossibility of service in such a case is due not just to the fact that the defendant cannot be found but to the fact that it is not known who the defendant is. The problem is conceptual and not just practical […]". (Emphasis added)

Mooij

In Mooij the claimant was also the victim of a cryptoasset fraud, sending just over 20 bitcoin to alleged fraudsters perpetrating an investment scam.

Having discovered the fraud, the claimant initially obtained a freezing injunction against the same two categories of persons unknown² as in Boonyaem, in respect of which the permission to serve them by alternative means was also granted. As in Boonyaem, the defendants also failed to engage with the proceedings.

The claimant later applied for summary judgment for (a) non-proprietary relief against the two categories of persons unknown and (b) proprietary relief, i.e. an order for delivery up of the relevant bitcoin, against additional named defendants being entities related to the Huobi cryptocurrency exchange, which controlled the wallets to which the claimant's bitcoin had been traced.

The summary judgment application was successful and notably was granted against the first category of persons unknown (i.e. the fraudsters) (as well as the other defendants), unlike in Boonyaem.

The reason for the divergence between the cases

The judge in Mooij acknowledged the difference in approach to Boonyaem, disagreeing with the interpretation of Cameron in that case.

In the judge's view, Cameron dealt with a situation where the anonymous nature of the hit and run driver meant that there was no way in which they could be notified of the proceedings. Such notification is a prerequisite for the court to have jurisdiction over the relevant defendant or alternatively to have jurisdiction that could be exercised in accordance with fundamental principles of justice.

In contrast to the hit and run driver in Cameron, the judge in Mooij concluded that it was possible to effect service on the fraudsters in both Mooij and Boonyaem via alternative service methods, as had been done for the freezing orders obtained initially in both sets of proceedings. The judge was therefore able to distinguish Cameron.

Comment

Essentially the key issue in both Boonyaem and Mooij was one of service – could the unknown and unidentifiable fraudsters be served with the judgments sought? In both cases the Court had previously concluded that freezing orders could be served via NFT at the wallets controlled by the fraudsters, and as such the decision is Boonyaem not to grant summary judgment due to identification and service issues came as somewhat of a surprise.

Accordingly Mooij is a positive development in cryptocurrency case law, re-opening the door to summary judgment applications against unknown and potentially unidentifiable fraudsters who have misappropriated cryptoassets. Given that service via NFT is likely to be possible in most instances of cryptoasset theft where stolen assets have been traced to identifiable wallets,³ this is an important development.

Prior to Boonyaem and Mooij, summary judgment against persons unknown in a crypto fraud context had been granted in Jones v Persons Unknown [2022] EWHC 2543 (Comm).⁴ Since those decisions, the court has also now granted default judgment against persons unknown in Mannarino v Persons Unknown [2023] EWHC 3176 (Ch). While neither of the judgments in Jones and Mannarino grappled with the issues raised by Cameron, the outcome of both is consistent with the analysis in Mooij.

Why does any of this matter? Obtaining summary judgment against unidentifiable fraudsters in cases of cryptoasset theft can be a very powerful tool where it is possible to trace a claimant's misappropriated cryptocurrency to wallets held at reputable cryptocurrency exchanges likely to comply with English Court orders. Those wallets can then be targeted for enforcement. This may be done on a proprietary basis, where the tracing concludes that the claimant's stolen cryptoassets remain in the wallets in question. Or it may be done on a personal basis, where the tracing concludes that the wallets in question are controlled by the unknown fraudsters such that they ought to be susceptible to enforcement as their assets. In that regard, the order for delivery up of crypto held at the Huobi exchange in Mooij replicates a similar order that was also made against Huobi in Jones, which incidentally involved the same solicitor/barrister pairing, and which the authors understand was successfully enforced.

¹Along with a third defendant being the company behind an allegedly fraudulent investment platform.

²As well as a third category of 'innocent receivers' against no summary judgment application was brought.

³Although there has been some judicial hesitation in ordering service solely by NFT absent another method of alternative service, such as email – see D'Aloia v Persons Unknown [2022] EWHC 1723 (Ch) at paragraph 40 (read RPC's write up of that judgment here). However ultimately service via NFT has now been used multiple times and is likely to become the standard method of service in cases like this in future.

⁴Read RPC's write up of that judgment here

UK CAT Collective Proceedings Spring 2024 Update

Tue, 30 Apr 2024 17:30:00 +0100

Last year, we reported on what was then a fledgling collective proceedings regime in the UK’s Competition Appeal Tribunal (CAT). Our 2023 update is here. Since then, the competition collective proceedings regime has continued to grow at pace, notwithstanding the seismic Supreme Court decision in PACCAR affecting the underlying funding arrangements which underpin the entire collective proceedings landscape.

In a short spring 2024 stock-take, we summarise some recent developments in the regime.

Collective proceedings - robust approach to determining carriage prior to certification (Hunter v Amazon.com)

Thu, 15 Feb 2024 10:15:00 Z

Key points

This is the first example of the CAT deciding a carriage dispute as a preliminary issue before certification. The CAT confirmed that this is the preferred approach, as opposed to “rolled up” hearings addressing both carriage and certification.
The test for determining a carriage dispute is assessing “suitability” of the competing proposed class representatives. The CAT has wide discretion as to how to conduct that assessment.
In this case, the suitability of the parties’ experts’ methodologies on proof of abuse and quantification of loss, and whether they were practically workable, were the determining factors.
Even though Ms Hunter lost the carriage dispute, her claim has not been dismissed, but stayed. It may be revitalised if Mr Hammond’s CPO application fails or a CPO is granted but later revoked.

In a recent decision, the CAT has given guidance on how carriage disputes between competing proposed class representatives (PCRs) will be addressed in future. This case concerned two competing PCRs, Ms Hunter and Mr Hammond, who are each seeking an opt-out collective proceedings order for their proposed claims against Amazon for alleged infringements of UK competition law related to the functioning of its “Buy Box” feature.

This is the first example of the CAT deciding a carriage dispute as a preliminary issue in advance of certification, rather than as part of a “rolled up” hearing addressing carriage and certification together. The CAT’s experience in a carriage dispute related to proposed FX collective actions, has been that “rolled up” hearings are more expensive but no better at enabling the CAT to make a decision, and that deciding carriage disputes as preliminary issues will be the preferred approach going forward.

Decision

In determining a carriage dispute, the CAT must assess the “suitability” of each PCR, which confers on the CAT a broad and multifaceted discretion. However, the CAT’s assessment does not have to take account of the merits of the competing claims. Which claim is broader, or first to file, are unlikely to be relevant considerations.

In this case, the CAT considered the key differences between the two PCR’s claims. The claims substantially overlapped in many ways, with nuanced differences in the abuses alleged, but significant differences in each PCR’s expert’s respective methodologies on proof of abuse and quantification of losses.

The differences in experts’ methodology were therefore key to assessing suitability. The two key questions the CAT considered were: (1) which methodology was better suited to articulating and resolving the PCRs’ claims, and (2) whether there was a difference in practical workability of the methodologies, or if either was unworkable.

Naturally, in order to demonstrate suitability, each PCR sought to undermine the methodology of the other’s expert. However, crucially, Ms Hunter’s expert stopped “well short” of calling Mr Hammond’s expert’s methodology unworkable.

The Tribunal ultimately ruled in favour of Mr Hammond, finding him most suitable to act as PCR. In doing so, the CAT found that Mr Hammond’s expert’s methodology sought to establish a counterfactual which was more closely aligned with the abuse alleged, whereas Ms Hunter’s expert’s proposed methodology did not align with what what the CAT held was the “true” counterfactual (the operation of the algorithm Amazon to select the featured offer in its “Buy Box”, without the alleged abuse).

In considering practical workability of Mr Hammond’s expert methodology, the CAT considered a number of factors determinative. These included that Ms Hunter’s expert was not willing to assert that Mr Hammond’s expert’s methodology was unworkable. The Tribunal also took into account the fact Mr Hammond’s expert had already considered how to resolve practical difficulties with his methodology, and its view that careful case management could ensure sufficient co-operation between the successful PCR’s expert and Amazon’s expert in an apparent effort to ensure that the PCR’s methodology is workable.

While it is open to the CAT to permit more than one PCR to proceed to certification, the overlap between the proposed class members, and similarly of the respective PCRs’ proposed claims, precluded that in this case.

Mr Hammond’s application is therefore permitted to proceed to the certification stage. Ms Hunter’s application was stayed rather than dismissed, on the basis that it was not hopeless, but merely came second to Mr Hammond’s. That stay may be lifted if Mr Hammond fails to obtain certification.

Take-aways

A carriage dispute will turn on the nature of the competing claims, but where the abuses alleged are similar this case may provide some guidance as to how the CAT will seek to assess suitability. PCRs will need to ensure that their proposed methodology for proving abuse and quantifying loss aligns closely with their claims, but also remains practically workable. The CAT has signalled that it will take an interventionist approach to case management to ensure a PCR’s experts are able to put forward appropriate expert evidence.

Unless a PCR’s application for a collective proceedings order is hopeless, it is unlikely that it would be dismissed in the event the PCR loses a carriage dispute. This would potentially enable the losing PCR to resuscitate their claim in the event that the successful PCR fails at some hurdle before trial, although there would be a number of practicalities to be dealt with in that situation, including whether funding and/or ATE insurance would still be available to that PCR.

For any PCR, a carriage dispute is likely to be a costly and risky exercise. Even if carriage is determined as a preliminary issue, each PCR will have to spend significant sums in order to issue their application for a collective proceedings order. For the losing party (and their funders), it will likely be cold comfort that their application may be merely stayed and not dismissed.

The winning PCR may still walk away bruised from a carriage dispute given the efforts made by the losing PCR to undermine their claim. The fact that the Tribunal explicitly took into account Ms Hunter’s expert not going so far as to call Mr Hammond’s methodology unworkable may also encourage a more scorched-earth approach by PCRs and their experts in future carriage disputes.

Coming to a bank near you? How "investment AI" could transform financial mis-selling claims

Thu, 09 Nov 2023 11:33:00 Z

Dan Hemming and Olivia Dhein take a look at what generative AI can already do in this area and how fundamental concepts in financial mis-selling cases such as advice and misrepresentation could change in the near future.

What can generative AI achieve in finance right now?

Generative AI already has already shown promise in investment experiments. For example, the University of Oxford¹ published a paper which studied the performance of AI when selecting private equity funds. It found that AI achieved returns that were 5% higher per year than average funds. This comes after another experiment earlier this year where ChatGPT was persuaded (ie some of its security "guard rails" were overridden) to pick securities for an investment strategy following investing principles followed by leading funds. While only a theoretical exercise, the 38 stocks picked outperformed the UK's 10 most popular funds (including for example Vanguard and HSBC) by a very respectable 6.6%.² In this context it is worth noting that another similar experiment³ had slightly less positive results, however ChatGPT still achieved a very respectable return.

Further, it was reported⁴ in May 2023 that JP Morgan filed a trademark application for a new tool called "Index GPT" which will be able to select investments for customers tailored to their needs. Goldman Sachs and Morgan Stanley have also⁵ started to test ChatGPT-style technology.

These examples illustrate the potential of this technology, which may well overhaul how investments are picked, particularly as it is able to digest large amounts of data and text that would be impossible for humans to do. At the moment, the products may still have flaws. But overall, whichever drawbacks may still exist in current iterations, it seems clear that the direction of travel points towards banks adopting the advantages of generative AI and its ability to independently take decisions without human guidance. Given the speed of developments in this area (Chat GPT was launched a year ago in November 2022), it seems plausible that any AI investment tool that independently develops an investment strategy could become sophisticated very quickly. This would especially be the case where banks feed it specific data sets to train the model up.

What difference could generative AI make to a financial mis-selling claim?

Given the examples above, it does not take a lot of imagination to see that financial institutions and fund managers may well use generative AI to select investments for their customers. What could possibly go wrong? The answer is that nobody knows - yet.

Unlike previous technology, the nature of generative AI means that humans are not programming the AI to do anything specific. Rather, the AI tool makes independent decisions based on general prompts as to what it would consider beneficial investments. In addition, the so-called AI "black box problem" means that as things stand, humans will not necessarily be able to understand how the tool selects an investment. To complicate matters further, AI tools currently have a tendency to make things up or "hallucinate", which may be difficult to detect for human users.

It becomes apparent that this will raise many legal and regulatory issues. What regulatory standards should the AI fulfil? What ethical principles should be followed when it is set up? And who should be sued if the AI malfunctions – the bank or the AI developer? If the answer is the bank, for example because it developed or enhanced the tool itself, what claims can be brought?

We can also see that some concepts will not change at all – for example, whether a human places reliance on advice given is unlikely to change fundamentally, whether the advice is given by a machine or a human. There will also always be the question whether the parties have excluded liability by contract. However, some of the discussion around core legal concepts in mis-selling cases may change significantly.

Advice

It is an open question for example whether the recommendations of an AI tool could amount to "advice" given to the customer, which may give rise to a duty of care in tort for the bank to exercise reasonable care and skill.

In terms of the natural language meaning of "advice", the technology already seems to be capable of providing advice because it is already at a point where it can select an investment strategy for maximum profit following general investment principles. There is also no technical reason why it would not be possible to connect it to the relevant trading systems to execute trades accordingly.

To assess whether such a tool is providing advice or not, the courts would likely need to make an assessment of how the AI tool was set up and what general principles it was supposed to follow. The court would also likely need to look at the prompts used by the humans involved, ie the instructions given to the AI, to test further whether the intention was for the tool to provide "advice", or not. This is likely to represent a whole new area where disclosure and expert evidence will be needed.

Misrepresentation and implied representation

While liability for "advice" could be excluded contractually by the bank, there is also the question whether there could be a misrepresentation to the customer where the bank does not alert them to the fact that an AI tool has, independently, selected investments for them.

Conceivably, a customer could argue that a misrepresentation occurred where they were under the impression that human bankers would conduct the customer's business, but in fact this was delegated to an AI tool with no or negligible human input. The novel point here is that generative AI is capable of taking investment decisions independently for the human banker, unlike previous technology which relies on being pre-programmed to do certain things within certain pre-set parameters.

Where banks are using AI tools to select investments, the customer could also argue that there was an implied representation that human bankers would check everything that was done by an AI tool. Generally, it is difficult to show that silence can found a claim in misrepresentation (see Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc⁶). But could this change?

The test cited in this case was to ask "whether a reasonable representee would naturally assume that the true state of facts did not exist and that, had it existed, he would in all the circumstances necessarily have been informed of it". Arguably, it could be said that a customer in the current circumstances would naturally assume that they would be informed if an AI tool took over the work of a human banker.

It is also worth noting that there is currently no specific labelling requirement in relation to AI tools that would require a financial institution to highlight to its customer that they are being used. The question will be whether a bank will have made an implied representation that humans are involved in the investment services provided to the customer, even where it is using generative AI which can act independently.

The future: flipping the arguments on their head

Taking things further, the argument could also be flipped on its head. Assuming that AI develops further to become highly sophisticated in this area, it may become the market standard that these tools are used to at least check the investment selection made by humans, as the AI tool may be less prone to overlooking anything relevant or taking an unwise decision. If this becomes the state of affairs, one could imagine that not using an AI tool could be cause for complaint by the customer, or there may even be a misrepresentation as to what service the customer is receiving if they are served solely by a human banker without that being made explicit.

Conclusion

We will need to wait and see what exactly transpires and how the technology is adopted in the financial services sector in order to assess how much of a legal shift will follow. English law has proven flexible when confronted with other new concepts such as cryptocurrency, and this would likely be the case here.

However, the shift that generative AI represents is a much more fundamental one because machines are becoming capable of taking over complex investment tasks traditionally carried out by humans. This has never happened before. Lawyers would be well advised to stay on top of these developments so that they are able to understand the implications for mis-selling cases which could change considerably in the future.

¹ Uhoh oxford study shows ai really can pick funds better than humans and papers.ssrn.com

² An investment fund created by chatgpt is smashing the uks top 10 most popular funds

³ will chatgpt soon replace my private banker

⁴ JP Morgan files patent chatgpt and JPMorgan develops ai investment advisor

⁵JPMorgan develops ai investment advisor

⁶[2010] EWHC 1392 (Comm), para 84

Clear failure required: High Court refuses directions under s 18 of the Arbitration Act 1996 where procedure for appointing arbitrator had not failed

Mon, 31 Jul 2023 10:44:00 +0100

Background

The claimant, a company supplying aircraft parts and registered in England and Wales, sought to pursue claims based on an alleged contract with the defendant, a company registered in Estonia, which included a London arbitration clause. However, the arbitration clause in the contract did not specify the procedure for the appointment of an arbitrator. It simply said: "This Agreement is subject to English jurisdiction. If a dispute cannot be settled by negotiation it shall be settled by arbitration in London." Absent the appointment procedure in the arbitration clause, the default provisions in sections 14(4) and 15(3) of the AA 1996 applied, by which the claimant was entitled to initiate arbitration by serving the defendant a notice, requiring it to consent to the appointment of a sole arbitrator. Additionally, the default procedure for appointment as stated in section 16(3) was also engaged, which mandates the parties to "jointly appoint the arbitrator not later than 28 days after service of a request...".

The claimant’s preference was that the arbitration be conducted by the London Court of International Arbitration (LCIA). Accordingly, the claimant sent a notice (Notice) to the defendant by email and airmail proposing the appointment of a sole arbitrator with a list of possible candidates, inviting the defendant to respond within 21 days. A copy of a request for arbitration (RFA) that the claimant had filed with the LCIA was sent with the Notice.

Subsequently, the claimant filed an arbitration claim under section 18 of the AA 1996 in the English High Court. The defendant conceded that there was a valid arbitration agreement. The court granted permission to serve the claim form on the defendant outside the jurisdiction. However, the defendant challenged the court's jurisdiction under CPR 11(1), arguing that there was no failure in the appointment procedure as required for a section 18 application. One of the defendant's arguments was that the claimant's Notice, which aimed to initiate the arbitration process, did not meet the requirements of the AA 1996 and was not validly served.

Decision

The underlying merits of the dispute were not at issue in the application. The court first decided that the defendant's arguments were related to the merits of the claim rather than the jurisdiction of the court. As a result, the defendant's application under CPR 11 was dismissed. On the substance of the claim, the court acknowledged that the Notice, in conjunction with the accompanying documents, met the requirements of the AA 1996 for commencing an arbitration. However, the court found that the method of service did not adhere to the terms of the parties' contract which required personal service of notices (the notice…"must be in English, in writing and must be served personally"). Consequently, the notice was deemed ineffective in initiating the appointment process for the tribunal, meaning that the process had not yet failed. Therefore, there was no basis for an order under section 18.

When coming to this conclusion, the court analysed the failure procedure under section 18 in conjunction with various default provisions contained in sections 14 and 16 of the AA 1996. In particular, the court considered section 14(4) which states that "[w]here the arbitrator or arbitrators are to be appointed by the parties, arbitral proceedings are commenced in respect of a matter when one party serves on the other party or parties notice in writing requiring him or them to appoint an arbitrator or to agree to the appointment of an arbitrator in respect of that matter". The court also considered the default provision in section 16(3) of the AA 1996 which deals with the appointment of the arbitrator where there is no agreement as to the procedure for appointing an arbitrator ("If the tribunal is to consist of a sole arbitrator, the parties shall jointly appoint the arbitrator not later than 28 days after service of a request in writing by either party to do so.").

The court then turned to the question of whether the court has power to make an order under section 18 of the AA 1996 in circumstances where there has been no failure of the procedure for the appointment of an arbitrator (as had happened in this case) because of the failure to serve a valid request to arbitrate.

Although section 18 was not expressly subject to the requirements of sections 14 and 16, that part of the AA 1996 provided a series of default procedures which "interlock and are to be read together". Having found that a notice of arbitration under section 14(4) of the AA 1996 had not been served, the court concluded that the process for the appointment of an arbitrator had not been validly begun. Because the notice in initiating the process of appointing the tribunal was ineffective, the appointment procedure had not yet failed. As a result, there was no basis for an order under section 18.

Comment: This ruling provides a valuable guideline on section 18 of the AA 1996, as it confirms that when determining what constitutes 'a failure of appointment procedure', it is important to apply section 18 in conjunction with various default provisions within the AA 1996 that pertain to the initiation of arbitration and the appointment of a tribunal.

Confidentiality of arbitration proceedings may not always be protected - The Republic of India v Deutsche Telkom AG [2023] SGCA(I) 4

Thu, 20 Jul 2023 09:56:00 +0100

Introduction

In general, arbitration proceedings are confidential.¹ Arbitration-related cases which end up in the courts often are reported only after the names of parties have been anonymised, and it is quite common for a sealing order to be issued on the court file, so as to preserve the confidential nature of the arbitration. In the recent case of The Republic of India v Deutsche Telkom AG [2023] SGCA(I) 4, the Singapore Court of Appeal ("CA") considered an application for a sealing order. The court examined the relevant legislation and concluded that while court proceedings relating to arbitration are typically kept private, nevertheless the court does have the power to order an open hearing.² The CA considered the significance of sections 22 and 23 of the International Arbitration Act 1994 (2020 Rev Ed) ("IAA") to determine the nature of interest in confidentiality that has to be protected, which was the confidential nature of the arbitration itself. As the confidentiality of the Arbitration in this instance had already been substantially lost, the court found that it would be in the interests of open justice not to grant the sealing order and accordingly dismissed India's application.

Background facts

The appellant, the Republic of India ("India"), owned an entity, Antrix Corporation Ltd, which entered into an agreement with Devas Multimedia Private Limited ("Devas").The agreement was later terminated. The respondent, Deutsche Telekom AG ("DT"), a company incorporated in Germany, was a shareholder of Devas. DT had initiated arbitration proceedings ("Arbitration") in Switzerland, against India, alleging that India's termination of the agreement violated an investment treaty between India and Germany. DT obtained an award in its favour and subsequently commenced enforcement proceedings in Singapore; it obtained an ex parte order of court granting leave to enforce the award in Singapore.

India applied to set aside the order granting leave for DT to enforce the award. The Singapore International Commercial Court ("SICC:") heard and dismissed India's application, and India then appealed against the SICC's decision and additionally sought an application for a sealing order to protect the confidentiality of the Arbitration.

Decision

In this instance, the CA had to consider India's application for a sealing order. India based its application on two grounds:³

i. Sections 22 and 23 of the IAA read with Order 16, rule 9(1) of the Singapore International Commercial Court Rules 021 and/or
ii. The court's inherent powers

India's case was substantially grounded on the fact that the sealing order was necessary to protect the confidentiality of the Arbitration. Even though some information on the Arbitration had already been made available online, India argued that the confidentiality of the Arbitration had not been entirely lost. India also alleged that it faced a risk of suffering prejudice if the sealing order was not granted as information on the Arbitration had been relied upon by external parties to negatively portray India.

DT argued that the application for a sealing order was of no real value given that the information relating to the Arbitration and other proceedings was already available to the public. DT also argued that the court's inherent powers were reserved to cases where it was in the interests of justice to use them, and this was not such a case.

The CA stated in its decision that a court may grant a sealing order pursuant to its inherent powers. However, in light of the principle of open justice, "imposing a cloak of privacy on court proceedings" is treated as an exception rather than the norm.⁴ This exception might apply to prevent a miscarriage of justice, for instance.⁵ Usually, arbitration proceedings are heard in private by default without the need for application by a party, pursuant to s. 22 of the IAA. Similarly, O. 16 r. 9(1)(a) and O. 16 r. 9(1)(b) of the SICC Rules 2021 also give the court the ability to preserve the confidentiality of proceedings.

However, in this particular case, there were multiple instances where information relating to the Arbitration had already been disclosed, both in Singapore and abroad.⁶ Accordingly, the CA held that "there was insufficient basis to override the strong interest in open justice in curia proceedings."⁷

Conclusion

The decision of this case is useful in illustrating that the confidentiality of an arbitration proceeding may not always be protected if the parties do not take the relevant precautionary measures to ensure that information is not released to the public.

Disclaimer

This article is produced by lawyers of Premier Law LLC, a constituent Singapore law practice of RPC Premier Law which is a Joint Law Venture with international law firm Reynolds Porter Chamberlain (RPC).

¹ For instance, see Rule 39 of the Singapore International Arbitration Centre SIAC Rules 6th Edition

² Section 22(2) of IAA

³ Paragraph 8 of the Judgment

⁴ Paragraph 24 of the Judgment

⁵ Paragraph 15 of the Judgment

⁶ Paragraphs 31 to 37 of the Judgment

⁷ Paragraph 28 of the Judgment

Strictly need to know: High Court provides further guidance on confidential embargoed draft judgments

Wed, 19 Jul 2023 11:11:00 +0100

A confidential embargoed draft judgment in relation to a planning dispute was circulated by the court's clerk to the parties' legal representatives six days before the finalised judgment was handed down.

The legal representatives for the defendant, London Borough of Lewisham (the Council), sent a copy of the draft judgment on the day it was received to three individuals at the Council noting prominently in the cover email that neither the draft judgment nor its substance (including the result) could be disclosed to any other person until it was handed down and that to do so would be contempt of court.

The draft judgment itself was shared internally at the Council with another two members of staff. The outcome of the case (as described in the draft judgment) was then communicated to a further six senior individuals at the Council (including several Councillors) who were informed that the outcome of the case and the draft judgment were subject to an embargo until judgment was handed down, and that disclosure would be contempt of court.

The outcome of the case was also shared with the Council's media manager so that a draft press release could be prepared in advance of the judgment being handed down. The media manager was on annual leave on the day the judgment was to be handed down so asked a colleague to send the press release to media contacts "first thing". The press release was emailed to the various external media outlets at 9.15am (45 mins before the judgment was handed down at 10am) noting that it was subject to an embargo until 10am.

The Council did not dispute that the distribution of the press release to external journalists ahead of the hand down breached the embargo. The issue in dispute was whether the internal distribution at the Council had breached the embargo.

The claimant, Helen Kinsey, contended that the internal communication of the outcome of the case to the individuals who did not receive the judgment could only have been for interest. Ms Kinsey claimed that this breached the embargo because it went beyond those who needed to see it for the (legitimate) purposes of correcting errors, preparing submissions on consequential matters and preparing for the publication of the judgment.

The Council argued that the internal communication of the outcome of the judgment within the Council did not breach the embargo. The individuals, who were all Councillors or otherwise in senior positions, did need to know the outcome to prepare themselves for publication of the judgment. Each of them had been professionally involved with the case and given the widespread public interest they were likely to be contacted for comment immediately after the judgment was made public. The Council argued that it was also legitimate for it to prepare a press release in advance of the handing down (to be distributed upon the judgment becoming public).

In relation to the internal circulation of the outcome of the case, the court held that there was no breach of the embargo. The court was clear that draft judgments can never be shared simply for information or for interest. There must be a clear need for the person to be made aware of the substance of the draft judgment for the purpose of preparing submissions, correcting errors or preparing for publication of the judgment. If it sufficed simply to inform the individual of the timing of the hand down and communicate the outcome promptly to them once the judgment was made public, then the draft judgment should not be shared with them in advance.

In this case, the court held that there was a need for the Councillors and those in other senior positions at the Council to be made aware of the outcome of the decision in advance of the handing down to enable them to "hit the ground running" when the judgment was made public. In doing so, the court seemingly accepted that the Councillors and other senior individuals at the Council would not have been sufficiently prepared for the publication of the judgment had they only been told of the outcome upon the judgment being handed down (and suggested that it may not have been practicable to communicate the outcome to each of them upon the handing down in any case).

However, the court was clearly keen to discourage parties from circulating draft judgments (or the substance of them) to large numbers, even internally within an organisation that was a party to the proceedings. The court emphasised the need for diligence, care and a conscientious exercise of judgement when considering to whom a draft judgment should be communicated. The court cautioned that parties should liaise with their legal representatives to identify those individuals who have a legitimate need to see the draft judgment (or be informed of its outcome) and to record those reasons contemporaneously.

The court also accepted that it was proper for a press release to be prepared by the Council (as a party to the litigation) so that it could be sent promptly after the handing down of the judgment. This was in stark contrast to the drafting of a press release by a barrister's chambers or a solicitors' firm to publicise their role in the case, which the court held was not a legitimate purpose citing the Court of Appeal judgment of the Master of the Rolls in Counsel General for Wales ². It was therefore legitimate for the outcome of the case to be communicated to the council's internal media manager in advance of the judgment being handed down so he would be in a position to update the public and inform the community of the outcome promptly on the judgment being handed down.

Unsurprisingly, however, the court held that the Council had breached the embargo by sending the press release to its external media contacts in advance of the judgment being handed down (which the Council did not dispute). This was notwithstanding the fact that the press release was emailed to only a portion of the press (rather than the public at large) just 45 minutes before the judgment was handed down and bore its own warning to journalists that the judgment was embargoed until 10am (the press did not actually report on the case to the public until 13.06am that day).

Nevertheless, the court accepted the apologies from the Council and in making no finding of contempt, further accepted that the breach arose from a genuine misunderstanding by the Council's media manager of the nature of the embargo on draft judgments, who had not appreciated that a press release with a note on reporting restrictions could not be shared with external journalists (which was standard practice for other announcements by the Council).

This case builds on a string of warnings given by the court in relation to the embargo on sharing the contents or substance of a draft judgment before it is made public. The most notable of these is the Court of Appeal judgment in Counsel General for Wales, in which the Master of the Rolls was clearly concerned about the frequency of violations of Practice Direction 40E and wanted to send a clear message to all those who receive embargoed judgments that the embargo must be respected. It is the personal duty of those who receive draft judgments (including solicitors, barristers and in-house lawyers) to ensure that the embargo is complied with.

In the Lewisham Council case, the court was quick to find that there was no contempt by any of the individuals at the Council involved in the press release being prepared and emailed to journalists ahead of the hand down. It appears from the judgment that the court took into account the sincere apologies it received from the individuals involved and the fact that the breach arose from a genuine human error.

That said, the embargo on the publication of draft judgments is something the court continues to take very seriously indeed. As the Master of Rolls noted in Counsel General for Wales, draft judgments are circulated in confidence as they may contain important, highly personal or price-sensitive information. It is therefore essential that they are made public in an orderly manner.

Although nobody in the recent line of cases has been held in contempt, it remains a very real risk for any individual who violates the embargo. If there is any doubt to whom the draft judgment or the outcome can be communicated, parties should seek the court's permission before doing so.

¹ The judgement was given in October 2022 but has only recently become available.

² R (Counsel General for Wales) v Secretary of State for Business, Energy and Industrial Strategy [2022] EWCA Civ 181.)

The CPR 3.10 cure: Court of Appeal prioritises substance over form in defective jurisdiction challenge

Mon, 03 Jul 2023 16:03:00 +0100

Facts

The case arose out of a commercial contract between two general practitioners (the claimants) and NHS England (the defendant). The claimants alleged non-payment of a grant and under-payment of rental reimbursement payments pursuant to the statutory regime.

The Court of Appeal was not concerned with the merits of the case, as the appeal turned on purely procedural issues.

The sequence of relevant procedural events can be summarised as follows:

The claimants issued a claim form on 12 August 2019 and on 27 November 2019, served an unsealed copy together with the particulars of claim on the defendant.
On 10 December 2019, two days before the expiry of the 4 month period for service, the defendant's solicitors wrote to the claimants' solicitors alerting them that the claim had not been effectively served, and followed up two days later with a letter advising the claimants' solicitors that good service had not been effected.
The sealed claim form was subsequently "served" on the defendant on 7 January 2020, some weeks after its period of validity had expired.
Ten days later, on 17 January 2020, the claimants applied for an order that valid service had been effected, whether by rectification of the claim form under CPR 3.10, or by permitting service by an alternative method under CPR 6.15, or by dispensing with the need for service under CPR 6.16.
On 21 January 2020, the defendant filed an acknowledgement of service under cover of a letter stating its intention to apply to strike out the claim form for non-compliance with CPR 7.5. On the form, the defendant ticked the box stating: "I intend to defend all of this claim" but not the box stating, "I intend to contest jurisdiction."
Three days later, on 24 January 2020, the defendant applied for the claim to be struck out due to non-compliance with CPR 7.5. The application made no reference to CPR 11.
The District Judge dismissed the claimants' applications and granted the defendant's strike out application.

First Appeal

The claimants appealed on the ground that the District Judge had erred in law by not finding that the defendant had accepted jurisdiction and/or lost its right to challenge the contest jurisdiction either by failing to use the procedure provided by CPR 11 and/or by failing to tick the box in the filed acknowledgement of service form indicating an intention to contest jurisdiction.

HHJ Pearce, sitting in the High Court, dismissed the appeal holding that the defendant's application to strike out the claim form due to non-compliance with CPR 7.5 should be rectified under CPR 3.10 and treated as an application under CPR 11¹ for a declaration that the court had no jurisdiction to hear the claim.

The claimants went on to appeal HHJ Pearce's decision to the Court of Appeal.

Arguments before the Court of Appeal

The claimants sought to challenge the decisions below on two bases. The first is that, consistent with the decision in Hoddinott v Persimmon Homes (Wessex) Ltd², a failure to apply under CPR 11¹ for a declaration that the court has no jurisdiction when acknowledging service (or within 14 days of acknowledgement of service) precludes a defendant from challenging jurisdiction in any other way, such as by an application to strike out the claim even when the claim form has been served out of time.

The second basis is that, consistent with the decision in Vinos & Marks & Spencer plc³, the power to cure procedural defects under CPR 3.10 cannot be used to override an express prohibition in another rule. The claimants also argued that if their failure to serve the sealed claim form on time could not be cured by CPR 3.10 despite the serious consequences, then the same procedural vigour should be applied to the defendant.

The defendant sought to distinguish Hoddinott from this case on the basis that the defendant's acknowledgement of service was accompanied by a covering letter indicating the defendant's intention to have the claim struck out and was followed three days later with an application to set aside service and strike out the claim. The defendant argued that there was nothing in the authorities that prevented the judge from treating that application, using the rectification power in CPR 3.10 if necessary, as if it had been made under CPR 11.

Decision of the Court of Appeal

Citing Steele v Mooney⁴, the Court of Appeal remarked that there is a valid distinction between making an application with defects and failing to make a necessary application at all. In this case, compliance with CPR 11¹ could have been achieved by the addition of minimal additional wording in the defendant's strike-out application which was implicit in the application that was being made: the defendant's solicitors' covering letter and its witness statement in support of the strike-out application clearly indicated the defendant’s intention to dispute the court’s jurisdiction to determine the claim.

The Court of Appeal disagreed with the claimants' interpretation of the Vinos principle and held that it must not be expanded into saying that CPR 3.10 cannot be used to rectify any breach of the CPR; otherwise the rule would be deprived of its utility.

Accordingly, the Court of Appeal decided that the defendants' strike out claim could be rectified under CPR 3.10 and treated as an application under CPR 11¹ for a declaration that the court had no jurisdiction to hear the claim. The distinguishing factor between the case at hand and Hoddinott was that the substance of the application had been made, but with defects.

It should be noted that the Court of Appeal held that the defendant's solicitors' failure to tick the box on the acknowledgement of service indicating an intention to contest jurisdiction was not fatal to their application for relief because, even if the box had been ticked, a CPR 11¹ application would still have been required to be made within 14 days. The Court of Appeal therefore concurred with HHJ Pearce in the High Court that a tick in the box is neither necessary nor sufficient as a basis for challenging jurisdiction.

Finally, the Court of Appeal drew a distinction in relation to procedural errors regarding the service of originating proceedings which would continue to be strictly applied and treated as a class of their own. In this regard, the claimants' argument that if their failure to comply with the rules is to be treated so strictly despite the serious consequences, the same procedural rigour should be applied to the defendant, fell on deaf ears.

Accordingly, the Court of Appeal unanimously dismissed the claimants' appeal.

Comment

The decision reiterates that applications to dispute jurisdiction (for example because the claim form was served out of time) should be made under CPR Part 11.

The case also serves as a warning of the issues that can arise when leaving the serving of a claim form until the last minute, as failing to serve a sealed copy of the claim form within the timeframe stipulated in CPR 7.5 is likely to have dire consequences. The Court of Appeal was at pains to emphasise the particular importance of the timely and lawful service of originating process. Failure to comply with the rules about service is to be treated with greater strictness than other procedural errors and is unlikely be capable of being rectified under CPR 3.10.

¹ Pitalia & Anor v NHS England [2023] EWCA Civ 657

² [2008] 1 WLR 806

³ [2001] 3 All ER 784 and followed in cases such as Ideal Shopping Direct Ltd v Visa Europe Ltd [2022] 1 WLR 1541

⁴ [2005] EWCA Civ 96

Thirty minutes in Decentraland: A metaverse adventure

Wed, 14 Jun 2023 14:52:00 +0100

The Crypto Fraud and Asset Recovery network (CFAAR) is set to host a webinar exploring Decentraland, on Tuesday 27 June 2023 at midday (sign up here). A true metaverse native, Tara Annison of Elliptic, will provide a guided tour.

In advance of the webinar, Chris Whitehouse and Becky Baker of CFAAR Founder Member RPC each spent thirty minutes exploring Decentraland for the first time. Here's what they found.

Chris' Adventure

'Art or DAI'

After hurriedly creating an avatar, I entered the tutorial area which gave me a quick run through of the basics of interacting with users and manipulating virtual objects. I was then given the choice of three portals going to various areas of interest.

I made my portal choice and was transported to an area called 'Art or DAI'¹ containing a number of virtual art galleries. Walking around them was not totally dissimilar to exploring a real gallery. I was able to wander around and paused to take in any particularly eye-catching pieces.

'HQ Vech' and 'Barter Town'

Next I decided to pick a random direction and see what I came across. After traversing some empty land plots, I found 'HQ Vech' selling various wearables (items you can use to customise your avatar). As I was only using the demonstration link I was not able to purchase anything so instead admired an explorer themed outfit that I felt would have been thematically appropriate.

I pressed on and ended up in an area called 'Barter Town', an open-air shopping area. Various digital wares were displayed in floating windows, which when approached provided you with a web link connected to the product.

I was intrigued to see you could collect rent on land plots (presumably in the form of MANA, Decentraland's internal currency). I will have to ask Tara about the economics of that during the webinar.

'Hen World'

The final area I visited was 'Hen World', which was marked nearby on the main Decentraland map. I had been expecting some kind of virtual farm, but it was actually an educational building for people to learn about health. Its different floors included a corridor lined with educational posters, an interactive quiz floor and a communal visitor area.

Becky's Adventure

I spent way too long trying to make my avatar look cool to fit into the hip world of Decentraland, but ended up in a blazer and kitten heels. I'm clearly a lawyer to my core.

After the demo, I was then offered a tantalising choice between several portals, just like Chris. I picked the portal going directly to Genesis Plaza, the main transport hub of Decentraland, a bit pedestrian compared to Chris' more adventurous choice. Or so I thought.

Genesis Plaza

On arrival, I was faced with a diving board and a mysterious whirlpool.

I immediately jumped in, expecting to find myself standing in a foot of virtual water. Instead, this happened:

My confusion only grew when I was faced with a well-muscled, giant Doge at the bottom:

It really was!

The Pedigree Fosterverse

After walking around the "whirlpool", I explored on foot for a little while to get a sense of the more unstructured parts of Decentraland that belonged to other people. The first place I stumbled across was The Pedigree Fosterverse.

I could pet, talk to, and adopt any of the rescue dogs you can see, both in Decentraland and in real life.

The Gold Rush

However, my favourite interaction was back in Genesis Plaza, where I met this elderly gentleman carrying a sack of (virtual) gold:

I thought I was about to be encouraged to buy some bogus coins, and would be able to report back about the sophistication (or lack of it) of cyberfraud in the metaverse to our CFAAR members. However, it was actually Decentraland giving me a gentle reminder not to get caught up in the crypto "gold rush". The old man told me about all his mishaps chasing the latest coins, with the strong implication that none of them had yielded quite what he'd hoped.

He left me with this hopeful farewell as he hurried on to better things:

Final impressions

Chris: Decentraland is a little underwhelming when you first enter, the graphics are quite basic, and it seemed to be largely empty, although that may just be because I don't know where the popular hang outs are. The social aspect would have been an interesting thing to explore, maybe on my next visit…

It's pretty hard though not to see the longer potential of metaverses like Decentraland. Virtual museums and shopping complexes could be fantastic experiences, particularly if consumed via a VR headset which would allow complete immersion in the experience. I particularly like the idea of the technology deployed towards education (along the lines of 'Hen World') with stimulating interactive learning environments supplementing classroom teaching.

Becky: I was impressed by the creativity and purpose of the areas I found in Decentraland. Nothing seemed gratuitous or chaotic, despite how wonderfully unusual it could be – it was all there to achieve a certain goal, whether to educate, advertise, or simply show the vast range of possibilities in the metaverse.

I didn't try to communicate with anyone in Decentraland, so the only interactions I had were automated (for example, the monologue above from the old miner, or from the various dogs I met in the Plaza and the Fosterverse). My experience was tightly controlled as a result, especially when I was in the central areas. The Decentraland powers-that-be were determined to guide and educate me through the various characters I met before I was set loose on the virtual world, which I thought was an admirable and engaging way of setting out one's house rules.

I think a more well-rounded metaverse native would have a very different story to tell about the dynamics of Decentraland once real human beings and their avatars are involved. This is why we will be introducing CFAAR members to the metaverse on 27 June through the eyes of Tara, who knows Decentraland like the back of her virtual (and, as Chris said, slightly pixelated) hand. You can sign up for the virtual tour here.

¹ DAI is a stablecoin on the Ethereum blockchain

The CAT's new approach: I can't afford a carriage (dispute)

Fri, 02 Jun 2023 14:05:00 +0100

In a recent ruling, the CAT departed from its previous approach and ordered that carriage should be heard as a preliminary issue rather than "rolled up" as part of the certification hearing.

We take a closer look at the CAT's previous approach to carriage disputes and the significance of its different tack.

I. Previous approach – carriage as part of certification

Certification and competing claims

By way of recap, the CAT’s certification assessment for collective proceedings¹ comprises two limbs:

(i) the authorisation of the proposed class representative (Rule 78 of the CAT Rules) (authorisation criteria); and

(ii) the certification of the claims as eligible for inclusion in collective proceedings (Rule 79) (eligibility criteria).

Under the authorisation criteria, if there is more than one applicant² seeking approval to act as the PCR in respect of the same claims, the CAT shall consider which PCR would be ‘the most suitable’ (Rule 78(2)(c)).

The CAT previously considered rival class actions in two key cases (FX and Trucks):

FX: competing opt-out claims

The FX case involved two competing applications for an opt-out collective proceedings order (CPO) following the Commission's infringement decisions regarding foreign exchange spot trading.

One application was brought by Michael O'Higgins FX Class Representative Ltd (O'Higgins PCR) and the other by Phillip Evans (Evans PCR). See our previous update here. Both PCRs sought damages on an opt-out basis. Given the similarity of the claims, a class member might fall within both classes. Therefore, the issue of carriage arose.

The CAT refused to determine carriage as a preliminary issue in advance of certification. In its decision on the carriage dispute timing, the CAT recognised the UK regime was in its infancy but considered the assessment of both the authorisation and eligibility criteria were interrelated such that the carriage issue could not be heard before certification. The CAT considered the carriage dispute would only arise once it is satisfied that each application meets both the authorisation and eligibility criteria. Therefore, the issue of carriage was to be determined as part of certification.

However, the CAT refused to certify either of the CPO applications on an opt-out basis. It proposed that both PCRs should refile their claims as opt-in instead. Given the majority concluded that certification on an opt-out basis was not appropriate, it was not necessary for the CAT to determine the carriage dispute (if the CPOs were certified as opt-in, the issue of carriage would not arise given the represented class members choosing to opt-in would be different).

While there was no formal determination of the carriage dispute, the CAT nevertheless set out some guidance:

• Relative test: the authorisation criteria have an explicit relative aspect and require consideration of the relative suitability of each PCR. While there is no express relative element referred to in the eligibility criteria, the CAT clarified that the condition of ‘suitability’ as part of the eligibility criteria involves both an absolute and a relative test. Therefore, where there is more than one application for certification, the factors going to the eligibility criteria are also to be taken into account as a means of differentiating between rival applications. The various certification criteria allow one application to be evaluated as against another, which is ‘the essence of how a carriage dispute is determined.’

• Timings: the CAT stated that relative timing of the two applications was immaterial in that case (O’Higgins PCR had filed approximately five months before Evans PCR). However, as it was the first carriage dispute, the CAT made some general observations and noted that a late applicant who does not attend the first CMC in another certification application should be under ‘no illusions’ that the first in time will have a significant advantage in terms of any carriage dispute.

Although it was not required to determine which application it preferred, the CAT stated that, if it were minded to certify on an opt-out basis, carriage should be granted to Evans PCR. It considered Evans PCR’s application was ‘better thought through’ and a ‘marginally better attempt at capturing an elusive loss.’ Several case specific factors were considered by the CAT in reaching a preference for Evans PCR.

Trucks: overlapping CPO applications

The Trucks case also involved two rival class actions. The Road Haulage Association had applied for a CPO on an opt-in basis and UK Truck Claim's CPO application was opt-out (with opt-in as an alternative basis). As with FX, the certification hearing in Trucks was held jointly.

Although the proposed classes in the RHA and UKTC applications were not identical, they substantially overlapped. This raised the jurisdictional question whether the CAT was able to certify two overlapping sets of collective proceedings and, if that were possible as a matter of law, whether it would be appropriate to do so. The CAT did not determine the jurisdictional position, as it considered it would be wholly inappropriate to approve both applications. The CAT confirmed it would only certify one.

Having concluded that both claims were in principle eligible and suitable for inclusion in collective proceedings, the CAT then considered which of the two applications was preferable. The CAT compared the differences between the applications, including class definition, funding, the run-off period and the impact of the availability of data on the respective experts’ methodology. Overall, the CAT considered that the RHA opt-in claim was preferable to the UKTC’s claim (even if the UKTC’s claim had been opt-in).

Court of Appeal guidance awaited

The CAT's FX and Trucks certification decisions are both currently on appeal. The appeals were heard during spring 2023 and the Court of Appeal's judgments are expected soon.

II. The CAT's different tack – carriage as a preliminary issue

While the Court of Appeal's guidance in FX and Trucks is awaited, the CAT has already departed from its previous approach to determining rival class actions.

In a recent ruling concerning two competing CPO applications brought by Claudio Pollack and Charles Arthur, the CAT decided that the issue of carriage should be determined as a preliminary issue, not as part of certification. The certification hearing would then follow (involving only one of the PCRs).

Marking a significant change from previous decisions, the CAT clarified that while each case will be considered on its merits, in most carriage disputes there is no advantage in hearing carriage together with certification. Following the Supreme Court's guidance in Merricks, the CAT considered the questions arising on certification are likely to be quite technical (whether or not the authorisation and eligibility criteria are satisfied), and are unlikely materially to inform the outcome of any carriage dispute.

A few key highlights from the recent ruling:

• Costs: the CAT considered that determining carriage in advance of certification can lead to considerable costs savings, as otherwise both PCRs would be required to prepare for the certification hearing.

• Role of proposed defendants: this is expected to be minimal. Unless to assist the Tribunal, proposed defendants should not be entitled to much of a say as to which PCR will be seeking to carry on proceedings against them. The suggestion is that proposed defendants may not have to participate in a carriage dispute at all - unless they choose to - and are entitled to reserve their position until the certification hearing.

• Timings: which PCR was 'first to file' is not determinative. However, where significant time and money has been spent in framing a carefully considered standalone claim, the CAT recognised that some credit is to be given for filing first. Although it was stressed that 'no potential class representative, considering making an application for certification, should assume that speed trumps consideration.' The CAT observed that the longer the delay before the second claim is filed (and the closer the applicant first to file is to a substantive resolution), the harder it will be to displace that first applicant.

• PCRs to cooperate: rival PCRs should cooperate regarding the hearing of carriage. Issues of delay relating to service should not hold up the resolution of carriage issues.

III. Rewriting the rulebook

The CAT did not consider itself constrained by previous decisions where carriage and certification had been heard together, although it noted the FX decision was correct (reflecting the 'first in time' status and the novel nature of the certification jurisdiction at that time).

The CAT now considers that issues of carriage and certification should normally be determined separately and determining carriage as a preliminary issue will lead to significant savings in terms of time and money (removing one PCR from the scene prior to the certification assessment). The importance of cost control was emphasised in the ruling. It was stressed that costs need to be kept to the proper minimum to ensure the continued viability of the collective proceedings regime which has its principled foundation in access to justice.

This recent decision is another example of the CAT reconsidering and adapting its procedures, drawing on lessons learned from the significant number of collective proceedings already underway.

¹For further background on developments, our February 2023 update on competition collective proceedings is here.

²PCRs do not always compete: in one case, relating to train tickets, Mr Boyle and Mr Vermeer applied jointly for a CPO. The CAT considered it did have jurisdiction to appoint two PCRs but declined to do so. The CAT noted that joint class representatives is not a cost-free option and was not justified in that case. Only one PCR (Mr Boyle) was appointed.

Singapore Court of Appeal Sends Acceleration of Interest Payment Clause To The Penalty Box

Mon, 24 Apr 2023 09:44:00 +0100

It is trite that such clauses are not enforceable as of right. The Singapore Courts have consistently affirmed the test set out in the seminal decision of Dunlop Pneumatic Tyre Co, Ltd v New Garage and Motor Co, Ltd [1915] AC 79 ("Dunlop") that a contractual clause will be considered a "penalty clause" (and therefore unenforceable) if it was found to be designed to deter a breach of contract rather than to provide for genuine compensation for the party.

Despite landmark decisions in the UK and Australia¹ casting some uncertainty over Dunlop's "genuine pre-estimate of loss" test, the Singapore Court of Appeal affirmed the continued application of the test in Dunlop.²

The recent decision in Ethoz Capital Ltd v Im8ex Pte Ltd and others [2023] SGCA 3 ("Ethoz Capital") is the latest case affirming the test in Dunlop, where the Court of Appeal interestingly found an accelerated repayment clause to be a penalty clause and thus unenforceable.

Relevant Background Facts

Ethoz Capital Ltd (“Ethoz”) lent $6.3 million to Im8ex Pte Ltd (“Im8ex”) under several loan facilities which were secured by mortgages over several different properties (“Properties”).

The parties subsequently renewed these loan facilities under a new set of 4 loan facilities (the "Facilities"). Pursuant to the Facilities, the amount advanced to Im8ex was $6.3 million (the "Advance") and was similarly secured by mortgages over the Properties.

The Facilities included several important clauses which were essentially:-

The Advance was extended at an interest rate of 3.75% p.a. to be paid equally over 180 monthly instalment payments.
An amount termed “Total Interest” (which was the aggregate of all the interest payments) was “deemed earned and accrued in full upon the drawdown of the Advance”, and if Im8ex defaults on payment, it will pay interest (“Default Interest”) on the Advance and Total Interest at a rate of 0.065% per day (“the Default Interest Rate”).
If Im8ex failed to pay any sum when due, Ethoz could declare that “all amounts due and owing under [the Facilities], including the Advance and the Total Interest and any default interests … be immediately due and payable.”

When Im8ex defaulted on payment, Ethoz applied for vacant possession of the Properties, payment of the Advance, the Total Interest and the Default Interest. Im8ex's case was, amongst other things, that the payment of Total Interest and Default Interest constituted unenforceable penalties.

The Court of Appeal's Decision

The Court of Appeal held that the accelerated payment clauses in the Facilities were unenforceable as penalty clauses.

The Court reiterated the well-established position that secondary contractual obligations are unenforceable if they are penal in nature, rather than compensatory.

Two distinct inquiries were identified in determining whether a contractual provision would be deemed to be a penalty clause: (a) whether the contractual provision creates a secondary obligation triggered by a breach of contract (the “threshold issue” referred to in Denka)³, and (b) whether it requires the defaulting party to pay an amount of money that seeks to intimidate or frighten the defaulting party to comply withtheir primary obligations.

With respect to the "threshold issue", that the Court of Appeal acknowledged the reality that distinguishing between the two types of obligations is "not always clear", and that some parties may try to 'mask' secondary obligations as primary obligations through "clever drafting".

The Court of Appeal held that Singapore courts would adopt a "substance over form approach – in line with the contextual approach to contractual interpretation", and the court must "analyse the whole contract, not just the impugned clauses in isolation." This involves a non-exhaustive list of factors including:

“the overall context in which the bargain in the clause was struck”;
“any particular reasons for the inclusion of the clause”; and
“whether the clause was contemplated to form part of the parties’ primary obligations to secure some independent commercial purpose, or was only to secure the affected party’s compliance with his primary obligations”.

Applying this approach, the CA held that it was clear that the "immediate and full payment of the Total Interest is a secondary obligation that is only triggered upon breach; it is not Im8ex’s primary obligation under the Facilities."

The Court of Appeal then considered the second inquiry and held that the immediate and full payment of Total Interest was a penalty. On the plain text of the Facilities, the increase between the regular interest rate and the Default Interest rate was an "extravagant increase" which Ethoz could not justify.

The Court of Appeal decisively held that the test in Singapore to be applied in determining whether a provision is an unenforceable penalty is that of Dunlop: "any clause that essentially forces compliance with the primary obligations of a contract – thus interfering with the parties’ freedom to break their contractual undertakings – will be held to be an unenforceable penalty".

Commentary

Ethoz Capital is the first reported decision in Singapore where the acceleration of interest payments upon breach amounted to a secondary obligation that was subject to the penalty rule. Such clauses are a mainstay in contracts such as loan or settlement agreements, where parties agree for a total sum to be paid over various instalments. In the event of default of payment for any instalment, the accelerated payment clause enables the non-defaulting party to immediately claim for the total outstanding sum instead of waiting for each instalment to fall due.

It may be tempting for lenders to provide for draconian remedies especially where there is a high risk of default by the borrowers. Such an approach should be tempered in light of the decision in Ethoz Capitol.

To avoid potential complications in attempting to enforce any accelerated payment clause, lenders should be aware of the following factors:

What is the borrower liable to pay under the accelerated payment clause?There are likely to be little to no complications enforcing the clause, if the borrower is only liable for the entire principal sum after defaulting on a single instalment. On the other hand, the same cannot be said if the borrower is made to also pay interest on the principal sum which has not even accrued. Alternatively, an exorbitant and crushing interest rate may also raise concerns with a Singapore court.
What is the lender's loss in the event of default? Lenders need to take a realistic and pragmatic estimation of the potential loss suffered if the borrower defaults on payment obligations. Where there is a genuine belief that the "premium" paid by the borrower over and above the principal sum reflects the potential loss, the basis, factors and calculations behind this belief should be included in the contract.
Can the parties agree beforehand that the accelerated payment mechanism is not a penalty clause? In light of the decision in Ethoz Capitol, the Singapore courts will look robustly at the substance of a contract rather than the labels ascribed by the parties. The mere fact that parties agree to a clause generally providing that they have agreed that a payment mechanism is not a penalty clause or that the mechanism is a primary obligation is very unlikely to be exempt from the Court's scrutiny.
Which system of law should govern the contract? Given the differing approaches adopted by Singapore, UK and Australia on the enforceability of penalty clauses, it would be prudent for lenders to seek legal advice to determine which approach is the most suitable for a particular contract.

¹Cavendish Square Holding BV v Makdessi [2016] AC 1172 ("Cavendish") held that the test for when a penalty clause is unenforceable is whether the impugned provision constitutes a secondary obligation that imposes a detriment on the contract-breaker that is out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation; and Andrews & Ors v Australia and New Zealand Banking Group Limited [2012] 247 CLR 205 ("Andrews") took a more expansive approach, holding that the rule against penalties should not be limited only to clauses that took effect upon a breach of contract. There is no single test for when the clause is unenforceable, but would consider factors such as whether the sum or remedy stipulated is (1) exorbitant or unconscionable or (2) out of all proportion to the interests of the party which it is the purpose of the provision to protect; or (3) whether the stipulated is properly characterised as having no purpose other than to punish.

²Denka Advantech Pte Ltd v Seraya Energy Pte Ltd [2021] 1 SLR 631 ("Denka")

³Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals [2021] 1 SLR 631 ("Denka"), where the issue was whether a liquidated damages clause was in fact a penalty clause

Doctrine of separability in arbitration: should the arbitration agreement and the main contract "sink or swim" together or alone?

Tue, 07 Mar 2023 10:55:00 Z

Introduction

In DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd¹ the Court of Appeal considered the arbitration law doctrine of separability. Under this principle, an arbitration clause, or agreement, is treated as a separate agreement to the main contract (or "matrix contract") of which it forms a part. In this case, the Court of Appeal upheld the High Court's decision to set aside the arbitrator's award, on the basis that the arbitrator did not have jurisdiction to decide the dispute as no arbitration agreement had been concluded. Now the leading case on the doctrine of separability, this decision clarifies the operation of the doctrine in circumstances where the parties dispute the existence of an arbitration agreement as well as the matrix contract.

Facts

The proceedings concerned a dispute between DHL Project & Chartering Ltd (DHL) and Gemini Ocean Shipping Co Ltd (Gemini). The dispute arose out of charterparty negotiations of a proposed lease for a vessel known as the "Newcastle Express". Following the negotiations, the broker circulated a document titled "M'Term recap" which summarised the status of the negotiations. This included the condition that the vessel was to be inspected and approved by Rightship, a widely used vessel vetting system, prior to the voyage and stated, "subject shipper/receivers approval". The recap also contained an arbitration clause.

Rightship was due to inspect the vessel on 3 September 2020. When the inspection did not occur, DHL emailed the broker to say that it did not accept the vessel as the relevant approval had not been obtained. DHL released the vessel, which Gemini treated as a repudiatory breach of the charterparty. Gemini commenced arbitral proceedings against DHL. The arbitrator found in favour of Gemini and made an award for damages and costs against the DHL.

DHL challenged the jurisdiction of the arbitrator under section 67 of the Arbitration Act (AA) 1996. DHL claimed that the charterparty had not been concluded as it was subject to obtaining "shipper/receivers approval", and that there was, therefore, no binding arbitration agreement. In the alternative, DHL also sought leave to appeal under section 69 of the AA on the basis that, even if the arbitrator did have jurisdiction, his decision was an error of law.

High Court

The High Court held that there was no binding arbitration agreement as the "subject" of the "shippers/receivers approval" had not been "lifted" (ie, that the relevant conditions to the contract had not been satisfied). Therefore, the section 67 application succeeded as the High Court found that the arbitrator did not have the relevant jurisdiction.

Gemini appealed this judgment to the Court of Appeal.

Counsel for Gemini submitted that the High Court in the first instance had failed to give proper effect to the separability principle and that there was no reason why the "invalidity or even non-existence" of the matrix agreement should entail the invalidity of the arbitration agreement. The question of whether a condition or pre-condition had been satisfied had nothing to do with the arbitration agreement, which counsel argued had already been concluded between the parties during their negotiations. Gemini admitted that there may be circumstances where the arbitration agreement and the matrix contract "sink or swim" together, but that there needs to be powerful reasons for this to be the case.

Counsel for DHL supported the reasoning of the High Court and submitted that the "subject" in question was a pre-condition to the contract, which included the arbitration clause. The parties therefore did not conclude a binding arbitration agreement.

Court of Appeal

The Court of Appeal was not persuaded by Gemini's submissions and dismissed the appeal.

In its decision, the Court distinguished between cases where it is alleged that the matrix contract was never concluded and cases in which a concluded matrix contract is alleged to be void or otherwise ineffective. In the latter category the arbitration agreement can survive the underlying void contract under the doctrine of separability.

The Court found that the present case fell into the former category as the charterparty had not been concluded. The Court held that it was required to establish whether the parties had entered into an arbitration agreement under the ordinary principles of contract formation, and that the doctrine of separability had no significant role in this regard.

When considering the question of contract formation, the Court of Appeal found that the "subject to approval" provision served as a pre-condition to the entire contract, including the arbitration clause. The commercial purpose of this clause was to allow either party to walk away from the contract until the relevant conditions were met. While the parties had agreed that the contract would include an arbitration clause, this in itself did not amount to an arbitration agreement.

Comment

The Court of Appeal's decision clarifies that where there is a dispute as to whether an arbitration agreement has been entered into, the ordinary principles of contract formation will apply.

While the Court acknowledged that it is "theoretically possible" for parties to conclude a binding arbitration agreement even if they have not yet agreed a matrix contract, the Court held that in most circumstances this will not be the case. In particular, when considering the intention of the parties the Court referred to the judgment in Enka v Chubb,²which states:

the principle that an arbitration agreement is separable from the contract containing it is an important part of arbitration law but it is . . . likely to be much better known to arbitration lawyers than to commercial parties. For them, a contract is a contract; not a contract with an ancillary or collateral or interior arbitration agreement.

Parties should therefore be mindful of the fact that their arbitration clause may not be binding during pre-contractual negotiations, unless specifically agreed. The Court acknowledged this concern in its decision and suggested that parties may wish to make an ad hoc agreement to submit the issue of whether a binding contract and/or arbitration agreement has been concluded to arbitration. Commercial parties and lawyers may wish to consider such an ad hoc agreement during negotiations moving forward. In the meanwhile, one regrettable aspect of the decision could be a significant increase in jurisdictional challenges in cases where the parties dispute the formation of a contract containing the arbitration clause.

¹DHL Project & Chartering Ltd v Gemini Ocean Shipping Co Ltd [2022] EWCA 1555.
²Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38.

High Court favours English jurisdiction in bribery claim brought by Kuwaiti pension fund

Tue, 28 Feb 2023 14:32:00 Z

The High Court recently rejected an application, brought by two defendants to an alleged bribery claim advanced by a Kuwaiti pension fund, that the claim should be heard before the Swiss courts, holding that England was the proper jurisdiction both in order to avoid the risk of fragmentation of proceedings, and in view of the close connection of the claim to England. This case is a useful review of the authorities in relation to forum non conveniens, and the bar that must be met to successfully challenge jurisdiction on this basis (The Public Institution for Social Security v Mr Ely Michel Ruimy, Aerium Finance Limited)¹.

Facts

Mr Ely Michael Ruimy and Aerium Finance Limited (AFL) (together, the Applicants) were the defendants (inter alia) to proceedings (constituted of two consolidated claims) brought against them by the Public Institution for Social Security (PIFSS), an institution in Kuwait which is responsible for the social security system and pension scheme. There were numerous defendants to the underlying proceedings, some of whom had already brought successful jurisdiction challenges². PIFSS alleged that Mr Ruimy was the joint founder of the Aerium Group, of which AFL (an English company) was a part. Mr Ruimy was also, at certain points in time, a director of AFL.

In summary, PIFSS alleged that secret commissions of USD 10.1m were paid from Mr Ruimy to Mr Al Rajaan (PIFSS's former Director General), in return for Mr Al Rajaan influencing PIFSS to invest sums in funds managed by the Aerium Group. AFL financed certain of those payments and was sued on the grounds that Mr Ruimy's knowledge could be attributed to it. Those payments were allegedly made from a Swiss bank account held by Mr Ruimy to: (i) an account held by Mr Al Rajaan's wife; and (ii) two Swiss jewellers in settlement of amounts owed by Mr Al Rajaan.

Similar issues as in the English proceedings had been brought by PIFSS in a debt claim against certain defendants (the Mirabaud Parties) before the Swiss court. The Mirabaud Parties were part of the group of defendants who had successfully challenged the jurisdiction of the English court. These Swiss proceedings did not relate to the same scheme as the commission payments detailed above. The Mirabaud Parties had also commenced proceedings against the Applicants in the Swiss courts for declaratory relief (seeking a declaration that the Mirabaud Parties were not liable to the Applicants in relation to the claims brought against them in the English proceedings).

The Applicants applied to challenge the English court's jurisdiction in favour of the Swiss courts on the grounds of forum non conveniens.

Arguments

The Applicants advanced four arguments to show that Switzerland was clearly more appropriate than England as a forum in which to try the case. This was so because: (a) the torts/wrongs alleged took place in Switzerland; (b) Switzerland was the centre of gravity and evidence; (c) relevant evidence would be heard in already existing Swiss civil proceedings, and there was a risk of irreconcilable judgments; and (d) Swiss law may be the governing law of the claims, and this was a minor indication as to the appropriateness of Switzerland. For example, it was where the bribes were handled and paid, and evidence about those bribes would be primarily located in Switzerland and inevitably relate to Swiss bank accounts (which could give rise to issues of Swiss banking secrecy, best addressed in Switzerland).

PIFSS, however, submitted that the claim had strong connecting factors to England, specifically that: (a) claims regarding the Aerium investments were already being heard in England (and were scheduled to go to trial in 2025); (b) there was a factual connection to England (dealings between the alleged perpetrators took place in London); and (c) both AFL and Mr Ruimy had connections to England (AFL was an English company, Mr Ruimy was living in England during the relevant period, and he retained assets in the jurisdiction). PIFSS also argued that the proceedings in Switzerland did not give rise to the risk of contradictory judgments, as: (i) the Swiss proceedings were against different defendants; and (ii) the Swiss proceedings would not progress until the English proceedings were resolved.

Decision

Mr Justice Jacobs broadly accepted the submissions of PIFSS and held that the Applicants had not established that Switzerland was a more appropriate forum than the English forum.

Jacobs J held that it was clear, after Vedanta Resources³, that the risk of inconsistent judgments is often a significant factor in a forum non conveniens analysis. The English proceedings would continue as against the other defendants, including Mr Al Rajaan and his estate, even if the application were successful – it would "result in a duplication of proceedings [..], with the allegations against the recipient of the alleged bribe (Mr Al Rajaan) being investigated and determined in England, but the allegations against the payor of the alleged bribe being investigated and determined in Switzerland". In addition, Jacobs J considered it was significant that Mr Al Rajaan was the anchor defendant and at no stage had challenged the jurisdiction of the English court. As such, were AFL and Mr Ruimy to be sued outside England, that would lead to "undesirable fragmentation" and "create a higher risk of inconsistent findings".

The judge held that there were strong connections with England. AFL was an English company and Mr Ruimy lived in England for the relevant period, such that he likely was in England when negotiating and arranging the bribes. Similarly, during the relevant period, Mr Al Rajaan spent time in England on business, and was a director of an English bank. Although the alleged bribes may have been paid in Switzerland, not all elements of the wrong were connected with Switzerland – for example, the instruction to pay them may have been given in England. It would be necessary for the court to determine the reason for the payments, and whether there were in fact secret illegal commissions. The justification behind the payments was likely to be more closely connected to England, which was a relevant factor in the Court's consideration of the connections to the English jurisdiction.

Jacobs J also did not agree that documents and witnesses related to the dispute would primarily be located in Switzerland. The Applicants had given no indication as to the form of their defence or identified any factual witnesses that would need to be called. They were not obliged to do so, but without that indication, the court could not speculate as to which case they might choose to advance.

Comment

This case illustrates the resurrected relevance of the forum non conveniens test in jurisdictional challenges in the post-Brexit era. Parties wishing to challenge the jurisdiction of the English court must present a compelling argument that another jurisdiction is clearly the most appropriate forum, It will not be sufficient for there to be isolated factors that support the jurisdiction of another court. The High Court will consider all elements of the claim to be advanced, including where the harmful act occurred, the risk of irreconcilable judgments and potential duplication of proceedings, and where the witnesses and documents will sit if the defendant has given any indication of the case it wishes to advance. However, whilst a defendant is not obliged to offer the court that preview, it would be well advised to consider whether it might be strategically advantageous to do so, as a court will not speculate for the parties' benefit.

¹[2023] EWHC 177 (Comm).

²See [2020] EWHC 2979 (Comm), upheld on appeal [2022] EWCA Civ 29.

³Vedanta Resources Plc v Lungowe [2019] UKSC 20.

Considering bringing an RFI application? Is it strictly necessary?

Tue, 31 Jan 2023 15:30:00 Z

Mr Justice Jacobs observed that this was the first RFI hearing that had come before him in over four years on the Bench, and that such applications are to be discouraged. The message from the Court is to carefully consider whether an application is strictly necessary to understand the case against your client and/or to prepare your own case bearing in mind the Commercial Court's current workload.

The Defendants had issued a series of requests for further information. The first request in respect of the Particulars of Claim was issued prior to service of the Defence, the second and third were issued in respect of the Reply and the fourth RFI, which was the subject of the application, was a combination of the requests that the Defendants considered had not been adequately answered. Although the Claimants had provided responses to the first, second and third RFIs, they declined to provide responses to the fourth RFI on the basis that the requests had either been answered already, or went beyond what was strictly necessary for the Defendants to understand the case they have to meet.

At the hearing, the Defendants submitted that the further information requested was necessary to enable the Defendants to understand the case against them, to prepare their Defence and to consider whether or not to strike out parts of the pleaded case. The judge was very clear that the test for ordering further information is that set out in paragraph D14.1(c) of the Commercial Court Guide which provides that "the Court will only order further information to be provided if satisfied that the information requested is strictly necessary to understand another party's case". In practical terms, this means that an applicant for further information needs to come to the court and explain precisely why they do not understand an aspect of the case against them and why it is material. The judge observed that in this case, he had read the pleadings twice and the case being advanced was clear.

The judge was also conscious of the stage the proceedings had reached. Pre-disclosure, the level of detail in the Claimants' pleading was considered by the judge to be as expected, for the Commercial Court, if not more detailed. Where the case is clearly set out, the judge did not consider it sensible as a matter of case management to start dissecting the pleading and analysing sentences or paragraphs in isolation. He also commented that, if you stand back and look at this whole case as a matter of common sense, it is a huge fraud case and there will be disclosure from both sides which is likely to change the case on both sides. It is important to recognise that reality and consider the requests in that context.

Where requests were effectively requests for disclosure, the proper course was to deal with those matters in the context of the Disclosure Review Document (DRD), not an RFI. Similarly, if the Defendants, or any of them, consider that some paragraphs are susceptible to being struck out, that is the appropriate application, not an RFI. Accordingly, the judge declined to order all but one of sentence of the 15 pages requests that had been made by the Defendants. The Judge awarded the Claimants their costs of the application.

The Applicants were (1) Formal Holdings Limited, (2) Mr Malcolm King and (3) Mr Nicholas King, the Defendants in the proceedings. The Respondents were (1) Steenbok Newco 10 SARL and (2) Ibex Retail Investments Limited, the Claimants in the proceedings. Claim number CL-2021-000321.

Court of Appeal rejects timing and informed consent defences in bond bribery case

Mon, 30 Jan 2023 15:30:00 Z

In a recent decision, the Court of Appeal decided in Trafalgar Multi Asset Trading Company Limited (in liquidation) v James David Hadley and others¹ that pleaded defences to a bribery claim were so fanciful as to entitle the claimant to summary judgment. In particular, the court rejected arguments that there could be viable defences in relation to timing or that there had been informed consent. This analysis necessarily involved detailed consideration of the authorities relating to bribery.

The factual context

The claimant was the trading arm of an investment fund. Its investment manager was Victory Asset Management (VAM), which was owned by a Mr Hadley. It was common ground that Mr Hadley owed the claimant the obligations of a fiduciary.

In March and June 2016, Mr Hadley arranged for the claimant to invest in bonds issued by CGrowth Capital Bond Limited (CGrowth). This investment was facilitated by CGrowth's introductory agent Platinum Pyramid Limited (PPL) whose owner and director was a Mr Thwaite. A term of the bond purchase agreements was that 100% of the proceeds of the bonds were to be paid over to three borrowing companies.

In 2015, prior to the bond purchase agreements, and unbeknownst to the claimant, PPL and CGrowth agreed that (i) PPL would receive 29% of all bond subscription monies paid by the claimant as commission and (ii) only 70% of the bond proceeds would be paid over to the borrowing companies, the balance being retained by PPL.

PPL and CGrowth's previous arrangements were clearly inconsistent with the terms of CGrowth's bond purchase agreements with the claimant.

Five days after the claimant invested in CGrowth's March bonds, Mr Hadley received £100,000 from PPL. At around the same time, Mr Hadley agreed to sell VAM to PPL. Mr Hadley received a further payment of £400,000 five days after the claimant invested in CGrowth's June bonds. The fact of the payments was common ground.

The parties' position

The claimant's case was that the parallel transaction to sell VAM to PPL created a conflict of interest as Mr Hadley was set to gain financially from the sale of VAM. The claimant also asserted that the payments totalling £500,000 were bribes and were made from the traceable proceeds of the March and June bonds. In essence, the claimant's case was that when negotiating the claimant's investment with CGrowth, Mr Hadley was obliged to act solely in the best interests of the claimant. Instead, he was at the same time seeking to personally benefit from the sale of VAM to the agent of CGrowth with whom he was negotiating the CGrowth contracts. Put simply, Mr Hadley had put himself in a position where the personal benefits he stood to gain from the sale of VAM to PPL (and the financial incentives received from PPL) conflicted with his fiduciary obligations to the claimant.

The defendants asserted that these payments were a deposit for the anticipated sale of VAM to PPL, that the March and June bonds were legitimate and commercial transactions and that no conflict of interest arose. In any event, the defendants relied on two defences. The first was that the March bonds were agreed before any negotiations had commenced regarding the sale of VAM such that there was no inducement, which would be a necessary ingredient for bribery (the timing defence). The second was that the fact of the sale and that a deposit would be payable had been disclosed to the claimant, who had not objected (the informed consent defence).

The claimant sought summary judgment on both defences, or alternatively strike out on the basis that neither had any realistic prospect of success. At first instance, the judge allowed the defences to proceed to trial. The claimant appealed.

Principles applicable to bribery

The Court of Appeal summarised the principles applicable to bribery thus:

The essential character of a bribe is that it is a secret payment or inducement that gives rise to a realistic prospect of a conflict between the agent's personal interest and that of his principal: Novoship (UK) Limited v Mikhaylyuk [2012] EWHC 3586 (Comm).
The payee of the bribe or secret commission must owe a duty to provide honest and disinterested advice or recommendations: Wood v Commercial First Business [2022] Ch 123.
The principal must be confident that the agent will act wholly in his interests: Ross River Ltd v Cambridge City Football Club [2008] 1 All ER 1004, Airbus Operation Limited v Withey [2014] EWHC 1126 (QB).
If the agent is tainted by the bribery at the time of the transaction between the payer of the bribe and the payee's principal, then the payee's conflict of interest means that the principal has been deprived of the disinterested advice of his agent and is entitled to a further opportunity to consider whether it is in his interests to affirm it. Subsequent transactions are also tainted by the bribe. Novoship (UK) Limited v Mikhaylyuk [2012] EWHC 3586 (Comm), following Fiona Trust v Privalov [2010] EWHC 3199 (Comm).
It does not matter whether the profit is given to the fiduciary in return for services which he performs for the third party or whether it is given on any other ground: Boston Deep Sea Fishing and Ice Co v Ansell (1888) 39 Ch D 339.
Equally, it does not matter whether the payer and the recipient are aware that they are committing a legal wrong: Ross River Ltd. Nor does it matter whether the recipient's mind has actually been affected: Logicrose v Southend United [1988] 1 WLR 1256.

The Court of Appeal was of the view that the payments of £500,000 received by Mr Hadley which were, at least arguably, funded by the undisclosed commissions paid to PPL by CGrowth, were bribes unless the claimant had given informed consent to the payments. The Court did not consider the timing defence to be realistic as it seemed clear that the sale of VAM was proceeding in parallel to the March bond investment and had tainted the June bond investment.

Principles applicable to informed consent

Fully informed consent is only available as a defence where full disclosure of everything material about the proposed transaction has been made to the principal such that the principal may decide whether or not to proceed.

The burden of providing full disclosure lies on the agent and it is not sufficient for him/her merely to disclose that he/she has an interest or to make such statements as could or should put the principal on enquiry. Nor is it a defence that, had he/she asked for permission it would have been given: Dunne v English (874) LR 18 Eq 524, Hurstanger v Wilson [2007] 1 WLR 2351.

What is material is to be assessed on the basis of whether it might (not would) have affected the principal's decision. What is required will therefore depend upon the facts of any given case.

Application to the facts

Whilst the claimant had been told of a potential sale of VAM to PPL and that a deposit might be paid, the claimant had not been told of the commission arrangements, or that the claimant's money would or might fund the deposit and other payments (or putting it at its lowest, PPL's financial ability to purchase VAM would or might be enhanced if the claimant invested in CGrowth's bonds). Without knowing of the commission arrangements, the claimant could not reach a fully informed view on whether or not to invest in CGrowth's bonds. It follows that full disclosure was not given and the informed consent defence was not available. The appeal was therefore allowed.

Comment

The issue before the court was whether there was a realistic prospect of arguing that (i) the financial benefit Mr Hadley stood to gain from the claimant's investment in the CGrowth bonds did not give rise to a conflict of interest and if so (ii) the claimant had provided informed consent. The court answered both questions in the negative.

The consequence of the conflict of interest and the lack of informed consent resulted in PPL being treated as having paid, and Mr Hadley as having received, £500,000 in bribes. It is notable that this conclusion does not derive from any suggestion that either PPL (through Mr Thwaite) or Mr Hadley acted dishonestly, or knew or suspected that they were doing anything untoward. It was also unnecessary to show whether or not Mr Hadley had actually been induced or influenced by the payments in his dealings with the claimant.

¹[2022] EWCA Civ 1639

High Court rejects Group Litigation Order in FSMA litigation as it would not further the Overriding Objective

Mon, 30 Jan 2023 14:00:00 Z

In a recent decision in Edward Moon & Ors v Link Fund Solutions,¹ Mr Justice Trower dismissed an application by two groups of claimants, declining to make the Group Litigation Order (GLO) sought. The claims arose out of investments made by certain investors in the LF Equity Income Fund (previously known as LF Woodford Equity Income Fund) (the Fund). Details of the claims are summarised below.

Although the court considered that the number of claims already issued was sufficient (the claim forms name around 3,000 individual claimants) and that the claims gave rise to common or related issues of fact or law as required, Mr Justice Trower ultimately concluded that he would not exercise the court's jurisdiction to order a GLO, on the basis that ordering a GLO in this case would not further the overriding objective. In reaching this decision, the court considered that (i) other procedural means exist (within the standard case management powers of the court) for achieving a similar or essentially similar result as a GLO; and (ii) as to the publicity of a GLO, these proceedings have already been widely reported and Mr Justice Trower held that the likelihood is that those investors who wish to sue have already instructed solicitors, and if they have not done so, the reason is likely to be that they do not wish to participate.

Background

The Fund was a sub-fund of the LF Investment Fund, of which Link Fund Solutions (Link) was the authorised corporate director. Link appointed Woodford Investment Management LLP, and later Woodford Investment Management Limited, as investment manager. The claimants are investors in the Fund and the claims relate to allegations that Link pursued an inappropriate investment strategy for the Fund and made untrue and misleading statements in the Fund's prospectus. A GLO was sought by the groups of claimants on the basis that it was said to be the most convenient way to manage the claims.

GLOs are governed by CPR 19.11 – 19.15 and allow claims giving rise to "common or related issues of fact or law" to be managed collectively by the court. If granted, a GLO will (i) contain directions for the establishment of a group register on which all claims managed under the GLO will be entered; (ii) specify the issues which will identify the claims to be managed under the GLO; and (iii) specify the court which will manage the claims on the group register. A GLO might also give directions for its publicity and for the appointment of a lead solicitor for the claimants or defendants.

A bespoke costs regime also applies to GLOs, with group litigants being severally liable for an equal proportion of the "common costs" relating to the GLO issues.

The two groups of claimants who applied for the GLO (the PLS Claimants) were investors in the Fund. They contended that the Fund's purpose was to provide a reasonable level of income through investing primarily in UK listed companies. They claimed that, from early 2017, there were changes in the Fund's investment style with a move towards more speculative investments, leading to increasingly poor performance of the Fund and a notable increase in the rate of redemptions by investors. Trading in the Fund was suspended in June 2019 when it was unable to meet redemption requests. The Fund's winding up began, with the FCA's approval, in January 2020.

As the authorised corporate director, Link was responsible for the management of the Fund in accordance with the rules set out in the FCA Handbook. The PLS Claimants claimed for damages against Link under s.138D of the Financial Services and Markets Act 2000 (FSMA) on the grounds that Link breached these rules in various respects, including by pursuing an inappropriate investment strategy and making untrue and misleading statements in the Fund's prospectus. Link denies the allegations and contested the application for a GLO, submitting instead that other forms of case management were more appropriate in this case.

Other potential groups of claimants, represented by other firms, had been identified at the time of the application. Those potential claims were broadly similar to the claims by the PLS Claimants, but with some material differences, including the suggestion that those other claimants might also bring claims against an investment management company who it is alleged heavily promoted the Fund to investors.

Decision

The court first decided that the number of claimants and the issues in play met the requirements for a GLO. The judgment then focused on whether the court should use its discretion to exercise its jurisdiction to make a GLO, jurisdiction which the court said "undoubtedly" existed.

The court noted the significant resources that would be allocated to a GLO and considered it necessary to determine if there are other means of achieving the case management advantages derived from a GLO. In so doing, the court was directed to examples of disputes when the court's general case management powers have worked effectively in the context of group litigation.

The court accepted that some of the characteristics of a GLO would be of benefit in the claims, such as the cost sharing mechanisms and the binding nature of orders and directions, and the establishment of a group register would theoretically enable potential future claimants to join the litigation in a structured way.

However, the court considered that the substance of the advantages of a GLO could be achieved through more standard case management. For example, it was open to the court to order generic statements of case outside of the GLO regime to allow the determination of common issues, and the determination of issues at trial would be binding on any claimants who joined a claimant group by becoming a party to an issued claim form.

It was common ground that the purpose of a GLO is not to encourage potential claimants to make claims. The court therefore considered that there would be limited utility in the creation of a group register, and the GLO's consequent publicity, because – given that the Fund was suspended several years ago and there had already been significant publicity – it was likely that potential claimants had already decided whether or not they wanted to participate.

Another characteristic of a GLO is the appointment of lead solicitors. Given that the law firms involved had co-operated on the claims to date and indicated their intention to continue to do so, the court considered that the need for lead solicitors was not established.

Another factor suggesting that a GLO was not appropriate at the current stage of proceedings was the uncertainty surrounding the other potential claimants, who might look to bring claims against an additional party and in respect of some slightly different issues.

The court therefore declined to make the GLO on the basis that it was not required, over and above standard case management options, to further the overriding objective.

Commentary

This decision demonstrates the English courts' continued reluctance to make GLOs, including in the financial services context. 111 GLOs have been made since 2000, with only one made in 2022.² It highlights that it is not enough for applicants to demonstrate that some of the characteristics of a GLO would be of benefit in the litigation, but rather that they needed to establish that the substance of those advantages could not otherwise be achieved through the court's use of its standard case management powers.

Whilst the courts might continue to make GLOs sparingly, the importance of group litigation and class action lawsuits more widely continues to grow, both within the financial services arena and elsewhere, particularly given the continued availability of litigation funding and an increasingly uncertain economic environment. As this judgment demonstrates, the courts will seek to use their case management powers to direct the conduct of such proceedings most effectively.

¹[2022] EWHC 3344 (Ch)
²According to the HM Courts & Tribunals Service list of group litigation orders.

Hong Kong – Parties agreed settlement terms without formal settlement agreement

Thu, 19 Jan 2023 10:00:00 Z

Introduction

In MSB International Ltd v Lok & Anor¹, the Court of First Instance of the High Court found that the parties had agreed a full and final settlement of all their claims in two related proceedings, by way of an exchange of without prejudice written communications between their legal representatives, although no formal draft settlement agreement referring to more comprehensive release terms and stated to be "subject to contract" had been agreed. In the circumstances, the court granted the applicants' application to stay the proceedings, save for the purpose of enforcing the settlement terms that had been agreed. While the case turns on its facts, it illustrates the important mechanics of settlement in complex commercial litigation and the need for parties to make it expressly clear from the outset when they desire settlement terms to be subject to a formal settlement agreement.

Background

The parties became embroiled in two main proceedings. In March 2021, the plaintiff company (the plaintiff) commenced proceedings against two defendants for (among other things) alleged breach of fiduciary duties (the main action). In October 2021, the first defendant (the first defendant) commenced proceedings seeking (among other things) payment of outstanding dividends allegedly owed to him as a former shareholder of the plaintiff (the shareholder action).

There followed a series of without prejudice settlement negotiations between the parties' legal representatives in February and March 2022. One of the main issues in the negotiations was the amount of any dividend to be paid to the first defendant. After a series of written offers and counter-offers between the parties' legal representatives, on 18 March 2022 the defendants' legal representatives in the main action wrote to the plaintiff's legal representatives stating:

“….. In short, the only item outstanding between our respective clients is the figure to be paid."

There followed a further written offer as to the amount of the dividend to be paid by the plaintiff to the first defendant, culminating in the plaintiff's written acceptance of the first defendant's final offer on 22 March 2022 (the March settlement agreement). Until that point, none of the without prejudice offers and counter-offers appear to have been made "subject to contract" – namely, subject to agreement of a formal settlement document.

After 22 March 2022 there followed a further series of communications between the parties' legal representatives concerning the mechanics of settlement and how best to document the settlement terms. For example, the parties communicated about a draft settlement deed (the draft settlement deed) with supporting documents concerning the first defendant's former shareholding. These further communications appear to have been conducted on a without prejudice and "subject to contract" basis.

Things appear to have taken a significant turn in April 2022 when the defendants' legal representatives in the main action proposed to add a fuller release of claims to the March settlement agreement (apparently, for the benefit of related parties). The plaintiff did not agree to the fuller release provision.

In May 2022, the plaintiff and two individuals (the applicants) – a former shareholder and a director – commenced a further court action against the defendants in the main action (the respondents) seeking specific performance to enforce the March settlement agreement (the specific performance action)². The applicants also applied to stay the main action and the shareholder action until final determination of the specific performance action.

On the applicants' stay application the main issue for the court's determination was whether the March settlement agreement was a binding agreement to settle the parties' claims in the main action and the shareholder action. The determination of that issue would make the applicants' claim for specific performance unnecessary. The court considered that the main issue in dispute involved two specific questions for determination.

Whether the March settlement agreement was a binding settlement or subject to conditions (such as the fuller release and execution of a formal settlement agreement)? If the March settlement agreement was not binding, then no settlement had been agreed because the parties had failed to reach agreement on the draft settlement deed.
In the event that the March settlement agreement was not subject to conditions, whether its terms were sufficiently certain and complete to constitute a binding settlement agreement?³

On the applicants' case, the March settlement agreement was binding and its terms were sufficiently certain. In particular, on 22 March 2022 the applicants' legal representatives had accepted the respondents' offer with respect to the only outstanding issue between the parties. At that point (so the applicants' argument went) there was a binding settlement that was not "subject to contract" or any other terms (such as the fuller release) and the further discussions regarding the draft settlement deed did not change the fact that a settlement had been agreed.

On the respondents' case, the March settlement agreement was not binding because any settlement was subject to a formal settlement deed with fuller releases and, in any event, the March settlement agreement was not sufficiently certain to constitute a binding agreement. The respondents characterised the events leading to the March settlement agreement as a "framework" for further negotiations.

Judgment

Having reviewed the parties' without prejudice communications and heard evidence from their legal representatives, the court held that the parties had settled all their claims in the main action and in the shareholder action on the basis of the terms of the March settlement agreement. Therefore, the court ordered a stay of those proceedings, save for the purpose of carrying the terms into effect.

Legal Principles

The court noted that it had an inherent and statutory jurisdiction to regulate its proceedings, including granting a stay in appropriate circumstances⁴.

The court also summarised the legal principles governing the formation of a settlement agreement⁵. A useful passage, particularly pertinent to the case, reads as follows:

"If the documents relied on as constituting a contract contemplate the execution of a further contract between the parties, it is a question of construction whether that is a condition of the bargain or whether it is merely an expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through."

"It is possible for the parties to intend to be bound forthwith even though there are further terms to be agreed or some further formality to be fulfilled, provided that the unagreed terms do not render the contract void for uncertainty."⁶

Status of March settlement agreement

Having reviewed the evidence in detail, the court concluded that the March settlement agreement was binding on the parties and not subject to any further conditions⁷. The court referred to the following.

There was no documentation to support the respondents' argument that the negotiations in the run up to the March settlement agreement were conditional on a fuller release being agreed and "subject to contract".
Even immediately after the March settlement agreement there was no reference in the draft settlement deed to either the provision for a fuller release or it being "subject to contract".
By a letter dated 5 May 2022 to the applicants' legal representatives, the respondent's legal representatives appeared to have asserted in writing for the first time that any settlement was conditional on a fuller release of all claims against related parties and the execution of a settlement deed.

Consistent with the legal principles summarised above, the court observed that:

"It was plainly open to the parties to negotiate on other terms set forth in the draft [Settlement Agreement] to see if they would be able to agree on such terms. If no agreement was reached, the parties would still have to abide by the terms of the Settlement Agreement."⁸

Contractual certainty

The court made a number of interesting observations and findings in this regard.

The fact that the parties had not reached agreement on the terms that the respondents wanted to include in the draft settlement deed did not (on the facts) mean that the March settlement agreement was uncertain or incomplete. The terms of the March settlement agreement were apparent from the written communications between the parties' legal representatives up to 22 March 2022⁹.
While the legal representatives may have negotiated a more "all-encompassing settlement" to ensure a clean break between the parties this did not mean that the March settlement agreement was insufficiently certain to be enforceable – particularly, given that the parties had negotiated with the benefit of legal advice¹⁰.
As a matter of law, there was nothing conceptually wrong about a settlement agreement that only covered ongoing proceedings between the parties but not other "potential claims"¹¹.

Comment

The judgment and the parties' legal submissions are a useful summary of the legal principles governing – (i) the courts' power to grant a stay in such circumstances and (ii) the formation of a settlement agreement.

Settlement negotiations in complex commercial litigation involving multiple parties are a matter that require careful handling and clear instructions. If a party's intention is that the terms offered on a without prejudice basis are subject to documentation in a formal settlement deed this should be made clear at the outset of the negotiations and expressly stated in the written without prejudice communications and documents.

In this case, the respondents' insistence on a fuller release (which, of itself, is not unusual in commercial litigation involving multiple parties) appears to have come after the applicants' acceptance of the outstanding issue between the parties. Moreover, the parties' written without prejudice offers do not appear to have made it consistently clear that a binding settlement was "subject to contract", including execution of a formal settlement deed – on the contrary, the court found that there was a binding settlement agreement based on the language of the parties' previous written offers and counter-offers. The case helps to illustrate the difference between settlement communications that are "without prejudice" (and capable of being accepted without more) and settlement communications that are also clearly "subject to contract" (and dependent on the execution of a formal settlement agreement).

Contact Us

Please contact Rebecca, James or Antony, if you have any queries regarding the issues raised in this article.

This article was originally published in the Litigation Newsletter of the International Law Office.

This article is intended to give general information only. It is not a complete statement of the law and does not constitute legal advice. It is not intended to be relied upon or to be a substitute for legal advice in relation to particular circumstances.

¹[2022] HKCFI 3751, HCA 400/2021 and HCCW 386/2021, 15 December 2022.
²HCA 547/2022.
³Supra note 1, at para 48.
⁴Supra note 1, at para 39. Section 16(3) of the High Court Ordinance (Cap. 4).
⁵Supra note 1, at para 41.
⁶Supra note 1, at paras 41(3) and (4).
⁷Supra note 1, at paras 44 and 60.
⁸Supra note 1, at para 59(2).
⁹Supra note 1, at para 66.
¹⁰Supra note 1, at para 67(2).
¹¹Supra note 1, at para 67.

No need for perfection: ISDA Master Agreement default notice still valid where some errors made

Tue, 10 Jan 2023 11:48:00 Z

However, the notice needs to communicate clearly, readily and unambiguously to the reasonable recipient in the context in which it is received the failure to pay or deliver in question. It also needs to enable the reasonable recipient to identify what the relevant trade requires it to do in order to cure any failure to pay or deliver within the grace period (Macquarie Bank Ltd v Phelan Energy Group Limited¹).

The court completed a careful analysis at an interim stage of exactly how inaccurate a default notice can be while remaining valid. In doing so, it preferred an approach of substance over form, emphasising that the question is whether clear enough communication has been effected by the notice or not. While the decision arose in the context of an FX swap, the decision is of interest more generally for trades governed by the ISDA Master Agreement, especially in times of general market volatility where calculations may need to be carried out at speed.

Background

Macquarie Bank Limited (Macquarie) and Phelan Energy Group Limited (Phelan) entered into a USD / South African Rand (ZAR) FX swap, governed by an ISDA 2002 Master Agreement. The parties concluded a trade for settlement in May 2021. However, the parties were at odds as to whether a strike price of 22.16 or 22.05 should apply, and Macquarie emailed Phelan on 29 May stating that it was due to receive a figure arrived at using the 22.16 strike price. Phelan disputed this, argued that a strike price of 22.05 should apply and did not pay Macquarie. Macquarie's use of the 22.16 spot rate for the calculation resulted in additional amount of USD 42,000 or approx. an additional 0.5% allegedly payable by Phelan.

Shortly after, Macquarie sent Phelan a notice informing it that failure to make payment by the first local business day after the notice would constitute an Event of Default under s. 5(a)(i) of the ISDA Agreement (the Disputed Default Notice). Phelan replied disputing that the amount quoted by Macquarie, based on the 22.16 strike price, was correct. Macquarie responded that it was reserving its right to designate an Early Termination Date under the ISDA Master Agreement. The following day it sent a letter titled "Designation of Early Termination Date", giving notice pursuant to s. 6(a) of the ISDA Master Agreement that it designated a June 2021 date as the Early Termination Date for the outstanding transactions, as a result of a continuing Event of Default (the Disputed ETDN). A few days later, Macquarie sent Phelan a "Notice of Early Termination Amount" which requested payment of approximately USD 22.6m.

Macquarie applied for summary judgment and an interim payment. The application was brought on the basis that, even if Phelan was right about the strike price, there was nonetheless an Event of Default and Macquarie was entitled to terminate the transaction on 4 June 2021. Macquarie therefore invited the court to summarily determine the termination issue in its favour, but accepted that there remained a triable issue as to what the correct strike price was. The interim payment that Macquarie applied for should be in an amount equivalent to the Early Termination Amount as if the transaction had happened on the terms alleged by Phelan.

Was there an event of default under the Master Agreement?

The court found that there had been a failure to make payment which had not been remedied, as required for an Event of Default under s. 5(a)(i). The court noted that Phelan nevertheless argued that there was no failure to remedy after notice of the failure was given, because the Disputed Default Notice was not valid.

The court then considered what the consequence of an incorrect figure in the Disputed Default Notice would be, and whether it needed to specify an amount at all. This was a matter of construing the contractual provision providing for the notice to be served and the notice.

The contractual provision needed to be construed to identify "the specification in the clause" (Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd²). This required a process of construction on conventional principles, but also with regard to the particular considerations relating to the ISDA Master Agreement set out in two authorities.

Lomas v JFB Firth Rixson Inc³ where it was held that the agreement should be interpreted in a way that serves "the objectives of clarity, certainty and predictability"; and
Lomas & Ors (Joint Administrators of Lehman Brothers International (Europe)) v Burlington Loan Management Ltd & Ors⁴ where it was held that the focus is "ultimately on the words used, which should be taken to have been selected after considerable thought and with the benefit of the input and continuing review of users of the standard forms and of knowledge of the market".

As for the notice, this should be construed properly in context to ascertain whether it meets the requirement of that specification and whether "they key represented by the notice fits the lock constituted by the contractual provision requiring the service of a notice to achieve a particular legal effect".

A valid s.5 notice - communicating clearly, readily and unambiguously

The court observed that notwithstanding the significance of a notice before a Potential Event of Default and actual Event of Default, s. 5(a)(i) and (ii) of the Master Agreement offered limited guidance as to the contents of such a notice before it will be effective.

The court concluded that a valid notice under section 5(a)(i) must:

communicate clearly, readily and unambiguously to the reasonable recipient in the context in which it is received the failure to pay or deliver in question (such that the reasonable recipient will clearly understand the trade under which the obligation to pay or deliver has arisen, and the particular obligation which it is said has not been performed); and
thereby enable the reasonable recipient to identify what the relevant trade requires it to do in order to cure any failure to pay or deliver (if it accepts that there has been such a failure) within the applicable grace period.

However, the notice does not need to contain express and wholly accurate statements of:

the identification of the confirmation for the relevant trade;
a precise and entirely accurate statement of the amount of the payment or delivery not made; or
the currency of the payment.

The court held that were the position otherwise it would lead to highly improbable consequences; for example failure to include the currency or a typing error could invalidate the notice. There was no language requiring such a construction, and the nature of the ISDA Master Agreement did not compel it. Whether the required information has been communicated unambiguously does not solely depend on the language used, and there could be unambiguous communication even when the communication involves a mistake.

Was the Disputed Default Notice a valid s.5 notice?

The court considered the context in which the reasonable recipient would have read the Disputed Default Notice. It held that it would have been immediately and unambiguously clear to Phelan that Macquarie was complaining that Phelan had failed to make the payment under the trade, that Phelan had made no payment and even on Phelan's case as to the correct strike price, it was obliged to pay ca. ZAR 117 m to cure the default and remedy that failure.

Phelan had argued that through the use of the internal Macquarie reference on the unsigned confirmation using the wrong strike price, and by claiming an amount that was payable which was not in fact payable, Macquarie had specified the wrong trade, and the Disputed Default Notice was therefore defective.

However, the court disagreed. There was only one trade between the parties with this settlement date, and only one trade by reference to a ca. USD 5.3m notional and it was absolutely clear that this was the trade which Macquarie was saying that Phelan had not paid, even if Macquarie had overstated the amount payable by 0.5%. The Disputed Default Notice was therefore valid and an Event of Default occurred when payment was not made the following day.

Was the Disputed ETDN valid?

Phelan also contended that the Disputed ETDN was invalid because there had been no Event of Default. This argument failed for the reasons above, so that in fact the transaction was terminated with an Early Termination Date of 4 June 2021.

The architecture of the ISDA Agreement

The court also considered the question whether an error in the Early Termination Amount calculation meant that the party making the error had no right to recover any such amount. Looking at the "architecture" of the ISDA Agreement⁵, the court noted that the effect of s 6(c)(i) and (ii) was that on the Early Termination Date all payment obligations owed under individual trades were replaced by the single amount payable. The calculation of the amount due may not occur until after the Early Termination Date (s 6(d)(i)), and interest runs from the Early Termination Date and not the date of any calculation (s 9(h)(ii)(2).

The court noted that where the relevant debt arises as of the Early Termination Date and prior to any calculation under the ISDA Master Agreement, it would be surprising if an error in one party's calculation was sufficient to prevent the debt becoming due. An important feature of the ISDA Master Agreement was that (within some limits) a party entitled to an Early Termination Amount was entitled to quantify the amount after the debt had arisen. The court will frequently determine the amount due itself where there is an invalid calculation of the Early Termination Amount.

The court found that Macquarie had sufficiently pleaded their cause of action as a debt claim and that even if Phelan succeeded as to the correct strike price, the Alternative Early Termination amount was due from Phelan to Macquarie.

Final conclusions of the court on the summary judgment application

The court asked the parties to agree declarations in an order reflecting its determinations that, if the strike price had been 22.05, then nevertheless:

there was an Event of Default within s. 5(a)(i) of the ISDA Master Agreement;
Macquarie validly designated 4 June 2021 as the Early Termination Date; and
on 4 June 2021, the Alternative Early Termination Amount accrued as a debt from Phelan to Macquarie.

¹[2022] EWHC 2616²Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 755
³Lomas v JFB Firth Rixson Inc [2010] EWHC 3372 (Ch) at para 53
⁴Lomas & Ors (Joint Administrators of Lehman Brothers International (Europe)) v Burlington Loan Management Ltd & Ors [2016] EWHC 2417 (Ch), at para 48(3)
⁵The court here also referred to the interpretation of the 1992 Master Agreement in Videocon Global v Goldman Sachs International [2016] EWCA Civ 528 at para 56.

No need for late night panic: Court of Appeal decides that midnight e-filing is permissible

Thu, 22 Dec 2022 14:50:00 Z

Facts

The issue initially arose in the context of a claim brought by JJH Enterprises Limited (JJH) in the Commercial Court against a number of Microsoft entities. The Microsoft entities had applied, unsuccessfully, to strike out JJH's claim and/or obtain summary judgment on it and wished to appeal that decision.

The judge had extended time for filing any appellant's notice seeking permission to appeal to 21 days after the determination of any application for permission to appeal made to the judge. The order did not specify a time on the final day by which the appellant's notice must be filed. The judge subsequently refused permission to appeal, resulting in Microsoft's time for filing an appellant's notice with the Court of Appeal expiring on 6 June 2022.

At 4:52pm on 6 June 2022, Microsoft filed an appellant's notice with the Court of Appeal electronically in accordance with the procedure prescribed by PD 51O. The following day, JJH's solicitors informed Microsoft's solicitors that they regarded the appellant's notice as having been filed out of time as it had been filed after 4:30pm. In response, Microsoft sought a declaration that the appellant's notice had been filed in time. The master that heard the application agreed and made an order declaring that the appellant's notice had been filed in time on the basis that the effect of paragraph 2.1 of PD 51O was that documents could be filed at any time up to midnight.

JJH's solicitors then requested that the master's order be reviewed by a Court of Appeal judge, a request that the master felt obliged to grant. In the meantime, the Court of Appeal had considered Microsoft's appellant notice and had refused permission to appeal. Accordingly, whether Microsoft's appellant notice had been filed on time became something of a moot point. Nevertheless, at JJH's solicitors' behest, the Court of Appeal considered the issue of timing given its significance to practitioners and court users alike.

Decision

The Court started by considering the relevant rules and practice directions:

PD 52C governs appeals to the Court of Appeal. Paragraph 2(3) provides that an appellant's notice must be filed in the Civil Appeals Office Registry. The default timeframe for doing so under Civil Procedure Rules (CPR) 52.12 (2)(b) is 21 days after the decision of the lower court. There is no provision dealing with the time of day before which filing must occur. The opening hours for the Civil Appeals Office Registry (which is part of the court offices for the senior courts) is stated in paragraph 2.1(a) of PD 2A to be weekdays between 10am and 4:30pm.

Filing is defined in CPR 2.3(1) as "delivering a document or information, by post or otherwise, to the court office".

Accordingly, the Court found that there is nothing in the rules or PDs limiting the hours of the day during which an appellant's notice may be filed, nor is there anything requiring that filing take place in office hours. In practical terms, when the only option for filing documents was personal delivery to the relevant court office or post, there was a practical limitation on when documents could be filed. However, with the advent of filing by fax and email, and more recently, electronic filing, the same practical limitation no longer exists. The question is then, where documents can be filed electronically at any time, whether documents filed after "office hours" are treated as being filed on the same day or on the next day the court office is open.

The Electronic Working Pilot Scheme introduced by PD 51O is intended to "enable parties to issue proceedings and file documents online 24 hours a day every day all year round, including during out of normal Court office opening hours and on weekends and bank holidays". There is no provision limiting the time of day during which a document can be filed and indeed the entire premise of PD 51O points the other way. It is clear, therefore, from the wording of PD 51O, that documents may be filed electronically out of office hours. The Court also noted that there does not seem to be any provision in the CPR or PDs issued under it requiring electronic filing to take place within office hours. Accordingly, in the absence of any provision to the contrary (eg, in an order which specifies the time by which a filing must be made), the Court concluded that electronic filing made out of office hours "would be effective for all purposes, including where time expired on the day in question".

Comment

The Court's analysis confirmed what many believed to be the (unwritten) position – namely, that where a rule, PD or order specifies that a filing may be made by a particular date, but is silent on the time by which such filing must be made, the filing may be made electronically at any time up to midnight on the deadline date. Conversely, and unsurprisingly, where provision is made for a particular time by which the filing must be made, either in a rule, PD or order, a document filed electronically on the deadline date but after the specified time will be treated as having been made out of time.

Great Peace confirmed: High Court decides that test for common mistake is settled

Thu, 22 Dec 2022 14:30:00 Z

Facts

The dispute concerned the use and ownership of trademarks. John Lobb Ltd is a family-owned company incorporated in England in 1972. John Lobb S.A.S was incorporated by Eric Lobb in France in 1946 for the purpose of developing the John Lobb business there. In 1976 Eric Lobb sold the majority of the share in John Lobb S.A.S to the Hermès Group. The sale included the rights in a trademark registered in France by Eric Lobb which protected John Lobb S.A.S products.

Since 1976 there has been collaboration between John Lobb S.A.S and John Lobb Ltd, which was regularised in a written agreement in 1992. The agreement was known as the Radlett Agreement and had a term of 15 years. Negotiations commenced between the parties in late 2005 concerning the nature and terms of the relationship between the parties which was to follow the Radlett Agreement. In March 2008 a new agreement was entered into between John Lobb Ltd, its shareholders and John Lobb S.A.S (the 2008 Agreement). This agreement was the subject matter of the dispute.

In May 2020 John Lobb Ltd brought a claim against John Lobb S.A.S seeking a declaration that it was not bound by the 2008 Agreement as it was void ab initio on the basis of common mistake. John Lobb Ltd sought to claim that were was "a fundamentally mistaken and commonly held belief as to the ownership rights in the John Lobb Marks". John Lobb Ltd's case was that it only entered into the 2008 Agreement because it relied on statements made by John Lobb S.A.S's lawyers following a meeting in 2006. John Lobb Ltd claimed that John Lobb S.A.S's lawyers' letter contained material statements of fact about rights in the trademark and that the letter contained fundamental errors of fact. John Lobb Ltd argued that the belief held by both parties about the ownership of the rights in the trademark was mistaken and that John Lobb Ltd is entitled to beneficial ownership of all the registered trademarks other than those that are registered in France. John Lobb S.A.S asserted that they hold legal and beneficial ownership of the entirety of the trademark portfolio. John Lobb S.A.S relied on the recitals of the 2008 Agreement which states in terms that this is so and the terms of the contract are clearly based upon this premise ("the Assumed State of Affairs").

In August 2020 John Lobb S.A.S applied for (i) an order striking out what were then the Particulars of Claim, pursuant to CPR 3.4(2)(a), on the basis that the Particulars of Claim disclosed no reasonable grounds for bringing the claim, or alternatively (ii) summary judgment against John Lobb Ltd on the whole of the claim pursuant to CPR 24.2(a)(i), on the basis that John Lobb Ltd had no real prospect of succeeding and that there was no other compelling reason why the case should be disposed of at a trial. The application was refused on the basis that the case was unsuitable for summary judgement and a strike-out order was not appropriate. John Lobb S.A.S appealed this decision.

Decision

On appeal the judge granted summary judgment, holding that John Lobb Ltd had no prospect of succeeding in its claim to avoid the 2008 Agreement on the basis of common mistake. The judge reached this conclusion on the basis that, on analysis of the 2008 Agreement, John Lobb Ltd was unable to demonstrate that the mistake as to the Assumed State of Affairs, which the parties must be assumed to have made for the purposes of the application, either (i) rendered the performance of the 2008 Agreement impossible, or (ii) rendered the subject matter of the 2008 Agreement essentially and radically different from the subject matter which the parties believed to exist. John Lobb S.A.S was entitled to summary judgment on this basis.

Applying the test in Great Peace

In reaching his decision the judge referred to the test in Great Peace and whilst he stated that the words of Lord Phillips in Great Peace should not be taken as statute, he applied the test in that judgment when considering the required elements of a claim based upon common mistake. The required elements from Great Peace are:

there must be a common assumption as to the existence of a state of affairs;
there must be no warranty by either party that that state of affairs exists;
the non-existence of the state of affairs must not be attributable to the fault of either party;
the non-existence of the state of affairs must render performance of the contract impossible; and
the state of affairs may be the existence, or a vital attribute, of the consideration to be provided

At first instance the judge held that John Lobb Ltd could not establish that John Lobb S.A.S's case in relation to the second and fourth elements were bound to fail.

The reasoning of the first instance judge in relation to the second element was that he did not see it possible to construe the 2008 Agreement "as containing a warranty by the claimant that the defendant is the legal and beneficial owner of the Mark" (i.e. a warranty that the Assumed State of Affairs actually existed). Additionally, the judge did not think it possible for the 2008 Agreement to be taken as allocating the risk in the event that the Assumed State of Affairs turned out to be incorrect. The first instance judge considered that the common understanding was clear from the 2008 Agreement but noted that the agreement "does not go on to specify what is to happen if that understanding proves to be wrong". He believed there to be a "marked difference" between the description of the second element in Great Peace and in Chitty where the relevant question is framed as whether, under the express or implied terms of the contract either party is treated as taking the risk of the situation being as it really is. On appeal the judge found no such difference, seeing it as quite clear that Lord Phillips in Great Peace did not mean to say that the question was confined to whether a warranty, in the technical sense of the word, had been given as to the existence of the Assumed State of Affairs. The appeal judge found the risk of the Assumed State of Affairs turning out to be wrong was allocated to John Lobb Ltd, with the result that the claim that the 2008 Agreement was void from the outset on the basis of common mistake cannot succeed. Accordingly, the second element of the test from Great Peace was not satisfied.

With regards to the fourth element the first instance judge referred to a marked difference between the description of the fourth element in Great Peace and the description in Chitty where the fourth element is described in the alternative to impossibility of performance, by reference to the contractual adventure being essentially different to that which was anticipated. The judge on appeal found no such marked difference. The appeal judge believed the test could be framed in two ways, neither of which had a material difference: (i) as a test of impossibility of performance; or (ii) as a test of essential and radical difference in the subject matter of the relevant contract. The judge found the first instance judge to have formulated the wrong test with regards to the fourth element and concluded that John Lobb Ltd could not satisfy the fourth element of the test. The judge found it clear that the mistake as to the Assumed State of Affairs did not render the 2008 Agreement impossible of performance or render the subject matter of the 2008 Agreement essentially and radically different from the subject matter which the parties believed to exist.

Comment

This judgment provides helpful clarification that the test in Great Peace remains the one that a judge will consider when deciding whether a contract is void for common mistake. It provides confirmation that if the party claiming common mistake fails to satisfy the test their claim can be dismissed at the interim stage.

Italian Local Authority succeeds in swap claim before the English Court

Mon, 14 Nov 2022 09:53:00 Z

Background

Following the controversial 2020 decision of the Italian Supreme Court in Cattolica, which concluded that certain interest rate swaps entered into by local authorities were void as a matter of Italian law, the Claimants, Banca Intesa Sanpaolo SPA and Dexia Crediop SA (the Banks), issued proceedings against Venice in relation to certain interest rate swaps (IRS) that were entered into under a ISDA Master Agreement in 2007 and sought declarations that the IRS were valid and binding. Venice sought alternative declarations that the IRS are not valid and, in addition, sought restitution of the net sums it had paid to the Banks over the life of the IRS. Venice argued that, as a matter of Italian law and as a consequence of the findings in Cattolica, Venice had lacked the capacity to enter into the IRS.

A key element of the IRS was that they had been entered into in order to replace a previous swap between Venice and Bear Stearns which had a significant negative mark-to-market from Venice's perspective. Rather than Venice paying the unwind costs of closing-out the original swap, the IRS were structured in such a way that the Banks paid these unwind costs (of c.€8m), with the pricing of the IRS adjusted accordingly.

1. The Speculation Argument

A major finding in Cattolica had been that Italian local authorities lacked the capacity to enter into speculative derivatives. While the English Court noted that the Italian Supreme Court's reasoning "may not appear entirely satisfactory", the English Court accepted that the Italian Supreme Court had spoken on this issue. The English Court therefore assessed whether, as a matter of Italian law, the IRS were in fact speculative. As Italian law does not define what a makes a derivative speculative, the assessment in this case involved a detailed analysis of Italian case law, as well as guidance found in judgments of the English Court.

The English Court concluded that under Italian law the IRS would be regarded as speculative, or at least predominantly speculative. This was based on a number of factors, including the fact that the manner in which they had been structured to cover the costs paid by the Banks to unwind the original swap meant that the IRS provided the Banks with protection of significantly greater value than Venice was obtaining from the Banks. It also meant that the pricing of the IRS diverged significantly from the prevailing forward rate curve and Venice had also taken on a significant new risk to which it had not been previously exposed to.

2. The Indebtedness Argument

The second argument advanced by Venice was that it had lacked capacity to enter into the swaps as Article 119 of the Italian Constitution only permitted local authorities to resort to "indebtedness" if it was in order to finance investment expenditure.

In Cattolica it was held that some derivatives constituted "indebtedness" for the purposes of Article 119, in particular derivatives which involved an "upfront loan". In this case, the English Court concluded that the payment of €8m, which the Banks had made to Bear Stearns in order to unwind the original swap and which was priced into the terms of the IRS, was as much an "upfront loan" as if the payment had been made directly by the Banks to Venice. In addition, because the IRS had been found to be speculative, it had not been entered into for the purposes of financing investment expenditure and, consequentially, contravened Article 119 of the Italian Constitution.

As a result of the findings above, the English Court determined that the IRS had contravened Italian law restrictions which prevent Italian local authorities from entering into speculative derivatives and having recourse to indebtedness, other than for investment. The IRS was therefore void for lack of capacity as a matter of English law and Venice was entitled to restitution of all sums which it had paid to the Banks under the IRS.

The Banks' Defences

The Banks raised a number of defences, including those outlined below.

3. Estoppel

The Bank argued that in light of representations by Venice in the ISDA Master Agreement (representing that it had the power to enter into the IRS and that doing do did not contravene Italian law), Venice was estopped from contending that the IRS were void. The basis of the Banks' argument was that the ISDA Master Agreement was a separate contract to the other contracts which governed the IRS such that, even if the IRS contracts themselves were void, the representations in the ISDA survived and gave rise to an estoppel.

Whilst the English Court accepted that there are circumstances where the ISDA Master Agreement and individual transaction contracts could "live separate lives", in the present case the argument was rejected. The English Court considered the ISDA Master Agreement and the IRS contracts to be a single contract as they were entered into for the same purpose and at the same time and the representations relied on by the Banks under the ISDA contracts were therefore equally unenforceable.

4. Change of Position Defence

The Banks also advanced the defence of change of position to Venice's claims for restitution. The Banks' argued that, in order to hedge their liability under the IRS with Venice, they had entered into the back-to-back swaps with other financial institutions under which the Banks had been obliged to make significant payments. The position of the Banks had therefore changed detrimentally.

Venice's case was that it could not be said that the Banks were relying on receipt of any payment by Venice when they entered into the back-to-back swaps because these had been entered into before they received any payments from Venice and at a time when there was no certainty that the Banks would ever receive any such payments. The Banks' decisions to enter into the hedging swaps should therefore be seen as a wholly independent decision taken for their own purposes and at their own risk, rather than in reliance on the receipt of payments by Venice.

The English Court chose not to follow findings from previous case law that the defence of change of position is ordinarily only available in respect of changes made after receipt of payment (noting this would result in an "inevitable appeal"),¹ and considered that, while the Banks' decision to enter into the back-to-back hedges may have pre-dated the actual receipt of sums from Venice, it was taken in anticipation of payment from Venice and for the purpose of hedging the Banks' liabilities under the IRS. Considering the circumstances of the case, the English Court found that the Banks did, in principle, have a defence of change of position notwithstanding the fact that the IRS was void for lack of capacity. However, quantification of the value of the claim (and the impact of the Banks' defence in reducing the sums Venice is entitled to recover) remains outstanding as quantum did not form part of the trial.

5. Limitation

The Banks also contended that Venice's claims were time-barred. However, the English Court found that Venice could rely upon section 32(1)(c) of the Limitation Act 1980, as in this case, Venice could not with reasonable diligence have identified its mistake prior to Cattolica's publication in 2020.

Comment

This is the first time an Italian local authority has successfully argued that an English law governed swap is void as a consequence of Italian law. While the English Court's interpretation of Cattolica means that not all English law governed interest rate swaps entered into by Italian local authorities will be void (and vanilla swaps not incorporating the break cost of an earlier swap do not appear to be impugned), the English Court's findings do provide further arguments for Italian local authorities to rely upon when seeking to set-aside swaps.

Subject to any appeal, the decision is likely to have a significant impact on other ongoing Italian swaps cases, as well as potentially triggering fresh claims by Italian local authorities. This is particularly the case where the English Court observed that many swaps entered into by Italian authorities incorporated break costs of earlier swaps, which it now appears fall foul of Cattolica, such that these swaps appear highly vulnerable to challenge.

¹Westdeutsche Landesbank Girozentrale v Islington LBC [1994] 4 All ER 890, South Tyneside MBC v Svenska International plc [1995] 1 All ER, Dextra Bank and Trust Co Ltd v Bank of Jamaica [2002] 1 All ER 1993.

Court of Appeal refuses to drive "a coach and horses" through the concept of a limited liability company in joint tortfeasor decision

Thu, 27 Oct 2022 17:15:00 +0100

The Court of Appeal considered that a finding of director personal liability in these circumstances would "drive a coach and horses through the concept of a limited liability company", and that there could be no accessory liability as there was no common design on the part of the company and director to commit the wrongdoing: Barclay-Watt v Alpha Panareti Public Ltd [2022] EWCA Civ 1169.

What was the scheme?

The claim related to a property investment scheme in which the claimants, some 280 individual residents in the UK (the Investors), were persuaded to invest. The investment scheme involved the purchase of apartments and villas at three sites in Cyprus which were being developed by the first defendant, a property development company (the Company) with a view to letting those properties to tourists.

The properties were marketed by third party companies under contractual arrangements with the Company. The contracts described those third parties as the Company's agents, and provided that the Company would provide all necessary promotional material. The second defendant was one of two directors of the Company and was described as the "driving force" behind the Company (the Director). Whilst the marketing was carried out by the Company via sales agents, it was the Director who planned the marketing of the investment to UK residents, and he remained closely involved with all aspects of the marketing.

The Company marketed the properties as "armchair investments" which would be easily lettable, with rental payments matching or exceeding the mortgage repayments. The investment was also marketed on the basis that the purchases were to be funded by a low interest rate loan from a Cypriot bank secured by a mortgage; the low interest rate of that loan was said to be possible by borrowing the funds in Swiss francs. The High Court found that the availability of a cheap mortgage in Swiss francs was a "big selling point" for Investors. In fact, after the investments were made, the fall in value of both sterling and the Cyprus pound against the Swiss franc meant that the cost of the mortgages spiralled.

Company negligent for failing to warn of currency risks

The High Court held that the Company acted negligently in its marketing of the properties. The Investors had claimed that the Company had made numerous misrepresentations and given negligent advice in the course of marketing the properties, which included, amongst other things, failing to warn the Investors of the foreign currency risks involving with borrowing in Swiss francs when the anticipated rental income would be in Cyprus pounds or sterling. The High Court found that, in marketing the mortgage as a fundamental part of their offering, the Company owed a duty of care to the Investors to put them on notice of those risks and had failed to do so in breach of that duty. The Company appealed this finding, which was dismissed by the Court of Appeal.

Director not personally liable for Company's wrongdoing

The Investors had also claimed that the Director, who was the brainchild and driving force behind the marketing scheme, was personally in breach of the duty to warm them about the currency risks of the loan (a claim which was ultimately not pursued), or that he was liable as an accessory to the tort committed by the Company. The Investor's appealed the High Court's finding that the Director was not personally liable.

The Court of Appeal reached the same conclusion as the High Court that the Director was not personally liable for the negligent conduct. In dealing with personal liability, the Court of Appeal observed the need to strike a balance between relevant competing principles: one being the principle that an individual is entitled to limit their liability by incorporating a company to carry on their business, and another being the principle that a tortfeasor should be liable for his or her tortious acts and should not escape liability merely because he or she is a director or officer of a company.

The Court of Appeal considered that a finding in this case that the Director was not personally liable did not offend these principles. Unlike the Company, the Director was not in any relationship with the Investors whereby he assumed responsibility towards them to warn them of the currency risks (and it would not have occurred to the Investors that he had), and therefore, there was no personal wrongdoing on the Director's part.

In order for the Director to have been found liable as an accessory to the Company's wrongdoing, the Director must have assisted the commission of an act by the Company, the assistance must have been pursuant to a common design on the part of the Director and the Company that the act be committed and the act must constitute a tort as against the Investors (Fish & Fish v Sea Shephard UK [2015] UKSC 10). The Court of Appeal did not find that the Director had assisted the Company in its wrongdoing, pursuant to a common design on the part of the Company and the Director; the Company had not consciously decided not to warn the Investors about the currency risks and therefore, it was difficult to say that there was a common design between the two not do so. The Court indicated that there could be a common design between the Company and the Director to market the properties in the way in which they were marketed (which did not include a warning about the currency) but to say that this amounted to a common design sufficient to incur personal liability as an accessory would lead to an unduly wide view of the personal liability of directors and senior managers.

A welcome decision for directors, but no escape if director commits wrongdoing

This decision highlights the Court's reluctance to pierce the corporate veil and hold directors and senior managers liable for conduct carried out by the company. It will undoubtedly be a decision welcomed by directors and senior managers on the one hand, but remains a disappointment to claimants who might feel equally aggrieved by the individual "key player" and the corporate which they represent, and face a situation where the individual has better means to meet an award for damages but is nonetheless insulated from liability. That being said, whether a director is personally liable for wrongdoing involving the Company will come down to the facts involved. Whilst directors should not be exposed to personal liability when carrying out the company's business, this does not equate to free rein to act unlawfully and expect to be shielded from liability by way of the corporate veil. There will be circumstances where director will be personally liable for wrongdoing which it has committed, for example where there is evidence to show a clear common design.

A balancing act: IMF confidentiality obligations do not trump duty of disclosure in Argentinian securities dispute

Thu, 27 Oct 2022 16:09:00 +0100

The application

The Republic of Argentina made an application under paragraphs 15 and 18.1 of CPR PD51U, to withhold from inspection documents which are in its possession and which were provided to it by the International Monetary Fund (IMF). Argentina resisted the production of the documents on the grounds that they were subject to a duty of confidentiality owed to the IMF.

The background

The underlying claim relates to securities issued by Argentina under which the right to payment was linked to the growth of Argentina's GDP. The claimants alleged that in 2013, Argentina decided to rebase its GDP by reference to a different year of base prices (2004 rather than 1993) and, as a result, it was declared that the relevant performance condition for payment under the securities was not met. Palladian alleged in various respects that the rebasing was either contractually invalid or involved a breach of Argentina's contractual duties.

Argentina, in its response to those allegations, relied upon its interactions with the International Monetary Fund (IMF) to explain both the timing of, and the decision to, rebase. Accordingly, the communications between Argentina and the IMF on those questions were relevant to the dispute.

The alleged confidentiality obligation

The IMF had asserted that any production of the documents would constitute a breach of Argentina's duties as a member of the IMF under Article 9, Section 5 of the IMF's Articles of Agreement. Article 9, Section 5 (along with a transparency policy published by the IMF) refers to the "inviolability of the IMF archives" and prevents the publishing or production of any documents from the IMF archives without the IMF's approval.

Confidentiality obligation did not override the duty to disclose

The Court ruled that Argentina's obligations to the IMF did not override the duty of disclosure. The decision was justified on a number of grounds: (i) the scope of the obligation of confidentiality; (ii) the relevancy of the documents in question; (iii) the unique nature of the documents in question; and (iv) proportionality.

The scope of the confidentiality obligation

The court considered the scope of the duty of confidentiality owed by Argentina under Article 9, Section 5 of the Articles of Agreement and while it acknowledged that there clearly was a duty of confidentiality, it was not of such great weight that it precluded disclosure of the documents.

Argentina, it was found, had sought disclosure of the documents from the IMF's archives because it no longer had its own copies of the documents in question. Had it retained those documents, Article 9 Section 5 would not have been engaged.

Further, the documents related to events that took place over a limited time period over 8 years ago and related, mostly, to interactions between only Argentina and the IMF such that there was a limited risk to third parties in the documents' disclosure.

The court also referred to the judgment of the Court of Appeal in Bank Mellat v HM Treasury(1) and noted that the mere existence of obligations of confidentiality may carry little weight without some evidence that there is a real risk of an adverse sanction following from production or inspection. In this instance, the IMF's objection to inspection appeared to be that of a general principle rather than a threat of specific concern.

The documents sought were highly relevant to the litigation

Considering the nature of the underlying litigation, the documents detailing the communications between the IMF and Argentina were obviously highly relevant and would, ordinarily, be disclosable. One of the issues that the expert witnesses were called upon to consider was that of the interactions between Argentina and the IMF. Given the unavailability of documents from Argentina's records had led to the request of the IMF in the first place, the court felt that the contemporaneous documents in question were of even greater importance. The court reiterated that contemporaneous documents are "the best and most reliable form of evidence" available to a court and that to refuse inspection of the documents in such circumstances could have a considerable impact on the trial.

The content of the documents sought was not covered by other disclosure

Argentina, in its supporting evidence, had sought to argue that disclosure should not be ordered because the IMF had stated that the information contained in a series of reports (that had been disclosed) covered most or all of the information that would be provided by the withheld documents. The court disagreed with that assertion, most notably, because it was an argument for which Argentina could advance no evidence. It was an assertion advanced by the IMF. The Court stated that for that argument to hold any weight, evidence of that nature would have needed to be given by an English solicitor with knowledge of the English disclosure regime, the issues in the case and the documents in question.

In addition, the court held that contemporaneous internal emails in providing a far more revealing picture than what could be obtained from published reports.

No proportionality arguments for a mere 1,000 documents

The court disagreed entirely with Argentina's submission that to order disclosure of the documents would be unreasonable or disproportionate and noted that ca.1000 documents was a relatively small pool of documents to review (by Commercial Court standards). The court also made it clear that in a claim valued at 650 million Euros with a five-week trial set down, the circumstances were not promising to seek to run proportionality arguments.

Commentary

Parties should be alert to the fact that a duty of confidentiality is not a golden ticket permitting documents to be withheld from disclosure. The court will consider the competing interests (including any relevant sanctions) against the consequence to the litigation should disclosure be withheld.

(1) [2019] EWCA Civ 499

Litigation risk arising from recent LDI related disruption in the UK gilt market

Tue, 18 Oct 2022 10:25:00 +0100

What is LDI?

In simple terms, LDI is an investment strategy whereby, rather than seeking to maximise the return on investments, the focus is on matching the value of the investor's liabilities with the expected returns on its investments (prioritising certainty over yield).

LDI is commonly used by defined benefit pension schemes which are obliged to pay their members monthly sums over the long term, with the value of these liabilities fluctuating depending on, amongst other things, interest rates and inflation. To provide certainty that the fund's assets will generate the requisite return, the fund will invest in assets which move in lockstep with movements in interest rates and inflation. For this reason, defined benefit pension schemes are huge investors in gilts.

LDI strategies also often employ a range of derivatives to manage interest rate, inflation and other risks. These include swaps and repo transactions, typically on a leveraged basis. For example, funds enter into interest rate swaps as a hedge against the effect of low interest rates in increasing the present value of future fund liabilities. In very simple terms, when interest rates remain low or move down, the funds receive sums under these swaps but, when interest rates rise, the funds make payments and have to post collateral to cover their future obligations under the swaps.

What has been happening in the gilt markets?

Gilt yields had been rising over the course of 2022 but spiked significantly and rapidly following the 'mini-budget' announced by the UK government on 23 September, which signalled the likelihood of higher future government borrowing in an already inflationary environment.

This spike in gilt yields had a particularly serious impact on funds employing LDI as, while rising yields do provide a benefit for pension schemes in that they reduce the present value of a pension fund's liabilities, those same rising yields caused the interest rate swaps and other derivatives employed by many funds to move significantly against them, triggering large margin calls requiring the funds to post additional collateral (often in the form of cash).

While pension funds had been able to meet a round of margin calls earlier in 2022 in a relatively orderly manner, the speed at which yields rose following the 'mini budget' meant that many now found themselves scrambling for cash to meet margin calls by selling their most liquid assets, gilts. Such forced sales of gilts had the consequence of further depressing the price of gilts and triggering a 'doom loop', with forced sales pushing-up gilt yields further, triggering larger margin calls and requiring further forced sales.

In response to this market instability, the Bank of England (BOE) intervened on 28 September, announcing a programme to buy long-dated gilts. While this intervention initially calmed the gilt market, gilt yields again started to rise significantly before the end of the BOE's intervention on 14 October 2022, with the BOE itself warning that "Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics, pose a material risk to UK financial stability". At the time of publication, and following the UK government's decision to abandon a number of the tax cuts originally proposed in its 'mini budget', gilt yields have dropped materially. However, it remains to be seen whether the UK government's latest actions will be enough to maintain stability in the gilt markets, or whether further developments might shift market sentiment, potentially triggering a further LDI driven 'doom loop'.

Even if the markets do remain stable over the medium term, the market disruption and forced selling experienced over the last few weeks will have caused short term losses, particularly in the case of funds which could not maintain their hedges when gilt yields were high and which were subsequently unable to re-hedge before gilt yields dropped in response to intervention by the BOE and UK Government. Where gilt yields have now dropped, that will have the effect of again increasing the present value of pension schemes' liabilities such that the losses suffered by funds on their LDI derivatives may well not be offset by any corresponding improvement in their long-term funding position.

Potential disputes which might arise

Market disruption of the sort experienced over the last few weeks inevitably has the potential to give rise to a wide range of legal disputes, including in the following areas.

It is likely that volatility in the gilt market will have had a material impact on the value and composition of funds' assets and will have resulted in a number of funds breaching internal investment restrictions, including in relation to leverage and the liquidity of their remaining assets. To the extent fund managers cannot quickly bring their funds back into compliance with these investment restrictions, they could face possible claims by investors if they suffer loss as a result. This will not be confined to LDI funds as, while such funds are the largest purchaser of gilts, gilts are held by a wide range of market participants which may also have been impacted by market disruption.

Where the majority of LDI funds will have sought wherever possible to maintain their hedges (rather than being left exposed to further movements in interest rates and inflation), there is scope for disputes to arise regarding whether financial covenants in the derivative contracts (ISDAs, GMRAs etc) were in fact breached, resulting in funds being closed-out of their hedges by their counterparties. Such disputes are likely to involve technical arguments regarding the interpretation of complex finance documents.

Focusing on the pension industry specifically, when a pension fund's investments go wrong the pension trustee, responsible for the investment decisions taken on behalf of the fund, will inevitably come under scrutiny, particularly in the case of those funds which were under hedged and/or did not have adequate collateral buffers to meet margin calls in an orderly manner. In turn, pension trustees might seek to pass responsibility to their investment manager, who will have advised the trustee on strategy and managed the fund's investments.

Fund's derivatives and repos could also be a source of disputes, including in relation to the circumstances in which they were entered into, any counterparty influence over fund strategy and the imposition of margin calls.

While rising gilt yields are likely to have improved the overall funding position of defined benefit pension schemes, pension trustees will now need to take steps to reassess their asset position and, if appropriate, deleverage and reallocate assets in response to the market disruption. Pension trustees which fail to take prompt steps to do so now will likely face criticism if losses are suffered as a result of a further round of market disruption.

More generally, the gilt market is a fundamental cornerstone of the UK economy, with gilts used as a reference point to price a wide range of other instruments, including mortgages and corporate bonds. Volatility in the gilts market will have seen a number of significant corporate transactions paused or aborted, which may again result in disputes. Similarly, we have already seen some UK commercial property funds suspend dealing following the steep rise in gilt yields. If disruption persists, we anticipate contagion spreading to further corners of the financial markets.

A hedge or a gamble? Potential claims for losses under FX derivatives

Tue, 18 Oct 2022 09:30:00 +0100

Currency depreciation

The US Federal Reserve's hawkish monetary policy in response to rising inflation has led to the dramatic strengthening of the US$ against almost every major currency. In late September 2022, the British pound plummeted to its lowest level against the US$ since 1972 (albeit exacerbated by other factors). The Euro has sunk below US$1 for the first time in 20 years and in Asia, the impact has been equally pronounced with major currencies including the Chinese renminbi, the Korean won, the Japanese yen and Malaysian ringgit falling sharply, in some cases to levels not seen since the global financial crisis.

These steep exchange rate fluctuations mean that businesses that bought billions of US$ worth of FX derivative products in an effort to “hedge” their position against an appreciating domestic currency are at risk of facing considerable losses.

Further, in an effort to navigate these significant currency fluctuations, it appears more and more businesses are turning to FX derivatives. By way of illustration, the People's Bank of China released data in October 2022 which identified that in the first half of 2022, FX risk-hedging by PRC companies totalled US$755.8 billion which represented an increase of 29% from last year.

That activity is expected to have accelerated further in the second half of the year given the more extreme recent swings in the currency markets. This builds in yet further significant risk.

FX hedging

FX hedging is important to many international businesses, in particular in the import and export markets, because their income is partly dependent on an exchange rate (or rates) and not only on income generation in their own currency. As their own currency appreciates, there is a need to protect the value of their income and mitigate the commercial impact of their services or exports becoming more expensive. Conversely, businesses may be impacted by the depreciation of their own currency if they are exposed to the rising cost of imports.

There are a number of ways that a business may hedge its exposure in order to seek to mitigate these risks. However, businesses worldwide have purchased exotic FX derivative products which, rather than a low-risk hedge, represent a high-stakes gamble. These products have various positive sounding names, such as "Target Redemption Forwards" (TRFs or Tarfs), "Knock-in, Knock-outs" (KIKOs) or "Target Redemption Notes" (TARNS).

There are subtle differences between these derivative products. However, in essence, the parties nominate a notional sum in a particular currency (for example, the RMB) and agree a benchmark exchange rate between that currency and another currency (for example, the US$) and agree that on pre-determined dates (fixing dates) they will make payments to one another through “put” and “call” options; the payments being calculated by applying the market exchange rate on that fixing date.

In practice, the two sums are netted off against each other and the party who is “out of the money” (ie who loses on the exchange rate) pays the other on each fixing date.

The attraction of such products is that they are generally zero-premium products (which means no upfront cost to the customer) and offer a better than market exchange rate. The problems with such products for customers are primarily that:

i. there is usually an element of gearing; if they are on the “wrong side” of the trade they have to pay the bank a sum based on a multiple of the original sum; and

ii. there is an asymmetry of risk and reward. The customer’s potential gains (and the bank’s losses) are capped by a “knock out” provision, which terminates the transaction if a certain “trigger” point is reached; for example, a certain level of profit has been earned by the customer or the base currency hits a certain level. However, if a customer is on the “wrong side” of the trade there is no “knock out” provision to protect the customer. Accordingly, the potential losses are unlimited.

These types of exotic FX derivatives have previously caused widespread economic misery in a number of jurisdictions, in particular in emerging economies in South East Asia and South America in 2008 and 2009. Indeed, they have been described as “products from hell” and the International Monetary Fund concluded that they do not function as a hedge, nor are they even a sound option for currency speculation.

More recently, in 2021, it was revealed that Deutsche Bank may have mis-sold FX derivatives to scores of businesses in Spain after it was announced that it had reached a settlement for over €10m with J Garcia-Carrion, Europe's largest wine exporter.

However, notwithstanding these issues, these types of products persist, and the banks have continued to explore new markets into which they can be sold.

Potential for disputes

In circumstances where customers are now exposed to significant losses under these FX derivative products, they will be asking challenging questions about how the products were sold, whether they were suitable for their purposes and whether the banks made them fully aware of all of the significant risks; particularly, given that it is highly questionable whether such products can ever function as a hedge.

It is important for such businesses to seek professional advice at an early stage, in particular as it may be possible to agree with the bank some form of satisfactory restructuring or settlement.

However, if that is not possible, customers will need to examine their legal options and potential remedies in the relevant jurisdictions. Given the choice of law and jurisdiction clauses generally included in these types of contracts, this is likely to include the Courts of the leading dispute resolution centres such as England & Wales, Hong Kong and Singapore. A number of relevant contracts may also specify that disputes be resolved by arbitration (rather than litigation) in circumstances where the customer is located in a jurisdiction in which there are issues surrounding the enforcement of foreign court judgments (for example, the PRC).

In these sorts of disputes, the banks commonly turn to their contractual disclaimers for protection and/or claim that they are not acting in an “advisory” capacity. While circumventing these types of “defences” is by no means easy, it has become apparent that many of the banks’ customer-facing staff did not understand some of the complex products that their banks sold and/or had little or no regard for the suitability of such products for their customers. Further, efforts have been made in certain jurisdictions to curtail the banks' ability to rely on such provisions. In Hong Kong, for example, the Securities and Futures Commission has, since, June 2017, required banks to include a mandatory "suitability clause" in the customer agreement whereby they contractually agree that any financial product solicited or recommended is reasonably suitable for the customer having regard to the customer's financial situation, investment experience and investment objectives.

As the storm clouds continue to gather over the global financial markets, the ability to predict the movement of FX rates is becoming ever more challenging. Businesses which have become, very possibly inadvertently, highly leveraged currency speculators will need to proceed with caution.

Overseas King's Counsel appearing remotely before Hong Kong's top court

Mon, 17 Oct 2022 09:58:00 +0100

Introduction

In an interesting and fully reasoned decision, delivered against the background of "Wave-5" of the Covid-19 pandemic in Hong Kong, a judge of the Court of Final Appeal has given approval for two King's Counsel (based in London) to appear remotely at a final appeal in January 2023¹ . While they could have appeared in person, an issue arose as to what would happen if either or both of the London advocates tested positive for Covid-19 while in Hong Kong and/or during the final appeal. While this is not the first time that eminent overseas King's (or Queen's) Counsel have appeared at an appeal in Hong Kong using videoconferencing facilities, the Court's order appears to come with the first fully reasoned decision. The decision is as welcome as it is pragmatic. Leading overseas King's Counsel, whether appearing in person or remotely before the Hong Kong courts, will receive a warm welcome from the local and international community in Hong Kong.

Background

Since approximately February 2022, Hong Kong has arguably experienced its worst phase of the Covid-19 pandemic. It was not until late September 2022 that hotel quarantine requirements on arrival were removed. Under the current "0+3" Covid-19 restrictions, a person who tests negative on arrival in Hong Kong is no longer required to undergo hotel quarantine – there are restrictions on visiting some specified places during their first three days and they are required to test daily for Covid-19.

Both London advocates are instructed by lawyers in Hong Kong with respect to an important appeal before the Court of Final Appeal (the Court) in January 2023. In short, the final appeal raises important issues concerning the rights of a transgender person in Hong Kong to change their gender identity without having to undergo genital reconstruction. Both London advocates are leading human rights lawyers and they have sought permission to appear for the purposes of (among other things) the final appeal.

However, given the state of flux with Hong Kong's quarantine restrictions and despite a considerable easing of social distancing measures recently, the lawyers for the parties (the two individual appellants and the Commissioner of Registration) sought a direction from the Court that both London advocates be allowed to attend the final appeal by videoconferencing facilities.

Concerns had been expressed that if either advocate tested positive for Covid-19 while in Hong Kong they would not be able to attend the final appeal physically and might not be able to leave Hong Kong until fully recovered – which could affect their other engagements in London. There were also concerns that the final appeal might be adjourned or, indeed, that the two advocates might not be able to attend at all.

It was against this background that the judge, case managing the case in the Court, was asked to review the matter and consider allowing both London advocates to appear at the final appeal by videoconferencing facilities.

Decision

The judge went to some length to make it clear that physical attendance of the parties' lawyers was the norm for substantive hearings before the Court. This was expected to remain the case given the considerable relaxation of Covid-19 quarantine and social distancing rules, albeit (as the judge noted) there was no telling what restrictions would be in place in January 2023 at the time of the final appeal. Importantly, the Court accepted that quarantine restrictions in January 2023 were likely to apply to persons who tested positive on arrival in Hong Kong. Therefore, the Court considered that the parties' concerns were not unreasonable².

Applying existing appellate case law³, the Court noted that the mode of hearing for a case was a matter of case management for the courts, taking into account all relevant circumstances while not being "too dogmatic"⁴. An application for remote hearing should be applied for in good time and be supported by reasons.

On a cautionary note, the Court stated:

"One should not work on a presumption that attendance by remote facilities will invariably be permitted solely because overseas counsel are engaged and they would be subject to quarantine restrictions if they were required to come to Hong Kong physically."⁵

With respect to the circumstances of the particular appeal, the Court took into account:

the desirability of the London advocates providing assistance to the Court with respect to important points of law;
the current practical difficulties that an overseas advocate may experience in Hong Kong if required to attend a hearing in person (having been admitted to do so);
that two leading London advocates had represented the parties in the Court of Appeal through remote attendance and one of them was due to appear at the final appeal. While the other had not appeared in the Court of Appeal, he too was a leading specialist who would provide the Court with invaluable assistance;
that junior members of the local Bar had been instructed to assist both London advocates and engaged in the proceedings throughout – the junior advocates and their instructing solicitors would attend the final appeal in person; and
that adjournments of appeals were a last resort and not granted lightly and, in an ordinary commercial case, the unavailability of a party's advocate did not necessarily change that. However, the judge observed:

"On the other hand, in light of the general public importance of the questions raised in these appeals, this Court is naturally disinclined to deprive itself of the assistance from specialist counsel who have a wealth of experience in the relevant Hong Kong legal regime."⁶

Therefore, the Court granted permission for both London advocates to attend the final appeal remotely using videoconferencing facilities.

Comment

The Court's decision and the supporting written reasons show a lot of common sense. Both London advocates are leading lawyers in their area of practice and can provide Hong Kong's "top court" with considerable assistance in an important final appeal. It should also be stressed that the final appeal will largely depend on legal submissions.

It is worth highlighting that the local lawyers will attend the final appeal in person and that the Court of Final Appeal and other courts in Hong Kong are getting used to using videoconferencing facilities for all or parts of some civil hearings. Indeed, overseas non-permanent judges of the Court of Final Appeal have participated remotely in final appeals during the pandemic – it will be interesting to see whether the overseas non-permanent judge due to sit, as part of the five-judge panel in the final appeal, does so remotely or in person. Subject to the Court's roster, that overseas non-permanent judge may be Lord Sumption – a judge who has been steadfast in his support for the Court of Final Appeal and who is much respected by the local and international community in Hong Kong⁷.

The Court's decision is also welcome because during the pandemic the number of leading King's (and Queen's) Counsel from England and Wales appearing ad hoc in Hong Kong court proceedings appears to have declined to something of an all-time low since 1997. This is unfortunate – particularly because some of the best proponents for the successful working of the courts in Hong Kong are (for example) those same overseas advocates. As the governing body of the largest local lawyers' organisation stated in June 2018, with respect to the Court of Final Appeal: "[s]ince its establishment in 1997, the CFA has been an unqualified success as part of the HKSAR legal system."⁸ This remains the position.

Finally, on a more historical note, the two London advocates in the final appeal will be some of the first overseas "King's Counsel" to appear ad hoc before the courts in Hong Kong – but not the first; it is understood that at least two leading overseas King's Counsel appeared (in person or remotely) before the courts in September 2022. As for which King's Counsel was the first to be admitted ad hoc for proceedings in Hong Kong that "honour" may go to a London advocate due to appear in person on 19 October 2022 at a substantial case management conference in connection with a retrial of a criminal case.

Contact Us

Please contact Antony, Warren or James if you have any queries regarding the issues raised in this article, or if you wish to consider any commercial dispute resolution matters in Hong Kong.

A version of this article was originally published in the Litigation Newsletter of the International Law Office: www.internationallawoffice.com.
This article is intended to give general information only. It is not a complete statement of the law and does not constitute legal advice. It is not intended to be relied upon or to be a substitute for legal advice in relation to particular circumstances.

¹Q v Commissioner of Registration and Tse v Commissioner of Registration (heard together) [2022] HKCFA 20, 3 October 2022.
²Supra note 1, at para 14.
³CSFK v HWH [2020] 2 HKLRD 586 and [2020] HKCA 207.
⁴Supra note 1, at para 12. Also see the draft Courts (Remote Hearing) Bill, which proposes (among other things) to codify current practice and put it on a legislative footing – in particular, section 5 ("Court may make remote hearing order"), section 12 ("Attendance at remote hearing") and section 14 ("Attendance at remote hearing deemed to be physical presence").
⁵Supra note 1, at para 11.
⁶Supra note 1, at para 18.
⁷On 7 October 2022, the extension of the terms of office of the Honourable Mr Justice Patrick Chan Siu-oi, GBM and the Right Honourable Lord Jonathan Sumption, respectively as Non-Permanent Hong Kong Judge and Overseas Non-Permanent Judge of the Court of Final Appeal, for a period of three years, was announced.
⁸Para 6 of a statement by The Law Society of Hong Kong on the Appointment of Judges, 28 June 2018.

Hong Kong Court of Appeal: pre-arbitration compliance is a matter of admissibility, not jurisdiction

Fri, 07 Oct 2022 10:15:00 +0100

The Court of Appeal, in C v D [2022] HKCA 729, has confirmed that compliance with pre-arbitration procedural requirements in a contractual escalation clause is an issue going to the admissibility of the claim, and not to the arbitral tribunal's jurisdiction, and that consequently an arbitral tribunal's decision was not liable to be set aside by the Court for lack of jurisdiction under Article 34 of the UNCITRAL Model Law.

Background

A dispute arose between two satellite operators. Their multi-tiered dispute resolution agreement provided that:

the parties shall attempt in good faith promptly to resolve any dispute by negotiation, and either party may by written notice to the other refer such dispute to the chief executive officers of the parties for resolution,
if any dispute cannot be resolved amicably within 60 business days, such dispute shall be referred by either party for settlement exclusively and finally by arbitration in Hong Kong at the Hong Kong International Arbitration Centre in accordance with the UNCITRAL Arbitration Rules, and
any award shall be final and binding on each party, and the parties agree to waive any right of appeal against the arbitral award.

D issued a letter to C expressing its willingness to refer the dispute to the parties' respective senior management teams for negotiation, but neither party eventually did so. D then commenced an arbitration and, in response, C claimed that the arbitral tribunal had no jurisdiction to entertain the dispute because there had been no request for negotiation.

The arbitral tribunal issued a partial award in favour of D, finding that the reference of the dispute to the senior management was optional, but had in any case been satisfied by D's letter. The tribunal accordingly rejected C's jurisdictional objection, and proceeded to find that C had breached the agreement and was liable to pay damages.

C applied to the Court of First Instance to set aside the partial award on the basis that it was made without jurisdiction. It did so under section 81 of the Arbitration Ordinance (Cap. 609), which gives effect to Article 34 of the Model Law, which in turn permits the Court to set aside an award if it deals with a dispute not contemplated by or falling within the terms of the submission to arbitration.

At first instance the Court noted that it could review the tribunal's decision de novo if the question of whether D complied with the dispute resolution procedure was one of "jurisdiction" falling within Article 34. The Judge found however that C's objection was one going only to the "admissibility" of the claim and that it therefore fell outside the review of the Court.

Issue

C appealed to the Court of Appeal, which had to decide whether the tribunal's partial award dealt with a dispute not falling within the terms of the submission to arbitration under Article 34, such that it had no jurisdiction.

Decision

In a wide-ranging judgment, the Court of Appeal considered court decisions in Hong Kong, the United Kingdom, Singapore, New South Wales and the United States, as well as academic writings. It held that the jurisprudence and academic opinion support the distinction between admissibility and jurisdiction, and recognise that non-compliance with procedural pre-arbitration conditions is a question of the admissibility of a claim, such that an arbitral tribunal's decision to rule on the merits is regarded, in those circumstances, as final and not subject to review by the Court.

The Court of Appeal took the view that, whilst the distinction cannot be read directly into Article 34, it can be given proper recognition as a matter of statutory construction. The Court did not accept C's arguments that, since D had agreed to a condition precedent to arbitration, it followed that the arbitral tribunal's decision on that issue was necessarily a jurisdictional decision, or one open to review by the Court under Article 34.

The answer ultimately depends in each case on the parties' intention, to be ascertained as a matter of the true construction of their agreement. The proper question to ask is whether the parties intend or agree that the question of whether the condition precedent has been fulfilled is to be finally determined by the arbitral tribunal.

In the present case, the Court of Appeal found that:

there was no dispute about the existence, scope and validity of the arbitration agreement,
C's objection was not that such a claim should not be arbitrated at all, but that the arbitral tribunal should reject the reference as premature because certain pre-arbitration requirements had to be satisfied first, and
there was no indication in the agreement that C and D intended compliance with the escalation mechanism to be a matter of jurisdiction.

On the facts of the case, and in the absence of any agreement to the contrary, the Court of Appeal upheld the first instance decision that the pre-conditions were concerned only with the admissibility of the claim, rather than the jurisdiction of the tribunal, and thus that the arbitral tribunal's partial award was not subject to review by the Court under Article 34.

Comments

General significance to arbitration law in Hong Kong

This case confirms that Hong Kong's position is in line with other jurisdictions, that an arbitral tribunal retains its jurisdiction to determine disputes concerning compliance with pre-arbitral procedural requirements, and that its decision is not then subject to review by the court.

Drafting escalation clauses

This decision does not alter the parties' entitlement to agree that a dispute over the satisfaction of pre-conditions to arbitration goes to the tribunal's jurisdiction, but clear and unequivocal language is required. Given the consensual nature of arbitration, it is the parties' agreement that determines the true scope of the disputes which may be submitted to arbitration.

Indeed, a dispute over an escalation mechanism is, in the Court of Appeal's view, intrinsically suitable for determination and is best decided by an arbitral tribunal, in order to give effect to the parties' presumed intention to achieve a quick, efficient and private adjudication of their dispute by arbitrators chosen by them on account of their neutrality and expertise.

"Clear and unconditional communication" determines whether arbitrator appointment was valid

Wed, 07 Sep 2022 14:25:00 +0100

The judgment arose from a dispute as to the validity of the arbitrator appointment in a London Maritime Arbitrators Association Arbitration (LMAA) and decided that it is the clear and unconditional communication by an arbitrator which determines whether their appointment was valid, as opposed to whether a contract had been formed with the arbitrator.

The claimant together with related shipowning companies chartered vessels to the defendant over a number of years, on bareboat terms. In 2018, the claimant and the defendant entered into a Reconciliation Agreement in relation to those vessels subject to charter, which provided for instalment payments by the defendant of outstanding amounts.

The dispute resolution clause in the Reconciliation Agreement provided that "[i]n case of any dispute or impasse that may arise regarding the execution or implementation of this agreement, the parties elect the forum stipulated in the Bareboat Charter contracts for the resolution of disputes."

The relevant Bareboat Charters, in turn, provided that the arbitration should be conducted in accordance with the LMAA terms current at the time when the arbitration proceedings are commenced. As to the composition of the tribunal, the relevant clause provided that the dispute should be resolved by three arbitrators, with the defendant required to appoint an arbitrator within 14 days of receiving the claimant's notice of arbitration. In the event the defendant failed to appoint its arbitrator within the allotted timeframe, the claimant would seek to appoint its arbitrator as sole arbitrator without prior notice.

Having received the notice of appointment of arbitrator by the claimant, the defendant appointed its arbitrator and sent a notice of such appointment to the claimant on 5 January 2022, i.e. within the prescribed 14-day period.

A month later, the defendant's appointed arbitrator said that they would not be able to act as an arbitrator because the maximum rate of compensation fell significantly below the level of their firm's charge-out rate. This led to the defendant seeking to appoint a replacement arbitrator, and the claimant to appoint its arbitrator as a sole arbitrator.

A dispute arose between the parties as to whether the defendant's arbitrator appointment was valid. The claimant argued that the defendant did not validly appoint its arbitrator within the prescribed timeframe and that its own appointed arbitrator should serve as sole arbitrator in the case.

The defendant sought summary judgment dismissing the claimant’s attempt to install its appointed arbitrator as sole arbitrator

In the judgment, Mr Justice Foxton noted that under s.16(1) of the Arbitration Act 1996, the parties “are free to agree on the procedure for appointing the arbitrator or arbitrators”. In this case the parties agreed a form of arbitration agreement which requires a party to appoint its arbitrator as part of the process of commencing an arbitration. Mr Justice Foxton noted that the timing of appointing arbitrators may have significant implications for limitation purpose, and some arbitration agreements bar claims where appointments have not been completed within a certain timeframe. Mr Justice Foxton emphasised that "this is particularly likely to be the case in the maritime context, in which there are usually shorter time periods for bringing claims". The

The claimant's submission was that an arbitral appointment required the conclusion of a valid contract with the potential arbitrator. In support of its position, the claimant referred to K/S Norjarl v Hyundai and Hashwani v Jivraj, concerning tripartite contracts which come into existence between the parties and the arbitrators when all the elements of a valid appointment have been completed. In this case, because no agreement on the arbitrator fees was reached and no contract between the defendant and the potential arbitrator was concluded, the clamant argued that the defendant's arbitrator appointment was invalid.

While the cases referred to by the claimant suggest that it is open to an arbitrator before the appointment to reach a special agreement with the appointing party as to their renumeration as a condition of accepting the appointment, Mr Justice Foxton did not read "the majority judgments as
determining that the issue of appointment turns on whether a contract has been concluded between the appointing party and the arbitrator." Although Mr Justice Foxton accepted that there can be a contractual relationship between an appointing party and the arbitrator it is appointing, he said that "[t]hat does not necessarily entail, however, that the issue of whether an arbitrator has been appointed for the purposes of commencing an arbitration under an arbitration agreement such as this one is to be determined by a contractual analysis of the dealings between the appointing party and the arbitrator it has approached." Accordingly, he rejected the Claimant’s submissions and instead followed the Court of Appeal’s "pragmatic" approach in its 1970 decision in Tradax Export SA v Volkswagenwerk AG (La Loma), concerning a party who had notified the other of the appointment of a particular arbitrator without having first secured confirmation of the arbitrator's willingness to act. In that case Lord Denning MR said that three things were necessary to constitute the appointment of an arbitrator: (1) it was necessary to tell the other side; (2) to tell the appointee himself and (3) the appointee “should be willing to act and have intimated his willingness to accept the appointment”. In that case the court found there had been no valid appointment without the appointee's express confirmation of their willingness to accept the appointment.

Based on this precedent, Mr Justice Foxton concluded that all that was required to show a valid appointment was “a clear and unconditional communication of acceptance of the appointment by the arbitrator, which is then notified to the other party, or communication of an unconditional willingness by the arbitrator to accept the appointment, which the appointing party then acts upon by communicating the appointment to the appointee and the other party”.

Having analysed the correspondence between the defendant and the arbitrator, Mr Justice Foxton concluded that the arbitrator in the case had clearly communicated his willingness to be appointed and the defendant had clearly communicated the fact of the appointment to the claimant and the already appointed arbitrator.

Comment

This decision provides guidance on an important practical issue. It confirms the principles that will be applied by the English courts in determining the validity of arbitrator appointments. In particular, a clear and unconditional communication of acceptance of the appointment by the arbitrator would be sufficient to determine the validity of their appointment. Any wider contractual analysis is not necessary. Such an arbitration-friendly approach will discourage parties from disputing the validity of arbitrator appointments which can lead to time-consuming and expensive arbitration-related litigation.

Court of Appeal confirms that conditional fee arrangements do not give rise to an implied a duty of good faith

Thu, 01 Sep 2022 12:30:00 +0100

A firm of solicitors acting under a CFA who had been instructed by their client to settle proceedings on a "drop hands" basis, with no order for costs, was not entitled to recover costs from their client on the basis that the client had breached a duty of good faith. The ruling cautions solicitors who enter into CFAs about the risks of clients agreeing a settlement that deprives them of their entitlement to conditional fees.(1)

Facts

The appellant, Candey Limited, a firm of solicitors, had acted for the first respondent, Mr Bosheh, in a claim against Mr Bosheh and the second respondent, Mr Salfiti, in which fraud was alleged. The solicitors had acted for Mr Bosheh under a 100% conditional fee agreement (CFA). Mr Bosheh had rejected a settlement offer from the claimant in the underlying litigation to discontinue the claim against Mr Bosheh and pay him 50% of any recovery that the claimant made against Mr Salfiti, up to a cap of £1million, as long as Mr Bosheh would agree not to give evidence. Under the terms of the CFA, the solicitors would have received any money paid out pursuant to this arrangement. Mr Bosheh ultimately settled on a "drop hands" basis on terms that did not give rise to an entitlement for the solicitors to receive a payment under the CFA. The solicitors sought to recover their fees by bringing a number of claims against Mr Bosheh, including in fraudulent misrepresentation, deceit and for breach of the CFA. The solicitors' claim against Mr Salfiti was that he procured Mr Bosheh's breach of the CFA and/or was liable in unlawful means conspiracy.

At first instance ([2021] EWHC 3409 (Comm)), the judge (Ms Clare Ambrose, sitting as a deputy High Court judge) dealt with a number of applications, including the solicitors' application to rely on privileged and confidential documents and Mr Bosheh and Mr Salfiti's application for an order striking out the claim in whole or in part. The judge ruled, among other things, that the claim based on the alleged implied terms, including that of good faith, had no prospect of success. She made similar findings in respect of the claims in deceit and fraudulent misrepresentation, conspiracy and inducing breach of contract. She found that the only claim made by the solicitors which had a real prospect of success (and which she therefore allowed to go on to trial) was the alleged breach of an express term of the CFA which provided that Mr Bosheh would "always seek to recover costs by order or agreement." The judge also held that the solicitors were not entitled to rely on either the client's privileged or some of the confidential material that they sought to deploy.

The solicitors appealed against the judge's finding that there was no implied duty of good faith owed by Mr Bosheh and the judge's refusal to allow them to rely on the confidential and privileged material.

Decision

The Court of Appeal (Coulson, Arnold and Phillips LJJ) dismissed the appeal.

The Implied Term as to Good Faith

Applying the usual test for implied terms (Marks and Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Limited [2015] UKSC 72; Europa Plus SCA SIF and Others v Anthracite Investments (Ireland) Plc [2016] EWHC 437 (Comm)), the Court held that there was no real prospect of implying a duty of good faith in the CFA because such a term was not obvious and the retainer and the CFA worked coherently without it. The Court further explained that an implied duty of good faith towards the solicitors would be contrary to the CFA itself, which expressly contemplated the prospect that the claimant in the underlying litigation would succeed in proving the fraud allegations (in which case the solicitors would recover nothing).

The Court went on to consider the main characteristics of a relational contract set out in Bates v Post Office [2019] EWHC 606 (QC). Among other things, there was no guarantee at the outset that the retainer would be a long-term contract, no commitment to collaborate, no high degree of communication and the spirits and objectives of the parties' venture were capable of being expressed exhaustively in a written contract. The Court therefore found that the retainer was not a relational contract, such that a duty of good faith would not be implied as a matter of law.

The Court concluded that the agreement was no more than an ordinary solicitor's retainer that happened to be on a CFA basis and there was no prospect of establishing an implied duty of good faith.

The Court further considered that, even if there were an implied duty of good faith, the solicitors had no real prospect of successfully establishing a breach of duty arising out of the "drop hands" settlement. The client was entitled to conclude that the "drop hands" settlement was not substantially less advantageous (and arguably better) than earlier proposals made in the proceedings, notwithstanding the fact that the terms of the "drop hands" settlement were disadvantageous from the solicitors' perspective.

The Use of Privileged and Confidential Material

The solicitors had sought to deploy privileged and confidential in their claim against the client for breach of an implied duty of good faith. Among other things, the solicitors alleged that the client had made misrepresentations as to the merits of his defence.

The Court upheld the first instance decision that, in putting forward their case, the solicitors were not entitled to rely on privileged material, nor were they entitled to rely on confidential documents which had been provided to them after the underlying proceedings had settled.

The privileged material in question comprised statements, answers to questions and other material provided by the client to the solicitors in order for the solicitors to prepare the defence and witness statements in the underlying litigation. The solicitors had sought to argue that the "iniquity exception" to privilege applied in respect of some of material.

The Court considered the leading authority on the iniquity exception (JSC BTA Bank v Ablyazov [2014] EWHC 2788 (Comm)) which provides that, in order to rely on the exception, a solicitor must show that the communications in question fell outside the ordinary course of his or her professional engagement. The Court found that a solicitor acting under a CFA is in no different position as to privilege to a solicitor acting on an ordinary retainer and that the privileged material in question did not fall outside the ordinary course of the solicitors' professional engagement. Moreover, the alleged false statements related back to the original fraud in the original proceedings. There was not a new or different fraud relating to the proceedings which took the case out of the ordinary run.

With regard to the confidential material (principally bank statements that had been provided to the solicitors by the client's bank), the Court found that the first instance judge was entitled to find that the solicitors' action in opening and inspecting the client's bank statements was unlawful and unjustified, since the solicitors knew that the statements had been provided to them because the bank mistakenly assumed that the proceedings were still ongoing. Applying the test in Mustard v Flowers [2019] EWHC 2623 (QB), the Court concluded that the public policy interest in excluding evidence improperly obtained was not trumped by the narrower objective of achieving justice in this particular case, particularly as the solicitors' claim was an attempt to avoid the terms of its own CFA.

Comment

The Court of Appeal clarified that a client owes no implied duty of good faith to his or her solicitor merely by entering into a CFA with them.

Delivering the leading judgment, Coulson LJ identified "the potential conflict of interest that can arise under a CFA between the client and the solicitor where the terms are drafted in such a way that the solicitor's costs recovery is itself dependant on the client recovering something – anything – from the proceedings." He went on to consider that "[s]uch conflicts cannot be resolved by an implied duty owed by the client to consider the solicitor’s financial interests rather than his own" and that it is instead "for the solicitor to ensure that such conflicts do not arise in the first place."

Solicitors who carry out work under CFAs should therefore carefully think about the terms of the retainer and consider the risk of their client agreeing a settlement that deprives them of their entitlement to conditional fees. For example, terms should be considered which make conditional fees payable in circumstances where a client settles on terms which an independent expert determines to be unreasonable.

The decision also confirmed that a client who makes false statements to its solicitors will not necessarily lose the protection of legal advice privilege. In order to trigger the iniquity principle, there must be an abuse of the solicitor-client relationship which is so severe as to put the communications outside the ordinary course of the professional engagement.

(1) (Candey Limited v Bosheh & Anor [2022] EWCA Civ 1103)

Nowhere to run: why a document can be "left" with a defendant and still be served in the right way

Thu, 01 Sep 2022 12:11:00 +0100

The Claimant's brother was the deceased "post-pop" artist Duggie Field. The Claimant obtained an order against the Defendant, Mr Field's partner, obliging the Defendant to hand over property belonging to Mr Field's estate including his artwork. When this order was not complied with, the Claimant sought a further order for the immediate delivery of this property, as well as an order that the Defendant provide information about the whereabouts of any missing property. The Claimant also applied for an order committing the Defendant to prison for contempt of court.

Service

Part 81 of the Civil Procedure Rules obliged the Claimant to personally serve the original order and contempt application on the Defendant. Where a defendant will not take a document handed to them, it is still possible to personally serve the document if the defendant is told what the document contains and the document is left "with or near" them.²

In this case:

The order was posted through the Defendant's letterbox, after a process server had spoken to the Defendant through the door at his flat and explained that the order related to proceedings brought by the Claimant.
A process server had attempted to hand the contempt application to the Defendant on the street, but it fell onto the floor as the Defendant refused to hold onto it, and the Defendant ran away. The process server then left the document at the front door of the Defendant's flat.

The court decided that both documents had been validly served because the process server had explained that they were serving documents connected to legal proceedings and:

The order was left as close to the Defendant as possible when it was posted through the door, the process server having just spoken to the Defendant through the door.
The contempt application was left near the Defendant as it touched him before falling to the floor. It did not matter that the document was then picked up by the process server and taken to the Defendant's flat.

Whilst it was not necessary for the court to consider whether it was appropriate to make an order that personal service was not required, it did comment on the circumstances in which it might be appropriate for such an order to be made. In the consultation paper which preceded the current Part 81 of the CPR, it was suggested that a court could only make an order dispensing with personal service if the defendant was evading service or was already fully aware of the contempt application. The court in this case favoured textbook commentary which suggests that the court can make such an order in broader circumstances, where it is just for the court to do so.

Disclosure of the whereabouts of assets

The court had jurisdiction to order the Defendant to deliver up Mr Field's property under section 3² of the Torts (Interference with Goods) Act 1977, but it was unclear whether the court could also order the Defendant to provide information about any missing property.

The court decided that there were two jurisdictional bases for it to make such an order:

The court has equitable jurisdiction to order third parties to provide information to enable a claimant to locate assets, pending the determination of the claimant's claim. This case was different from the typical case in which such orders are made because the court had already decided that the Claimant was entitled to the assets, and the party from whom the information was being sought was the defendant, not a third party. However, the court decided that the underlying justification for making such an order was the same: in both situations the orders were necessary to enable assets to be identified and preserved.
The power under section 37¹ of the Senior Courts Act 1981 to grant injunctions. The court drew an analogy with another case, in which the court made an order under that section obliging the Defendant to surrender himself to the police and provide an affidavit detailing his assets, as a condition of being permitted to continue defending the claim against him.³

Contempt

A person is in contempt of a court order and can be committed to prison if they (i) knew of the terms of the order; (ii) acted or failed to act in a manner which breached the order; and (iii) knew of the facts which made their conduct a breach of the order.

The court in this case decided that the Defendant was in contempt. The process server had explained what was being served, the Defendant had not complied with the order, and he had deliberately not allowed the Claimant's agents to collect the property subject to the order. The court confirmed that it is not necessary to show that the Defendant knew that his acts did, as a matter of law, breach the order.

Commentary

Clearly, the court is willing to take a practical approach to service and recognise the obstacles defendants can put in place to avoid the service of documents. This decision follows other decisions in respect of service and is part of a broader trend of the court permitting service by alternative methods, such as by Non-Fungible Tokens.⁴

The court's comments in respect of the circumstances in which personal service may be dispensed with may assist claimants in future cases who are struggling to serve a defendant but cannot prove that the defendant is trying to evade service.

In deciding that it had the power to make an order obliging the Defendant to disclose the whereabouts of assets, the court has confirmed that it has a robust suite of powers to support a claimant's recovery of assets.

¹Howard Field v Giovanni del Vecchio [2022] EWHC 1117 (Ch) and [2022] EWHC 1118 (Ch)
²Gorbachev v Guriev [2019] EWHC 2684 (Comm)
³JSC BTA Bank v Ablyazov (No. 8) [2013] 1 WLR 1331
⁴D’Aloia v (1) Persons Unknown (2) Binance Holdings Limited & Others [2022] EWHC 1723 (Ch)

High Court confirms permission not needed for "Technology Assisted Review" to facilitate discovery in litigation

Wed, 31 Aug 2022 09:40:00 +0100

Introduction

China Metal Recycling (Holdings) Ltd (in liquidation) v Deloitte Touche Tohmatsu,(1) is a recent decision of the Court of First Instance of the High Court that confirms that court approval is not needed for the use of technology assisted review (TAR) to facilitate the discovery process pursuant to an agreed protocol between the parties, although the court has power to order the manner in which discovery of documents is undertaken between the parties if they apply to court. While the court approved the party-agreed protocol, that provided for limited discovery, of equal interest is the court's encouragement of constructive engagement between parties and their legal representatives including the use of technology to assist with the management of cases.

Background

The case involves a substantial piece of litigation between the parties, in which the liquidators brought a claim for alleged professional negligence against the company's former auditors (the defendant). The documents in the defendant's possession were stated to date back over ten years ago and constitute hundreds of hard copy files and over five million electronic documents.

The parties had agreed in principle to a protocol providing for limited discovery and permitting the defendant to use TAR software technology. In brief, TAR helps identify whether documents in digital form are likely to be relevant to issues in the dispute by using machine learning algorithms – this generally relies on an initial period 'training' the software what is and is not relevant. The purpose of TAR is not to replace manual review but to help identify documents more likely to be relevant and to prioritise those for review.

The defendant's legal representatives applied to the court for an order that the defendant be permitted to give limited discovery (as set out in the annex to the application) and, possibly out of an abundance of caution, also sought an order that the defendant be permitted to use a TAR software technology "to reduce the time and costs of the discovery exercise".(2)

The plaintiff appears to have agreed in principle to the defendant's use of TAR but there was a dispute how long the defendant could take for its review. There was no dispute that the court had power to make an order regarding the manner of discovery between the parties, including limiting the scope of such discovery.(3)

Decision

The court noted that this was not the first time it had considered the use of TAR (although in the prior case(4) there was no dispute between the parties about using TAR). Now, the court has noted that it is not necessary for parties to seek the court's permission to use TAR. – the parties have an obligation to search for relevant documents (electronic and hard copy) and how the discovery process was conducted was primarily a matter for parties and their legal representatives.

The court usefully observed:

The Court does not direct how a party is to conduct traditional discovery so as to ensure compliance with a party’s discovery obligation. In my view there is no particular reason why it should be necessary for the Court to approve the use of TAR or any other technology, which a party’s lawyers believe will facilitate discovery, although it is sensible for the parties to agree in advance how TAR is to be used. This is what has happened in the present case.(5)

The court also made two cautionary observations about court involving itself out the outset in "the determination of the detailed methodology for the use of TAR or similar technology" to facilitate the discovery process:

the court did not share the parties' familiarity with the background facts of the case or the relevant documents, so the parties were usually in as good a position to decide how to approach discovery; and
the court might not have the parties' and their legal representatives' "understanding of the technology available and the ways in which it can be used".(6)

Therefore, it would often be more practical for the parties to agree as much of the methodology between them by means of protocols and only involve the court in the event of disputes "over the adequacy of [a party's] discovery".

In arriving at its observations and giving the directions sought (subject to a court ordered deadline), the court helpfully:

reiterated the starting point for discovery being the "Peruvian Guano" test, which was maintained as part of the civil procedure reforms in Hong Kong in April 2009, while a new rule was adopted to give the court the power to limit discovery and provide for the manner in which it was given with an emphasis on making use of technology;(7)
referred to case law in other common law jurisdictions, such as England and Wales,(8) Australia and New Zealand(9) and in the United States(10), that had considered the use of analytical tools to facilitate the discovery process. In a clear nod to the use of technology, the Hong Kong court stated:

In my view the issue is not whether TAR can be used. Clearly in 2022 the use of analytic tools of this sort is to be expected in the conduct of litigation whether to research the law or to order and analyse data. I can see no reason why the default position should be assumed to be that a person with some legal qualification personally checks data on a screen. Increasingly all data will be stored and accessed through electronic means;(11) and

summarised the nature of the TAR and machine learning tools that the defendant proposed to use.(12)

Comment

Protocols concerning the discovery process are not new in large scale commercial litigation in Hong Kong and are often the subject of correspondence and agreement between the parties' legal representatives. TAR or computer assisted review is also regularly used in document heavy litigation.

China Metal Recycling (Holdings) Ltd (in liquidation) v DTT serves as useful clarification that the use of such technology does not, in principle, require the courts' permission and is first and foremost a matter for agreement between the parties and their legal representatives. The existing procedural framework requires the court and the parties to manage cases cost-effectively and with reasonable proportion and procedural economy,(13) and gives a power for the court and the parties to limit the scope of discovery (14) – the courts' primary role in this context is to determine disputes as to the adequacy of a party's discovery. As the court notes, in this case although the defendant's application was understandable on the facts there was actually little for the court to decide beyond the time within which discovery was to be completed.(15)

The Hong Kong courts have addressed discovery of Electronically Stored Information (ESI) in the past, confirming that parties do not need "to turn over the contents of their filing cabinets (in this context electronic ones)".(16) However, in the context of cautionary judgments both in Hong Kong(17) and abroad(18) when parties have failed to cooperate on e-discovery, the court's decision in China Metal Recycling is a welcome reminder that the parties are expected to cooperate on the methodology of electronic discovery without needing to run to court for approval when they can agree. It is also a welcome update to the landmark decision of the English court that first allowed TAR (under the name 'predictive coding') in the discovery of ESI but indicated that the parties "were quite right to seek the court's approval".(19)

Finally, the court's decision should be viewed in the wider context of the courts in Hong Kong trying to embrace IT in civil proceedings with (for example) greater use of remote hearings and orders for service (or substituted service) of court documents using modern technology (such as sending a link to an online data room containing those documents to the defendant's online messenger account). The court has showed it is prepared to embrace the use of technology for procedural efficiency without the judge necessarily needing to understand the technical intricacies of how that technology might work.

This article was published on ILO on 29 August 2022.

(1) [2022] HKCFI 2344, 3 August 2022.

(2) Supra note 1, at paragraph 2. Given the circumstances, the court describes the application as having been taken out for "sensible reasons" (Supra note 1, at paragraph 17).

(3) Rules of the High Court, Order 24, rule 15A ("Order for limiting discovery").

(4) Elliott International LP v Bank of East Asia Ltd (No 1), [2018] 4 HKLRD 396.

(5) Supra note 1, at paragraph 7.

(6) Supra note 1, at paragraph 8.

(7) Supra note 1, at paragraphs 5 and 6.

(8) Supra note 1, at paragraph 9.

(9) Supra note 1, at paragraph 13.

(10) Supra note 1, at paragraphs 12 and 13.

(11) Supra note 1, at paragraph 14.

(12) Supra note 1, at paragraphs 3(2) and 10.

(13) Rules of the High Court, Order 1A.

(14) Supra note 2.

(15) Supra note 1, at paragraphs 7 and 15.

(16) E.g. Moulin Global Eyecare Holdings Ltd v KPMG [2010] HKCU 1251.

(17) E.g. Liquidators of Moulin Global Eyecare v Ernst & Young [2008] HKCU 981.

(18) E.g. Digicel (St Lucia) Ltd v Cable v Wireless [2008] EWHC 2522 (Ch).

(19) Pyrrho Investments Limited v MWB Property Limited [2016] EWHC 256 (Ch) (in which RPC acted for the Claimants), at paragraph 1.

The October CPR update: three important changes for litigators

Thu, 18 Aug 2022 11:38:00 +0100

The permanent incorporation of the disclosure pilot into the rules will come as no surprise to practitioners. The substantive changes that will come into force in October include (among other things) clarifications on issues for disclosure, Part 8 proceedings, and adverse known documents. Certain practical changes are also being introduced, for example legal representatives will be able to sign the Disclosure Certificate on behalf of their clients.

In relation to service out of the jurisdiction, the amendments to the rules will broaden the circumstances in which claimants may serve documents in English proceedings on parties outside the jurisdiction. Finally, the amendments to Practice Directions including PD16 are part of the Civil Procedure Rule Committee's (CPRC) ongoing project to simplify the CPR, albeit they do not overhaul the substance of the existing rules.

Each of these three sets of amendments comes into force on 1 October 2022.

Permanent incorporation of the disclosure pilot

From 1 October, the disclosure pilot scheme which began on 1 January 2019 will no longer be a pilot as it will be incorporated permanently into the CPR under Practice Direction 57AD (PD57AD).

PD57AD applies to existing and new proceedings in the Business and Property Courts of England and Wales. It does not apply to cases in the ordinary Queen's Bench Division or the County Courts.

PD57AD is substantially in the form of (and replaces) Practice Direction 51U, although there are a few significant changes that will be introduced in October. These changes include the following:

CPR Part 8 claims are now explicitly excluded from PD57AD under new rule 1.4(7), unless otherwise ordered by the court. However, the court has discretion under new rule 1.12 to adapt the provisions of PD57AD in such manner as it considers appropriate when making an order for disclosure in a Part 8 claim. Part 8 claims involve cases where the claimant seeks the court's decision on a question which is unlikely to involve a substantial dispute of fact, or where a rule or practice direction requires or permits the use of the Part 8 procedure. Under new rule 1.12, a party seeking an order for disclosure in a Part 8 claim must file and serve a List of Issues for Disclosure in relation to which disclosure is sought and the Models that are to be adopted for each issue.
There is to be a significant new provision addressing Issues for Disclosure, which have necessitated adjudication from the court in certain cases. For instance, the issue of whether it is necessary for an Issue for Disclosure to be a pleaded issue has recently been considered by the courts. A new rule under paragraph 7.7 provides additional guidance, including on this point under subparagraph (v):

"When drafting Issues for Disclosure the parties should have regard to the primary functions of those Issues namely (i) to help the parties to consider, and the court to determine, whether Extended Disclosure is required and, if so, which Model or Models should be used; (ii) to assist the parties in identifying documents and categories of documents that are likely to exist and require to be disclosed; (iii) to assist those carrying out the disclosure process to do so in a practical and proportionate way including, in the case of search-based disclosure, to help define and guide the searches; (iv) to assist with the process of reviewing documents produced by searches; and (v) to avoid the production of documents that are not relevant to the issues in the proceedings."

An amendment to paragraph 2.7 provides that a document may be "adverse" if it contradicts or supports an issue in dispute, "whether or not that issue is one of the agreed Issues for Disclosure".
Paragraph 3.1(2) clarifies that the duty to disclose known adverse documents exists regardless of any disclosure order.
Under paragraph 8, a party may address Model C requests not only to the other party or parties, but also propose that Model C be used in respect of documents which it may propose searching for and disclosing itself.
An amendment to paragraph 10.8 provides that a Certificate of Compliance is not required where the Disclosure Review Document has been dispensed with in accordance with the relevant rule.
Under paragraph 12.6, a legal representative may sign the Disclosure Certificate on behalf of a client provided the legal representative has been given authority to do so, having explained the significance of the certificate to the client first. A representative’s signature in such circumstances will bind the client as much as if the client had signed the Disclosure Certificate itself.
Paragraph 4 of Appendix 5 to PD57AD has increased the value under which a claim will be treated as a Less Complex Claim from £500,000 to £1,000,000, unless by virtue of the nature, complexity or likely volume of Extended Disclosure the claim would benefit from the full procedure of PD57AD.

The Chancellor of the High Court, Sir Julian Flaux, recently noted that the courts have witnessed a significant change in culture and in parties' behaviour regarding disclosure over the past two and a half years as a result of the Disclosure Pilot. Although the Disclosure Pilot has tended to result in a front-loading of work in the disclosure process, Sir Flaux has observed that generally parties have engaged with one another at a much earlier stage on the issue of how to deal with the disclosure of large volumes of data. This early consideration and engagement has, in his experience, led to a dramatic decline in the number of post-CMC applications for specific disclosure.

Service out of jurisdiction

Part 6 of the CPR deals with the service of documents in English proceedings outside of England and Wales.

Amendments to rules 6.37 and 6.38 will mean that a claimant is no longer required to apply to the court for permission to serve a document other than a claim form outside the jurisdiction in certain circumstances.

At present, a claimant requires the court's permission to serve a document outside the jurisdiction unless a party to the proceedings has given an address for service in Scotland or Northern Ireland. A claimant may also currently serve particulars of claim without permission where the court has given permission for a claim form to be served on a defendant out of jurisdiction, and the claim form states that particulars of claim are to follow.

From 1 October however, if a document other than a claim form is required to be served in the proceedings, the claimant may serve that document on the defendant without the court's permission where either:

the claim form has previously been served on the defendant out of the jurisdiction with the permission of the court; or
the court's permission is or was not required to serve the claim form (whether within or out of the jurisdiction).

This change is being introduced to address the practical problems that arise when proceedings are served out of jurisdiction with the court's permission, but either the order giving permission is limited to the claim form or there was no requirement for court permission to serve the claim form. In both cases, subsequent documents needing to be served outside the jurisdiction would usually require an additional application for permission to the court. The rule change will mean that a claimant will have an automatic right to serve court documents, applications, and orders outside of England and Wales without the requirement to seek the permission of the court, provided the claim form was served with the court's permission (or did not require the court's permission to be served out of jurisdiction).

This will be a welcome development for claimants and lawyers alike, as the time and cost of an application for permission to serve documents outside of England and Wales can be avoided in circumstances where a claim form has previously been validly served on the defendant out of the jurisdiction.

Additionally, an amendment to 6.33(2B) will address a previous gap in the CPR. New rule 6.33(2B)(c) provides that a claimant may serve a claim form on a defendant outside the United Kingdom without the court's permission where, for each claim made against the defendant to be served and included in the claim form, the claim is "in respect of a contract" containing a term to the effect that the court shall have jurisdiction to hear that claim.

The purpose of the new rule 6.33(2B)(c) is to fix a lacuna which had been created by the deletion of previous paragraph 3.1(6)(d) of Practice Direction 6B (PD6B) following Brexit. The phrase "in respect of a contract" is not limited to claims which arise under a contract, it will also catch claims which relate to or are connected with a contract.

Furthermore, amendments to paragraph 3.1 of PD6B will add a range of additional jurisdictional "gateways", which define the circumstances in which a claimant may apply to the court for permission to serve a claim form out of the jurisdiction.

For instance, in relation to information orders against non-parties, a new provision under paragraph 3.1(25) of PD6B provides that a claimant may serve a claim form out of the jurisdiction with the permission of the court where:

"A claim or application is made for disclosure in order to obtain information—

(a) regarding:
(i) the true identity of a defendant or a potential defendant; and/or
(ii) what has become of the property of a claimant or applicant; and
(b) the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR rule 6.32, 6.33 or 6.36."

This new provision will enhance the ability of the courts to assist parties seeking to obtain information from non-parties where assets are outside the jurisdiction. The issue has been particularly acute in cases where a party has needed to identify the destination of money or cryptoassets. For more information on jurisdictional issues involving cryptoassets, see here to read about a recent case where the claimant was able to serve out of jurisdiction a Bankers Trust Order on a defendant in the United States.

Three further examples of new jurisdictional gateways that will be added under paragraph 3.1(22)-(25) of PD6B provide that a claimant may serve a claim form out of the jurisdiction with the permission of the court in the following circumstances:

A claim is made for a declaration that no duty of confidentiality or right to privacy has arisen where, if the duty or right was found to have arisen, it would have arisen in the jurisdiction or would be governed by the law of England and Wales.
A claim is made for unlawfully causing or assisting in a breach of confidence or misuse of private information where (i) the obligation or right in question arose in the jurisdiction or is governed by the law of England and Wales, (ii) the detriment was suffered, or will be suffered in the jurisdiction, or (iii) the act which caused such detriment was committed or likely to be committed within the jurisdiction.
A contempt application is made.

Simplification of PD16: Statements of Case

On 1 October 2022, PD16 relating to Statements of Case will be replaced as part of the CPRC's project to simplify the CPR, which began in 2021. The CPRC has a statutory duty under section 2(7) of the Civil Procedure Act 1997 to "try to make rules which are both simple and simply expressed".

The substance of PD16 will remain largely the same but the language will be made clearer and more concise. In particular, duplicate provisions that are already contained in Part 16, or elsewhere in the CPR, will be removed from PD16. The new PD16 also shifts from the use of masculine to gender neutral language (such as references to "the defendant" throughout the text, rather than "he").

In essence, lawyers will not be required to familiarise themselves with a new regime but may benefit from the simplified language and format of PD16. Lay litigants may also be assisted by the move to plain English.

Other practice directions considered by the CPRC to be unnecessary will be dispensed with on 1 October 2022, namely PD2D (References in the Rules to action done by the court), PD4 (Forms), and PD15 (Defence and Reply). Other practice directions (like PD16) will be retained in revised format, or subject to consequential amendments, in particular: PD3D (Mesothelioma Claims), PD8A (Alternative Procedure for Claims), PD52B (County Court and High Court Appeals, and PD52C (Appeals to the Court of Appeal). See here for more details.

Conclusion

Each of these three upcoming sets of amendments are evidence of the CPRC's commitment to taking a modern and flexible approach to dispute resolution under the CPR. The upcoming changes are an attempt to comply with the CPRC's statutory duty to make rules which are both simple and simply expressed, and to address certain jurisdictional and disclosure-related challenges that may arise in complex disputes. In general, the adaptability of the English courts and the CPR is undoubtedly a contributing factor to the courts' reputation as a pre-eminent forum for resolving disputes for international parties.

[1] McParland & Partners Ltd [2020] EWHC 298 (Ch); Lonestar Communications Corp LLC v Kaye [2020] EWHC 1890 (Comm); Revenue and Customs v IGE USA Investments Ltd [2020] EWHC 1716.; Curtiss v Zurich Insurance Plc (T/A Zurich Building Guarantee and Zurich Municipal) and Another [2021] EWHC 1999 (TCC).

"Specifically mentioned": High Court clarifies rules about documents referred to in evidence under the Disclosure Pilot

Wed, 03 Aug 2022 14:53:00 +0100

The claimant, Michael Wilson and Partners Limited, sought an order under paragraph 21 of the PD 51U disclosure pilot (PD51U.21) requiring two of the defendants to disclose "no less than nine sub-categories of documents" purportedly referred to in witness statements (the witness statements of the late Mr Michael Robinson, at one time retained by the first defendant and Mr Philip Shepherd QC, one of the other named defendants).

The defendants were an individual (John Forster Emmott) and the lawyers who had represented him in other proceedings also involving the claimant. In these other proceedings, costs orders had been made against the claimant. The claimant issued a claim alleging that the defendants had dishonestly conspired to make claims for costs orders to which they were not entitled. The defendants applied to strike out this claim. The witness statements in question were filed by the defendants in support of the strike out application.

Decision

HH Judge Pelling QC (HHJ Pelling) rejected the claimant's application for disclosure of the documents that it asserted were referred to in the witness statements.

HHJ Pelling explained that PD51U.21 acts as a "self-contained code" by reference to which a party in receipt of a witness statement can seek the disclosure of documents mentioned in the statement. This is subject to two requirements: (i) the document(s) for which disclosure is sought must be "mentioned"; and (ii) assuming that (i) is established, the party seeking disclosure must satisfy the court that the order is "reasonable and proportionate".

In this case, the claimant requested disclosure of documents which it said were "bound to exist", based on the content of the Defendants' witness statements. HHJ Pelling criticised the "extravagant terms" of this approach. He held that the starting point should be a witness statement which is alleged to contain mention of otherwise undisclosed documents. These documents (or categories of documents) should be identified and then consideration given as to whether disclosure would be reasonable and proportionate.

HHJ Pelling noted that the definition of "mentioned" in PD51U.21 is the same as in CPR 31 and therefore "mentioned" must really mean "specifically mention[ed]". He expanded on this point, highlighting the claimant's reliance on the note at paragraph 31.14.4 of the White Book to justify the proposition that where a witness statement refers to other documents which themselves contain additional references, then the recipient of the statement is also entitled to ask for these additionally referenced documents. HHJ Pelling held that this was not a construction which was "reasonable or appropriate to adopt". The entitlement to disclosure at 31.14.4 only caught those documents which were actually mentioned in or attached to a witness statement. Further, HHJ Pelling stated that the claimant's approach would increase costs and run counter to the overriding objective. He noted that the claimant's desired conclusion would be "contrary to principle" because it could not be said that a document referred to within a document referenced in a witness statement was being relied upon by that witness as part of their evidence.

As noted, above, the claimant sought nine different sub-categories of documents in relation to Mr Robinson's statement. HHJ Pelling rejected this request on the basis that (i) a mere reference to a retainer did not constitute it having been "specifically mentioned"; and (ii) that the claimant's request was "expressed in the most general terms." In relation to Mr Shepherd QC's witness statement, HHJ Pelling again rejected the claimant's request for disclosure of retainer documents, conditional fee agreements, and funding deeds. HHJ Pelling held that the witness statement did not mention a written retainer and that disclosure relating to funding was not appropriate. HHJ Pelling did, however, suggest that it would be appropriate for Mr Emmott (the first defendant) to file a brief witness statement explaining why privilege was being asserted. HHJ Pelling also flagged that it would not be "reasonable or proportionate" to order Mr Shepherd to produce a document "which he has not seen and does not possess".

HHJ Pelling did agree with the claimant in relation to a matter of legal professional privilege. The Claimant submitted that it was wrong to characterise retainer letters or conditional fee agreements as privileged by their nature. HHJ Pelling agreed with this and explained that the notion of inherent privilege would go much further than the authorities justify. HHJ Pelling agreed with the opinion of FTT Judge Barbara Mosedale in Edward C Behague v The Commissioners for Her Majesty's Revenue & Customs [2013] UKFTT 647 (TC) (6 November 2013)¹, that "everything depends upon what the actual letter says".

We note that the judge's position here appears consistent with the judgment in Hoegh v Taylor Wessing LLP [2022] EWHC 856, in which an application for the disclosure of documents brought under paragraph 21.1(2) PD51U similarly failed because the Court held that no specific documents had been referred to in a witness statement where mention was made of a firm of accountants undertaking ‘a review’ of a party’s tax affairs².

Commentary

Following the announcement of 15 July 2022³, we now know that the Disclosure Pilot is here to stay and that it will become a permanent part of the CPR as the new PD57AD (currently PD51U) from 1 October 2022 onwards. The ever-growing body of case law on the Disclosure Pilot will therefore continue to be relevant. This case is helpful in providing some guidance on how the courts are likely to approach applications for disclosure where documents appear to be "mentioned" in a witness statement. Moreover, it is clear that this decision is not confined to an application under PD51U.21, but that it applies more generally to "specific" disclosure requests in such circumstances.

Clarity and specificity are clearly essential when it comes to disclosure requests. It is not acceptable to make a very "general" request, instead requests should: (i) specify that a witness statement appears to mention undisclosed documents; (ii) identify those documents (or categories); and (iii) then explain why the request is reasonable and proportionate. The definition of "mention" should be adhered to on the basis that this must mean "specifically" mentioned. Further, inherent privilege cannot be assumed when it comes to retainer letters and conditional fee agreements just because of the nature of these documents: whether they actually attract privilege will depend on their contents.

¹https://financeandtax.decisions.tribunals.gov.uk/judgmentfiles/j7472/TC03031.pdf
²See also Rubin v Expendable Ltd [2008] EWCA Civ 59 and Dubai Bank v Galadari (No 2) [1990] 1 WLR 731 (wherein the Court held that a document was not ‘mentioned’ in a witness statement unless a direct allusion was made to it).
³https://www.judiciary.uk/announcements/disclosure-working-pilot-has-been-approved/

Back to basics on contract interpretation as Court of Appeal finds that natural meaning of settlement agreement prevails

Mon, 01 Aug 2022 16:47:00 +0100

At the same time, the Court of Appeal allowed the solicitors' appeal in respect of the decision to strike out the claims against the firm partially rather than in their entirety, finding that the settlement agreement had released the firm from all claims arising from the relevant matters, rather than merely claims arising out of breach of duty.

Background

The appeals concerned a group of companies ultimately owned and controlled by an individual, Mr Schofield. During a reorganisation of the group, certain of the group companies entered into a loan facility and several interest rate hedging agreements with Barclays Bank plc (the Bank). The Bank demanded payment from certain of the group companies in their capacity as guarantors. When payment was not forthcoming, the Bank appointed administrators of those group companies. The administrators subsequently instructed the solicitor defendant to review claims which the group companies had advanced to rescind the swaps and recover compensation from the Bank on the grounds of mis-selling and manipulation of LIBOR. By the time the administrations came to an end, the group companies had issued legal proceedings against the Bank. The litigation was settled by an agreement in December 2015 (the Settlement Agreement).

In July 2019, Mr Schofield and one of the group companies brought misfeasance proceedings against the administrators, claiming that they had been wrong to accept appointment as administrators and to have conducted the administrations as they did. Two of the other group companies also brought proceedings against the solicitors alleging that the firm ought not to have accepted instructions and that they breached fiduciary or other duties in their assessment of the swap claims.

In November 2020, the solicitors and administrators issued applications to strike out the proceedings against them and/or for summary judgment on the ground that any claims against them had been released by the Settlement Agreement.

The strike out/summary judgment applications were heard in May 2021. The judge concluded that the Settlement Agreement had released all the claims asserted against the administrators in the misfeasance proceedings. The judge also concluded that the solicitors had been released from claims only for breach of duty “whilst acting as agents”, but not for claims for alleged breaches of duty to advise.

Mr Schofield and the group company appealed against the striking out of their claims against the administrators. The other group companies appealed against the partial striking out of their claims against the solicitors. The solicitors appealed against the decision to strike out the claims against them partially rather than in their entirety.

Decision

The court dismissed the group companies' respective appeals, holding that, on the natural and correct interpretation of the Settlement Agreement, each party agreed to release its own “Affiliates” in addition to those of any other party. Referring to clause 2.1 of the Settlement Agreement, which provided "This Agreement is made in full and final settlement of all Claims any Party has or may have against any other Party or against any other Released Party", the court found that the terms "most obviously suggest that the claims being settled encompass all that any “Party” has against any other “Party” or anyone else within the class of “Released Parties” ("Released Parties" having been defined as "the Parties and their Affiliates"). The court also considered that the Bank would likely have wanted the Settlement Agreement to release each of the parties' own "Affiliates" in order to give it protection against "ricochet" claims (i.e., contribution claims against itself).

The court held that Mr Schofield's evidence concerning the group companies' intention that the Settlement Agreement should not operate to release claims against the administrators or solicitors was inadmissible because, among other things:

Mr Schofield's evidence sought to rely on what was said between the parties during pre-contractual negotiations;
Mr Schofield's evidence sought to rely on what he was told by representatives of the Bank months before the claim against the Bank was issued, which the court considered could not "possibly cast any significant light on what the compromise embodied in the Settlement Agreement […] was intended to achieve"; and
Mr Schofield only offered evidence of subjective intent – no evidence was offered as to what, on an objective basis, a reasonable person in the position of the parties would have intended.

In considering whether the administrators and solicitors constituted "Affiliates" under the Settlement Agreement ("Affiliate" having been defined as "in relation to any person, a Subsidiary of that person, a Parent of that person, any other Subsidiary of that Parent, and an Employee of that person, of its Subsidiaries and of its Parents"), the court found that the definition of "Affiliate" captured a person's "Employee" which in turn captured "any former ... officers ... and agents". Accordingly, the court held:

The administrators were “Affiliates” within the meaning of the Settlement Agreement because they were officers and agents of the relevant group companies and therefore naturally met the definition of “Employee". Consequently, the administrators also came within the definition of “Affiliates” and “Released Parties”.
The solicitors were “agents” of the relevant group companies because they acted on behalf of the companies, and their involvement extended beyond mere advice. Consequently, the solicitors also came within the definition of “Affiliates” and “Released Parties”.

The court also allowed the solicitors' appeal, holding that the Settlement Agreement released the solicitors from all relevant claims, rather than only claims arising out of breach of duty. In reaching this conclusion, the court noted that "Clauses 2.1 and 3.1 of the Settlement Agreement provide for a “Released Party” to be released from “all Claims”; “Claims” is defined to refer to “any and all Liabilities” arising from or in connection with the relevant matters; and “Liability” is expressly stated to extend to any obligation “however and whenever arising and in whatever capacity”".

Comment

When interpreting a contract, the courts will focus on the natural meaning of the words used. Although this is contract law 101, it is sometimes overlooked by parties and practitioners alike. Practitioners must ensure, particularly during the rush of settlement negotiations, that the claims intended to be given up by their client, and no more or no less, are sufficiently captured by the settlement agreement to be entered into. As can be seen from this case, the natural interpretation of a settlement agreement could ultimately provide a much greater shield than intended by a party. Accordingly, it is crucial that practitioners bear in mind the extent of the applicability of any settlement agreement to third parties (both known and unknown) when drafting, even in situations where the insolvency of an entity appears unlikely.

Court of Appeal finds that damages-based agreements are not available to defendants

Wed, 27 Jul 2022 17:44:01 +0100

Background

The appeal arose in the context of several underlying disputes concerning shareholdings in, and the extraction of money from, Tonstate Group Limited (TGL), a property investment company.

Mr Wojakovski held 50% of the shares in TGL at the time the disputes arose, with Mr and Mrs Matyas (his parents-in-law) holding the remaining 50%. Mr Wojakovski's shares were originally transferred to him by Mr and Mrs Matyas. In one of the actions, TGL (and other group companies) alleged that Mr Wojakovski had been wrongfully extracting money from those companies for years. Judgment was granted against Mr Wojakovski for approximately £13 million when he admitted extracting such funds without authorisation for the purposes of defrauding HMRC.

In another of the actions, Mr and Mrs Matyas sought rescission of their transfer of shares to Mr Wojakovski on the basis that they would not have transferred the shares had they known Mr Wojakovski had been extracting monies from TGL and other group companies. This claim was settled in May 2020 with an agreement that Mr Wojakovski would transfer 75% of his shares in TGL to Mr and Mrs Matyas, and his estranged wife. Mr Wojakovski retained 25% of his TGL shareholding.

Candey Limited (the Solicitors) acted for Mr Wojakovski in these disputes pursuant to a single-page agreement which was said on its face to be a DBA.

DBAs – a form of 'no win, no fee' agreement, which allow legal representatives to receive a percentage of the sums recovered from an opponent – were legalised for all forms of civil litigation in April 2013, through an amendment to section 58AA of the Courts and Legal Services Act 1990 (the 1990 Act) and the introduction of the Damages-Based Agreements Regulations 2013 (the 2013 Regulations), which set out the required terms and conditions of DBAs. Section 58AA(3) of the 1990 Act provides that a legal representative and their client can agree that the client will make a payment to the legal representative if the recipient obtains "a specified financial benefit" in connection with the litigation, with the payment determined by reference to the financial benefit obtained.

Mr Wojakovski was declared bankrupt in October 2020, following which the Solicitors claimed that they were entitled to a percentage of the value of Mr Wojakovski's retained shareholding in TGL pursuant to its DBA. The judge at first instance concluded that the DBA did not entitle the Solicitors to payment if Mr Wojakovski retained some or all of the shares claimed from him, but only if he recovered something from an opponent "in or as a consequence of the proceedings", which he did not. The Solicitors were therefore not entitled to any payment under the DBA. The Solicitors appealed this decision.

Decision

The Court of Appeal dismissed the appeal, holding that an agreement between a defendant and their legal representative which provides for a payment to the legal representative of a percentage of the sum the defendant successfully resists having to pay to their opponent is not a DBA as defined by section 58AA(3) of the 1990 Act. Accordingly, the court held that any such agreement is "unlawful and unenforceable." As Mr Wojakovski recovered nothing else in the proceedings, the Solicitors were not entitled to any payment under the DBA.

In reaching this conclusion, the court considered the history of the introduction of DBAs and noted that there was nothing in the 2009 Jackson Report on civil litigation costs, which brought about the widespread legalisation of DBAs, the Parliamentary debates concerning the introduction of the 2013 Regulations, or the Explanatory Memorandum to those 2013 Regulations, which supported the concept of a DBA being entered into by a defendant who did not have a counterclaim. Given the longstanding prohibition of contingency fee agreements at common law, the court observed that the lack of reference to the availability of defendant DBAs was a "powerful indication" that it was not Parliament's intention to introduce such DBAs. It would not be possible to expand the exceptions to the common law prohibition unless there was clear legislative intent to do so.

However, it was the wording of s58AA(3) of the 1990 Act – that a client is to make a payment to its legal representative if the client "obtains a specified financial benefit" from the litigation – which the court found most persuasive in reaching its judgment, putting the matter "beyond doubt". The court held that the word "obtains" envisages the client acquiring something that they do not already have (from the opponent) and not merely retaining something which they already have.

The court also held that, on the construction of Mr Wojakovski's DBA, the Solicitors would not be entitled to any payment in any event, as the DBA was dependent on a recovery from Mr Wojakovski's opponents. The court observed that Mr Wojakovski had "gained nothing" and was in fact "substantially worse off", having parted with 75% of his TGL shareholding. The court observed that to allow such a form of a DBA would be a case of "heads I win, tails you lose"; with a losing client having to pay the ordered sums to an opponent and a winning client still having to pay a percentage of the sum claimed by an opponent to its legal representatives.

Comment

This decision has, for now, put to bed the question as to whether DBAs for defendants are permissible. The court was clear that when a defendant does not obtain a defined financial benefit from their opponent, any DBA will be unlawful and unenforceable.

The debate as to whether defendant DBAs should be permissible will rumble on. There have been several recommendations over the years to make DBAs available to defendants, but changes are yet to be introduced. One of the judges in the Court of Appeal's decision left us in no doubt about their views; when, win or lose, a defendant "faces financial disaster" under a DBA, it is "not surprising that legislation aimed at promoting access to justice should not permit such agreements."

Solicitors risk not getting paid for their work if they are relying on a DBA with a defendant client. Therefore, defendants and their solicitors should carefully consider the funding arrangements they have in place for litigation and consider if alternative arrangements need to be made. These might include seeking third party litigation funding, agreeing a conditional fee arrangement (where the level of fees payable depends on the case outcome) or the client obtaining after the event insurance.

(1) [2022] EWCA Civ 936

High Court holds litigation funder liable for costs that pre-dated funding agreement

Fri, 22 Jul 2022 10:03:35 +0100

Background

The decision arises out of underlying proceedings commenced in February 2019 by the ECU Group Plc (ECU), an investment firm specialising in currency risk management, against entities within the HSBC group (the HSBC parties). ECU alleged that, between 2004 and 2006, the HSBC parties were responsible for manipulating the interbank spot foreign exchange rate in order deliberately to trigger 'stop-loss orders' which had been placed by ECU in connection with their management of their clients’ mortgage debts under their multi-currency facilities with HSBC's UK private bank.

Therium, a commercial litigation funder, had entered into a litigation funding agreement with ECU in September 2019 (the LFA), by which time the particulars of claim and defence had been filed. Therium agreed to provide a commitment of c. £6.6m to ECU for the purposes of funding the proceedings up until the conclusion of the liability trial and to reimburse ECU for part of its costs incurred since 30 November 2018. If the proceedings were successful, Therium stood to receive a contingency fee of three times the amount of costs funded plus 20% of any recovery net of costs above £100m, as well as reimbursement of costs funded.

In November 2021, Mrs Justice Moulder dismissed all of ECU's claims on limitation grounds and ordered ECU to pay the HSBC parties' costs of the proceedings on the indemnity basis.

The HSBC parties then applied for an order that Therium pay their costs and that it be jointly and severally liable with ECU in respect of those costs. In support of their application, the HSBC parties submitted that Therium had funded a large majority of ECU's total costs, had paid nearly all of ECU's costs since 30 November 2018 (prior to the LFA) and stood to obtain substantial profits from the litigation if ECU was successful. In addition, the HSBC parties argued that they should not have to pursue each person with potential responsibility for the litigation for individually allocated sums, and that it would be unheard of on the authorities for the court to order several liability.

Therium accepted that it should have some liability for costs of the proceedings; however, Therium argued that it should only be liable for costs incurred by the HSBC parties after the date of the LFA (19 September 2019) and, of those costs, it should only be liable for a percentage corresponding to its percentage contribution to the total funding after that date.

Decision

Moulder J held that it was just to make an order against Therium in respect of the HSBC parties' costs from and including 30 November 2018, ie before the date of the LFA. This case could be distinguished from the authorities to which she had been referred because, on signing the LFA, Therium had assumed liability for costs incurred prior to that date. Although Therium did not cause those costs to be incurred, it had taken a positive decision that as part of the funding arrangements it would fund those incurred costs. Accordingly, Therium's entitlement to the contingency fee and to be reimbursed for costs funded applied both to sums incurred from 30 November 2018 to the date of the LFA and to future costs. Having taken the potential upside of the contingency fee (which, under the LFA, was calculated by reference to all funded costs), it would be unfair for Therium to avoid the corresponding downside of being liable for such incurred costs in circumstances where the litigation was unsuccessful.

Moulder J also held that Therium should be jointly and severally liable with ECU for the HSBC parties' costs. In reaching this decision, Moulder J took account of the fact that Therium had by far the dominant financial interest in the outcome of the proceedings and effectively controlled the proceedings through the LFA; the HSBC parties had no choice but to incur costs in defence of the claim and it would not be fair to make recovery of those costs dependent on the pursuit of numerous individuals and entities; and, while Therium could seek to join the other funders in due course, it would not be just to delay making an order against Therium to give it further time to do so.

Comment

Litigation funders should not assume that their liability for costs when a claim is unsuccessful will be determined by the date of the LFA or the percentage of funding contributed, as has been shown here. The court has a broad discretion when making costs orders and, in doing so, will consider what outcome is just in all the circumstances. In this case, the court had regard to the fact that Therium had the dominant financial interest in the proceedings, stood to gain a large sum if the litigation was successful and had taken the potential upside of funding costs incurred from 30 November 2018 – and held that it should, therefore, face the corresponding downsides.

(1) [2022] EWHC 1616 (Comm)

Competing subordinated debts – the lessons learnt from Lehmans' insolvency

Fri, 08 Jul 2022 14:45:00 +0100

The Court of Appeal's decision in the consolidated cases of Lehman Brothers Holdings Scottish LP 3 v Lehman Brothers Holdings plc (in administration) and others¹ [2021] EWCA Civ 1523 was the latest in a long line of cases seeking to unwind the issues arising from Lehman Brothers' unexpected collapse.

The background

At the time of the Lehman collapse, the applicable capital adequacy requirements under the umbrella of the Basel II regime permitted three tiers of capital to count towards a bank's qualifying capital. Tier 2 and 3 requirements could be fulfilled by entering into loans, which could include intra-group loans. Various Lehman Brothers entities entered into a number of subordinated loan facility agreements both intra-group and with external investors which met with those requirements. The question that arose for determination is how these differing types of loan instruments ranked in the distributing administration of LB Holdings Intermediate 2 Limited (LBHI2), a UK company in the Lehman Brothers group, given that there were insufficient assets in LBHI2 to satisfy all claims by subordinated creditors. At its core was an issue as to whether external lenders had any better claim in the administration than the Lehman lending entities engaged in the intra-group arrangements.

The Court's analysis divides the claims that were the subject of the appeal into four categories: Claims A, B, C and D. Very broadly, Claim A arose under internal subordinated facility agreements between Lehman Brothers Holdings plc (LBH-PLC) as lender and LBHI2 as borrower. Claim B arose under an internal transaction involving floating rate subordinated loan notes issued by LBHI2 which were held by Lehman Brothers Holdings Scottish LP3. Claims C and D were both claims against LBH-PLC and could be satisfied out of what LBH-PLC received from LBHI2 under Claim A. Claim C arose under subordinated intra-group loan facility agreements with Lehman Brothers UK Holdings Limited as lender and LBH-PLC as borrower. Claim D arose out of subordinated loan notes issued by LBH-PLC on the market and was advanced by LB GP No 1 Limited and Deutsche Bank as an external investor.

The issue before the Court of Appeal: what is the order of priority for the payment of subordinated debt?

The main issue for the Court was to construe the various debt instruments to determine whether they demonstrated an intention by any of the creditors to subordinate their interests to other creditors that would otherwise either rank in the same category or be junior to their interest. In doing so, the Court had regard to the following standard principles. Firstly, a creditor cannot improve its ranking in the insolvency waterfall by contract – all it can do is put itself further down the queue than it would otherwise have been. Secondly, if there is nothing in the contractual arrangements to indicate priority amongst members of the same class of creditors, the presumption is that the creditors in the group will all rank pari passu, irrespective of whether those words are used in the contractual arrangements. Thirdly, as the debt instruments were drafted by skilled professionals and were at the high end of sophistication, a textual analysis was the principal method of interpretation as opposed to more purposive approaches.

The Court also found that those who put the instruments in place took the view that the relative priority between subordinated debt instruments was a question that was not going to arise because the possible insolvency of the Lehman group was simply not something that was contemplated at the time.

The Court of Appeal's decision on subordination

The analysis of the subordinated debt instruments is complex, but suffice to say the Court held that Claim A was to be paid in priority to Claim B. An argument that the Claim B documents ought to be rectified to make it clear that they were not subordinated to Claim A failed on the basis that there was no clear shared intention between the parties to alter the priority between the subordinated debt instruments as no-one had really thought about it. The result was that LBH-PLC took priority.

Claims C and D were claims against LBH-PLC, which were (to the extent they could be from the funds available) to be satisfied from the proceeds of Claim A. The question then was what the relative priority of Claims C and D should be. Utilising a detailed analysis of the precise wording of the debt instruments underpinning Claims C and D, and in particular the definition of "Subordinated Liabilities", the Court concluded that Claim C (by the internal lender) was subordinated to Claim D (by at least in part Deutsche Bank as an external lender). It followed that Claim D would be paid before Claim C, rather than Claims C and D ranking pari passu which would have been the default outcome. In terms of recoveries, this was significant, as the claims under Claim C were extensive, and would have significantly reduced the Claim D claimants' recovery if treated as pari-passu. The Court considered this to be an appropriate outcome given the loan notes in Claim D had been sold on the open market to external investors, whereas Claim C arose out of sub-debt distributed within the Lehmans group.

The effect of guarantees in an insolvency context

One further issue that arose for determination concerned the quantum of the debt that could be proved under Claim C. When LBH-PLC entered into administration, its obligations were guaranteed by Lehman Brothers Holdings Inc (LBHI), which is the ultimate US holding company of the group. The lender under Claim C, Lehman Brothers UK Holdings Limited (LBUK), had claimed under the guarantee and obtained a partial payment from LBHI (to whom LBUK's claims were then assigned under a settlement agreement). The question was whether LBHI (as successor to LBUK's interests under Claim C) could prove in LBH-PLC's administration for the entire amount which LBUK originally advanced to LBH-PLC, or whether it had to give credit for the payment which it had itself made to LBUK in its capacity as guarantor of LBH-PLC.

The Court considered a long line of authorities from which it concluded that, under normal circumstances, where a surety pays part of the debt guaranteed, the liability of the principal debtor is discharged to the extent of the part payment. The creditor is only entitled to claim the balance from the principal debtor.

The question was then whether the rule against double proof in insolvencies altered that analysis. This is a rule that is intended to prevent the same debt being claimed twice – for example where the principal debtor is insolvent, the creditor has a claim against the principal debtor in respect of the debt, and the guarantor may claim indemnity from the principal debtor for any payments made to the creditor on behalf of the principal debtor in respect of the same debt.

The Court concluded that the rule against double proof was a judge-made rule and was not intended to be rigidly applied. It considered it was important to keep in mind the purpose of the rule – which was to avoid making distributions in respect of the same debt twice.

In the context of these particular arrangements, the Court found it important that the effect of the settlement agreement between LBHI, LBH-PLC and LBUK was to discharge any claim to an indemnity that LBHI might have had against LBH-PLC. That meant there was no prospect of LBHI proving in the administration of PLC in its capacity as guarantor of PLC, and accordingly the rule against double proof did not apply. In the circumstances, Claim C was reduced by what the guarantor paid.

Comment

The key takeaway from this decision is that although the construction of complex sophisticated debt instruments will be determined largely by reference to the actual words used, this does not mean that the Courts will not find a way to a construction that is consistent with the apparent equity of providing restitution to external investors in preference to lenders in what appear to be more artificial intra-group transactions.

The Court also adopted a purposive approach to the rule against double proof to consider the mischief that the rule was intended to prevent. Where there was no prospect of a claim being made by the guarantor, and therefore no competing claims to be policed, there was no justification for allowing the creditor to prove for the entire debt without giving credit for any part payment received.

Ref:

¹Full citation: Case No A3/2020/1787 between Lehman Brothers Holdings Scottish LP3 v (1) Lehman Brothers Holdings plc (in Administration) , (2) Deutsche Bank A.G. (London branch), (3) The joint administrators of LB Holdings Intermediate 2 Limited (in Administration and Case numbers A3/2020/1810 and A3/2020/1811 between (1) The joint liquidators of LB GP No 1 Limited (in Liquidation), (2) Deutsche Bank A.G. (London Branch) v (1) The joint administrators of Lehman Brothers Holdings plc (In Administration), (2) Lehman Brothers Holdings Inc.

Sebastian Holdings litigation – tail-end risks mount for Mr Vik

Wed, 06 Jul 2022 14:08:00 +0100

This time, the stakes are much higher than substantial sums of money – Mr Vik now faces a potential custodial sentence after having been found by the Commercial Court to have been in contempt of court for deliberately giving false evidence.

After more than a decade (and at least 18 recorded judgments), the end to these hard fought proceedings is not yet in sight with issues of sentencing and other matters scheduled to be heard by the Commercial Court later this year.

Background

DBAG initially commenced proceedings against Sebastian Holdings and Mr Vik in 2009 for c. US$250mn. The claim arose out of loss-making trades primarily in FX and equities derivatives which Sebastian Holdings conducted through DBAG. Sebastian Holdings counterclaimed for c. US$8bn in alleged trading profits that it was claimed would have accrued but for DBAG's actions. Following a 14-week trial, Sebastian Holdings was ordered in a 2013 judgment to pay US$250mn to DBAG and Sebastian Holdings's counterclaim was dismissed. Infamously, Mr Vik was found to have falsified at least elements of a dummy trading book which he had claimed recorded the real time trading he would have engaged in but for the losses he said DBAG caused by closing out the trades in issue, which he had relied on as evidence to support the counterclaim.

After Sebastian Holdings failed to pay the judgment debt, DBAG made a successful application for an order pursuant to CPR 71 requiring Mr Vik to produce certain documents and attend an examination on Sebastian Holdings’s means and assets (the Order). Mr Vik's subsequent application to vary and/or strike out the Order was ultimately unsuccessful, and he thereafter disclosed certain hard copy documents and attended the examination pursuant to the Order (the Examination).

Around six years later, DBAG made an application to commit Mr Vik for contempt in respect of alleged breaches of the Order (the Committal Application). DBAG claimed that Mr Vik had breached the Order by (i) deliberately giving false evidence in response to certain questions at the Examination and (ii) failing to produce all the documents required by the Order.

Committal Application Judgment

Following a three-week hearing in May, Mrs Justice Moulder held in favour of DBAG, finding that Mr Vik had deliberately given false evidence in response to certain questions at the Examination and failed to produce all the documents required by the Order. The judge held that Mr Vik was not a credible witness, and that certain of Mr Vik's answers at the Examination were "clearly a lie" and "clearly absurd". The judge worked through in detail the specifics of three transactions on which Mr Vik had given evidence during the Examination, finding that in each case Mr Vik's evidence had included deliberate falsehoods. She also held that Mr Vik had deliberately withheld documentation which he was obliged to disclose. Being concerned with the truth of the evidence Mr Vik had provided on the transactions under inquiry, these findings turn very much on the facts of the case. More details for those interested can be found in the reported judgment at Sebastian Holdings, Inc & Anor [2022] EWHC 1599 (Comm).

PD57AC: How compliant is compliant? High Court refuses to strike out passages in fact witness statements

Thu, 30 Jun 2022 11:19:00 +0100

In this IP dispute, the High Court rejected a number of objections to sections of two witness statements, concluding that despite some "minor infractions" it was not reasonably necessary to strike out any of the paragraphs or passages complained of, because "very largely" they comprised admissible trade evidence.

This is the latest in a recent line of authority on the application of rules concerning the preparation of witness statements following the introduction of the new regime in April 2021. PD57AC was introduced in large part to prevent improper influence on the memory of a witness during the preparation of a statement and was intended to reduce perceived 'over lawyering' of witness evidence (including the making of legal submissions and commentary about contemporaneous documents) and associated costs.

The Court had regard to recent High Court decisions about PD57AC including Mansion Place Ltd v Fox Industrial Services Ltd(2), Blue Manchester Ltd v Bug-Alu Technic GmbH(3), and Greencastle MM LLP v Alexander Payne & Ors(4), in which the Court in each case held that sections of witness statements were non-compliant, and ordered either the strike out or redrafting of that evidence. The applicable principles were not in dispute – the difference here was the Court's approach to enforcement and the question of proportionality.

Facts

The underlying proceedings concerned an alleged infringement of trademarks registered in the UK/EU and in Overseas Territories including Chile, Mexico, Panama, Peru and the UAE.

In order to reach a finding in respect of the alleged trademark infringement, the Court needed to be informed about the context of all alleged infringements and in particular the relevant characteristics of the average consumer in each territory (trade evidence).

The trade evidence (lay opinion evidence from suitably experienced people in the trade about the circumstances in the trade concerned) was a key component of the defendants' case, and a central issue on the application was whether the way in which the defendants put that evidence before the Court was compatible with PD57AC.

The defendants proposed to rely on trade evidence from two witnesses who sought to give evidence about the relevant market and consumer relations. This evidence included opinion evidence, which was said to be within the personal knowledge and experience of each witness. Of note, one witness statement commented specifically on selected documents from the applicants' disclosure, and the other referred to a schedule compiled by the defendants' trademark attorneys.

The application

At the pre-trial review, the applicants objected to a number of passages in the two statements, on the grounds that the passages contained:

opinion, matters of belief, commentary on other evidence, submission, argument or repetition;
commentary on an exhibit which was not on matters from within the witnesses' own knowledge or was speculation; and
impermissible commentary on documents.

Decision

Of particular interest is the Court's clear guidance about when to deploy an application under PD57AC. It noted that the practice direction "should not be taken as a weapon with which to fillet from a witness statement either two or three words at various points or essentially insignificant failures to comply with PD57AC in a witness statement" and that careful consideration should be given to proportionality. The Court also stated that "an application is warranted only where there is a substantial breach of PD57AC" which "should be readily apparent and capable of being dealt with on the papers".

At a general level, the Court concluded that although there were some "minor infractions" in the witness evidence, it was not reasonably necessary to excise any of the paragraphs that were complained of, because they largely comprised admissible trade evidence (although the weight to be given to that evidence stood to be assessed by the trial judge).

In addition to considering whether trade evidence could be given under PD57AC (answer: yes) and whether the evidence complained about by the applicants was rightly categorised as trade rather than expert evidence (answer: yes, but with weight to be given to that evidence to be determined at trial), the Court considered whether the witnesses' approach to giving such evidence fell foul of PD57AC.

The Court's assessment of the impugned passages emphasised efficiency, practicality and the ability of the trial judge to make rulings as to the weight to give to certain passages at trial. The Court pointed to comments in earlier jurisprudence regarding cost-saving benefits of the approach enshrined in PD57AC, including: (5)

'Serious consideration should be given to finding a more efficient and cost-effective way forward' in a PD57AC application (the relevant application had taken a full day to argue).
'Parties in the Business and Property Courts who indulge in unnecessary trench warfare in such cases can expect to be criticised and penalised in costs'.
The Court will not strike out offending parts of witness statements where that is not reasonably necessary.

Three specific decisions in the judgment are of individual interest, as they appear to step back from a strict enforcement of PD57AC:

The Court declined to strike out a passage containing commentary on documents, agreeing with the defendants' submission that the witness was not asked to comment on what the documents showed, but rather was asked to comment on them because of his knowledge of the market from which they came. The Court held that such evidence was acceptable because it 'puts the disclosure documents into context'(6).
The Court also declined to excise a passage of text that was introduced by the words 'I consider the key point for the court to note is …', noting that simply because the evidence was "packaged as a submission" did not affect the evidence itself, and it was not reasonably necessary to strike the initial words out.
The Court allowed witness evidence given by reference to a schedule of information prepared by the defendants' trademark attorneys (the schedule), even though the schedule was not a contemporaneous document or prepared by the witness and the witness would not have been able to give the same evidence without reference to the schedule. The Court allowed the evidence on the basis that errors in the information presented could be challenged at trial, and that the schedule was "an efficient way of conveying information which one party contends is relevant and one which, ultimately, saves costs and court time".(7)

Comment

This judgment takes a surprisingly light touch to policing of the PD57AC principles and has important consequences relevant both to the witness drafting their statement and to the potential applicant seeking to challenge compliance.

Whilst the decision could (and should) be understood in the context in which it was made – namely the admissibility of IP trade evidence – we suggest treating it with caution in a more general context. In particular, the Court's blessing of the passages of evidence containing reference to documents should be seen as no more than contextualising the use of trade evidence. As such, we do not expect to see a wide-scale judicial stepping back from the policing of PD57AC. As ever, practitioners should continue to strive for compliance in form and substance, not least due to the obligation to sign the certificate of compliance and the significant impact non-compliance can have (strike-out/sanctions).(8)

That said, proportionality and reasonableness still need to underpin any application in respect of PD57AC. The judgment sends a clear message to practitioners that such applications should be considered carefully and only made when substantive or significant non compliance has been identified. The Courts are also evidently concerned to limit the time and expense consumed by witness evidence and related applications, and this judgment makes it clear parties should keep that objective in mind, and refrain from pursuing "essentially insignificant" breaches.

There is limited specific guidance in the judgment as to what would constitute an "essentially insignificant" failure to comply with PD57AC (such a determination appears to be wholly objective), but when considering making an application in respect of PD57AC, practitioners should:

Carefully consider each issue identified in a witness statement to identify whether each point is significant and reasonably requires a ruling by the Court;
Endeavour to resolve any underlying disputes about witness evidence in correspondence prior to resorting to an application to the Court;
Remember that while parties are entitled to apply in the event of non-compliance, such an application should not be deployed as a weapon or a strategic device: significant non-compliance (on an objective determination) should be identified before the Court is asked to intervene; and
Consider whether the application can be determined on the papers.

Readers are also directed to Curtiss v Zurich [2022] EWHC 1514 (TCC) which was handed down on 17 June 2022, in which the Court awarded the respondent to an application regarding PD57AC compliance 75% of their costs on an indemnity basis, despite a partially successful application, on the grounds that the application was 'oppressive and disproportionate'. That judgment also emphasised that parties should use common sense and have regard to proportionality when assessing how to respond to a failure to comply with PD57AC.

(1) [2022] EWHC 1244 (Cth)
(2) [2021] EWHC 2747 (TCC) at [22]-[38]
(3) [2021] EWHC 3095 (TCC)
(4) [2022] EWHC 438 (IPEC)
(5) At [11], citing Blue Manchester Ltd v Bug-Alu Technic GmbH [2021] EWHC 3095 (TCC) and Mansion Place Ltd v Fox Industrial Services Ltd [2021] EWHC 2747 (TCC)
(6) [70] – [75]
(7) [84] – [90]
(8) See, for example, Greencastle MM LLP v Alexander Payne & Ors [2022] EWHC 438 (IPEC)

High Court decides that reviving proceedings automatically stayed under CPR 15.11 requires relief from sanctions

Wed, 29 Jun 2022 16:30:00 +0100

In a recent judgment, the English Commercial Court in Bank of America Europe DAC v CITTA Metropolitana Di Milano has provided guidance on the "automatic stay" provisions of CPR 15.11 and the circumstances in which parties can revive dormant proceedings subject to such an automatic stay.

This judgment arose in the context of an ongoing dispute regarding two interest rate swaps (the Swaps) which the Metropolitan City of Milan (Milano) had entered into with Merrill Lynch (now Bank of America) (BofA) in 2002. The Swaps were documented under a 1992 ISDA Master Agreement, providing for the application of English law and the jurisdiction of the English Courts.

In 2015, Milano wrote to BofA raising various complaints regarding the Swaps and threatening to commence proceedings in Italy. Faced with this complaint, and in order to ensure that the English Court was the court first seised for the purposes of the Brussels Regulation Recast, BofA promptly issued proceedings in the English Court seeking negative declaratory relief (the English Proceedings) and effected service of these English Proceedings on Milano.

Importantly for the purposes of this judgment, having been served with the English Proceedings, Milano did not file an acknowledgment of service or defence and, in addition, took no steps to pursue the threatened proceedings against BofA in Italy and continued to make payments to BofA under the terms of the Swaps. In the face of Milano's approach, BofA chose not to seek judgment in respect of its claims for declaratory relief and, instead, adopted a 'wait and see' approach, taking no steps to progress the English Proceedings.

As a consequence of the parties' inaction, the English Proceedings were subject to an automatic stay pursuant to CPR 15.11, which provides for such a stay to take effect six months after the deadline for service of the defence if the claimant has not sought default or summary judgment by that date. The purpose of this automatic stay provision is to avoid 'zombie' claims which have been issued but are then neither progressed nor subject to judicial case management.

A number of years later, in 2021, Milano commenced proceedings against BofA relating to the Swaps before the Italian Court, purporting to rely upon a jurisdiction agreement in favour of the Italian Court contained in an antecedent 2001 agreement entered into between Milano and BofA prior to the documentation of the Swaps in 2002 under the ISDA Master Agreement.

In response, BofA made the present application to the English Court under CPR 15.11(2) seeking to lift the automatic stay in order to progress the English Proceedings. Milano opposed the lifting of the stay but, in the alternative, sought an extension of time to file an acknowledgment of service indicating an intention to contest the jurisdiction of the English Court.

Relief from sanctions is required to lift an automatic stay under CPR 15.11(2)

As an initial point, the English Court had to determine whether an application under CPR 15.11(2) to lift an automatic stay should be characterised as an application for relief from sanctions such that the Denton test had to be satisfied, or whether a less onerous test applied.

BofA submitted that relief from sanctions under CPR 3.9 is only required where there has been "a failure to comply with any rule, practice direction or court order" and, where there was no specific rule requiring a claimant to seek summary or default judgment, relief from sanctions was not required. This submission was supported by a number of first instance decisions in which the English Court had previously considered this issue, albeit not in great detail.²

However, in the present case, the Judge departed from these decisions and concluded that relief from sanctions was required. The Judge determined that a claimant's failure to seek summary or default judgment (or a case management stay) represented a failure to comply with their obligation to assist the court and to further the overriding objective by bringing the case before the court for case management. Allowing the proceedings to be removed from judicial oversight amounted to a breach of a "rule, practice direction or court order" for the purposes of CPR 3.9 or, alternatively, was sufficiently close to a breach of a rule as to justify the application of the Denton test by analogy. The English Court also clarified that, where a claimant wishes to place a claim which it has started 'on hold', the appropriate course of action is for the claimant to seek the defendant's consent and/or apply to the court for a stay of proceedings, rather than taking no action such that an automatic stay would arise under CPR 15.11.

Application of the Denton principles

Having determined that BofA's application amounted to an application for relief from sanctions, the Court went on to apply the well-known Denton test which involves the following three-stage enquiry:

a) An assessment of the seriousness and significance of the breach.
b) Considering the reason why the default occurred.
c) Consideration of all of the circumstances of the case.

Applying this test, the English Court had little hesitation in granting BofA relief from sanctions and allowing the automatic stay to be lifted under CPR 15.11(2). While the fact that five years had passed since the automatic stay came into force meant that BofA's breach was more than trivial, the English Court had to consider the context of the application in its totality. Here, this context included the following:

the English Proceedings were largely defensive and had been commenced in response to threatened Italian proceedings;
the CPR 15.11 stay came into effect as a result of failures by both BofA and Milano (with Milano having failed to file an acknowledgement of service or defence);
Milano's ambivalent position, threatening Italian proceedings but continuing to make payments under the Swaps, placed BofA in a difficult position. While the English Court determined that BofA should not have allowed the English Proceedings to become automatically stayed under CPR 15.11, it acknowledged that seeking default judgment would not necessarily have been straightforward for BofA (given the court's hesitance in granting default judgment in proceedings seeking declaratory relief);
the five-year lapse of time before the making of this application was largely a result of the fact that it had taken Milano that long to come "off the fence" and commence its Italian proceedings;
no trial or hearing dates had been impacted by the passage of time before the application; and
BofA would suffer considerable prejudice if its application for relief from sanctions was rejected. The English Proceedings would in effect be struck out and BofA would lose any jurisdictional advantage associated with it having previously taken steps to ensure the English Court was first seised.

In granting BofA relief from sanctions, the English Court also rejected an argument by Milano that BofA's decision to allow the English Proceedings to become subject to an automatic stay amounted to an abusive attempt to “warehouse” the English Proceedings. While the English Court agreed that commencing and maintaining litigation can constitute an abuse of process both when the claimant has no intention of ever bringing the claim to a conclusion, or where the claimant has no present intention to do so, but would do if a particular contingency materialised (referencing the recent judgment in Asturion Foundation v Alibrahim [2020] 1 WLR 1627), that was not the situation in the present case. While BofA had made a "procedural misjudgement" by allowing the proceedings to become automatically stayed under CPR 15.11, its decision reflected legitimate concerns regarding potential Italian proceedings. The English Court also noted that a desire to avoid incurring unnecessary legal costs associated with litigation can be a good reason for a party not to pursue a claim.

Milano application for extension of time to file an acknowledgment of service

Having allowed the automatic stay to be lifted under CPR 15.11(2), the English Court then had to consider Milano's own application for an extension of time to file an acknowledgement of service. This again amounted to an application for relief from sanctions.

Having applied the Denton test, the English Court also allowed Milano's application for an extension of time. In reaching this decision, the English Court appears to have been particularly influenced by the fact that Milano would have suffered serious prejudice if the application were denied, in that it would lose the ability to argue its challenge to the jurisdiction of the English Court to hear the English Proceedings, or to submit evidence in relation to that challenge.

In addition, the English Court noted that, if it rejected Milano's application for an extension of time, such that Milano could not file an acknowledgement of service, then Milano would not have submitted to the jurisdiction of the English Court. In such a scenario, in seeking default judgment, BofA would need to go to considerable time and expense satisfying the English Court that it had jurisdiction to determine the English Proceedings (as required by the provisions of Article 28 of the Brussels Regulation Recast). This meant that Milano's jurisdiction arguments, including matters of Italian law, would therefore need to be considered by the English Court even if it denied Milano's application for an extension of time and the English Court considered these jurisdictional arguments would more efficiently be resolved if Milano's application were granted, such that the English Court could then have the benefit of hearing argument from both BofA and Milano.

Comment

This judgment provides useful guidance on the application of CPR 15.11 and the circumstances in which relief from sanction will be granted allowing a party to revive dormant proceedings subject to an automatic stay.

While the finding that an application under CPR 15.11(2) requires relief from sanction does represent a departure from other first instance decisions, where this judgment represents the first occasion on which CPR 15.11 has been subject to detailed judicial scrutiny, it is suggested that this judgment will likely be followed in future unless and until there is Court of Appeal authority on this issue.

The judgment also provides a helpful reminder that, when a claimant is faced with a similar scenario where a defendant has not acknowledged service but it is nonetheless in the claimant's interests not to progress the claim, the correct approach is for the claimant to seek the defendant’s consent to a stay or to apply to the English Court for a case management stay, rather allowing the automatic stay under CPR 15.11 to take effect.

(1) [2022] EWHC 1544
(2) Including King v Stiefel [2021] EWHC 1045

"Train of inquiry" documents: Court makes rare and exceptional order for Model E Disclosure under disclosure pilot

Fri, 24 Jun 2022 11:30:00 +0100

Model E disclosure requires the affected party to disclose helpful documents, adverse documents and those that may lead to a "train of inquiry" that may then result in the location of further helpful or adverse documents for disclosure.

Background

This interim decision (which related to both disclosure and security for costs) was made in the context of a re-trial of the Defendant's (Mr Azima's) counterclaim against the Claimant (RAKIA) and the Additional Defendants (Defendants) for alleged unlawful hacking of his confidential data and the consequential losses arising thereof.

As required by PD51U, prior to the CMC the parties had attempted to negotiate the List of Issues for Disclosure (LOID) but were unable to agree on the wording and/or inclusion of certain Issues for Disclosure, nor what the appropriate disclosure Model should be for some of the issues.

The key Issue that could not be agreed was Issue 3(a) of the LOID. The parties could not agree whether the following underlined wording should be included:

"“From 1 December 2014 until 30 September 2016 what steps, which were or might reasonably be construed as being unlawful, were taken by or on behalf of [RAKIA and the Defendants] to obtain information about or belonging to Mr Azima. What information was thereby obtained, to whom was it provided, and for what purpose was it provided?”"

Mr Azima argued that the underlined words should be excluded from the Issue for Disclosure as their effect was to limit the searches required of the parties in a claim where a covert conspiracy was alleged. In response, RAKIA argued that any lawful steps could not possibly be considered a "key issue" given that the claim related to an alleged unlawful conspiracy.

Mr Azima also sought Model E Disclosure on this issue. RAKIA and the Defendants sought the inclusion of the above words and Model D Disclosure.

Wording of the Issue for Disclosure

In assessing the wording to include, the Judge helpfully summarised the relevant legal principles as to how Issues for Disclosure should be formulated pursuant to paragraph 7.3 of PD51U. He emphasised that the meaning of "Issues for Disclosure" for the LOID means "only those key issues in dispute, which the parties consider will need to be determined by the court with some reference to contemporaneous documents in order for there to be a fair resolution of the proceedings. It does not extend to every issue which is disputed in the statements of case by denial or non-admission."

The Judge also outlined the key points from the recent authorities on this issue. In McParland & Partners v Whitehead¹, Sir Geoffrey Vos found that issues for disclosure are very different from issues for trial. They consist of the issues to which undisclosed documents in the hands of another party are likely to be relevant and important for the fair resolution of the claim. The LOID should therefore only extend to those issues that require extended disclosure of documents (that is, further disclosure beyond what has been provided on initial disclosure). It should not be a mechanical exercise of going through the pleadings to identify issues that will arise at trial for determination. Further, following the decision in Curtiss v Zurich Insurance PLC², even where a matter in dispute is a central issue to the case, this in itself does not suffice to make it a proper Issue for Disclosure. Instead, it must be an issue that must be determined for the fair resolution of the proceedings.

Given that Issue 3(a) was a central issue in the case, the Judge determined that the Defendants' proposed additional wording could potentially be used to avoid disclosing documents that Mr Azima would be entitled to see, and thus went too far. The additional underlined wording was therefore excluded from the LOID.

Extended Disclosure Model

The Judge also provided a helpful summary of the position on Extended Disclosure Models as set out in PD51U. Where a party seeks search-based disclosure in respect of an Issue for Disclosure (i.e. Extended Disclosure Models C, D and/or E) the party requesting Extended Disclosure has the burden to show that the model being sought is "appropriate, reasonable and proportionate" (paragraph 6.5 of PD51U). The key difference between Model D and Model E disclosure is that, whilst both models require a party to disclose both helpful and adverse documents to their case, Model E also includes "train of inquiry" documents (i.e. documents that may lead to a train of inquiry which may then result in the identification of other documents for disclosure). PD51U specifies that Model E disclosure is only to be ordered in an "exceptional case".

With regard to the exceptional nature of Model E, the Judge noted that in recent cases it was held not to be sufficient for a party to justify seeking Model E Disclosure on the basis that a case is high value, important to the Claimant or involves allegations of fraud³. Further, In State of Qatar v Banque Havilland SA⁴, the Court initially refused to order Model E Disclosure in a case involving a conspiracy but revisited this once further evidence had come to light about the respondents' approach to disclosure (which involved withholding a recording of a telephone conversation and other documents being otherwise unavailable through loss or destruction, as well as the unlikelihood of there being a "smoking gun" in a covert conspiracy case). However, even then, the Court only ordered Model E in relation to one particular issue.

Mr Azima sought Model E Disclosure for certain issues as he said the circumstances of the case put him at a disadvantage in terms of having available contemporaneous documents from which to test the evidence. In making this argument, he asked the Court to take into consideration (1) the claimant's previous alleged failures in relation to disclosure, including a substantial loss of documents (by destruction, use of encrypted messages, loss, and a failure to have disclosed documents in the first trial that were now relied upon), and (2) the nature of the alleged wrongdoing, which comprised an alleged clandestine conspiracy to hack his confidential data.

The Judge held that, whilst in practice there may be little difference between Model D and E disclosure on Issue 3(a), where there has potentially been a cover-up of wrongdoing, there needs to be a mechanism to explore whether this is indeed the case and, if so, how it worked. Model E provided this. In the light of the critical nature of this issue in the case, and the circumstances surrounding it, the Judge found that the case was sufficiently exceptional to justify an order for Model E Disclosure for this issue.

The Judge did not, however, find that it was justified to make an order for Model E Disclosure in respect of any other Issue for Disclosure in the LOID.

Commentary

This case provides a helpful example of the analysis that a Court will undertake before making an order for Model E Disclosure and the high threshold that must be met before such an order is made. It is worth noting that the court only ordered Model E disclosure in relation to one specific issue, which was described by the Judge as a "core critical issue". As such, it remains an exceptional Model to adopt and this decision does not appear to indicate that Model E Disclosure will become more commonplace in future.

¹[2020] Bus LR 699
² [2021] EWHC 1999 (TCC)
³ Kelly v Baker [2021] EWHC 964 (Comm)
⁴ [2020] EWHC 1248 (Comm) and [2021] EWHC 2172 (Comm)

High Court again highlights importance of the confidentiality embargo on a draft judgment

Thu, 23 Jun 2022 14:10:00 +0100

Background

The decision related to the disclosure of a draft judgment in which the judge, Mr Nicholas Caddick QC (sitting as a Deputy High Court Judge), found in favour of the Claimants ("Match") in relation to claims of passing off and trademark infringement against the Defendants ("Muzmatch", which was founded by Mr Younas), by virtue of the use of the words "MATCH" and "TINDER" for their online introduction and dating services.

The draft judgment was sent to parties by email on 12 April 2022 with the standard emboldened heading, which explained that: (i) the Practice Direction supplementing Civil Procedure Rules Part 40 applied; (ii) it was provided in confidence to the parties and their legal representatives and could not be disclosed to any other person or used in the personal domain; and (iii) the parties needed to take all reasonable steps to ensure that the draft's confidentiality was preserved.

The rules relating to embargoes are set out at paragraph 2.4 of Practice Direction 40E, which provides that:

"A copy of the draft judgment may be supplied, in confidence, to the parties provided that—

(a) neither the draft judgment nor its substance is disclosed to any other person or used in the public domain; and

(b) no action is taken (other than internally) in response to the draft judgment, before the judgment is handed down."

The formal hand down of the judgment was scheduled to take place on 20 April 2022. Shortly prior to the handing down of the judgment, the Judge was shown an email from counsel for the Claimants stating that they had been approached by members of the press, who were aware of the outcome of the case and requesting comments. It transpired that the Defendants had been the source of the journalists' information.

In response to the disclosure, the Judge requested, in line with the approach adopted in the recent decision of R (Counsel General for Wales) v Secretary of State for Business Energy and Industrial Strategy [2022] EWCA Civ 181 "a full written explanation from those involved in the release to the press of information concerning the result of this case" and also of the steps taken by the Defendants' solicitors to "draw the clients' attention to the confidential nature of the draft judgment and its contents".

Decision

The judge stressed in his judgment that no criticism should attach to the Defendants' solicitors, Bristows LLP, for their conduct in this matter, accepting that they took robust steps to ensure that their clients were aware of their confidentiality obligations.

Upon receipt of the draft judgment, and before forwarding a copy to his client, the Defendants' solicitor made it "very clear" that Mr Younas should not inform anyone of the outcome of the case without discussing it with him first. This was because the draft judgment and the outcome of the case was "confidential" and on a "need to know" basis, otherwise there was a risk of contempt of court.

Mr Younas later emailed his solicitors, requesting that they file new trademark applications as per the draft judgment. The Defendants' solicitor declined, noting that while they could prepare them, they could not file them, as they were in response to the draft judgment and if they did so, it could be considered to be in breach of the embargo.

On 19 April 2022, Mr Younas again emailed his solicitors, stating that "we have the journos ready", which his solicitors took to mean that the press were aware that the judgment was due to be handed down.

Internal disclosures by the Defendants

Despite the warnings by his solicitors, on the same day that the draft judgment was sent to Mr Younas, he informed four Muzmatch employees of the outcome of the case. He informed the Head of Marketing, the Chief Technical Officer, the Head of Mobile and a Designer.

Mr Younas explained, and it was accepted by the judge, that telling the Head of Marketing so that they could together prepare a press release for publication after hand down, fell within the scope of what was permissible under CPR PD40E. However, there was an issue as to whether the other three people should have been told about the outcome of the case. Mr Younas explained that they were told to enable them to prepare technical and design changes which were required as a result of the judgment.

The judge recognised that the draft judgment could have "very serious repercussions" on the Defendants' business operations and noted that CPR PD40E makes clear that disclosing information internally for the purpose of preparing submissions, agreeing orders on consequential matters and preparing themselves for publication is permitted. It was noted that the employees were told of the draft judgment's confidential nature and there was no evidence of them passing that information on.

Other disclosures by the Defendants

While it was decided that there was nothing "inherently improper" about the Defendants preparing a press release, which was entitled "EMBARGOED UNTIL 20th APRIL 10:30AM BST – Muzmatch…loses fight with Match Group to keep its name", the subsequent offering and disclosure of it by Mr Younas to 10 journalists via Twitter and email in advance of the hand down was held to be a serious breach. It was of no consequence that the journalists had agreed to respect the embargo.

Mr Younas did not inform his solicitors of the breach. The court held that the breach should have been known to Mr Younas from the clear advice that he had received from his solicitors not to share the information. Ultimately, despite finding that the breach was "serious", the Court accepted Mr Younas' apology as resolving the matter – and Match confirmed that it did not intend to initiate to initiate formal contempt proceedings, and the Judge did not see the need for the Court to do so of its own initiative.

Comment

This decision is one of a number in recent months relating to the breach of an embargo. It is clearly an issue that the Courts are alive to and are keen to make an example of those who contravene the strict confidentiality obligations, in order to warn against and discourage future breaches. Although this case did not result in formal contempt proceedings, the seriousness with which the Court regards such leaks is clear, and is consistent with Sir Geoffrey Vos' warning in Counsel General for Wales that "far stricter measures" need to be put in place for those who breach embargoes.

In this case there was no fault or criticism of the legal representatives, rather it emphasises the need for parties in receipt of a draft judgment to exercise careful consideration as to who needs to know the result and for what purposes. The decision is also helpful, as it clarifies that parties are entitled to take internal steps to prepare for the publication of a judgment, including considering the operational impact.

(1) (1) Match Group LLC (2) Meetic SAS (3) Match.com International Limited v (1) Muzmatch Limited (2) Shahzad Younas [2022] EWHC 1023 (IPEC)

The "Legal Minefield" of Witness Statements for Multi-Lingual Witnesses under PD32 and PD57AC

Wed, 15 Jun 2022 10:59:00 +0100

Facts

The wider proceedings concerned two partnerships formed between Mr Bahia and Mr Sidhu, which acquired several properties. Mr Bahia and Mr Sidhu managed their property portfolio successfully for many years, but eventually the relationship between them became hostile and a dispute arose over the assets and income of the partnerships.

By October 2016 Notices of Dissolution had been served in respect of both partnerships. Mr Sidhu passed away in November 2018 and Mr Bahia commenced proceedings against the representatives of Mr Sidhu's estate. In November 2019 the High Court gave summary judgment on the issue of existence and dissolution of the partnerships, ordering that both had been dissolved and should be wound up and that any necessary inquiries should be determined at a hearing. It was later ordered in July 2020 that a trial would be held on 17 inquiries arising in the dispute.

The Court heard from a total of 10 witnesses, including Mr Bahia. The Court's consideration of Mr Bahia's witness evidence in the context of his cross-examination is particularly noteworthy for practitioners who have witnesses who speak multiple languages.

The Witness Evidence of Mr Bahia

Mr Bahia relied on two witness statements during the hearing, which were written in English and prepared by Mr Bahia's solicitors. Both statements acknowledged that English was not Mr Bahia's first language and that his usual way of communicating was to use both English and Punjabi. The statements also noted that certain words and phrases used in the case had been explained to Mr Bahia by his solicitors.

During the course of Mr Bahia's oral evidence, it came to light that a Punjabi translation of his second witness statement had been prepared after the of signing the English version, but that it had not been signed or filed at court.

Mr Bahia acknowledged under cross-examination that there were "many" words in the English version of his witness statement that he did not understand. Mr Bahia also requested to take breaks to remind himself of his statement, admitting that he sought assistance from his son on the translation of certain words during his cross-examination. An interpreter was also required for the entirety of Mr Bahia's evidence, and Mr Bahia often switched between Punjabi and English.

Defendants' Submission

As a result, in closing submissions the Defendants' counsel submitted that Mr Bahia's witness statements were in breach of CPR Practice Direction 32 and Practice Direction 57AC and that they should be treated with a "considerable degree of caution" and afforded no weight, in the absence of documentary or other satisfactory corroboration. This submission was on the basis that (i) Mr Bahia's witness statements were not in his own words and (ii) Mr Bahia's witness statements and statement of truth had not been drafted in his own language.

In response to these concerns, Mr Bahia's counsel argued that the recent proliferation of witness statement guidance and rules had become a "legal minefield" and that it was "particularly hazardous" in a case such as this where the witness spoke two languages.

Mr Bahia's counsel referred to para 18.1 of CPR Practice Direction 32, which states that "the witness statement must, if practicable, be in the intended witness's own words". It was argued that it was not practicable to do anything other than prepare Mr Bahia's statements in English in words that were not necessarily his own, as Mr Bahia communicates in two different languages. Counsel also referred to certain sections of the 'Equal Treatment Bench Book' issued to Judges, including:

i. "… people for whom English is not a first language may not always fully understand what they are being asked. It is one thing to know the basics of a language … it is quite another matter having to appear in court, understand questions and give evidence … " (§109)

ii. "some people also 'code switch' as they talk, switching unconsciously between languages as they search for the most natural way to express themselves …" (§113)

The Equal Treatment Bench Book also warns Judges of the need to be alert to different language needs, and not to assume that just because a witness has lived in the UK for many years they do not require an interpreter.

Decision

The Judge acknowledged that the witness statements were overly "lawyered" and that the second statement in particular did not depict clearly Mr Bahia's recall of key events. On balance however, the Judge found that Mr Bahia's solicitors were faced with a "difficult decision" over which language to use, and that their decision to do so in English was not open to criticism. The Judge considered Mr Bahia to be an honest witness, who was hampered by his language difficulties and poor recollection. The Court ultimately found that there had been no serious breach of the relevant Practice Directions, noting that they could be clearer as to the approach to be adopted in these situations.

Comment

The Court acknowledged these difficulties and indicated the need for clarity in the Practice Directions to address the particular issues arising in these situations. This case therefore highlights the difficulties faced by solicitors where English is not the first language of a witness, both in terms of the preparation of witness statements, and in preparation for cross-examination.

Solicitors must carefully consider the most appropriate language for witness statements, with reference to Practice Directions 32 and 57AC in mind and what the most "practicable" language is based on the witness' language capabilities. Similarly, very careful preparation for cross-examination should be undertaken, including deciding in consultation with the witness whether an interpreter is required.

(1) Bahia v Sidhu [2022] EWHC 875 (Ch)

APP fraud: Commercial Court considers approach to unjust enrichment and knowing receipt claims

Wed, 15 Jun 2022 10:30:00 +0100

Facts

The Claimant, Tecnimont Arabia Limited ("TAL"), is a company operating in Saudi Arabia and is part of a multi-national Italian corporation. On 30 October 2018, as a result of deception on the part of a fraudster, TAL instructed its bank to pay US $5 million to a dollar account held at the National Westminster Bank ("NatWest") in the name of a third-party, Asecna Limited (the "Account"). The Account was controlled by the fraudster who subsequently dispersed the majority of the funds over the following two days to various accounts in different countries.

NatWest had received and acted upon fraud alerts before the final payments were made out of the Account. On 31 October, NatWest received two automatic fraud alerts at 10:10am and 1:04pm, respectively. These alerts resulted in online banking services being suspended temporarily. However, after investigation, online banking services were resumed in both cases. By 11:56am on 1 November, NatWest had become aware of the fraud, but one final payment was made out of the Account on the same day at 3:44pm. NatWest's anti-money laundering fraud detection systems also triggered an alert in respect of the Account on 11 November.

Claims

TAL brought claims against NatWest for unjust enrichment and knowing receipt. An unjust enrichment claim requires consideration of four key questions: (i) has the defendant benefitted or been enriched; (ii) was the unjust enrichment at the expense of the claimant; (iii) was the enrichment unjust; and (iv) is there any specific defence available to the defendant?

NatWest argued that, if enrichment had occurred, it was not at TAL's expense because the payment from TAL to the Account was not direct (as it was an international payment, the money sent by TAL passed through numerous other accounts in the course of processing the payment). The relevant transfer was an offshore transfer in US dollars from Saudi British Bank SJSC in Saudi Arabia (“SABB”), via Citibank in the US as SABB’s correspondent/intermediary bank, to NatWest in London, communicated using SWIFT messages.

NatWest also sought to rely on the defences of 'change of position' and 'ministerial receipt'. TAL argued that these defences were not available to NatWest and, in particular, that the bank could not rely on the defence of 'change of position' because it had not acted in 'good faith' (Niru Battery Manufacturing Co v Milestone Trading Ltd² ). TAL argued that this was the case i) by reason of the design and operation of NatWest's fraud detection systems, ii) because the second automatic fraud alert was dealt with outside NatWest's usual processes, and iii) because NatWest had direct knowledge of the fraud when the final payment out was made.

TAL argued that any enrichment was 'unjust' as it had arisen as a result of a mistake. NatWest, on the other hand, submitted that TAL ran the risk that the payment was a fraudulent payment or "shut its eyes" to that risk. The issue was essentially one of fact.

Decision

Knowing receipt

In his judgment, the Judge (Bird J) stated that it was established law that, if the transferred property is not trust property, there can be no liability for knowing receipt³. TAL argued that the transferred funds represented trust property because the transfer itself was procured by fraud. However, the Judge did not agree, finding that "The claimant paid away monies acting under a mistake induced by the deceit of a third party. In my judgment, the defendant is right to submit that the property was not trust property at the time it was received."

The Judge also noted that NatWest received the deposit for its customer and not for its own account and there was, therefore, no valid claim for knowing receipt (in the case of Twinsectra v Yardley⁴, Lord Millett stated that a cause of action based on knowing receipt only arises where the defendant received or applied the funds in breach of trust for his/her own use).

Unjust enrichment

Was the unjust enrichment at the expense of the claimant?

The Judge stated that the purpose of the “at the expense of” element is to check that there has been a “transfer of value” in the sense that the defendant has received a benefit from the claimant and the claimant has suffered a loss or detriment through his provision of that benefit. The Judge considered that there are at least four ways in which a claimant can satisfy the court that the defendant has been unjustly enriched at its expense (assuming there to be a “transfer of value”):

The claimant and the defendant had direct dealings.
The claimant and the defendant did not have direct dealings, but the substance of their dealings was such that the law would treat them as direct.
The claimant and the defendant dealt with each other’s property.
The claimant could trace an interest into property provided to the claimant by a third party.

In relation to the second way (considering whether the transactions should be treated as a direct transfer), the Judge found the following to be relevant:

The analysis must focus on the transactions and not the effect of the transaction. This reflects the need to avoid considering the “economic reality” of the transaction.
The substance of the transaction is key rather than its form. This reflects “transactional reality” and ensures that “apparent” features of the transaction give way to “real” features. The purpose and genuineness of each step must be considered.
The nature of the transactions may be important (eg the fact that charges and land purchases are “indissolubly bound together”).
The number of parties providing funds should be considered.

Applying the above principles, the Judge refused to treat the international inter-bank transactions as forming a single scheme or transaction. In reaching this decision, the Judge found it relevant that the transfers involved “the adjustment of balances” between two pairs of banks: SABB and Citibank; and Citibank and NatWest. The interbank accounts are settled in the normal course of business by a running account and “it is usually unnecessary for either bank to transfer funds to the other”.

In relation to the fourth way (considering whether TAL could trace an interest into the property), the Judge applied the principle that tracing through mixed funds (including those created by international banking transfers) was impermissible at common law⁵. On this basis, any enrichment would not have been "at the expense" of TAL.

Was the enrichment unjust?

The Judge found that a claimant may sometimes be denied relief on the basis of unjust enrichment if i) the claimant responded unreasonably to their doubts, and so unreasonably ran the risk of error, ii) if they had doubts, they may be denied relief on the distinct grounds that they compromised or settled with the defendant, or iii) on the basis that they are estopped from pleading their mistake. The Judge found that there was no need for any independent “assumption of risk” bar, as had been suggested by NatWest. That being the case, and after considering the facts, the Judge found in favour of TAL that any enrichment was unjust on the basis that employees at TAL were "completely taken in by the fraud" and at every stage believed that they were acting on a true instruction.

Is there any specific defence available to the defendant (such as 'change of position' or 'ministerial receipt')?

In relation to the defence of 'change of position', the Judge held that the relevant question was whether it was 'unjust' to permit NatWest to rely on the defence. Following an examination of the bank's internal systems, the judge held that nothing in the design or operation of NatWest's AML or anti-fraud systems would make it unjust to allow NatWest to rely on the change of position defence. While it could be said that an employee was careless, or did not handle one of the automatic anti-fraud alerts in accordance with internal guidance, this was not enough to justify the conclusion that NatWest should be precluded from relying on the change of position defence and nothing in the employee's conduct raised any question of unconscionability. Finally, the Judge held that, once NatWest knew of the fraud, the process of freezing the Account was not handled 'efficiently'. However, he stated that lack of efficiency was not a sufficient reason to preclude reliance on the defence and noted that it was important to bear in mind that the payment out of the Account was essentially an automated process (the final transfer out was not actively authorised by NatWest, but was “permitted” by NatWest's automated processes).

On the basis of the decisions outlined above, the Judge did not consider the availability of the defence of ministerial receipt.

It is understood that TAL did not seek permission to appeal.

Comment

Recent decisions in relation to fraudulent payments have generally involved claims against the defrauded party's own bank.

However, it is perhaps not surprising that victims of fraud are increasingly looking to the fraudster's own bank for redress. This is particularly the case where the recipient bank has failed to act expeditiously once notified of the fraud or its systems and controls appear not to have met applicable standards and failed to detect the fraud.

¹ [2022] EWHC 1172 (Comm)
² [2004] 1 All ER (Comm) 193 CA
³ Byers v Samba Financial Group [2021] EWHC 60 (Ch) and Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156
⁴ [2002] UKHL 12, paragraph 12
⁵ Bird J held that the correct approach to tracing is that set out in Agip (Africa) Limited v Jackson [1991] Ch 547

Marex Strikes Again: Giles v Rhind exception to rule against reflective loss is "dead for all intents and purposes"

Fri, 10 Jun 2022 11:36:00 +0100

Breeze & Wilson v Chief Constable of Norfolk [2022] EWHC 942 (QB) was such a case. In the judgment, Master Stevens strongly rejected the argument that the Giles v Rhind¹ exception to the rule against reflective loss continued to exist in the post-Marex world. The exception previously enabled a shareholder to distinguish between certain specific claims being made in a personal capacity as opposed to being made on behalf of the company. Master Stevens' judgment suggests that litigators will continue to look to Marex for guidance for many years to come when bringing claims on behalf of shareholders.

Factual background

The claim arose from a discontinued prosecution of the two Claimants on a charge of conspiracy to defraud in relation to the running of several mental health businesses through companies of which the Claimants were majority shareholders and directors. The Claimants were ultimately acquitted but by that time the companies had become insolvent. The Claimants argued that the insolvency was directly due to the police investigation and prosecution. As a result of this, the Claimants sought damages for business losses in excess of £15 million each. The claim was stayed pending the outcome of Marex, as the judgment in that case would have been highly relevant to the claim, as the most substantial part of the damages claimed related to the diminished value of the Claimants' former shareholdings.

This decision deals with two applications: a strike out application by the Defendant on the basis that the Claimants' claims were inconsistent with the decision in Marex; and a cross-application by the Claimants to amend their pleadings in light of the decision in Marex.

Legal background

The rule against reflective loss was originally conceived in Foss v Harbottle [1843] 2 Hare 461 as a limited bar to prevent individuals seeking relief for injury to a company when the company itself had the cause of action. In those circumstances, the company was considered to be the proper claimant, rather than the individuals.

In Prudential Assurance Co Ltd v Newman Industries Ltd (No2) [1982] Ch 204, the Court of Appeal confirmed that a shareholder could not bring a claim in respect of the diminution in the value of his shareholding which was merely the result of a loss suffered by the company, even in circumstances where no proceedings had been brought by the company. In such circumstances, the loss suffered by the shareholder merely reflected that of the company.

Following the decision in Prudential, the rule against reflective loss expanded following decisions in cases such as Johnson v Gore Wood [2000] UKHL 65 and Gardner v Parker [2004] EWCA Civ 781, leading to a greater range of actions being barred, including actions by company creditors.

Matters were reconsidered by the Supreme Court in Marex, which was ultimately considered by seven justices of the Supreme Court with judgment being given in July 2020. The decision reaffirmed the "bright line legal rule" established in the Prudential case, meaning that the rule against reflective loss only applied to claims brought by shareholders in relation to loss suffered in their capacity as shareholders (such as diminution in value or distributions), and not to claims brought in other capacities, such as a creditor of a company.

However, more importantly for the present decision, Marex considered the applicability of the Giles v Rhind exception to the rule in Prudential, i.e. that there were certain special circumstances where a shareholder could recover for loss, flowing from the company's loss, where the company was unable (rather than unwilling) to pursue its cause of action. In that case, the company's inability to pursue its cause of action against the individual was caused by the wrongdoing of that same individual so, by way of exception to the rule against reflective loss, Giles was able to pursue an action against the wrongdoer in his personal capacity. The Claimants in the present case made arguments in support of their pleading based on the view that the Giles v Rhind exception was still good law following the decision in Marex. The Defendant robustly opposed this view. In his decision Master Stevens considered whether this claim was sustainable in light of the Supreme Court decision in Marex.

Decision

Having considered Marex and subsequent cases brought to his attention, Master Stevens determined that the Giles v Rhind exception is "dead for all intents and purposes" following the judgment in Marex and on that basis found that the strike out application on those pleading points should be granted. In his judgment, he commented on the delay of the Claimants in making the amendments to their Particulars of Claim some 6.5 years after the issue of the Claim Form to be "wholly inappropriate" and the delay in producing a pleading until 14 months after the Supreme Court judgment to be "at odds with modern CPR compliant litigation where these is an onus on efficient case progression". Delay is not a ground for striking out alone but it can be a material factor in reaching a determination.

Commentary

Although some commentators have treated Marex to be a conclusive clarification of the rule against reflective loss, parties continue to grapple with its wider impacts and ramifications. Indeed, the significant dissenting judgment of Lord Sales, who was joined by Lady Hale and Lord Kitchin, is likely to continue to be utilised by practitioners for some time yet. At its heart Marex was a case that determined whether creditors were barred from bringing claims due to the rule against reflective loss. The majority judgment in Marex corrected this point of law, confirming that creditors were not barred from bringing bringing such claims by virtue of the reflective loss rule. However, ambiguity does remain with regards to other aspects of the rule and there is scope for continuing debate in this area. The fact that the test to strike out a pleading allows the court to make an allowance for developing jurisprudence may leave the door open to further disputes of this kind.

¹[2002] EWCA Civ 1428

Are you a "person discharging managerial responsibility"? High Court clarifies meaning of PDMRs under FSMA

Mon, 23 May 2022 17:07:00 +0100

In a recent interim decision in Allianz Global Investors GmbH and Ors v G4S Ltd (formerly G4S plc) [2022] EWHC 1081 (Ch), Mr Justice Miles clarified the scope of the expression "persons discharging managerial responsibility" ("PDMRs") for the purpose of establishing liability under s.90A and Schedule 10A of Financial Services and Markets Act 2000 ("FSMA"). S.90A and Schedule 10A contain a regime for the civil liability of issuers of publicly traded securities for publication of false or misleading or incomplete information and for dishonest delay in publication of information to the capital markets. Liability under s.90A only arises where a PDMR within the issuer knew or was reckless about the offending statement or dishonestly concealed material facts or a PDMR acted dishonestly in delaying the publication.

The claimants, institutional investors in G4S Limited (formerly G4S plc) ("G4S"), brought claims against G4S for breaching market disclosure rules. The defendant applied to strike out all or parts of the claims and/or for summary judgment in respect of the claimants' allegations that certain named individuals were PDMRs of the defendant within the meaning of s.90A FSMA. Miles J declined the defendant's application on the basis that there was a real prospect of the claimants establishing civil liability at trial for statements made by senior management, but only if the claimants could establish that the senior management on whose conduct they rely were its de jure, de facto or (arguably) shadow directors at the relevant times.

The facts

The case arises out of three related actions brought by institutional shareholders against G4S, a formerly listed company carrying out security and related outsourcing activities.

The UK government was and is a major customer of the defendant and its subsidiaries. The relevant services were provided by its indirect, wholly owned subsidiary, G4S Care & Justice Services (UK) Ltd ("G4SCJS") to the Ministry of Justice and consisted of various contracts for the tagging of prisoners. In July 2020, the Serious Fraud Office and G4SCJS entered into a deferred prosecution agreement in relation to allegations of (i) wrongful billing (in particular, charging the government for dealing with prisoners who were never tagged or who had died) and (ii) providing fraudulent financial models to the government for the purpose of calculating the costs of providing services.

The claimants are bringing claims against G4S as a follow on action and contend that, because of the above matters, information published by the defendant to the market contained untrue and misleading statements, or omitted required information, and that the claimants are entitled to compensation as a consequence. Claims are also brought for compensation for dishonest delay in publishing information.

An important factual component in this case is that the defendant's group was organised as a publicly listed holding company with a board comprised of two or three executive directors (and a majority of non-executives) and the majority of operational functions of the group being run by and through subsidiaries. The shareholders were of course shareholders in the listed parent holding company, and the potential FSMA s90A claims relate to the shares in that company, and not G4SCJS in which the misconduct took place. Of the five PDMRs identified by the claimants, only the fifth person (P5) was a formally appointed (de jure) director of the defendant. The other four (P1 to P4) were de jure directors of G4SCJS, the trading subsidiary in which the alleged wrongful billing and financial model fraud took place. P1 to P5 were also directors of other subsidiaries of the defendant.

The defendant applied to strike out all or parts of the claims and/or for reverse summary judgment in respect of the claimants' allegations that P1 to P4 were PDMRs of the defendant within the meaning of s.90A FSMA.

Issue 1: The construction of the term PDMR for the purposes of liability under section 90A and Schedule 10A

Section 90A and Schedule 10A of FSMA contain a regime for the civil liability of issuers of publicly traded securities for publication of false or misleading or incomplete information and for dishonest delay in publication of information to the capital markets. The liability arises when a "person discharging managerial responsibility" within the issuer knew or was reckless about whether a statement was untrue or misleading and extends to dishonest omissions of relevant information and dishonest delay in publishing such information.

Schedule 10A, paragraph 8(5) sets out the definition of a PDMR:

"(a) any director of the issuer (or person occupying the position of director, by whatever name called);
(b) in the case of an issuer whose affairs are managed by its members, any member of the issuer;
(c) in the case of an issuer that has no persons within paragraph (a) or (b), any senior executive of the issuer having responsibilities in relation to the information in question or its publication."

The claimants argued that PDMRs for the purposes of liability under s.90A and Schedule 10A extended beyond directors of the issuer to include other senior executives responsible for managerial decisions affecting the future developments and business prospects of the issuer and/or those business units. This was on the basis that in defining the term PDMR the legislature had adopted an autonomous concept of European law said to be found in EU financial regulation. The defendant argued that the term PDMR was restricted, in accordance with the language of the statute, to directors of the issuer.

Miles J upheld the defendant's argument that the definition in paragraph 8(5) of Schedule 10A is clear and unambiguous and should be given its natural reading, such that PDMRs of the defendant for the purposes of the section 90A claim had to be directors of the issuer at the relevant times. In reaching this conclusion, Miles J paid close attention to the legislative history of the PDMR concept in UK law, and he considered and rejected the claimants' argument that in defining the term PDMR the legislature adopted an autonomous concept of European law.

However, Miles J concluded that (as the defendant had conceded) a PMDR did not have to be a formally appointed de jure director of the issuer, and could include de facto or (arguably) shadow directors of the issuer.

Issue 2: Do the claimants have a real prospect of establishing at trial that P1-P4 were directors of the defendant?

Having found that only directors of an issuer can be PDMRs (including de facto and, arguably, shadow directors), Miles J considered whether the claimants had properly pleaded a case that the contested PDMRs were de facto directors of the defendant which had real prospects of succeeding at trial.

Miles J held that there was an arguable pleaded case that the four individuals identified by the claimants as PDMRs were de facto directors of the defendant at the relevant times (although he commented on a lack of clarity and precision in the pleadings which he considered would be desirable to correct). . He observed that establishing whether P1-P4 were de facto directors of the defendant required an "intensely fact specific" inquiry. The judge considered that would likely require disclosure by the defendant and cross-examination of witnesses to develop a full picture of the defendant's corporate governance structure and the roles, decision making and actives of the contested PDMRs. On this basis, Miles J declined to strike out the claimants' claims or to grant summary judgement to the defendant on this issue. It was a matter which was suited for determination at trial.

The significance of the ruling

This is an important decision on the scope of PDMRs for the purposes of liability under s. 90A and Schedule 10A of FSMA. The outcome is not surprising given the clear text of the parliamentary language. While Miles J held that as a result PDMRs for the purposes of s.90A are restricted to directors (in some sense) of the issuer company, he concluded that the term "director" is broad enough to encompass not only de jure, but also de facto and at least arguably shadow directors. Moreover, he stated that there is "some potential for elasticity in the application of the concept of de facto directorship in light of the purposes of the statute" (i.e. FSMA and s.90A in particular). He also observed that the authorities on de facto directorship have so far not grappled with how that concept should operate in the context of a holding company which performed all of its operations through subsidiaries. These were all helpful observations, which the shareholder claimants will no doubt have welcomed.

How these further questions will be resolved will be followed with interest as the matter progresses. The judgment carefully balanced respect for the clear parliamentary language with the underlying purpose of s90 FSMA, leaving plenty of room for claimants to obtain remedies for prospectus non-disclosure.

Irrelevant to any issue in the proceedings? High Court orders complete re-review of party's redactions under disclosure pilot scheme

Fri, 20 May 2022 14:36:00 +0100

In JSC Commercial Bank Privatbank v Kolomoisky and other¹ the English court determined that, having adopted an unduly narrow approach to relevance, the first defendant should conduct a complete re-review of each of over 6,000 WhatsApp messages in order to determine whether the redactions that had been applied could be maintained, and to provide further information about each redacted message.

The key point highlighted in this judgment is that, once a document has been identified as relevant to an Issue for Disclosure such that it falls to be disclosed, that document can only be redacted where the material in question is irrelevant to any issue in the proceedings. Where material is irrelevant to an Issue for Disclosure, but relevant to a wider issue in the proceedings, that material cannot be redacted on the basis of irrelevance under paragraph 16.1(1) of CPR PD51U.

Facts

This judgment is the latest decision handed down by the English court in long running Commercial Court proceedings pursued by the Ukranian state owned Privatbank against its former owners. By way of very brief summary, the underlying dispute concerns allegations by Privatbank that
its former owners (the first and second defendants) participated in a fraudulent scheme to misappropriate substantial sums from Privatbank.

In the course of these proceedings, a disclosure order was made by the English court attaching the disclosure review document setting out details of the Issues for Disclosure and the models for disclosure to be applied. The Issues for Disclosure included (a) the control exercised by the first and second defendants over the claimant and (b) the first and second defendants' ownership and control of other entities relevant to the claimant's claim.

The first defendant duly provided disclosure, as part of which it disclosed ca. 6,209 WhatsApp messages. All but 272 of these messages had been redacted in whole or in part, with the first defendant's advisers providing a high-level explanation that these redactions fell within paragraph 16.1(1) of CPR PD51U, which allows a party to redact material which is both "irrelevant to any issue in the proceedings" and confidential. No specific explanation was provided giving more detail of the basis for the redactions applied to individual messages and, in a number of cases, it was not possible to identify the counterparty to the WhatsApp message in question.

Following the first defendant's disclosure of these redacted WhatsApp messages, there was protracted correspondence in which the claimant sought a fuller explanation for the redactions and pushed for additional disclosure. Ultimately, the first defendant agreed to remove redactions from 150 messages and provided these to the claimant in unredacted form. By way of explanation for this further disclosure, the first defendant's advisers conceded that, following its re-review, it was "at least arguable that [the 150 messages] may have been relevant to the issues for disclosure" but stated that the first defendant considered that they were unlikely to be of any particular significance to the issues in dispute.

The Claimant subsequently made an application under paragraph 17 of CPR PD 51U arguing that there had been a failure adequately to comply with the original disclosure order.

Findings: the material must be irrelevant to "any issue in the proceedings"

In granting the claimant's application, the English court determined that the approach to relevance adopted by the first defendant when applying redactions had been too narrow.

Firstly, the first defendant's correspondence suggested that, when conducting the re-review which had resulted in a further 150 messages being disclosed in unredacted form, the first defendant's advisers had considered whether the redacted material was relevant to an Issue for Disclosure, rather than whether it was relevant more broadly to "any issue in the proceedings". This was the incorrect approach and, instead, when a document is relevant to an Issue for Disclosure, a redaction will only be appropriate where the redacted material is irrelevant to "any issue in the proceedings" (even if the material considered for redaction is not itself relevant to an Issue for Disclosure).

Second, the first defendant had taken an unduly narrow view as to what might be relevant to any issue in the proceedings. While much of the redacted material was said to involve unrelated commercial transactions and other commercial information about matters not forming the subject matter of the proceedings, the court agreed with the claimant that this information might still be relevant to the issues in the proceedings. In particular, it was likely that at least some of the redacted material might be relevant to issues regarding the level of control which the first and second defendant had exercised over the claimant and other entities e.g. showing the way in which the first and second defendant worked together and operated their jointly controlled assets. The fact that the commercial transactions covered by the redactions were not the transactions which the proceedings directly concerned did not mean that they were automatically irrelevant to any issue in the proceedings.

Having concluded that the first defendant had adopted an unduly narrow approach, the English court then had to determine what relief was appropriate to remedy the situation. The claimant invited the court to order that the first defendant should disclose certain specified chains of WhatsApp messages in unredacted form or, alternatively, suggested that the first defendant could allow the messages in question to be inspected by either the court or members of the claimant's legal team, who would be made subject to a confidentiality club. The English court considered that, having regard to all the circumstances of the case, neither of those options was appropriate. Instead, the court made an order requiring the first defendant and its legal advisers to conduct a full re-review of the redactions applied to all of the ca. 6,209 WhatsApp messages, stating that it anticipated that the first defendant would now disclose many more documents on the basis of the guidance provided by the court regarding the correct approach to relevance. In addition, the court directed that a schedule should be prepared covering any redactions maintained by the first defendant following its re-review, detailing the parties, the time and date of the relevant message and providing a generic description of its subject matter.

Comment

While the court's decision was perhaps unsurprising, it does highlight the important distinction to be drawn when applying redactions between Issues for Disclosure and "any issue in the proceedings" and represents a salutary reminder of the potential consequences of adopting an overly narrow approach to extended disclosure under the Disclosure Pilot. It also provides a useful overview of the court's expectations regarding the level of detail a party should give when explaining the basis upon which redactions should be applied, clarifying that a generic statement that the redacted material is irrelevant and confidential may well be insufficient.

¹[2022] EWHC 868 (Ch)

Privy Council decides that banks owe no Quincecare duty to a beneficial owner of monies in an account

Tue, 17 May 2022 14:58:00 +0100

A bank does not owe the beneficial owner of account monies any duty of care in negligence, including any Quincecare duty: this was the conclusion of the Privy Council in the Isle of Man case Royal Bank of Scotland International Ltd v JP SPC4 and another.¹ The appeal concerned a fraud where the account holder had defrauded the beneficial owner of the monies, an investment fund, by paying funds out of the relevant bank accounts in contravention of a legitimate investment scheme.

The Privy Council's main conclusion was that an extension of the duty to cover a beneficiary, who effectively sits behind the bank account customer, should be declined. It therefore rejected what would have represented a significant extension of the duty which would have required banks to monitor transactions for fraud not only with their customers in mind, but also any beneficial owners. While this decision will undoubtedly come as a relief banks, it is really the logical conclusion given that none of the Quincecare cases or other authorities supported the expansion of a bank's duty in this way. The Quincecare duty itself that a bank owes to their customer however remains as it has always been.

The decision will likely be viewed with great interest in England and Wales where the scope and nature of the Quincecare duty has recently commanded significant judicial attention. Although the decision is not formally binding on the English courts, it is likely to be highly influential especially given the Board of the Privy Council², and the fact that the analysis is based on English case law. Interestingly, the specific fact pattern of the case seems to have taken a back seat in the mind of the Privy Council, who focused on the analysis of the scope of the duty, deciding it mainly on the basis of precedent. This is unusual for a Quincecare case, which are generally decided on the basis of the specific facts at hand, but indicates that this decision will likely be universally followed.

This more bank-friendly decision follows a number of claimant-friendly decisions, in particular the decisions of the English Court of Appeal in Philipp v Barclays Bank UK plc³ and JP Morgan Chase Bank NA v Federal Republic of Nigeria⁴ in which strike out applications by the banks were rejected and the claims were allowed to proceed to trial. Trial in the latter case was earlier this year and judgment is awaited⁵.

Background

The appeal was brought by the investment fund JP SPC 4 (the Fund) against the respondent Royal Bank of Scotland International Ltd (the Bank).

The Fund was a Cayman Island based investment fund which established a scheme by which investors lent to solicitors in England and Wales to finance high-volume, low-value litigation (the Scheme). The basis for the Scheme was that these claims would be profitable for the solicitors, so that the loans would be repaid to the Fund with interest. The loans were going to be advanced and repaid through an Isle of Man company, Synergy (Isle of Man) Ltd (SIOM). SIOM held two bank accounts with the Bank, and the Fund alleged that it was the beneficial owner of the monies in the bank accounts, which the Bank was alleged to have known.

The Fund had commenced proceedings against the Bank, alleging that SIOM and two individuals, Mr Schools and Mr Kennedy, behind it were parties to a fraud, resulting in money that belonged beneficially to the Fund being paid out for their benefit and that of associated third parties, rather than being invested in the Scheme. The Bank itself was not alleged to have been a participant in the fraud.

The Fund argued that the bank owed it a duty of care in tort that, if established, would mean that the Bank was under a duty to take reasonable care to protect the Fund from losses caused by the fraudulent misappropriation of funds from the accounts.

Mr Schools and Mr Kennedy were able to transfer approximately £37.8m to third parties and personal accounts. Of about £65m that did go to law firms, around £40m went to law firms in which Mr Schools had an interest, which had not been disclosed to investors, in contradiction of the terms of the Scheme.

In 2011, the Bank, after consultation with its legal team, renamed the accounts so that they referenced "JP SPC 4", ie the Fund, and later categorised them as high risk. The misappropriation of funds after this re-categorisation amounted to at least £60m. The Fund was never part of the fraud, and had no ability to monitor the accounts.

At first instance, the Bank applied for strike out or summary dismissal of the Fund's claim, which was dismissed, but the Bank's appeal to the Isle of Man Court of Appeal was successful. The Fund appealed to the Privy Council.

The Privy Council's decision

Quincecare duty extends only to the customer – and not any further

The Privy Council considered whether a duty of care was owed by the Bank on the basis of "assumed facts" ie -

The Bank knew or ought to have known that the monies were not beneficially the property of SIOM but instead of the Fund and
the circumstances were such that a reasonable banker would have had grounds for considering that there was a real possibility that the Fund was being defrauded.

The Privy Council held that the assumed facts were the relevant facts when considering whether the Bank owed a duty of care to the Fund. Accordingly, the lower courts had been correct to "grasp the nettle" (in relation to the strike out / summary judgment application), and decide one way or another whether the alleged duty of care existed.

It rejected the Fund's argument that the Bank owed a duty of care that was already established in law on the basis of the Quincecare case itself, and Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA⁷: neither case supported the Fund's argument.

The Privy Council held that the case of Quincecare established that a bank has a duty to refrain from executing a customer's order if, and for so long as, the bank is "put on inquiry" in the sense that the bank has reasonable grounds for believing, assessed according to the standards of an ordinary prudent banker, that the payment order is an attempt to defraud the customer.

The Privy Council noted that Steyn J had held in Quincecare that in the context of the duty there was a consideration of protecting innocent third parties. The Privy Council clarified that the reference to protecting innocent third parties was only to say that combating fraud against the customer by recognising a duty owed to the customer protects the customer, but also other innocent victims of fraud. That case never considered a duty of care owed by the bank to innocent third parties, and only considered the bank and its customer as relevant parties.

The Privy Council also reviewed other Quincecare authorities. It noted in relation to Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd⁸ that even though the Supreme Court had found that the purpose of the duty was to protect the bank's customer, there was no hint in the judgment that the duty might be owed to anyone else. Further, in JP Morgan Chase Bank NA v Federal Republic of Nigeria⁹, a case considering the duty in the context of defrauding a sovereign state, there was similarly no indication that the duty could be owed to others who are not the bank's customer. The Privy Council also considered the recent case of Philipp v Barclays Bank UK plc¹⁰ (for our commentary on this decision, see here). Overall, it concluded that the authorities do not support the argument that the duty extends beyond being a duty owed to the bank's customer, which arises as an aspect of the bank's implied contractual duty of care and co-extensive tortious duty of care.

The Privy Council in addition considered Baden in detail, where it had been held that a duty of care owed to third party beneficiaries of an account existed, and it did not matter that the loss in this case was pure economic loss and both acts and omissions were held to be covered. However, the Privy Council held that this decision was no longer good law as it rested on the two-stage approach in Anns v Merton London Borough Council¹¹ in determining whether a duty of care existed, which has been overruled.

Therefore, the Fund's case that the Bank arguably owed it a duty of care on the existing authorities was rejected. The claim had no real prospects of success and there was no reasonable ground for bringing it.

Assumption of responsibility by the Bank to the Fund cannot be established

The Fund argued that on the assumed facts there was an implied assumption of responsibility by the Bank towards the Fund. The Privy Council reviewed various authorities on the assumption of responsibility in relation to a task or service. It concluded that no express assertion of assumption of responsibility had been made in the pleadings and none of the relevant factors were alleged to be present. It was not alleged that the Bank undertook to perform any task or service for the Fund or that there were any exchanges crossing the line between them. The Bank only undertook to provide a service for its customer, SIOM. The Fund and the Bank were not alleged to have dealt with each other at all.

As for the re-naming of the bank accounts, there was no suggestion that this arose from any dealings between the Fund and the Bank¹². Rather, one of the directors of SIOM had dealt with the Bank on the re-naming.

Further, the Privy Council rejected an argument that the Fund's reliance on the Bank could be inferred because the Fund was unable to monitor the accounts, as there had been no evidence of reliance by the Fund. Therefore, there were no pleaded facts and nothing in the assumed facts to establish a duty of care based on an assumption of responsibility by the Bank.

No duty of care based on incremental development of the law

The Privy Council also fully rejected the argument that there was an incremental development of the law to recognise a duty owed to the Fund. Unlike the authorities on the incremental development of a duty of care, here there was no legal lacuna which meant that a party suffering loss was left without legal remedy. SIOM, as customer of the bank, had a valid claim for negligence in contract and tort against the Bank for the loss suffered by the Fund, and would recover this as trustee for the beneficiaries. It was irrelevant that SIOM was now in practice unlikely to bring a claim against the Bank. The Fund would have a claim for loss against SIOM for breach of fiduciary duty.

Some of the authorities made it clear that even without a legal lacuna, there can, exceptionally, exist a duty of care owed by a bank to a non-customer for pure economic loss. However, in these cases the purpose of the service was to benefit the non-customer, and in one of them the non-customer was relying directly on the bank to draw up a document. The purpose of the Bank's service was to benefit the customer, and the Fund did not place direct reliance on the Bank, nor did the Bank know or ought to have known of any such reliance.

The Privy Council also found that it would not be fair, just and reasonable to impose a duty of care on the Bank to the Fund. This would be an unacceptable burden on banks going outside their contractual relationship with their customers, and there was no good reason for incremental development beyond the well-established Quinceare duty of care. It was also a consideration that this was a situation of pure economic loss, and that the conduct of the Bank was an omission, not an action. The Bank had no special level of control over the fraud and could not be said to have assumed responsibility to protect the Fund from the fraud.

Accessory liability

The Privy Council also considered accessory liability and the leading authority on dishonest assistance in Royal Brunei Airlines Sdn Bhd v Tan¹³. It found that Tan decided that banks who are alleged to be assisting a breach of fiduciary duty are liable only if they are dishonest and not merely negligent. Assuming that there had been a breach of fiduciary duty by the Bank's customer to the Fund, if the Bank were treated as liable to the Fund for negligence this would be tantamount to holding it liable for having negligently assisted a breach of fiduciary duty. This would undermine Tan.
The general position established in Tan, which was that there is no duty of care owed by the bank to the beneficiaries, applied here.

Conclusion

If the duty of care arose whenever a bank knew or ought to have known that the funds were beneficially the property of someone other than the customer, then this would have radical implications, and this was correctly highlighted by the Isle of Man Court of Appeal as a "massive" extension of the Quincecare duty owed by banks, with significant consequences for banking law and practice. The Isle of Man Court of Appeal had been correct to decide that there was no reason for the Fund's claim to proceed to trial because it was bound to fail.

References

¹[2022] UKPC 18

² which included Lady Rose who was the trial judge in Singularis and who gave the leading judgment in the Court of Appeal's decision in JP Morgan Chase Bank NA v Federal Republic of Nigeria and Lord Burrows who was the first instance Judge in JP Morgan's failed strike out.

³ [2022] EWCA Civ 318

⁴ [2019] EWCA Civ 1641

⁵ RPC acts for the Federal Republic of Nigeria in its Quincecare claim against JP Morgan.

⁶Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363

⁷Baden v Societe Generale pour Favoriser le Developpement du Commerce et de l'Industrie en France SA [1993] 1 WLR 509

⁸ [2019] UKSC 50

⁹ [2019] EWCA Civ 1641

¹⁰ [2022] EWCA Civ 318

¹¹ [1978] AC 728

¹²Para 66

¹²[1995] 2 AC 378

Court of Appeal says no to purely factual appeals

Thu, 12 May 2022 09:51:00 +0100

The trial judge must be "plainly wrong", in the sense that their conclusion was "rationally insupportable" in order to warrant such interference. The court also considered a list of features of purely factual appeals which are unlikely to succeed in the appeal court.

Facts

The underlying dispute arose between Gabriele Volpi, a businessman in the oil industry, and his son, Matteo, who had, at times, worked for his father.

In 2012, Matteo, working with a long-time business associate of and advisor to his father, acquired an apartment in Lugano, financed mainly by CHF 4 million provided by Delta Limited, a company controlled by his father. A loan agreement between Gabriele and Matteo in this amount was signed by Gabriele by 28 February 2012.

The apartment was refurbished at significant further cost. In August 2012, a further loan agreement was circulated, bearing what appeared to be the signature of both Gabriele and Matteo, which recited Matteo's confirmation that he had received several loans from his father amounting to a total of CHF 6 million (the Loan Agreement).

On 22 August a representative of Matteo, acting pursuant to a power of attorney (the Power of Attorney), signed a mortgage in respect of the Lugano apartment, securing borrowing of up to CHF 6 million.

Relations between Matteo and his father eventually broke down, and Gabriele claimed repayment of the total loaned amount of CHF 6 million. Matteo disputed the authenticity of his signatures on both the Loan Agreement and the Power of Attorney, claiming that his understanding was that the Lugano property had been bought by a family trust of which he was the beneficiary.

At first instance, there was expert evidence on the authenticity of the signatures on the Loan Agreement and the Power of Attorney, and factual evidence from Matteo and various other representatives who were involved in the acquisition of the property and drawing up the relevant agreements. The trial judge found that the balance of probability fell firmly on the side of the funding being provided by way of loan to Matteo?, with the most weighty factors being that all arrangements were put in place for a loan agreement, driven by the fact that (as explored in evidence) Gabriele was at the time "obsessed" with protecting family assets against possible claims by his daughters-in law, and the preponderance of the expert evidence suggesting that it was likely that the Loan Agreement was signed by Matteo.

The Decision

Matteo's appeal proceeded on the basis that there was no oral or contemporaneous evidence that the parties ever agreed a loan or that Matteo signed the purported loan agreement. That left only the expert evidence, which, Matteo submitted, was inconclusive and insufficient to satisfy the burden of proof. The Court of Appeal roundly rejected these submissions and dismissed the appeal.

Lewison LJ considered the evidence before the trial judge and concluded that they were clearly entitled to draw the conclusions they had done in Gabriele's favour. The Loan Agreement, and the earlier agreement signed by Gabriele only in February 2012, both stood as contemporaneous evidence of Gabriele's intention to provide a loan. Matteo's own contemporaneous understanding – that the property was to be purchased by the trustees of a discretionary trust – was itself inconsistent with the making of an immediate outright gift to him personally.

The judge was also entitled to find that it was more probable than not that the signatures on the Loan Agreement were genuine. Lewison LJ noted that the expert evidence, taken at its highest in Matteo's favour, did not positively assert that any of the signatures on the Loan Agreement had been forged.

Whether the appeal court would have reached the same conclusion as the judge at first instance is not the point: it was not for an appeal court to come to an independent conclusion as a result of its own consideration of the evidence. The question before the Court of Appeal was whether the judge's finding that the money provided by Gabriele and Delta was a loan rather than a gift was rationally insupportable. It was not.

In the judgment, Lewison LJ also considered the submissions on behalf of the appellant to demonstrate many of the features of factual appeals which are unlikely to be successful, including:

Seeking to retry the case afresh
Resting on a selection of evidence rather than the whole of the evidence that the judge heard
Seeking to persuade an appeal court to form its own evaluation of the reliability of witness evidence when that is the "quintessential function" of the trial judge
Seeking to persuade the appeal court to reattribute weight to the different strands of evidence
Concentrating on particular verbal expressions that the judge used rather than engaging with the substance of his findings

Comment

The judgment both articulates and applies well established principles that appeal courts will not trespass on findings that are for the trial judge to make, particularly in areas such as the reliability of witnesses and the weight to be given to the various strands of evidence. In addition, on a very practical level, Lewison LJ provides a useful checklist for practitioners to consult when considering an appeal seeking to go beyond issues of law in order to improve the chances of a successful appeal.

Court of Appeal upholds the CAT's opt-out certification in Le Patourel v BT

Tue, 10 May 2022 17:09:00 +0100

Last week, the Court of Appeal delivered its judgment in Le Patourel v BT Group. BT's appeal against the Competition Appeal Tribunal's decision to grant a collective proceedings order (CPO) on an opt-out* basis was unsuccessful.

In a claimant-friendly ruling, the Court of Appeal held that the CAT's opt-out determination was correct and that direct account crediting at distribution stage would be permissible.

Background

Justin Le Patourel (the Proposed Class Representative) is a telecoms consultant who previously held policy roles at Ofcom. He has brought a collective action against BT arising out of a 2017 Ofcom review into BT's charges for residential landline telephone services. Le Patourel claims that BT abused its dominant position by imposing unfair and excessive prices. The standalone claim is brought on behalf of approximately 2.3 million BT customers for aggregate damages estimated at circa £589 million.

Last September, the CAT certified Le Patourel's claim on an opt-out basis. In March, BT's appeal against the CAT's certification decision was heard in the Court of Appeal before Sir Julian Flaux, Lord Justice Green and Lord Justice Phillips.

In its ruling, the Court of Appeal dismissed BT's three grounds of appeal relating to the CAT's opt-out determination and its findings on the method of distribution:

1. The CAT's discretion to order opt-in/opt-out

The Court of Appeal clarified that there is no general presumption in favour of either opt-in or opt-out. The CAT makes the determination of opt-in or opt-out on the basis of all the circumstances of the case and has an unfettered discretion. The starting point is one of neutrality.

BT had argued that exceptionally in this case class members can be identified and contacted using BT's customer records which weighed in favour of opt-in. However, the Court of Appeal held that the CAT was entitled to conclude that if an opt-in were ordered, the take-up could be very limited. It noted the ability of a claimant to convert identifiable contacts into litigants goes well beyond issues of identifiability and contactability. The CAT had examined a wide range of relevant factors such as size of the class in addition to more subjective class characteristics (such as age profile, social class and technical ability). The Court of Appeal did not consider there was a basis in law on which it could interfere with the CAT's specialist conclusions which 'lay squarely within its broad margin of judgment'. Neither was there an error of law in the CAT's findings about the financial viability of the claim absent an opt-out order which it was entitled to make as an exercise of its judgment.

In relation to whether the CAT had erred in its understanding of the concept of 'practicability', it was stated that 'practicability' is simply a matter the CAT is entitled to take into account as part of its overall discretion. The opt-out/opt-in test is 'multifactorial'. This flows from the expressly open-ended nature of the CAT's discretion under Rule 79(3) and the additional matters referred to in that rule are all matters the CAT 'may' (not 'must') take into account.

The Court of Appeal found there was no error of law in the balancing exercise which was well within the CAT's margin of discretion, and dismissed this ground of appeal.

2. The CAT's power to order an account credit

BT had further argued there was an error of law in the CAT taking into account the benefits of an account credit. It was argued the CAT had exceeded its jurisdiction in referring to the possibility of distribution of damages by way of an account credit by BT. BT considered the CAT had no lawful power to order an account credit or make any order other than a traditional award of damages.

The Court of Appeal also dismissed this ground of appeal and found that the CAT was correct to conclude that it had the power to order an account credit. At the appropriate time in the future, the CAT can permit an account credit in the exercise of its case management powers and it is within its power to ensure that funders and representatives are paid (given its broad costs discretion). In any event, the CAT's decision would have been the same even had the CAT concluded there was no power to order an account credit. Going further, and citing Lord Briggs in Merricks, the Court of Appeal commented that ADR could play a part in the resolution of parts of collective proceedings. Proposals as to how best to achieve an informal, mediated, method of distributing the award could include any creative award which the CAT could then approve as part of a Collective Settlement Order (CSO).

3. The assessment of merits in relation to opt-in/opt-out

BT submitted that the CAT had erred in referring to merits in relation to the opt-in/opt-out determination. In particular, BT argued the CAT had erred in concluding the strength of the claims was only relevant to the opt-in/opt-out decision if the claim was 'very weak', even if it could surmount the summary judgment/strike-out threshold. BT considered the CAT had created a test not reflected in the statutory scheme.

In dismissing BT's third appeal ground, the Court of Appeal did not consider that the CAT had intended to invent a new test. Standing back and notwithstanding the ambiguities, the Court of Appeal did not consider that merits played any further role in the CAT's opt-in/opt-out decision after having addressed the merits in determining the claim had a realistic prospect of success. Determining the summary proceedings but then concluding that the merits added nothing additional to the opt-out determination was a course of action open to the CAT. Therefore, that aspect was set aside as irrelevant to the CAT's analysis. The Court of Appeal found the CAT's decision on opt-out was motivated by different conclusions which were all matters within its power to arrive at.

The significance of the ruling

The Court of Appeal's judgment clarifies important questions of principle regarding the CAT's approach to the certification of collective proceedings as either opt-in or opt-out. The ruling marks the first time the opt-in/opt-out determination has been specifically considered at the appellate level. It cements the wide discretion available to the CAT relating to opt-in/opt-out and confirms there is flexibility in the CAT's case management powers regarding distribution.

In what will be seen as a further claimant-friendly ruling, citing Merricks the Court of Appeal reiterated that the principal object of the collective action regime is to facilitate access to justice for those (in particular consumers) who would otherwise not be able to access legal redress. The ruling aligns with the recent trend in favour of certification of consumer claims on an opt-out basis.

Developments in the new area of collective proceedings for competition law damages are continuing apace. Next month, the Court of Appeal will be called upon again to hear an appeal against another collective proceedings order, this time in the case of Gutmann.

In a postscript, the Court of Appeal has invited the CAT to reconsider various points made concerning collective proceedings set out in the Guide, as the CAT's experience of such claims continues to develop. Last month the Government announced it has decided to carry out a further technical review of the CAT Rules, working with the CAT and other interested parties. Revision of the Guide to reflect the CAT's recent experience in collective proceedings - in addition to any specific rule changes - is therefore likely to take place soon.

*An opt-out claim is brought on behalf of all of the members of a defined class except those that choose to opt-out. By contrast, in an opt-in claim each person wishing to benefit is required to join the claim at the outset.

Court of Appeal strikes out defences that funds' losses resulting from FX manipulation have been passed on to investors following redemption

Fri, 06 May 2022 11:00:00 +0100

The Court of Appeal held that the proper claimants at all times were the Funds, both before and after any redemptions, regardless of whether these were structured as a company, trust or partnership. Redemptions by investors also did not avoid the Funds' loss, as these constituted a collateral benefit and so are not treated as making good the Funds' loss.

Facts

The appeal arose from claims by over 170 claimant Funds for damages arising from alleged 'illegal and anti-competitive manipulation of foreign exchange (FX) markets' by the Banks. The claims were for breach of statutory duty of article 101 of the TFEU², and section 2 of the Competition Act 1998. The Funds consisted of companies, trusts and partnerships.

The Banks denied liability and argued, in the alternative, that liability would be avoided or passed-on to the extent that an investor had redeemed its investment in a Fund at a lower Net-Asset-Value than would otherwise had been the case.

The Funds applied to strike out this argument as disclosing no reasonable grounds for defending the claim. The Funds argued that the proper claimant at all times was the investment fund – regardless of whether it was structured as a company, trust or partnership and regardless of redemptions.

The Court of Appeal decision

The Court of Appeal overturned the first instance Judge's decision that:

the general principles preventing current shareholders / beneficiaries / limited partners from bringing claims for damage to company / trust / partnership assets, did not prevent former shareholders, beneficiaries, or limited partners from bringing a claim upon redemption of their investment, where they had a separate cause of action;
article 101 of the TFEU and section 2 of the Competition Act 1998 gave rise to a statutory duty owed to all individuals – including current/former shareholders, beneficiaries and partners; and

redemption of an investment at a lower NAV crystallised the investor's loss, giving rise to a separate right to claim against the Banks – such that it was arguable that that the Funds had passed-on those losses to the redeemed investor and so the Funds could no longer claim these losses from the Banks.

Companies

A shareholder cannot claim for losses to the value of its shares, or distributions from its shares, arising from damage to the assets of a company. Such losses are not separate and distinct from the loss suffered by the company, and only the company is entitled to claim for its loss. This is known as the rule against claiming 'reflective loss'³

At first instance, the Defendants successfully argued that this rule did not apply to former shareholders upon redemption of their shares at a lower NAV.

However, in between the first instance and Court of Appeal hearings, the Privy Council in Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd⁴ rejected the argument that the rule against claiming for reflective loss did not apply to former shareholders who had sold their shares.

The Banks sought to argue that the situation was different for investors who redeemed their shares, as this involved a payment by the Fund company to the investor, rather than shares being sold to a third party. The Court of Appeal rejected this distinction and held that the rule against reflective loss extended to investors who redeem their shares.

The Court of Appeal also took into account the practical impact the Banks' position could have in quantifying claims by companies, and the "chilling effect" it could have on settlement of claims in circumstances where a shareholder could acquire a new, freestanding right of claim against the same third party upon redemption of its shares.

Trusts

The Court of Appeal affirmed the principle that the trustee, not the beneficiary, of a trust has the right to sue for damage to trust assets⁵.

Accordingly, the Court of Appeal held that the statutory duty under article 101 of the TFEU and section 2 of the Competition Act 1998 was owed to the trustee of the Funds, not to the beneficiaries. The beneficiaries did not suffer any distinct loss from the Fund at the time of the breach of duty. The redemption of the beneficiary's interest in the trust did not give rise to a separate loss.

Accordingly, the Court of Appeal held that any cause of action for damage caused to the trust vests in the trustee of the Fund and remains with the Fund upon redemption.

Partnerships

The Court of Appeal adopted a similar approach in relation to partnerships:

affirming the principle in Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson⁶ that only the general partner can bring proceedings in relation to damage of a partnership asset;
holding that the statutory duty under article 101 of the TFEU and section 2 of the Competition Act 1998 is owed to the partnership, not each limited partner; and
rejecting the Banks' argument that a former limited partner suffered a separate loss and acquired its own free-standing cause of action upon redemption.

Collateral Benefit

The arguments before the first instance Judge focused on the question of reflective loss, and title to sue upon redemption. However, the Court of Appeal emphasised that this is not determinative of whether the Funds' losses have been avoided or mitigated by redemption.

The practical implications of this question were significant. If the Funds' losses were avoided upon redemption:

every claim for damages brought by a company, trust or partnership would potentially require an investigation and assessment of each and every change in share capital, or beneficial or partnership interest, from the date the damage was suffered until judgment;
in circumstances where the investors do not acquire a right to claim upon redemption, the Banks would then potentially avoid liability for those losses; and
many claimant companies, trustees or partnerships would likely have been over-compensated in the past.

The Court of Appeal held that the redemptions did not avoid or mitigate the Funds' losses, as this constituted a collateral benefit (or res inter alios acta). Applying the principles in Swynson Ltd v Lowick Rose LLP⁷ the Court of Appeal held that any benefit the Funds derived from the redemptions at a lower NAV arose independently from the Funds' loss caused by manipulation of the FX rates. Rights to redemption were governed by separate contracts between the Funds and its investors regarding the constitutional and capital arrangements of the Fund, that were entirely separate from the FX transactions between the Funds and the Banks.

Comment

The Court of Appeal's approach is to be welcomed in avoiding the practical difficulties, costs and risks that could have arisen as a result of approach argued by the Banks – particularly in relation to the quantification and/or settlement of claims by companies, trusts or partnerships, and the possible proliferation of separate claims by shareholders, beneficiaries and partners. For investors, the Court of Appeal's decision means that potential redemptions will need to be considered carefully, as doing so could leave the investor out of pocket where the fund has a valid claim against a third party.

¹ [2021] EWHC 399 (Comm)
² Treaty on the Functioning of the European Union
³ Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 2004
⁴ [2021] UKPC 22
⁵ See, Webster v Sandersons Solicitors [2009] EWCA Civ 830
⁶ [2012] WEHC 3259
⁷ [2017] UKSC 32

Hong Kong – General adjournment of court proceedings ends with more guidance for remote hearings

Wed, 04 May 2022 09:49:00 +0100

This was the second such adjournment – the first having been between January and May 2020. The number of infections reached approximately 75,000 reported cases per day at their peak in March 2022 (in a city of approximately 7.5 million people). At the time of writing, daily reported cases have decreased to approximately 500 per day.

Against this background, on 31 March 2022 the judiciary announced the end of the “general adjourned period”. The courts gradually resumed business on 12 April 2022. The judiciary’s press release and “Notification for Stakeholders” confirm details of the resumption. As yet, there appears to be no reliable information on the number of court hearings that have been delayed because of the second general adjournment. During the first general adjournment it is thought that approximately 25% of the courts’ annual caseload was affected.

To mitigate the effect of the pandemic on the courts’ business, on 25 March 2022 the judiciary announced another “Guidance Note for Remote Hearings for Civil Business in the High Court”. This is the fourth guidance note pursuant to the courts’ incremental approach to the use of remote hearings. The guidance note recognises that the severity of the pandemic could impact on the ability of judges to attend court in person.

Therefore, on 3 March 2022, the Chief Justice issued a direction, pursuant to s. 28(1) of the High Court Ordinance, that appointed a judge’s residence “as a place where he/she may sit for the purpose of exercising the civil jurisdiction of the High Court”. All stakeholders (including, legal representatives) have had to familiarise themselves with developments.

Please contact Carmel or Jennifer if you have any queries regarding the issues raised in this article.

This article is intended to give general information only. It is not a complete statement of the law. It is not intended to be relied upon or to be a substitute for legal advice in relation to particular circumstances.

Commercial Court confirms limits of full and frank disclosure duty in arbitration enforcement action

Wed, 27 Apr 2022 16:21:54 +0100

Facts

General Dynamics, a global defence conglomerate, was contracted to provide the state of Libya with communications systems for military vehicles and related services. General Dynamics did not receive full payment. In 2016, an International Chamber of Commerce tribunal awarded General Dynamics £16 million (plus interest and costs).

Libya did not pay. In 2018, General Dynamics issued proceedings in the High Court to enforce the arbitral award in England, pursuant to section 101 of the Arbitration Act 1996. At first instance, the judge granted an order recognising the award and dispensing with formal service of the arbitration claim form. This decision on service was overturned in the Court of Appeal and Supreme Court. For further details, see "The current state of service".

In August 2021, Libya applied to set aside the orders made at first instance on the basis that General Dynamics had failed to comply with its duty of full and frank disclosure when it made the without notice application.

Background

A party's duty to provide full and frank disclosure is of paramount importance. In summary, where an application is made without notice, the applicant must disclose all relevant and material matters to the court, including points of law and defences that the respondent could deploy. The duty also extends to facts including those which should have been known to the applicant had it made proper enquiries.

Failure to provide full and frank disclosure can lead to the order being set aside and cost penalties, thus depriving the applicant of any advantage gained from its breach of duty. However, the court retains a discretion to maintain the order, notwithstanding any breach.

Decision

Libya advanced two arguments, both of which were ultimately unsuccessful.

Had General Dynamics failed to comply with its duty of full and frank disclosure by failing to inform the court that there was only one recognised government in Libya?

No; the Court held that there was no force in this argument. It was not relevant to issues before the Court in this hearing as it related to service of the claim form, the relevant parts of the order for which had been set aside. The Court commented that the alleged non-disclosure was a narrow point which obtained no significant advantage for General Dynamics.

Had General Dynamics failed to comply with its duty by not informing the court that Libya had adjudicative and enforcement immunity under the State Immunity Act 1978?

No; while it would have been preferable for General Dynamics to have stated that Libya was, in principle, afforded immunity under the State Immunity Act, it did not thereby obtain a benefit it would not otherwise have obtained. Libya's immunity was self-evidently tempered by section 9, which provides that where a state has submitted to arbitration of a dispute, it cannot claim immunity in any associated court action in the United Kingdom.

Libya had claimed that the failure to disclose its immunity was significant and had implications for enforcement. It had argued that if the orders were granted, General Dynamics would have been able, without a further court hearing, to proceed to execute the award and enforce against Libya's assets, regardless of its immunity defences.

There was, however, no evidence that General Dynamics had conceived a strategy to make the application and then immediately enforce against assets without further reference to a judge. Libya's claim that a writ of control could have been requested by General Dynamics without further recourse to the court was, in any event, incorrect. Any such request would have had to be put before a judge.

Issues over immunity in relation to execution would be raised and addressed only when a specific asset or method of enforcement had been identified. Disclosure of the proposed assets and route of enforcement at an application hearing for recognition of the arbitral award was unnecessary, premature and risked undermining enforcement by "tipping-off" the respondent.

Comment

The duty of full and frank disclosure has clear limits and, more broadly, the court will take a practical approach to the recognition of arbitral awards – these are the key takeaway points from this decision of the Commercial Court. It is notable, however, that despite the Court considering that the non-disclosure was neither of great significance, nor afforded General Dynamics any benefit, it would have been preferable for it to have raised the issue of immunity. Libya's status in the proceedings was self-evident and any claim to immunity was easily rebutted. The judge's comments offer a salutary warning of the need to take the court carefully through all the relevant facts and legal issues in any hearing where one party is not present.

(1) [2022] EWHC 501 (Comm)

Court of Appeal holds that Quincecare duty can arise in principle where customer gives instructions in authorised push payment fraud

Thu, 21 Apr 2022 14:46:00 +0100

Background

The case concerned an authorised push payment (APP) fraud, where the victim is deceived into instructing their bank to make a "push" payment, ie a payment instruction out of their own account, by a fraudster who then steals the money. Mrs Philipp, a music teacher, lost most of her life savings through such a fraud. Through a series of phone calls by a person only known as JW, Mrs Philipp and her husband had been made to believe that they were cooperating with the Financial Conduct Authority and National Crime Agency to bring other fraudsters to justice. JW convinced the couple to move £700,000 of their savings into an account in Mrs Philipp's name with the respondent bank, Barclays. Mrs Philipp then instructed Barclays to transfer this sum from her account in two payments to separate bank accounts in the United Arab Emirates, believing that this would protect the money from fraud.

The couple attempted to transfer the funds in Barclays' Thornbury branch but due to a problem with the international payment system this did not go ahead, so that Mrs Philipp then used another branch to make the first transfer. The second transfer was made using yet another Barclays branch, after which the money disappeared. Mrs Philipp brought a claim against Barclays for breach of duty, arguing that Barclays owed a duty in tort or implied into the contract between her and Barclays, or under s 13 of the Supply of Goods and Services Act 1982. This duty was a duty to observe reasonable care and skill about executing her instructions, which was also argued to be a species of the duty identified in Barclays Bank v Quincecare [1992] 4 All ER 363 (the Quincecare duty). Mrs Philipp argued in particular that various features of the payments would have alerted an ordinary prudent bank, which then would have delayed the transfers and made inquiries as to what was happening.

At first instance, Barclays successfully applied for strike out of the action, and the court accepted Barclays argument that it did not owe a duty of care in these circumstances, and that this did not need to be decided at trial. Mrs Philipp appealed to the Court of Appeal.

No fraudulent agent necessary for bank's Quincecare duty to arise

The Court of Appeal unanimously found in Mrs Philipp's favour, allowing the appeal and ordering the case and the question of whether the Quincecare duty was engaged and whether the bank breached that duty to be decided at trial.

The Court found that while the major cases considering the Quincecare duty had dealt with circumstances where instructions for payment were given by a fraudulent agent acting for a company or firm, this did not mean that this was a necessary ingredient for the duty. The reasoning for the existence of the duty was that the bank, as an agent for the customer, not only has a duty to execute payment instructions, but also a duty to use reasonable skill and care in executing the customer's order. If an ordinary prudent banker would be "on inquiry" that executing the order would result in misappropriation of the funds, then the duty arises, and execution of the payment cannot be carried out. The relevant standard is expressed in different ways in the case law, but they are equivalent: the ordinary prudent banker, the reasonable bank manager and the honest and reasonable banker. Overall, the underlying logic is to protect the customer, and the reasoning for the duty does not depend on whether the instruction is given by an agent of the customer, or not. The duty can apply where the customer gives the instruction themselves where they are the victim of APP fraud, provided that in the circumstances the bank is "on inquiry".

A carefully calibrated Quincecare duty is workable and not onerous

The court also considered the workability of the duty. At first instance, expert evidence that the duty was workable had been submitted on Mrs Philipp's behalf, and on appeal, new evidence in that regard had been filed by the intervening party, The Consumers' Association, who argued that the duty would not be unworkable and onerous because it would reflect current banking practice. In contrast, Barclays had not filed any (expert) evidence yet on the issue and had only given initial disclosure. The Court decided that as the issue involved disputed facts, this could not be resolved at the summary stage and the court below had erred in accepting an absence of duty of care without a trial.

Barclays had argued at first instance that the duty as contended for by Mrs Philipp in this case would be onerous and unworkable which had been accepted by the first instance Judge. On appeal, Barclays further questioned whether the duty could even be possible given the huge number of banking transaction executed every day and the speed of transfer obligations on banks, such as in relation to BACS payments and the Faster Payment system. The Court did not accept this argument in the appeal as a relevant concern because of the careful calibration of the Quincecare duty, which is conditioned by the ordinary banking practice at the relevant time. If the facts arising in Mrs Philipp's case, together with ordinary banking practice in March 2018, meant that an ordinary prudent banker would have been put on inquiry about APP fraud, this simply would not mean that the circumstances of many millions of low value BACS transfers would do so.

Nothing novel about this interpretation of Quincecare duty

The Court rejected the argument by Barclays that allowing the appeal would involve any extension of the Quincecare duty. Rather, the duty, which it found to be arguable in this case, was determined by established principles. The Court referred with approval to Nigeria v JP Morgan Chase Bank NA [2019] EWCA Civ 1641, and highlighted that Rose LJ had held that the Quincecare duty itself was one aspect of a bank's overall duty to exercise reasonable skill and care in the services it provides, and at first instance in the same case that the duty of inquiry aspect of the Quincecare duty would be in line with sound policy, because banks should not "sit back and do nothing" in the fight to combat fraud.

Summary judgment not suitable for this type of claim

The Court noted that the only legal conclusion necessary to resolve this appeal was that as a matter of law the Quincecare duty of care does not depend on the bank being instructed by an agent of the customer. It was at least possible in principle that the duty could arise where a victim of APP fraud gave the instructions to their bank, but whether such a duty in fact arose in this case needed to be decided at trial. The summary judgment that had been obtained by Barclays was therefore set aside.

Commentary

The most notable aspect of this decision is that a fraudulent agent is not necessary in order for a bank's Quincecare duty to arise, and that there is nothing legally novel about this conclusion. This is a customer friendly decision which prevents banks from obtaining victories arguing that no such agent was involved. Ultimately, it will depend on a fact specific analysis whether there was a breach of duty in the context of APP fraud, and the Court's emphasis on the "fine calibration" of the duty means that arguments in these cases will very much need to focus on the banking practice at the relevant time, which will likely happen in the forthcoming full trial of this case. However, it also noteworthy that the Court cited with approval policy reasons for the Quincecare duty and the role of banks in preventing fraud.

Supreme Court rules that solicitor's equitable lien was valid even though no proceedings were issued

Wed, 13 Apr 2022 09:45:00 +0100

The Supreme Court has re-confirmed that a solicitor benefits from this equitable lien when they are instructed to make a claim even if proceedings have not been issued and it is not anticipated that the claim will be disputed.

The facts

Bott & Co Solicitors Ltd is a solicitors' firm which handles flight delay compensation claims. Many of the claims handled by Bott are claims for compensation from Ryanair.

Initially, for claims which were admitted, Ryanair would pay the compensation into Bott's client account. Bott would deduct their fees from the compensation (25% of the total compensation awarded plus a £25 administration charge per passenger) and pass the rest on to the customer.

However, Ryanair changed its practice in 2016 and began to pay compensation directly to customers. Ryanair said that it considered it unwelcome and unnecessary for claims handlers to become involved when customers could simply make a claim using a form on their website. When Ryanair paid Bott's clients directly, Bott lost the opportunity to deduct its fees from the compensation (and given the relatively small sums involved, it was not practical for Bott to pursue individual clients for its fees).

Bott claimed an equitable lien over the compensation payable by Ryanair to Bott's clients. They sought an injunction preventing Ryanair from paying Bott's clients directly when they were on notice that Bott was instructed, and an indemnity for the fees it had not been able to recover from its clients.

The solicitor's equitable lien

Generally, the solicitor's equitable lien entitles a solicitor who assists a client in making a claim to recoup the costs of doing so out of the money recovered from the opposing party (ie. to deduct their fees before paying the remainder of the settlement or proceeds of a judgment to their client). If the opposing party pays the money to the client directly despite knowing that the sum ought to be paid to the solicitor so that they can first deduct their fees, the court may order the opposing party to reimburse the solicitor for any fees which the solicitor has been unable to recover from the client.

The Supreme Court's judgment: reflecting the realities of modern litigation

The High Court had found in favour of Ryanair, whose decision was affirmed by the Court of Appeal. The Court of Appeal held that an equitable lien did not arise unless and until Ryanair disputed a claim for compensation. Since the amount of compensation was fixed by EU regulations and the making of a claim was largely mechanical and formulaic, the services provided by Bott would not amount to litigation services of the kind protected by the lien.

Bott appealed to the Supreme Court. By a 3:2 majority, the Supreme Court found in favour of Bott and allowed the appeal.¹

Relying on an earlier Supreme Court judgment in Gavin Edmondson Solicitors v Haven Insurance Co Ltd,² the Court held that whilst the remedy had traditionally only been available after proceedings had been issued, it was now available for pre-action work to reflect the realities of modern litigation where out of court settlements and alternative dispute resolution were to be encouraged.

Where the solicitor acts for a potential claimant, the Court held that an equitable lien would be available where the solicitor provides services within the scope of a retainer in relation to the making of a client's claim, which services significantly contribute to the successful recovery of a fund by the client. The Court recognised that the threshold for the last part of the test is a low one. The Court held that it was met in this case where the solicitor had issued a pre-action letter in a standard format to Ryanair even though, in all likelihood, the clients would have achieved the same outcome by making a claim directly via Ryanair's online form.

The majority rejected the contention of the two dissenting justices that some type of actual or anticipated dispute was required for the lien to arise. Practically, it would not always be possible to determine whether a dispute would arise, and solicitors needed to know in advance whether their fees would be deductible from compensation.

Comment

This is an important case, and not just for airlines and solicitors. Parties who often deal with small claims, should exercise caution when liaising directly with a represented individual. Even though it might seem fairer, at least from the perspective of a party in Ryanair's position, to pay customers directly and maximise the compensation they get to keep, that ignores the fact that the customer has elected to use a solicitor to achieve compensation. Compensation should not be paid directly to a law firm client when the paying party is on notice that the law firm has a claim for fees from the compensation.

The judgment is also important in terms of access to justice. The rationale for the equitable lien is to enable solicitors to offer litigation services on credit to clients who, although they might not have the means to pay legal fees up front, do have a good claim. The equitable lien is one way in which litigation services can be more accessible, particularly for relatively low value cases with good prospects of success.

¹Bott & Co Solicitors Ltd v Ryanair DAC [2022] UKSC 8

² 2018 UKSC 21

Privy Council widens law on freezing injunctions in "ground-breaking" exposition of the law

Tue, 12 Apr 2022 12:02:00 +0100

Rejecting the long-established position in The Siskina, the panel of judges confirmed that a court's injunctive power extends to the grant of freezing orders where (i) there are no relevant domestic proceedings in prospect and (ii) the sole purpose of the order is to aid enforcement in foreign proceedings.

Facts

The decision arises from combined appeals in an action originally brought in Hong Kong by Convoy Collateral Ltd (Convoy) against Dr Cho Kwai Chee, for damages arising from allegedly fraudulent investments made during his time as a director of Convoy.

Convoy applied for a freezing injunction against Dr Cho in the British Virgin Islands (BVI) and sought permission to serve the application out of the jurisdiction. A second freezing order was also sought against Broad Idea International Ltd (Broad Idea), a company incorporated in the BVI which was majority owned by Dr Cho.

The Court of Appeal of the Eastern Caribbean Supreme Court rejected both applications, finding that:

there was no jurisdictional gateway pursuant to the Eastern Caribbean Supreme Court Civil Procedure Rules 2000 (the EC CPR) which would permit service of a freezing order upon Dr Cho in Hong Kong where that was the only relief sought; and
the High Court of the BVI was unable to grant a freezing order against Broad Idea on the basis that it only had the power to grant freezing injunctions which were ancillary to substantive proceedings brought in its jurisdiction.

In its appeal to the Privy Council, Convoy sought to overturn each of these decisions.

The expanded seven-member bench of the Privy Council acknowledged that to uphold the first limb of the appeal would require a departure from the test established by the House of Lords decision in Siskina v Distos Cia Naviera SA [1979] AC 21(The Siskina) and the subsequent decision in Mercedes Benz AG v Leiduck [1996] AC 284 (Mercedes), which had provided the authority as to whether a court has the power to authorise service on a defendant outside the jurisdiction in circumstances where a freezing injunction is the only relief sought.

Decision

The Privy Council upheld the Court of Appeal's decision in relation to both limbs.

On the question of service out of the jurisdiction, the Privy Council found unanimously that a freezing injunction did not constitute an injunction for the purposes of the relevant jurisdictional gateway under the EC CPR. The injunction sought against Dr Cho must therefore be dismissed on the basis of the current provisions of the EC CPR.

In relation to the second limb, the Court accepted the reasoning in Mercedes in relation to the interpretation of the procedural gateway and found, on the facts of this case, in favour of Broad Idea by upholding the Court of Appeal's decision to discharge the injunction against it. However, the Court's obiter comments in relation to the power to grant freezing injunctions outside of the jurisdiction were ground-breaking in their departure from the position in The Siskina.

In his discussion of the authorities which contributed to the development of the orthodox position, Lord Leggatt noted that The Siskina was decided at a time when freezing injunctions were in their infancy, and that the development of modern international commerce had long since altered the nature of protection which freezing orders would need to provide. While the foundational principles of freezing orders included a jurisdictional limitation designed only to ensure the enforceability of relevant judgments against foreign defendants, such a limitation could not be maintained in circumstances where the risk of dissipation of assets in the jurisdiction could exist regardless of where a defendant was resident or situated. Quoting Equitable Remedies, 9th ed (2014), Lord Leggatt observed that, subject to any statutory restrictions, the powers of courts with equitable jurisdiction to grant injunctions on the basis of what is "just and convenient" are effectively unlimited and should adopt the application of new practices where appropriate.

On that basis, the majority of the panel accepted Convoy's submissions that the law on the impact of The Siskina must be clarified. It concluded that the authority, which states that power to grant an injunction is dependent on the existence of a claim for substantive relief in that jurisdiction, had been comprehensively undermined by subsequent developments, and that any attempt to re-assert the principles of The Siskina would be "putting the clock back".

Commentary

As noted by Sir Geoffrey Vos (in the minority), the Privy Council's obiter comments, while not binding on lower courts, present a "ground-breaking exposition of the law of injunctions", extending far beyond the scope of BVI law. Although section 25 of the Civil Jurisdiction and Judgments Act 1982 already gives English courts the power to grant injunctive relief in support of foreign jurisdictions (in conjunction with specific gateway for service of such claims under CPR PD 6B 3.1(5)), the decision in Convoy may well widen circumstances in which such injunctions are granted. However, recognition will likely have its most significant impact in those common law jurisdictions where no such framework exists; extending the potential to seek freezing injunctions in their jurisdictions to litigants across the world.

Perhaps most importantly, Leggatt's impassioned call for the law of injunctions to adapt as necessary in order to allow the courts to respond to changes in modern commerce has put the legal world on notice that the scope of freezing injunctions will continue to evolve. Developments in this area will no doubt continue to be watched closely.

Competing opt-out claims refused certification in CAT's FX decision

Mon, 04 Apr 2022 17:02:00 +0100

Since the first opt-out certification last summer in Merricks, a steady stream of collective claims has been certified by the CAT. There have now been four opt-out certifications with many more applications in the wings. Last week's FX decision is the CAT's first certification refusal following Merricks.

The CAT's ruling concerns two competing applications for an opt-out collective proceedings order (CPO). One CPO application was brought by Michael O'Higgins FX Class Representative Ltd (O'Higgins PCR) and the other by Phillip Evans (Evans PCR). The claims seek damages on a class-wide basis following the European Commission's infringement decisions regarding foreign exchange (FX) spot trading (referred to as the Three Way Banana Split Decision and the Essex Express Decision, named after the cartelists' chatrooms on Bloomberg).

There were three issues determined by the CAT: the certification issue; the opt-in v opt-out issue; and the carriage issue.

The judgment was split, with Sir Marcus Smith and Professor Neuberger delivering the majority opinion and Paul Lomas dissenting.

1. The certification issue

Although the certification issue was relatively uncontentious as between the parties, the CAT considered that it was incumbent on it to reach its own conclusions on certification. The CAT went through the certification criteria in detail and found that the Authorisation Condition and Eligibility Condition were both satisfied in relation to each application. Had each application been the only one in issue, the CAT confirmed it could - and should - be certified as collective proceedings.

Both applications were therefore successful on certification, although the CAT acknowledged it had not been presented with much of an argument on the issue. The "real battle" turned on the basis of certification (i.e, opt-in v opt-out).

2. The opt-in v opt-out issue

Both PCRs had sought certification on an opt-out basis. In opt-out proceedings, the claim binds all the proposed class apart from those who choose to opt out. Opt-out is a novel feature of the competition class action regime. By contrast, in opt-in proceedings class members must sign up to the claim in the usual way. As pointed out in the majority ruling of the CAT, opt-in claims have "buy-in" from the relevant class members whereas opt-out ones do not.

The CAT explained that the Authorisation Condition and the Eligibility Condition (which had already been considered for the purposes of the certification issue) were to be considered again for the opt-in v opt-out issue. The various certification factors must be considered afresh: they are likely to have different relevance and carry different weight.

In its analysis, the CAT majority concluded that a number of factors pointed weakly in favour of opt-in. These included: i) neither the O'Higgins PCR nor the Evans PCR were a pre-existing body; ii) the level of funding available to the applicants; and iii) the existence of the Allianz proceedings (a separate claim brought by a number of institutions originally in the Commercial Court) which potentially overlapped. The CAT considered that, by themselves, these factors were "pretty marginal" but cumulatively they pointed away from opt-out. In relation to funding, the CAT noted that O'Higgins had obtained funding of £29.4m and Evans of £22.5m. It concluded that, taking into account ATE insurance premia and other costs, O'Higgins had £16.6m of that and Evans £14.1m left for the remainder of the claim. Although describing the funding as "impressive", the CAT concluded both sums were too low, and that both parties should have budgeted for an additional spend of at least a further £25m. Given the potential shortfall, the CAT was concerned the applicants would likely come under pressure to settle before trial. Those are clearly very significant sums.

Those factors were reinforced by the two specific factors relevant to opt-in v opt-out as set out in the legislation: "strength" and "practicability". Both factors pointed clearly and strongly away from certifying on an opt-out basis:

"Strength" – the CAT clarified this cannot simply be equated to the test for strike out. A weak claim could be certified on an opt-out basis. Although it decided not to do so, the CAT found that the claims pleaded in the applications were so weak that they were liable to be struck out. While the claims were not struck out, the CAT noted it seemed perverse to permit a claim unsupported by "reasonable grounds" to proceed on an opt-out basis.

"Practicability" – this was assessed from the standpoint of the class members. The CAT considered there was no reason why it was not practicable for the putative class to join on an opt-in basis, given all the circumstances and in particular the general sophistication of the putative class, the class knowledge and the potential size of the claim. There was evidence that members of the putative class had not chosen to opt in when given the option. The CAT observed that where the proposed class members appear to be choosing not to participate, "access to justice should not be forced upon an apparently unwilling class."

Therefore, the CAT refused to certify the proceedings on an opt-out basis.

3. The carriage dispute

FX involved a carriage dispute between two competing PCRs (the Evans PCR and O'Higgins PCR). As both applications had been brought on an opt-out basis, the proposed classes overlapped and only one claim could have continued.

Given the majority concluded that certification on an opt-out basis was not appropriate, it was not necessary for the CAT to determine the carriage dispute (i.e., which of the competing PCRs should be granted carriage of the proceedings). However, the CAT nevertheless stated that if it were minded to certify on an opt-out basis, the carriage of the proceedings should be granted to the Evans PCR whose application was "better thought through" and a "marginally better attempt at capturing an elusive loss."

While there was no determination of the carriage dispute, the CAT set out useful guidance as to how such determinations would be made. It noted the Authorisation Condition has a relative aspect which would enable consideration of the relative suitability of each PCR. While there is no express relative element in the Eligibility Condition, the CAT clarified that the condition of "suitability" involves both an absolute and a relative test.

The CAT stated that relative timing of the two applications was immaterial in this case. As this was the first carriage dispute, the CAT took the opportunity to make some general observations on timing. The CAT noted that a late applicant who does not attend the first CMC in another certification application should be under no illusions that the first in time will have a significant advantage in any carriage dispute. So while it seems we are unlikely to see a "first to file" race as happens with US class actions, timing will be a relevant consideration.

Strike-out consideration

Even though the respondents had not applied to strike out either of the proposed claims, the CAT considered it was obliged to consider (of its own initiative) whether the applicants had reasonable prospects for making the claims. The CAT's concerns were focussed on the issue of causation. Specifically, the articulation of the causal link between the Commission's FX cartel decisions and the alleged market-wide harm affecting the proposed classes. Due to the level of generality or abstraction in the pleadings, the CAT considered the claims could be struck out.

However, as the applications raised novel and difficult questions, the CAT did not exercise its discretion to strike out. The CAT did not consider it should do so in an area of law subject to some uncertainty and in a state of ongoing development. This was to allow the applicants an opportunity to address the concerns. However, absent significant amendment and revision, the CAT noted a future strike-out application "may very well be on the cards."

Dissenting judgment

The CAT panel was not unanimous in its views and Mr Lomas dissented from the majority regarding the opt-in v opt-out issue. His judgment referred to the fact that access to justice has to be more than notional (citing the saying "open to all, just like the Ritz"). Mr Lomas criticised the majority ruling and proposed an alternative approach to the opt-in v opt-out determination, setting out his assessment in a schedule to the judgment. He considered the CPO should be granted on an opt-out basis.

What's next?

In refusing opt-out certification, the CAT has stayed the applications and granted the two PCRs permission to submit a revised application for certification on an opt-in basis within three months of the ruling. However, both PCRs intend to appeal. Both Evans and O'Higgins' position was that proceeding on an opt-in basis would stifle the claims and lead to them not being pursued in any form, because it would not be possible to get sufficient individual claimants to sign up to make them viable.

The FX decision is timely. Last month, the Court of Appeal heard BT's appeal against the CAT's opt-out certification of the collective proceedings brought by Le Patourel. BT's appeal is the first time the opt-out determination has been specifically considered at appellate level (as the issue was not relevant to the Merricks appeals in either the Court of Appeal or Supreme Court). Important points of principle will be set down by the Court of Appeal in its forthcoming judgment, given two of BT's three grounds of appeal related to the opt-out basis of the CAT's certification. Its ruling is expected soon. The Court of Appeal was urged to hear BT's appeal on an expedited basis, particularly given the elderly demographic of a portion of the proposed class.

The opt-out feature is seen as fundamental to the success of the class action regime and enabling access to justice for those harmed by competition infringements. It is often only on an opt-out basis that collective proceedings are financially viable and can attract third party funding. Previous opt-in class actions, such as the Replica Football Kits claim brought by Which? under the old regime, were largely deemed failures due to poor levels of take-up. Whether opt-out competition class actions can serve as a potential blueprint for other areas of law remains to be seen.

Read the full judgment here.

Hong Kong – General adjournment of court proceedings given severity of “5th Wave” of COVID-19

Mon, 04 Apr 2022 10:11:00 +0100

The “general adjourned period”, as it was known, ran from 29 January to 3 May 2020. Since then, and until recently, the courts have generally remained open during the pandemic, with more use being made of remote hearings and disposal of civil proceedings based on written submissions.

Given the severity of the “5th Wave” of the pandemic in Hong Kong, on 4 March 2022 the judiciary announced another “general adjournment of proceedings”; this time to run from 7 March to 11 April 2022.

It is estimated that, within a couple of months, COVID-19 infections increased from approximately 12,500 people (in a city of approximately 7.5 million people) to a situation where, by mid-March 2022, well over 10% of the city’s population had been infected. Some estimates suggest that, by the time the current surge of infections is over, more than half of the city’s population will have been infected.

The current general adjournment is similar to the previous one except that this time the courts have tried to complete hearings that had started but not finished by 7 March 2022. Civil hearings originally listed during the current adjournment will be dealt with remotely, by paper disposal or refixed (subject to directions by the courts). The knock-on effect is likely to be more pronounced for substantive criminal matters.

The judiciary’s press release (dated 4 March 2022) and supporting “Notification for Stakeholders about General Adjournment of Proceedings” confirm the types of court and registry business that continue to be conducted. While the current general adjournment is referred to as a short period of “around one month” it may be extended.

Contact Us

Please contact Carmel or Jennifer if you have any queries regarding the issues raised in this article.

Can litigation privilege be claimed for exploratory correspondence with an expert before litigation is in prospect?

Thu, 24 Mar 2022 09:54:00 Z

The expert's work had been intended to provide "ballast" for a claim in suspected mismanagement, but in fact the expert's investigation uncovered a potential alternative claim, which was quite distinct from the claim initially being investigated.

Facts

As is well known, English law divides legal professional privilege into two broad categories: legal advice privilege and litigation privilege.

The facts in this case are complex and not entirely clear from this interlocutory judgment. For present purposes, it is sufficient to note that there were three claims on the basis of which litigation privilege was potentially in play:

First, there had been a shareholder dispute which concerned the distribution of insurance proceeds following the total loss of a vessel owned by the first claimant. It was accepted by the defendants that by October 2018 litigation was in reasonable contemplation in relation to the shareholder dispute and that litigation privilege could be claimed by the claimants for documents created for the dominant purpose of that dispute.
Secondly, at the same time, there was a dispute regarding the settlement of the first claimant's exposure under certain freight forwarding agreements (the FFAs) (the so-called “mismanagement claim”). This claim does not (yet) appear to have been pursued in litigation.
Thirdly, in the context of correspondence about the mismanagement claim, the claimants (via their solicitors) instructed an expert to audit the freight forwarding agreements "to make good any legitimate grievance that might exist" and to provide "ballast in the correspondence". The claimants say that as a result of that instruction and further enquiries, a new claim emerged regarding the basis on which the FFAs were entered into (the so-called “mispricing claim”). The claimants asserted that the instruction of the expert and the further enquiries arising from it were protected by litigation privilege as litigation regarding the FFAs was reasonably in contemplation by late 2018.

The initial question was thus whether litigation privilege could be claimed for the ballast exercise prior to the crystallisation and discovery of the mispricing claim.

Test for litigation privilege

A document may be protected by litigation privilege if it was created for the dominant purpose of conducting litigation in reasonable prospect. The following refinements can be derived from Starbev GP Ltd v Central European Holding BV [2013] EWHC 4038 (Comm):

The burden is on the party claiming privilege. The assertion of privilege and a statement of the purpose of the communication on the face of the document are not determinative and are evidence of a fact that may require to be independently proved.

The party claiming privilege must establish that litigation was reasonably contemplated or anticipated. It is not sufficient to show that there is a mere possibility of litigation or that there was a distinct possibility that someone might at some stage bring proceedings or a general apprehension of future litigation.

It is not enough to show that proceedings were reasonably anticipated or in contemplation. The party must also show that the relevant communications were for the dominant purpose of either:

enabling legal advice to be sought or given; and/or
seeking or obtaining evidence or information to be used in or in connection with such anticipated or contemplated litigation.

• Where communications may have taken place for a number of purposes, it is incumbent on the party claiming privilege to establish that the dominant purpose was litigation.

Decision

No litigation privilege

The Court concluded that the expert was instructed in order to support the claimants' mismanagement allegation in correspondence. That correspondence uncovered the mispricing claim, which was stated to have come as a surprise to the claimants and by extension could not have been the dominant purpose of the correspondence, nor could any litigation have reasonably been in prospect in relation to it.

The dominant purpose of the correspondence was, as the claimants had stated, to obtain evidence in support of the "mismanagement claim". However, that claim has not reached a stage where it was possible to say that litigation in relation to the mismanagement claim was in reasonable prospect. Indeed, the judge noted that there was no suggestion that the mismanagement claim was to be added to the current proceedings or pursued in separate proceedings. Accordingly, the exchanges with the expert were not prepared for the dominant purpose of litigation that was reasonably in prospect.

The Court therefore concluded that no litigation privilege could attach to the correspondence with the expert as there was no litigation reasonably in contemplation in relation to the mismanagement claim, and the mispricing claim had yet to be identified let alone crystallised at the time of that correspondence.

No waiver

The second issue considered by the Court was whether references in a witness statement to the steps taken by the claimants to identify the mispricing claim (and the documents generated in that process), in circumstances where the mispricing claim was otherwise time-barred, amounted to a waiver of privilege in those documents.

Generally, the relevant test is whether there is reliance on the contents or effect of the privileged documents, with only the former giving rise to a waiver.

The defendants argued that the references in the witness statement to the various stages of the process leading to the discovery of the mispricing claim involved a waiver of privilege by relying on the expert report and underlying documents there referred to. The claimants pointed out that it was incumbent upon them to explain the circumstances in which the mispricing claim had been discovered and the steps which had to be gone through in order to discover it. The claimants did not, however, rely on or identify any documents as part of that explanation.

The Court dismissed the waiver application stating that there was not, in any sense, a reliance in the witness statement on any particular document. Indeed, there was no express reference to documents, merely a reference in general terms. The witness statement merely went through the various steps that were taken by the claimants from November 2018, which led to the discovery of the mispricing fraud. That was insufficient to give rise to any waiver.

Comment

There are two main points to note from this decision.

The first is that investigations to ascertain whether a suspected claim might exist are not normally protected by litigation privilege as, by definition, there is no litigation reasonably in prospect in respect of the suspected claim at that stage. The fact that the investigations brought to light a completely different claim to the potential claim being investigated does not operate to cloak those investigations retrospectively with litigation privilege. This illustrates the strictness of the test to be satisfied for litigation privilege to apply.

The second is that great care must be taken in narrating steps taken in investigating a potential claim. In order to ensure that there is no waiver of privilege in the documents generated by that investigation, it is important to ensure that no reliance is placed on the privileged documents, and it would be advisable to limit or entirely remove any express reference to privileged documents from the narrative.

(1) Kyla Shipping Co Ltd and others v Freight Trading Limited and others [2022] EWHC 376 (Comm)

Court of Appeal issues "clear message" that those who breach embargoes on draft judgments risk contempt proceedings

Tue, 22 Mar 2022 15:21:00 Z

In its judgment in R (on the application of Counsel General for Wales) v Secretary of State for Business, Energy and Industrial Strategy [2022] EWCA Civ 181, the Court also provided useful guidance on the permissible uses of draft judgments.

Facts

The English Courts often circulate their judgments in draft to parties and their lawyers before they are officially published, which is known as being "handed down". Pursuant to CPR PD 40E para 2.5 the parties must, however, keep the contents of the judgment strictly confidential.

In the present case, the Court of Appeal had provided a draft of its judgment to the clerks in the chambers of two barristers acting for the successful appellant.

The draft contained an express warning on its front page that it was to remain confidential to the parties and their legal representatives and that neither the draft nor its substance should be disclosed to any other person or made public in any way.

Two days before the judgment was to be handed down, a staff member in the chambers emailed the two barristers to ask if they would like the judgment to be publicised on the chambers' website and whether they would provide some text for that purpose. The email referred to the handing down taking place "tomorrow". In fact, it was due to take place two days later.

One of the barristers drafted and sent the staff member text for publication. On the following day, the staff member requested confirmation that the story could be posted to social media. The same barrister confirmed that it should be. The staff member replied to confirm that the story would be posted later that morning.

The press release was then posted to the chambers' website and social media for five hours before it was pointed out that it should not have been released as the judgment had not yet been published. The chambers' senior practice manager wrote a letter to the Court in order to apologise.

Sir Geoffrey Vos MR requested a more detailed written explanation of what had happened and required the two barristers to appear before the Court in a special hearing.

The Court's view

Sir Geoffrey Vos, with whose judgment Nicola Davies LJ and Dingemans LJ agreed, said that these events should not have happened.

The Judge drew attention to the terms of para 2.4 of CPR PD 40E, which provides that: "(a) neither the draft judgment nor its substance is disclosed to any other person or used in the public domain”, and “(b) no action is taken (other than internally) in response to the draft judgment, before the judgment is handed down".

The Judge pointed out that the persons to whom the judgment is normally supplied are counsel, solicitors and the parties (whether individual or corporate). Para 2.5 of CPR PD 40E envisages that a party's legal team may supply an electronic copy to that party, but not to anybody else. In addition, para 2.6 provided that: "additional copies may be distributed in confidence within the organisation, provided that all reasonable steps are taken to preserve its confidential nature and the requirements of paragraph 2.4 are adhered to". This was not, the Judge emphasised, a licence to circulate the draft judgment beyond those who needed to see it.

The purpose of circulating draft judgments before handing down was to enable parties and their lawyers to suggest typographical corrections, prepare submissions and agree orders on consequential matters, and prepare for the publication of the judgment.

Here, the Judge found that a number of specific errors had been made:

It had been inappropriate for persons in chambers to be given a summary of the judgment. This had not been necessary for any of the usual purposes for which judgments are circulated in draft.
Drafting press releases to publicise chambers is not a legitimate activity to undertake within the embargo. It would be different if a corporate party wished to issue a press release immediately on hand down to explain to the public what had happened in the judgment.
Too many people in the barristers' chambers had had access to the summary in the press release. It should be sufficient for one named clerk to provide the link between the court and the barristers concerned. No one else in chambers should have access to the draft judgment or any of the related documents without good reason.
The measures taken by the barristers' chambers had been lax. The barristers concerned did not read or properly read emails they were sent in relation to the draft judgment and no proper precautions or double-checks were in place.
The Judge emphasised that barristers and solicitors are personally responsible to the court for ensuring that the confidentiality of draft judgments is adhered to and they have a duty to explain the relevant obligations to their clients. He warned that those who broke embargoes could find themselves the subject of contempt proceedings as envisaged in para 2.8 of CPR PD 40E.

Commentary

This decision indicates a heightened concern by the Court as to how embargoed judgments are currently treated. Here, the Court not only required the persons in question to provide a full explanation, further to an explanation and apology already provided by their chambers, but also issued a fully reasoned judgment on the consequences of the embargo breach. The Court noted that at least anecdotally it appeared that violations of embargoes on draft judgments are becoming more frequent and that the purpose of the judgment was to send "a clear message" that such embargoes must be respected.

While the rules on embargoes themselves have not been changed by this decision, it is a pointed reminder to lawyers and parties that they should take great care to observe the embargo on draft judgments, and must put in place "effective" safeguards and double checks. It also provides useful clarity as to what activities may and may not be undertaken while an embargo is in force. Those who fall foul of the restrictions may find themselves the subject of contempt of court proceedings. Lawyers should ensure that they fully and carefully explain these restrictions to clients.

Court of Appeal holds that Quincecare duty can arise where the customer gives instructions in authorised push payment fraud

Tue, 15 Mar 2022 08:51:00 Z

The Court decided unanimously that the Quincecare duty, ie the duty to refrain from acting on a payment instruction and to make inquiries when the bank is on notice of a serious possibility of fraud, does not depend on whether the bank is instructed by an agent of the customer. Rather, at least in principle it is possible that the Quincecare duty could arise where a customer instructs the bank themselves to make a payment, where the customer is the victim of authorised push payment fraud. The Court emphasised the public policy considerations underpinning the Quincecare duty which reflects the role of banks in combatting fraud. The Court held that whether such a duty arises for the bank must be decided at trial and was not suited to the summary judgment stage. It therefore set aside the summary judgment that had been obtained in favour of the bank.

The judgment in Philipp v Barclays Bank UK Plc [2022] EWCA Civ 318 can be found here.

To read our full analysis, click here.

Where's the damage? High Court dismisses jurisdiction challenge in US$495 million claim

Thu, 10 Mar 2022 15:09:00 Z

The underlying claims relate to allegations of negligent misstatements and advice provided by UBS to the claimants which, they say, led them to make an investment that was almost completely lost when UBS exercised security over shares held by it in London as mortgagee (contrary to the statements and advice).

UBS challenged jurisdiction of the English court in relation to the claims brought by the first and second claimants. In her judgment, Mrs Justice Cockerill DBE held that the English court did have jurisdiction: the claimants had a good arguable case that the damage had occurred in England and also that their claims in tort arose out of the activities of the branch established in England (where the shares in question had been liquidated).

There is an obvious appeal to this pragmatic approach to jurisdiction. It is good news for counterparties where security is held in the UK, in terms of giving some certainty that claims arising out of margin calls would be capable of being heard in the English courts, despite international dimensions of the wider transactions. On one view, this approach to assessing when and where the loss occurred is at odds with the usual approach taken in English law in "bad investment" cases in relation to limitation and causation – in which the loss is said to occur and crystallise when the investment is made. However, the judge was not persuaded by UBS' submissions (which focused on English authorities) that there was at least a "rule of thumb" that in a case of negligent misstatement, the damage will occur where the misstatement is received and relied upon (focusing on the distinction between direct and indirect loss).

Facts

In Autumn 2013, Mr Kwok (the first claimant) decided to invest around US$3 billion in certain shares (the "H-Shares") issued by a major Chinese financial institution ("Haitong" and the "Investment"). Mr Kwok was then approached by a trusted friend and advisor, Mr Stephen Wong (then a Managing Director of Wealth Management at UBS) who had learned of Mr Kwok's intentions. Mr Wong informed Mr Kwok that UBS were aware that Haitong would be issuing new H-Shares on the Hong Kong Stock Exchange ("HKEX"). UBS wished to participate as a placement agent, and if Mr Kwok could commend UBS to Haitong then he and UBS would assist and advise Mr Kwok in acquiring H-Shares in an advantageous manner. Mr Kwok decided to invest around US$1billion in partnership with UBS (and the remainder through other institutions). He did recommend UBS to Haitong, and UBS was appointed as placement agent.

The investment structure was complex, driven largely by the desire to (lawfully) avoid triggering the need for approval by the Chinese securities regulator. The H-Shares were acquired by a corporate vehicle (Dawn State, the third claimant) owned and controlled by a third party (Haixia, a Chinese financial services firm), with the purchase being funded in part (US$500 million) by Mr Kwok (through Ace Decade, the second claimant), and in part by a leveraged finance facility provided by UBS (US$750 million) secured against the H-Shares. The H-Shares allotted to Dawn State were assigned to UBS London by way of security and deposited in a secured account held with and registered to UBS London as custodian. Following the share acquisition, Mr Kwok (through Ace Decade as nominee) had an option to acquire Dawn State.

UBS provided the leveraged facility to Dawn State – and in all contracts it expressly identified UBS London or UBS London Branch. Under the terms of the facility, UBS was entitled to terminate the financing if any of the Full Mandatory Pre-Payment Events occurred, which included triggers relating to a collapse in the H-Shares.

Between 1 and 6 July 2015 there was a substantial drop in the Chinese stock markets – the price of the H-Shares declined very rapidly which triggered a series of events. UBS was entitled to (and did) demand mandatory prepayment of the entire facility over the subsequent three days (the demand notice was made in the name of UBS London Branch). The second claimant informed UBS that it could not make payments according to the stringent deadline, and despite pleas from Mr Kwok, Mr Wong informed him that no additional time would be given, and UBS London had resolved to sell the H-Shares which it held as security. UBS London issued a "Notice of Acceleration Event" and then exercised its rights as mortgagee under the security terms, purportedly selling the H-Shares on or around 15 July 2015. UBS London remitted the balance of US$4.7 million to Dawn State (the amount remaining after all fees and charges had been applied). Ace Decade exercised its option on 18 December 2015, and therefore now owns Dawn State.

The Claims

The claims are in negligent misstatement. The claimants allege that Mr Kwok repeatedly expressed concerns regarding the inclusion of the mandatory prepayment provisions in the facility documentation, and was given assurances by Mr Wong to the effect that (i) UBS London had a policy that it would not demand additional collateral or mandatory prepayment, and even if it did make such demand, it would give them additional time to make such payments, (ii) UBS London had given such favourable treatment to the shareholder of the Ping An insurance company, and would treat the claimants in the same way, and (iii) Mr Kwok and Ace Decade should not be concerned about the margin call and/or prepayment provisions.

The claimants maintain that those representations were false, and the advice was negligent – and that as a result they have suffered substantial economic loss, for which they seek damages (in the principal sum of US$495 million).

Challenge to jurisdiction

UBS challenged the court's jurisdiction in relation to claims by the first and second claimants (but not the third defendant's claims – which UBS accepts fall within a jurisdictional clause contained within facility agreement and connected documentation).

UBS focused on the international nature of the parties' dealings: the relationship for the tort claims was between Mr Kwok and Mr Wong (who at the time was the Managing Director for UBS Wealth Management in UBS Hong Kong), the torts are alleged to have been committed by Mr Wong in Hong Kong, the subject matter of the advice and misstatements relates to investments in shares in a Chinese company, listed on HKEX, and the investment used Chinese intermediaries.

It was common ground that Lugano II applied for the purposes of determining jurisdiction over the claims (UBS being a Swiss company domiciled in Switzerland – a Lugano member state)²

The general rule under the Brussels-Lugano scheme is that a defendant should be sued in their state of domicile, with special jurisdictions operating only as derogations from the general rule which has "overriding importance". The main focus in the judgment is the exception under Article 5(3) of the Lugano Convention: that special jurisdiction will be established in the courts:

"for the place where the harmful event occurred or may occur."

UBS sought to rely largely on domestic case law, which focused on the proposition that there is at least a "rule of thumb" that in a case of negligent misstatement the damage will occur where the misstatement is received and relied upon and the distinction between direct and indirect loss. The judge commented that the domestic case authorities on the question of where the damage had occurred had been of little assistance, given they largely related to non-contingent loss crystallising on the entering into of an agreement: instead she was persuaded to take full account of the EU jurisprudence in this area.

Decision

Having carefully considered both the domestic and European case law, the judge gave useful guidance as to how the question of "where the damage has occurred" will be assessed in cases of economic loss:

i. The leading CJEU cases demonstrate that in the context of the damage head it is the manifestation of damage that is relevant, not the transaction that ultimately led to such loss.

ii. Manifestation is more likely to be associated with crystallisation of the damage than the origins of the transaction in cases where there is a difference.

iii. Caution may need to be exercised when looking at damage that may or may not occur depending on what happens in the future. In this context careful thought may be needed to distinguish between the last thing that happened to bring the loss home to the claimant and the point where the loss itself becomes clear.

iv. While foreseeability and a consideration of factors relating to the sound administration of justice cannot provide an independent basis for a conclusion that jurisdiction resides in a particular location, the CJEU has clearly used such factors in some cases. At times the relation of these factors to the reasoning is unclear. However their existence and the rationale for the rule seems to justify their use by way of cross-check where the analysis simply by reference to manifestation remains troublesome.

Applying those principles in this case, the judge concluded that the only logical way to view the manifestation test in this case is to focus on the moment and place where the loss occurs. She held that "[i]t cannot sensibly be said that the damage in question "actually manifested" when Mr Kwok and Ace Decade relied on the representations, or when the funds were sent (from whatever destination). Nor can it be right that damage is suffered at the last point - when Mr Kwok and Ace Decade feel the loss."

Rather, she concluded that the "most natural analysis" is to view the damage as occurring where and when the H-Shares were liquidated by UBS. Therefore, the judge held that the money in this case is "lost" to the claimants in London, where the shares they had invested in were held and where the funds they had invested were depleted: the loss crystallises, manifests, becomes certain and irreversible with that sale of shares. The judge also looked at the "special circumstances" by way of cross check – an approach justified in the authorities – and concluded that those circumstances also pointed to London (the secured account being held in London, and all contractual documents were in English and governed by English law). Accordingly, the judge held that both the test and cross-checks indicate that the requirements for Article 5(3) were established, and the challenge to jurisdiction was dismissed.

¹ Professor Briggs, Civil Jurisdiction and Judgements (7th ed. 2021 at p. 275)
²After the expiry of the transition period under the UK-EU Withdrawal Agreement, the Lugano Convention continues to apply to proceedings already commenced

Relying on the Defence to plead a new, time-barred claim – Court of Appeal provides clarity

Thu, 24 Feb 2022 11:32:00 Z

In the recent case of Mulalley & Co. Ltd v Martlet Homes Ltd [2022] EWCA Civ 32 the claimant was permitted to introduce a new claim, post-limitation, in response to what was potentially a full defence to the original Particulars of Claim.

Facts

The Defendant had designed and installed external wall systems (involving wall insulation, fire barriers, and an overcoat of render) for five high-rise residential towers owned by the Claimant. Following the Grenfell fire tragedy, the Claimant carried out checks on the wall systems. Major fire safety defects required their replacement. Proceedings against the Defendant were issued at the end of the contractual limitation period.

The Particulars of Claim mostly focused on allegations of inadequate workmanship. The Defence denied the allegations and relied upon a certificate allegedly evidencing compliance with the Building Regulations previously in force. The Defence also argued that the wall systems needed to be replaced because of combustible insulation within them which, the Defendant argued, was not a prohibited material at the time of their installation. This insulation issue was not pleaded in the Particulars of Claim; it might therefore have afforded the Defendant a complete defence.

The Claimant sought to amend its Particulars to plead that (i) the insulation in the wall systems did not comply with the Building Regulations then in force, and (ii) the Defendant was liable for selecting and installing the insulation used (the "Amendment"). By this time, however, the limitation period had expired. The Defendant argued that the Amendment constituted a new claim and was statute-barred.

The relevant law

Section 35(5)(a) of the Limitation Act 1980 permits a claimant to add an otherwise time-barred claim to existing proceedings only "if the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action".

This is also reflected in CPR 17.4, which provides: "where… a party applies to amend his statement of case… and a period of limitation has expired… The court may allow an amendment whose effect will be to add or substitute a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings."

The Court of Appeal therefore had to consider whether the Amendment:

Was a new claim; and, if so –
Did it arise out of the same facts or substantially the same facts as were already in issue?

Decision

Was the Amendment a new claim?

If the Amendment was not a new claim it could not have been time-barred.

The Court of Appeal found that the Amendment was a new claim because, among other reasons, it was expressly pleaded as a "contingent" claim and it focused on design choices (whereas the original claim primarily focused on workmanship).

The same or substantially the same facts as were already in issue?

If the Amendment – as a new claim – did not arise out of the same or substantially the same facts, it would have been time-barred.

The decision in Goode v Martin [2001] EWCA Civ 1899 was central to the Court's analysis. The claimant in that case sustained severe head injuries while sailing as a guest on the defendant's yacht. The defence contested the facts relied upon by the claimant, providing a different account. The claimant was allowed to plead a new claim (otherwise time-barred) because she did not introduce any additional facts or matters beyond those raised by the defendant himself. The Court commented: "All that Brooke LJ did in Goode v Martin was to say that, if a defendant advanced a new case in its defence, and the claimant wanted to say that, even on that basis, the claim was still good, then the claimant should be permitted to do so."

In the Court of Appeal's judgment, the Amendment did arise out of the same or substantively the same facts as were already in issue. It explained:

"Mulalley may have chosen to defend themselves against the original design allegations in an expansive way, pointing (amongst other things) to the certificate which they say shows that their selection of the combustible cladding was in accordance with the Building Regulations 2000, but that does not mean that Martlet are not entitled to challenge what they say…

… A claimant ought to be able to submit to the court that the defendant is liable even if the version of events he has pleaded by way of defence is accepted."

The Court also explained:

"because Mulalley has chosen to put particular facts in issue in defending themselves, there can be no unfairness in allowing Martlet to turn those matters back on the defendant."

Comment

The Court of Appeal clarified the proper approach when considering whether otherwise time-barred claims can be introduced to existing pleadings under Section 35(5)(a) of the Limitation Act 1980 and CPR 17.4.

Claimants should take comfort from the judgment. They will not be prevented from introducing new claims in response to points raised in the Defence, even if they would otherwise be time-barred.

Defendants, on the other hand, should take care. Facts pleaded in defence of one claim might afford a claimant the opportunity to plead additional claims – even if the limitation periods have already expired. What might, at first, appear to be a total defence might only invite additional claims.

ESG claims in the banking and financial markets Sector: will "greenwashing" claims soon be common in the UK?

Mon, 14 Feb 2022 14:06:43 Z

Whilst banks and other financial institutions have responded positively to the increased demand for such funds, forays into greener, more socially conscious landscapes will not come without associated litigation risk.

The increased prevalence of ESG funds and other investment products will come with greater scrutiny of the processes involved in selecting and marketing those products. By its very definition, ESG can encompass a smorgasbord of values, practices and subject areas; this ranges from reducing harmful environmental practices and identifying supply chains connected with modern slavery issues, to implementing anti-bribery and anti-corruption policies. Consequently, creating a uniform framework for assessing levels of ESG-compliance can be challenging given the disparate and broad-ranging legal and policy guidance in existence.

Various ratings agencies such as the Dow Jones Sustainability Index, MSCI ESG Research, Sustainalytics and Thomson Reuters ESG Research Data (amongst others) provide scoring systems based on ESG performance. Whilst in theory these are useful mechanisms for making informed assessments about companies’ ESG practices, scoring systems can use inconsistent methodologies and assessment criteria and so consistency and transparency problems persist. In June 2021, the Sustainable Finance Taskforce of the Board of the International Organisation of Securities Commissions published a “Report on Sustainability-related Issuer Disclosures”, calling for the implementation of “a global corporate sustainability reporting architecture”. The report also referenced IOSCO’s report on “Sustainable Finance and the Role of Securities Regulators and IOSCO”, which had highlighted “(i) multiple and diverse sustainability frameworks and standards, including on sustainability-related disclosure; (ii) a lack of common definitions of sustainable activities; and (iii) greenwashing and other challenges to investor protection"(1).

In July 2021, Alan Miller, the chief investment officer of SCM Direct published a blog post on the SCM Direct website entitled "Does ESG stand for Extra Strong Greenwashing, Legal & General?"(2). In it, he accused Legal & General Investment Management's ESG China CNY Bond Ucits ETF as being "the most flagrant example of greenwashing in the UK". Citing the Ten Principles of the UN Global Compact initiative relating to the alignment of businesses with behaviours and practices promoting human rights, fairer labour standards, preservation of the environment and anti-corruption, Miller argued that the ETF fell woefully short of ESG-compliance given its connection with the Chinese government and associated breaches of the Ten Principles that occur within the country. Additionally, Miller noted that the ETF holds the same bonds as non-ESG funds, but through a practice of 'tilting' "applies JESG issuer scores to adjust the market value of index constituents from the baseline J.P. Morgan China Aggregate Index". The area is ripe for controversy.

Rise of ESG litigation in recent history

Litigation in ESG-related areas has increased in recent years. Strategic litigation in an environmental context has seen a sharp rise; the “UN Global Climate Litigation Report: 2020 Status Review”(3) notes that as of 1 July 2020, at least 1,550 climate change cases were filed in 38 countries In fact, various environmental charities exist for the sole purpose of bringing environmental challenges, such as UK-based organisation ClientEarth, which currently has “168 active cases tackling the most pressing environmental challenges"(4).

The recent case of the Netherlands branch of Friends of the Earth, acting alongside various other NGOs and individual claimants against Shell is a key example of one of the group litigation claims that have sprung up in an ESG context. This case resulted in a judgment requiring Shell to cut carbon emissions by 40% within ten years(5). Clearly companies are now facing greater scrutiny for longstanding and thus unchallenged practices and Court users are finding innovative ways to hold companies to account.

Shareholder activism

Shareholder activism has also seen a rise in recent years; corporate shareholders have shown increasing interest in scrutinising the extent to which companies have considered ESG factors in their decision-making.

By way of international example, in November 2021, the Federal Court of Australia granted Guy and Kim Abrahams (as trustees for the Abrahams Family Trust) access to documents relating to the Commonwealth Bank of Australia's decision to pursue various projects including an oil pipeline in the USA and a gas project in Queensland(6). Disclosure of these documents was requested under the Australian Corporations Act, on the grounds that the decision to pursue them failed to take into account the bank's Environmental and Social Framework, Environmental and Social Policy and the Paris Agreement. The Environmental and Social policy and framework had been implemented as a result of a previous challenge by Abrahams against the bank in 2017; Abrahams had alleged that the bank had failed in its 2016 annual report to disclose climate-related business risks.

Whilst there has, as yet, been no ESG claim against a financial institution in UK, the trend worldwide is for this to increase, especially given the fact that in the UK, climate reporting is now a requirement for premium listed companies in their annual reports for the period of January 2021 onwards, and it is now mandatory for large businesses to disclose their climate-related risks and opportunities, in line with the Taskforce on climate-related Financial Disclosures recommendations.

In this context, banks and financial institutions face increasing demands to alter their practices. The pressure group Market Forces, for example, encourages investors to invest strategically in order to persuade banks and pension funds abandon fossil fuel investments altogether.

Nature of potential claims

Investors who choose to place their money in ESG funds will be particularly sensitive to any information coming to light that indicates companies selected for ESG funds have not lived up to expectations, or have been selected on the basis of flimsy criteria. On 19 July 2021 the FCA published a letter from Nick Miller, Head of the Department for Asset Management Supervision, to chairs of authorised fund managers, setting out expectations on the design, delivery and disclosure of ESG and sustainable investment funds. With increasing consumer demand and the pronounced increase in funds seeking to accommodate investor preferences, it was noted that "we are concerned by the number of poor-quality fund applications we have seen and the impact this may have on consumers". By way of example a key consideration was that "fund names are subject to restrictions and they must not be misleading. Where a fund uses 'ESG', 'green', 'sustainable', 'responsible', 'ethical', 'impact' or related terms in its name, this could be misleading unless the fund pursues ESG/sustainability characteristics, themes or outcomes in a way that is substantive and material to the fund's objectives, investment policy and strategy’"(7). The FCA are evidently concerned with greenwashing issues and the danger of marketing products that do not live up to their ESG promises; this may prove to be ripe ground for future litigation claims of misrepresentation and mis-selling.

Another potential area for ESG-related litigation may arise in the context of investors who have purchased securities relying on statements made by issuers that turn out to be false or misleading. Such shareholders could have claims under section 90 and 90A of FSMA; these sections offer compensation for false or misleading statements in relation to listing particulars, prospectuses and published information. A particular instance in which loss could arise is if misleading statements relating to ESG-compliance are in fact false and the market value of securities falls as a result. Such claims may prove ripe ground for group litigation and/or representative actions under CPR 19.6. Additionally, given that environmental issues generally affect a great number of individuals, group litigation in an environmental context (such as the aforementioned case against Shell) may become increasingly prevalent. This trend may in turn be a key area of opportunity for litigation funders.

Conversely, fixation on sustainability at the cost of financial performance could also be a catalyst for disputes. Terry Smith, founder of Fundsmith, in an annual letter to investors noted that "Unilever seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business…a company which feels it has to define the purpose of Hellmann's mayonnaise has in our view clearly lost the plot". Whilst Smith kept his Unilever shares because he believed that the company's "strong brands and distribution will triumph in the end", his comments indicate a concern about the financial cost of pursuing ESG compliance over business success.

Undoubtedly the scene is set for further contentious action. A recent survey of corporates found that reputational damage was perceived as the biggest ESG-related risk but that litigation risk was also on their radar.

(1) https://www.iosco.org/library/pubdocs/pdf/IOSCOPD678.pdf
(2) https://scmdirect.com/esg-greenwashing-legal-general/
(3) https://reliefweb.int/sites/reliefweb.int/files/resources/GCLR_0.pdf
(4) https://www.clientearth.org/
(5) https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:RBDHA:2021:5339
(6)http://climatecasechart.com/climate-change-litigation/wp-content/uploads/sites/16/non-us-case-documents/2021/20211104_NSD8642021_decision-1.pdf
(7) https://www.fca.org.uk/publication/correspondence/dear-chair-letter-authorised-esg-sustainable-investment-funds.pdf

Hide and Seek: Limitation Periods in Competition Law Damages Claims

Mon, 07 Feb 2022 14:49:22 Z

Secrecy is at the heart of cartels between businesses seeking to artificially increase or maintain prices, allocate customers or protect their market shares in certain geographies. As a result, victims of cartels are often unaware that they have been harmed financially until details of the cartel come to light during regulatory investigations. This information asymmetry between victims and perpetrators in cartel damages claims pervades many aspects of competition law disputes, with defendants often being required to disclose vast amounts of data and documents during such proceedings to establish the economic and factual theories of harm.

Additionally, the secretive nature of cartels raises a question of when limitation periods begin to run for claimants wishing to recover their potential losses from the cartelists. Generally, section 2 of the Limitation Act 1980 (LA 1980) states that "an action founded on tort(1) shall not be brought after the expiration of six years from the date on which the cause of action accrued." However, the law also recognises that where "any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant…the period of limitation shall not begin to run until the plaintiff has discovered the… concealment… or could with reasonable diligence have discovered it" (section 32(1) LA 1980). This provision is typically relied on by claimants in cartel cases.

Given the secretive nature of cartels, limitation therefore often does not begin to run until facts relevant to the claimant's right of action have been revealed. This was often taken to be from the point at which a public regulator such as the UK's Competition and Markets Authority (CMA) or the European Commission (EC) publishes or announces sufficient details of an infringement decision.

However, a recent High Court judgment put back into focus the second limb of section 32(1) LA 1980: the question arose whether a claimant could with reasonable diligence have discovered the facts relevant for it to bring an action prior to the regulator's announcement of an infringement decision.

Gemalto v Infineon and Renesas(2)

On 19 July 2019, Gemalto issued a claim against Infineon and Renesas for damages arising out of an infringement of competition law by the defendants for the supply of smart card chips. The action was based on the EC's infringement decision dated 3 September 2014 (the Decision).(3)

On the basis that the cartelists coordinated their prices between 2003 and 2005, ordinarily, limitation would have expired by 2011. Given the secret nature of the cartel however, limitation was suspended up to the date on which the claimant could reasonably have discovered the essential facts of the cartel. The question put before the judge in a preliminary issues hearing was accordingly whether that date was the date of the Decision, or whether Gemalto, had it been reasonably diligent, could have discovered the facts required for it to plead its damages claim at a date prior to the announcement of the Decision.

The legal test

Before considering the facts of the case, it is worth setting out the applicable legal tests as to the operation of section 32(1) Limitation Act 1980 as summarised by Bacon J. in Gemalto and as derived from a line of case law.(4)

Firstly, the judge established that limitation would run from the moment in time at which the claimant could plead sufficient facts to establish the following constituent elements of a competition law damages claim:

"(i) an agreement or concerted practice between undertakings; (ii) having as its object or effect a prevention or distortion of competition law that is appreciable; (iii) which affects trade between Member States, or within the UK; and (iv) which has caused loss and damage to the claimant."(5)

Secondly, the particular facts that would enable a claimant to plead to (i) and (ii) above are:

"(i) the identity of the undertakings who had participated in the agreement; (ii) the fact that the agreement involved the coordination of market behaviour for [in this case, smart card chips] in breach of the EU competition rules; (iii) the fact that the geographic scope of the cartel extended to the EEA; and (iv) the time period covered by the agreement."(6)

It was conceded by Gemalto that knowledge of these facts would also permit it to infer that the cartel had affected trade between Member States, or within the UK. Based on then knowing that Gemalto had purchased cartelised products, knowledge of loss and damage could also reasonably be inferred.

In addition, as to the requisite level of knowledge, the judge held that the appropriate test was the so-called 'statement of claim test'. In other words, a claimant would require knowledge of facts that would permit it to properly plead its case, benefitting from a judicial acknowledgement of the asymmetry of knowledge of information in competition law damages claims. It is not necessary for the claimant to be certain of these facts: a reasonable belief, on an objective basis, in their accuracy is sufficient.

The facts

The judge recognised that the application of the legal tests was a fact-sensitive question. The judgment should accordingly be read as pertaining primarily to the smart card chips cartel and the individual circumstances of the claimant, Gemalto.

In short, the judge held that Gemalto had sufficient knowledge of the facts of the cartel for it to plead properly to a damages claim prior to the announcement of the Decision on the basis of two key events:

Firstly, during the EC investigation, Gemalto as a direct purchaser of smart card chips had received two Requests for Information (RFI) from the European Commission in 2012. The RFIs indicated the market – smart card chips – as well as the suspected time period of the infringement and its EEA scope. They also contained specific questions as to the manufacturers of smart card chips, namely Philips, Samsung, Renesas and Infineon. The RFIs were widely discussed within Gemalto.

Secondly, on 22 April 2013, the EC issued a Statement of Objections (SO) to the smart card chip manufacturers, which was also discussed internally within Gemalto.

While the judge held that the RFIs provided many of the required factual details for Gemalto to plead its claim, it was the issuing of the SO that put Gemalto in a position to reasonably believe that it had suffered loss and damage. As an SO is issued by the EC following a detailed review of the evidence before it and based on a strong belief that the addressees of the SO breached EU competition law, a claim filed after the issuing of as SO would not have been speculative in this regard.

The judgment

The judge ultimately found that (a) Gemalto had sufficient facts available to properly plead its case and (b) could have been sufficiently confident that a breach of European competition law had occurred by the time the EC issued the SO. Accordingly, the limitation period had expired in April 2019, six years after the SO, and three months before Gemalto's claim was filed in July 2019.

Implications of the judgment

By its very nature, the assessment of whether limitation has started running prior to the publication of an infringement decision is highly fact-sensitive. For example, many prospective claimants will not have been issued with RFIs that provided key information for them to plead their case prior to the adoption of a decision, and cartelists that elect to settle their cases with the regulator will frequently not be issued with an SO. Even where an SO is issued, the announcement will not normally contain sufficient information for claimants to prepare pleadings without the benefit of having been provided with further information during an RFI process. A careful analysis of specific circumstances will always be required.

However, the case serves as a reminder that parties to competition law damages claims should carefully consider whether the limitation period has already started running prior to the adoption of an infringement decision, particularly where claims are filed towards the end of the six-year period following the decision, where there are parallel proceedings in other jurisdictions and where the investigation by the regulator was drawn out. In some cases, a claimant will accordingly be required to either enter into standstill agreements with defendants or to issue a claim and stay proceedings until a decision is adopted to preserve its rights.

Parties should also be mindful of the associated costs of bottoming out a limitation defence: being highly fact sensitive, limitation disputes will usually be determined as a preliminary issue involving detailed witness statements, legal submissions and a hearing.

Lastly, it should be noted that the impact of the judgment is limited to claims arising out of cartel behaviour that occurred prior to 9 March 2017.(7) Limitation periods for cartels that occurred after this date will start running from the date the anti-competitive behaviour ended and the claimant has sufficient knowledge to properly plead its case (as before), but, importantly, will be suspended during an investigation of the cartel by a competition authority, including any subsequent appeals,(8) and during consensual dispute resolution.(9) Going forward, in most cases limitation will therefore run for a period of six years from the date one year after the decision becomes final (i.e. when the time period for appealing the decision has expired or, if the decision is appealed, any avenues for appeal have been exhausted).

(1) Competition law damages claims are often pleaded as breaches of statutory duty.
(2) Gemalto Holding BV and others v Infineon Technologies AG and others [2022] EWHC 156 (Ch) (Gemalto).
(3) European Commission Decision in Case AT.39574 Smart Card Chips dated 3 September 2014.
(4) Including Arcadia Group Brands v Visa [2015] EWCA Civ 883, DSG Retail v Mastercard [2020] EWCA Civ 671, Granville Technology Group v Infineon Technologies [2020] EWHC 415 (Comm) and OT Computers v Infineon Technologies [2021] EWCA Civ 501.
(5) Gemalto, paragraph 24.
(6) Gemalto, paragraph 25.
(7) See Claims in respect of Loss or Damage arising from Competition Infringements (Competition Act 1998 and Other Enactments (Amendment)) Regulations 2017 of 8 March 2017.
(8) Para 21 of Schedule 8A to the Competition Act 1998.
(9) Para 22 of Schedule 8A to the Competition Act 1998. 'Consensual dispute resolution' means arbitration, mediation, or any other process enabling parties to a dispute to resolve it out of court.

No knowing receipt claim where equitable interest is destroyed: Byers v Saudi National Bank

Thu, 03 Feb 2022 21:07:03 Z

A continuing proprietary interest in the relevant property is required for a knowing receipt claim to be possible.

The case(1) arises in the context of the continuing legal fallout from the corporate collapse of both the Ahmad Hamad Algosaibi & Brothers Company (AHAB) and the Saad Group in 2009. Those collapses, the creditors pursuit of recoveries and the subsequent allegations of fraud involving those behind the Saad Group have played out in courts around the world over the last 13 years. The latest judgment, this time from the English Court of Appeal, arises out of an ultimately unsuccessful attempt by liquidators of a Saad Group company in Cayman to bring a claim in knowing receipt in relation to its alleged interests in various shares transferred to a bank in Saudi Arabia shortly before the Saad Group's collapse.

Whilst this case ultimately turned on issues of Saudi Arabian law, the principles examined at first instance and in the Court of Appeal are of wider interest to those who may be looking to advance a claim in knowing receipt.

Facts

The Claimants are Saad Investments Company Limited (SICL), a company registered in the Cayman Islands, and its joint official liquidators, Mr Mark Byers and Mr Hugh Dickson. A winding up order was made against SICL on 18 September 2009.

The claim arises from a transfer of shares in 5 Saudi Arabian banks from Mr Maan Al-Sanea, the driving force behind the Saad Group, to Samba (a Saudi Arabian bank, whose assets and liabilities were transferred on 1 April 2021 to the Defendant) in September 2009 (the September Transfer). The Claimants alleged that the September Transfer was made in breach of trust, and that Samba was liable as a knowing recipient of the shares because it had knowledge of SICL’s interest in the shares. Samba failed to comply with an order for disclosure and was consequently debarred from defending the claim except in respect of certain limited issues. The First Instance judge stated "all factual questions other than the content of Saudi Arabian law and the valuation issues were deemed to have been resolved in accordance with the claimants' pleaded case"(2). The only substantive issues which fell to be determined by the High Court and subsequently the Court of Appeal were:

Whether the effect of Saudi Arabian law, as the governing law of the September Transfer, was to extinguish SICL's rights in the shares even if Samba had knowledge of SICL's interest ('the Saudi Arabian Law Issue');
Whether the claim, pleaded by the Claimants as governed by Cayman Islands or English law, must fail if SICL's interest was so extinguished ('the Law of Knowing Receipt Issue'); and
The value of the shares at the date of the September Transfer and at the date of judgment – the question was whether a block discount should be applied to the quoted prices of the shares on the Saudi Arabian stock exchange ('the Valuation Issue').

First instance decision: no continuing proprietary interest to support knowing receipt claim

At trial the judge, Fancourt J, determined both the Law of Knowing Receipt Issue and the Saudi Arabian Law Issue in favour of Samba. He held that "SICL had no continuing proprietary interest in the Disputed Securities [shares] after the September Transfer capable of supporting a claim against Samba in knowing receipt"(3). Fancourt J thought it unnecessary to decide the Valuation Issue given his findings on the first two issues, but noted that if he had found differently in respect of those he would have agreed that a block discount was applicable.

Court of Appeal confirms approach but considers block discount inappropriate

The Claimants appealed Fancourt J's decision submitting that:

the Claimants did not need to have a continuing proprietary interest in the shares to succeed in their knowing receipt claim,
in any event, SICL's interest in the shares was not in fact extinguished as a matter of Saudi Arabian law; and
the Judge was mistaken in thinking it appropriate to apply a "block discount".

The Court of Appeal held that:

there was nothing in Fancourt J's reasoning to suggest he was wrong in his conclusion with regards to the Saudi Arabian Law Issue.
Fancourt J was right in his conclusion on the Law of Knowing Receipt Issue. It was held that a continuing proprietary interest in the relevant property (in this case shares) is required for a knowing receipt claim to be possible. A defendant cannot be liable for knowing receipt if he took the property free of any interest of the claimant.
Fancourt J was mistaken in thinking that applying a block discount would be appropriate. The Court of Appeal's reasoning was based on consideration of the circumstance where a trustee has elected to receive the value of an asset rather than its return in specie. The sum which is necessary to restore or re-constitute the trust fund will be best determined by reference to the cost of the asset had it been purchased by the trustee rather than what the asset would have fetched on a sale.

(1) [2022] EWCA Civ 43
(2) Paragraph 6
(3) Paragraph 9

Case closed: Court of Appeal has no inherent jurisdiction to review decision by single Court of Appeal Judge refusing permission to appeal if refusal is 'arguably wrong'

Thu, 03 Feb 2022 10:54:41 Z

The Court of Appeal noted that it is never enough to demonstrate that the refusal was arguably wrong, and that instead the rules around reopening a refusal of permission are narrowly confined.(1)

Facts

The claimant was incorporated in 1998 to take over a project to recycle furniture which had been started some years earlier by volunteers in Aberystwyth. One of the volunteers was the first defendant / appellant who became a director of the claimant, along with four others. In 2003 the claimant purchased a property (a derelict platform at Aberystwyth Railway Station) and adjacent waste land. The claimant company moved into a property developed on the land. The first and second defendants took financial and accountancy advice in relation to the provision for themselves of pensions from the claimant, which resulted in the property being largely transferred (in several transactions) to the pension fund with a leaseback to the claimant.

In March 2019, the claimant issued a claim against the first and second defendants for breach of directors' duties in relation to the property transactions. The defendants denied any wrongdoing, contending that, as the claimant was a company limited by guarantee with no shareholders, they were entitled as the only members and directors to make the relevant property transfer and their actions could be attributed to the claimant, so that they had acted lawfully.

At first instance, the High Court held that the defendants were in breach of their duties under sections 171 to 177 of the Companies Act 2006 (the 2006 Act) and of their fiduciary duty to the company but that they had not acted dishonestly. The defendants appealed on the grounds that the High Court was wrong as a matter of law to draw a distinction between the capacity and powers of the claimant company and to find that the first and second defendants had acted outside the powers and in breach of duty, and that the Court ought to have found that the company, acting by or with the unanimous agreement of its members, had capacity and power to deal with its property in any lawful manner.

Popplewell LJ refused permission to appeal. In August 2021 the defendant applied under CPR 52.30 and the Court of Appeal's inherent jurisdiction permission to reopen the appeal. The application to reopen the appeal came before Andrews LJ on paper. Andrews LJ considered that Popplewell LJ had not directly engaged with one of the issues raised by the first defendant's proposed appeal and ordered that the application to reopen should be dealt with at the same time as the application for permission to appeal (if reopening the appeal was allowed) at a hearing before the full Court of Appeal.

Decision

The Court of Appeal began by noting that the appellant's submissions proceeded on the "fundamental misapprehension" that the Court of Appeal had some inherent jurisdiction to review a decision by a single Court of Appeal judge to refuse permission to appeal if the issue raised on appeal was an arguable one, so that the decision to refuse permission was "wrong". The Court of Appeal said that such supposed jurisdiction would be completely contrary to CPR 52.30(1) and (2), which is a tightly constrained jurisdiction. The Court of Appeal will only reopen a refusal of permission to appeal if the criteria in that rule are satisfied. Those rules provide that an appeal – including a decision on permission to appeal – will not be reopened unless: (a) it is necessary to do so in order to avoid real injustice; (b) the circumstances are exceptional and make it appropriate to reopen the appeal; and (c) there is no alternative effective remedy.

The Court of Appeal further noted that the existence of such an inherent jurisdiction would also contradict a number of decisions of the Court of Appeal regarding the appeal jurisdiction, which make it clear that it is never enough to demonstrate that the refusal of permission was arguably wrong.(2)

The Court of Appeal also rejected the appellant's argument that the inherent jurisdiction derived from or was supported by the power given in CPR 3.1(7).

The Court of Appeal confirmed that whilst an exhaustive definition of the circumstances in which this discretion could be exercised was not possible, as a matter of principle it could normally only be exercised: (a) where there has been a material change of circumstances since the order was made or (b) where the facts on which the original decision was made were (innocently or otherwise) misstated.(3)

Accordingly here any application to reopen the appeal could only be made under CPR 52.30.

As to the satisfaction of the criteria set out in CPR 52.30(1) itself, the Court of Appeal endorsed the commentary in the White Book, which states that the rule is drafted in highly restrictive terms, is truly exceptional, and that both practitioners and litigants should note the high hurdle to be surmounted and should refrain from applying to reopen the general run of appellate decisions. The Court of Appeal confirmed that the jurisdiction could only be properly invoked where it is demonstrated that the integrity of the earlier proceedings had been critically undermined.

As to whether the present case met that high threshold, the Court of Appeal held that it did not. Whilst Popplewell LJ had not expressly dealt with a point raised by the appellant under section 39 of the 2006 Act regarding the ultra vires doctrine, the Court of Appeal held that this was a "bad point": the fact that section 39 abolished the ultra vires doctrine as between the company and third parties did not relieve the directors from liability to the company for their breach of duty or wrongdoing merely because, as members of the company, they agreed with the course which was taken.

As to Popplewell LJ's reasoning in dismissing the appeal, the Court of Appeal held that Popplewell LJ had dealt expressly with the appellant's main argument in refusing permission to appeal. The Court noted that Andrews LJ herself had recognised on paper that the High Court's reasons for rejecting the defendant/appellant's main argument and Popplewell LJ's reasons for refusing permission to appeal in respect of it, were unimpeachable. The Court of Appeal held that it followed that, although Popplewell LJ had not dealt expressly with all of the appellant's arguments, he had been right to refuse permission to appeal. From this, it had to follow that the appellant could not begin to satisfy the first two criteria for reopening an appeal under CPR 52.30. There could be no question of it being necessary to reopen the appeal to avoid real injustice, and the appellant could not show that he had suffered any injustice from his application for permission to appeal being refused. Furthermore, there was no question of the circumstances of the case being exceptional.

The Court of Appeal held that it was clear from the authorities that "exceptional" meant more than merely out of the ordinary run of cases, but rather that an obvious and egregious error has occurred in the permission to appeal process which error has vitiated or corrupted the very process itself or, the integrity of that process has been critically undermined. In circumstances where Popplewell LJ did not expressly deal with a particular point, but was right to refuse permission to appeal, the appellant came nowhere near satisfying that test.

This application to reopen the refusal of permission to appeal therefore failed.

Comment

Once again the Court of Appeal has confirmed the highly restrictive nature of the appeal rules. In doing so it has closed down, for sound policy reasons, any suggestion of there being any special jurisdiction to re-open an appeal beyond the strict criteria contained in the Civil Procedure Rules. However, that decision did appear to turn on the fact that the analysis undertaken by the appeal judge was "unimpeachable". Parties seeking to reopen an appeal permission decision must consider if they meet the very high threshold.

(1) Ceredigion Recycling and Furniture Team v Pope [2022] EWCA Civ 22.
(2) (R (Goring on Thames Parish Council) v South Oxfordshire District Council [2018] EWCA Civ 860.
(3) Tibbles v SIG plc [2012] EWCA Civ 518.

How aware were you? High Court refuses to strike out fraudulent misrepresentation claim in VW 'Dieselgate' emissions

Thu, 03 Feb 2022 10:46:38 Z

The crux of the judgment related to whether the claimants were sufficiently "aware" of the alleged implied representations to have relied on them in deciding to purchase their vehicles. The Court considered that the issue was not a "short point of law" and it must be considered at the trial, which is scheduled for January 2023.

Facts

The case arises from 'Dieselgate' or the 'VW Emissions Scandal'. The class action Claimants are owners of Volkswagen, Audi, Skoda and SEAT diesel vehicles. The Defendants are Volkswagen AG, Audi AG, Skoda Auto a.s., Seat S.A., Volkswagen Group United Kingdom Limited and a group of authorised VW dealers (collectively referred to as "VW").

The basis for the class action against VW is that the engines purchased by the Claimants were fitted with a "defeat device" which allowed the vehicles to cheat emissions tests. The defeat device enabled the engines to recognise when they were being tested for compliance and had two modes. When operating in mode 1, the engine would emit nitrogen oxides at a level below the permissible levels allowed under the relevant emission regulations. Otherwise, when operating in mode 2, the emissions exceeded permissible limits.

The Claimants advance various causes of action, including allegations that VW fraudulently made implied representations to all potential purchasers that their vehicles complied with emission standards and that all testing had been carried out properly and honestly (the "Deceit Claim").

VW made an application to strike out or summarily dismiss the Deceit Claim on the basis of a contention that the Claimants must plead and prove that they were "consciously aware" of the fraudulent misrepresentations in order to sustain their claim. VW sought to argue that it was unlikely and implausible that the Claimants would "actually have turned their minds" to the alleged representations at the time of purchasing the vehicles and that the claim should therefore be dismissed or struck out.

"Awareness" in previous authorities

The Court considered the relevant prior judgments relating to the level of "awareness" of a representation which is required in order to establish reliance on it in a misrepresentation claim, which is particularly acute when considering representations such as these which are implied from the representor's conduct in proposing a transaction.

Those authorities included the well-known LIBOR cases of Property Alliance Group v Royal Bank of Scotland plc(2), Marme Inversiones 2007 v Natwest Markets plc(3) and Leeds City Council v Barclays Bank plc(4), which represent a strand of caselaw on the level of awareness required in respect of the implied representation that banks selling LIBOR-linked products were not engaged in manipulation of that benchmark.

In the latest of those LIBOR cases, the Leeds decision, the Judge in Charge of the Commercial Court allowed Barclays' application to strike out claims against it, on the basis that the claimants had not been able to plead that the alleged misrepresentations were actively in their mind at the time of being made, such that their claim must fail on grounds of reliance. That decision is currently under appeal. In reaching that finding, Cockerill J expressed some reservations as to whether a "quasi-automatic awareness" might be sufficient, but then found herself bound to hold that active awareness of thought was required at least in the particular circumstances of LIBOR manipulation fraudulent implied representation cases. In doing so, the judge in Leeds distinguished other lines of case law on reliance including the House of Lords criminal case of DPP v Ray(5), and Spice Girls Ltd v Aprilia World Service BV(6), amongst others.

High Court decision in the VW case: Claimants' reliance must be decided at trial

Having considered the line of authorities, the Court dismissed VW's application to strike out the Deceit Claim. The Court refused to determine as a summary matter whether the awareness component of the Claimant's claim had been satisfied, noting that it was not a "short point of law" and that it was a matter which would have to be dealt with at the trial.

Turning with particular interest to Leeds, the Court observed that that judgment had raised the question as to whether "quasi-automatic awareness" of an implied representation might be sufficient. The Court considered it to be arguable that a customer buying a vehicle from a reputable manufacturer could have a quasi-automatic awareness of an implied representation that the car is lawful to drive and that it complies with all relevant regulations.

The Court also disagreed with the basis on which the judgment in Leeds had distinguished the judgments in DPP -v- Ray and Spice Girls. In essence, it regarded the outcome of the LIBOR strand of case law to be a wrong turn in the law. The Court observed that the Spice Girls case supported a principle that sufficient reliance on an implied representation could be established by a counterfactual of truth - i.e., by establishing that the transaction would not have proceeded if the representee had been told the truth instead of the (implied) false representation. That test, of course, does not require conscious awareness or thought about the false representation as part of reliance, which can therefore take a form closer to an automatic assumption that the (in fact false) implied representation is true.

The Court concluded that the Deceit Claim had a real prospect of success where there was a relevant assumption or counterfactual of truth (i.e., where the Claimants would not have purchased the vehicles if not for the misrepresentations). It was therefore a case which must be tested at trial.

Comment

The judgment highlights the complexities of the requirement of awareness in a fraudulent misrepresentation claim. While the issue of the Claimants' reliance is yet to be determined in this case, the judgment is a welcome swing away from the recent LIBOR cases and back to the earlier strands of authority on these points. In so doing it adds significant momentum to the clear note of scepticism struck in the Leeds decision, but in an admirably direct way. It is welcome recognition that it may be sufficient from a reliance perspective for a claimant to show that there was a quasi-automatic assumption drawn from the context that the defendant was making an implied representation of honesty, particularly where it can be shown that the claimant would not otherwise have entered into the transaction had they known the truth.

The case law on this issue remains in flux, with the anticipated decision of the Court of Appeal in Leeds being the next opportunity to consolidate and clarify the requirements of extent of awareness.

(1) Crossley and others v Volkswagen Aktiengesellschaft and others [2021] EWHC 3444 (QB)
(2) Property Alliance Group v Royal Bank of Scotland plc [2016] EWHC 3342
(3) Marme Inversiones 2007 v Natwest Markets plc [2019] EWHC 366 (Comm)
(4) Leeds City Council and others v Barclays Bank plc [2021] EWHC 363 (Comm)
(5) DPP v Ray [1974] AC 370
(6) Spice Girls Ltd v Aprilia World Service BV [2002] EWCA Civ 15

Limitation Act 1980 s.32(1): whether a claimant could have discovered fraud with "reasonable diligence" extends to events prior to accrual of the cause of action

Thu, 06 Jan 2022 16:39:28 Z

Facts

The case arises out of an investment in the European Care Group ("ECG") business by a property debt fund called the European Real Estate Debt Fund (the "Fund"). European Real Estate Debt Fund (Cayman) Limited (in liquidation) (the "Claimant") is the assignee of the Fund.

ECG had been founded by the First Defendant, Mr Treon, in 2000. ECG was advised for many years by the Second Defendant, financial advisory firm RP&C International Limited (which subsequently changed its name to Arundel Group Limited), and in particular Dr Srinivas, the Third Defendant.

In 2010, ECG decided to issue a series of loan notes in an attempt to raise US$50m. ECG appointed the Second Defendant as placement agents and the Third Defendant as the person responsible for liaising with new investors.

On 24 June 2011, the Fund made its principal investment in ECG in the amount of £11m. Prior to the Fund's investment, the Fund's advisers had engaged in numerous discussions with the First and Third Defendants about the investment and ECG's business and prospects from around January 2011 onwards.

The Fund's advisers discovered that certain financial information about ECG's business and prospects that had been provided by the Defendants was false and misleading and confronted the First Defendant at a meeting in March 2012. The First Defendant was removed as a director of ECG in March 2012. ECG's new management subsequently invited the Fund to make a further investment and the Fund invested another £4.25m in July 2012.

In 2014, ECG went into administration and the Fund lost the entire value of its investment.

The Claimant, as the Fund's assignee, alleged that the Defendants fraudulently misrepresented the recent financial performance and future prospects of the business which were relied upon and subsequently induced the Fund's investment in ECG.

The Claimant issued the claim on 16 October 2017, and sought to rely on s32(1) of the Limitation Act 1980 to seek to postpone the start of the limitation period. The Defendants argued that the claim was statute barred, as it was brought more than six years after the Fund's investment in ECG.

High Court decision

Although the Court noted that it would otherwise have found for the Claimant on most of the claims, it held that the claims were statute-barred.

The court considered s32(1) of the Limitation Act 1980 which provides:

"Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either –

(a) the action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff's right of action has been deliberately concealed from him by the defendant; or
(c) the action is for relief from the consequences of a mistake

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it. References in this subsection to the defendant include references to the defendant's agent and toany person through whom the defendant claims and his agent.

The Court further referred to the judgment in OT Computers Limited v Infineon Technologies AF [2021] EWCA Civ 501, noting in particular:

the state of knowledge which a claimant must have in order for it to have discovered the concealment (fraud in this case) has mostly been regarded as the knowledge sufficient in order to enable it to bring a claim;
there will be cases where the discovery of relevant facts involves a process which takes place over a period of time during which a claimant who exercises reasonable due diligence could have discovered enough to plead the claim or embark on the preliminaries before issuing proceedings;
the question is whether or not the claimant could, with reasonable diligence, have discovered the fraud sooner (the standard for this was not to be judged against the six-year limitation period; instead, the test is how a person carrying on a business of the relevant kind would act if they had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency); and
the burden of proof is on the claimant to establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take.

The Court noted that s32(1) only becomes relevant once there is a complete cause of action, as that is the point where the limitation period would commence. That said, the Court must examine all of the facts and should not artificially restrict itself to events or circumstances which arose only after the cause of action accrued.

The principal question when determining whether or not s32(1) can be relied upon is whether the claimant either has, or could have, reasonably discovered the fraud without taking exceptional measures. This may well turn on events which occurred before as well as after the loss was suffered.

Applying these principles to the facts of the case, the Court expressed that it expected that the Fund's advisers, who were experienced in analysing and assessing financial and accounting information, would have undertaken due diligence before arranging an investment. The Court held that it was clear to the Fund's advisers that the financial information provided by ECG prior to the Fund's investment was incomplete. The Court further found that the financial information that had been provided prior to the investment would have caused a reasonably diligent investor to ask further questions and demand additional information. Finally, the Court found that if the Fund's advisers (or the putative reasonable investor) had asked further questions and made information requests regarding the financial information that had been provided, they would have discovered sufficient facts to enable the Fund to plead a statement of claim.

In the light of the above, the Court concluded that the Claimant failed to satisfy the requirements of s32(1) and the Claimant's claim was statute-barred.

Comment

In the context of s 32(1) of the Limitation Act 1980, it is clear from this decision that the Court's enquiry as to whether the claimant could have discovered a fraud with reasonable diligence extends to the period before the claimant suffered a loss.

It is the responsibility of the claimant to gather sufficient evidence and material in order to demonstrate and convince the Court that, without exceptional measures, it would not have been possible to discover the fraud. The Court will then consider circumstances arising both before and after the action accrued, particularly whether or not it was reasonable for the claimant to undertake certain diligence.

The decision is a caution to victims of fraud who seek to rely on s32(1) to extend the primary limitation period for a fraud claim. As Mr Justice Miles put it at paragraph 775 of his judgment: "the special statutory postponement of the limitation period […] is not available to all victims of fraud, however careless they may be in attending to and asserting their rights. If a claimant could reasonably have discovered the fraud by virtue of events and circumstances occurring before it actually suffered a loss, there is no principled rationale for allowing it the indulgence of more than the normal six years’ period to bring its claim."

Is your phone tracking you? Perhaps, but it is a mere witness to your whereabouts according to the Court of Appeal

Thu, 06 Jan 2022 16:10:21 Z

The Court of Appeal found that even where the records sought were likely to prove whether the insurance claim was false, the service provider was no more than a mere witness to the alleged wrongdoing and so it had no jurisdiction to make a Norwich Pharmacal order. In deciding this way, the court found that enabling a person to lie about their whereabouts did not mean that a mobile phone service provider was so involved in the lie so as to justify the disclosure of its records.

Facts

The claimant is an insurance company who issued a home insurance policy covering an address in London. The policy covered the costs of alternative accommodation where the policy holder was forced to live elsewhere but set a limit of £1,000 per month where the policy holder was able to stay with relatives. In August 2019, the policy holder made a claim for flooding and told the claimant that he and his family were staying with his parents. Then, in December 2019, the policy holder told the claimant that he and his family were renting a house for £1,850 per month and the claimant made payments covering that higher sum from December 2019 to May 2020.

Upon further enquiries, the claimant discovered that the rented house was owned by the policy holder's parents and started to suspect that he had concocted a formal tenancy to circumvent the £1,000 monthly limit on displacement costs. During the investigation, the policy holder gave a formal statement about his parents' whereabouts during the relevant period. The claimant doubted this statement and planned to issue proceedings to recover the excess payments made under the policy but, before doing so, wished to obtain proof that the policy holder's parents were not where he said they were in the relevant period.

The defendant is the service provider for the policy holder's mother's mobile phone. The claimant issued a claim against the defendant for a Norwich Pharmacal order on the ground that they intended to launch proceedings against the policy holder but required data showing the location of the mother's phone before doing so.

The first instance judge refused the claimant's application and the claimant appealed.

Decision

The Court of Appeal summarised the authorities setting out the requirements for granting a Norwich Pharmacal order, which are:

A wrong must have been carried out, or arguably carried out, by an ultimate wrongdoer;
There must be a need for an order to enable an action to be brought against that ultimate wrongdoer; and
The party against whom the order is sought must be more than a mere witness to the wrong.

The question the court had to decide, therefore, was whether Vodaphone, the defendant, was more than a mere witness to the wrong that the policy holder had arguably carried out i.e., lying about the whereabouts of his parents in order to claim an uplift in the displacement costs payable under the policy. The claimant argued that Vodaphone was more than a mere witness because it had facilitated the wrong: unlike landlines, mobile phones have enabled people to lie about their whereabouts and by providing a mobile phone service Vodaphone had facilitated the ability of the policy holder's mother to pretend she was living elsewhere and her son to make a false insurance claim.

The court was not persuaded by this argument. The judges said that they could see that the policy holder's parents were arguably involved in the wrongdoing but that they could see no basis on which it could be said that his mother's mobile phone service provider was more than a mere witness to the wrong. The fact that the phone account holder was able to say she was in one place and be in another thanks to her mobile phone did not draw the phone company into her wrongdoing. They acknowledged that while it was true that the phone records sought might have assisted in establishing the truth, there was no real difference between Vodaphone and anyone else who may be able to provide evidence on that issue (including the milkman) who would manifestly be mere witnesses. The court therefore found that it had no jurisdiction to grant the Norwich Pharmacal order sought.

Comment

In setting out the third limb of the Norwich Pharmacal test, the court gave helpful guidance on what needs to be shown of the party against whom the order is sought. This limb is often expressed as requiring that party to have been so mixed up in the wrongdoing so as to have facilitated it. However, the court explained that this formulation is simply a means of demonstrating that the party is more than a mere witness to the wrong. If there are facts that fall short of demonstrating that that party facilitated the wrongdoing but that show that it was more involved than a mere witness would be, a Norwich Pharmacal order may still be ordered against it. What is required is that the party is more than a mere witness, not that it facilitated the wrongdoing (as is often stated).

This is particularly important in the contemporary context in which individuals create reams of data recording their day-to-day activities without effort and, often, any intention to do so: the entities who hold that data are likely to be mere witnesses to those activities such that the court will not compel disclosure of that data even where it would be likely to prove (or disprove) a claim against the individual. This is likely to be of considerable comfort to consumers in the digital age.

(1) [2021] EWCA Civ 1771

High Court clarifies new witness evidence rules and requirement for list of documents under Practice Direction 57AC

Mon, 20 Dec 2021 17:04:21 Z

Facts

The Defendant (Fox) agreed to design and build an extension to and refurbish student accommodation for the claimant (Mansion). The project was delayed, and the contractual completion dates were missed. This resulted in a dispute regarding Mansion's right to deduct liquidated damages from sums claimed by Fox in a payment notice.

The key issue was whether Mark Kite, Fox's managing director, entered an oral agreement by telephone with Mansion's director, Shankar Ramanathan, on 14 October 2020. Fox alleged that in this phone call Mansion agreed not to deduct liquidated damages from Fox as regards the project delays and Fox agreed not to claim any loss and expense. Mansion averred that no binding contract was formed, whereas Fox maintained that there was a binding agreement, or alternatively, the liquidated damages provision was void and/or unenforceable.

The parties both made applications in relation to the admissibility of the other party's witness statements.

Fox's witness statements attached a list of documents referred to in the statement, but not all of the documents to which the witness had been referred. Mansion's solicitors asked Fox's to confirm the approach used and Fox's solicitor replied: "I have to confess I wasn’t aware Practice Direction 57AC applied and have prepared the statements the 'old fashioned way' by exhibiting documents referred to in the statements." Fox's solicitors later stated that this was only a reference to the PD 57AC requirement to list documents, instead of the whole of PD 57AC.

Mansion's solicitors raised their concerns in relation to Fox's witness statements and PD 57AC compliance, and in return Fox's solicitors raised concerns with Mansion's witness statements. Mansion applied to remove non-PD 57AC-compliant sections of Fox's evidence and for the certificate of compliance to be amended to specify that the requirements of PD 57AC were not discussed with or explained to the witnesses until after the statements were drafted, and that the statements were not prepared in accordance with the statement of best practice in PD 57AC. Fox later sought to amend/redact Mansion's evidence that was not compliant with PD 57AC and/or CPR 32 and Fox's counsel identified corrections and additions to ensure compliance.

It later transpired that one of Fox's witnesses (Mr Higginbottom), a non-solicitor, had taken Mr Kite's evidence for the initial drafts of Mr Kite's statements. Fox maintained that following Aquarius Financial Enterprises Inc v Lloyd’s Underwriters (The Delphine) [2001] 2 Ll.Rep. 542, the witness statements could be prepared by someone other than the party's solicitor if the third party exercised the same standards that would apply if the statements were taken by the solicitor. Further, Fox's solicitors explained to Mr Higginbottom the approach to preparing trial statements, specifically the need for the statements to be in the witness' own words and confined to the facts, and avoid argument, submission or any detailed commentary on the documents.

Decision

The judge found that Fox's solicitor was aware of PD 57AC (having referred to it in earlier, unrelated adjudication proceedings). The judge reiterated the importance of avoiding satellite litigation that is disproportionate to the size and complexity of the dispute, and flagged that the sensible course of action where one party is concerned that another has not complied with a PD, is to raise the concern with the other side and attempt to reach an agreement. The assistance of the court should be requested at a time and manner that does not disrupt trial preparation or cause unnecessary costs. In this case the judge did not criticise the parties for bringing the matter before court as it highlighted the new PD and enabled the court to set out guidance.

The judge clarified that where paragraph 3.2 of PD 57AC stated that a witness statement must identify by list: “what documents, if any, the witness has referred to or been referred to for the purpose of providing the evidence set out in their trial witness statement" this does not require each document looked at during the proceedings by the witness to be listed. The purpose of the rule is to provide transparency regarding documents used to refresh the memory of the witness so that the court and the other side can understand the extent to which the witness might have been influenced by the contemporaneous documents, including those not seen at the time. Even prior to PD 57AC, a proper approach to preparing a trial witness statement would result in compliance with the statement of best practice in PD 57AC.

The judge found that Mansion was justified in its concerns with regards to Mr Higginbottom's impartiality and independence in preparing Mr Kite's draft statements, especially for a case where the evidence related to a vital telephone exchange. Whilst the judge found that it may be difficult for Mr Higginbottom to record the evidence "without viewing it through the lens of his formed opinion", it was evident from Fox's solicitor's statement and an email from counsel that steps had been taken to ensure Mr Kite's account was revised before service to set out the words Mr Kite had used, rather than any paraphrasing. The judge also found that Mr Kite and Mr Higginbottom being tendered for cross-examination at trial was an additional safeguard against tainted evidence.

The court also found that Fox's witness statements were prepared with the PD in mind and that the best practice principles had been adopted. The Court rejected Mansion's application for Fox's representatives to re-draft the certificate of compliance.

The judge also confirmed that in keeping with PD 57AC, commentary on documents or opinion should be avoided. Accordingly, both parties had to redact evidence where this had not been complied with.

Comment

First, this decision provides clarity that witness statements only need to list documents used to refresh the memory of the witness. This puts to bed the debate whether client witnesses, who may have seen documents throughout the course of litigation, may need to refer to documents seen earlier on in the process. Second, the decision reminds practitioners that the statement of best practice should be used as a checklist for witness evidence. And third, as long as practitioners bear the principles of PD 57AC "in mind" when preparing witness evidence, even if there is not complete compliance with the rules, an attack on the witness statement by the other side may not be successful. This may discourage parties from engaging in satellite disputes save in the most egregious cases of non-compliance.

No best endeavours order where documents are out of party's control

Thu, 16 Dec 2021 15:20:00 Z

Background

The Claimants and the third party to the action (who were various aircraft leasing companies) applied for an order for disclosure by the Defendant (Saudi Arabian Airlines Corporation) in a dispute relating to lease agreements over 50 Airbus aircraft (the Lease Agreements). The dispute concerned questions of interpretation of the Lease Agreements and estoppels based on alleged statements or assumptions which were communicated between the parties.

Disclosure was sought in respect of documents held on personal devices, in particular mobile phones, owned by two senior officials of the Defendant. Both these individuals were no longer employed by the Defendants. The first individual's personal mobile phone was not generally used for work purposes, although it may have been used for work purposes exceptionally. The second individual did not believe that his mobile phone contained any relevant material which should be disclosed.

The Claimants and third party claimed that these two officials were critical figures in the negotiation, execution and performance of the Lease Agreements. In addition, they relied on the fact that the disclosure review document listed these two individuals as custodians in respect of various documents and identified mobile telephones as data sources.

The relevant principles on "control"

The judge held that the requirement that a document has to be in the party's "control" is a critical component in delimiting the documents to which the party's obligations of disclosure apply. If that were not the case, a party's disclosure obligations would be uncontrollably wide and would create unnecessary and potentially expensive issues for determination as part of an already costly disclosure process.

A party may be deemed to have control over documents in the physical possession of a third party where: (i) the party has a legally enforceable right to obtain access; and (ii) there is a standing or continuing practical arrangement between the party and the third party whereby the third party allows the party access to the documents (even if the party has no legally enforceable right of access). However, in order to establish this sort of practical arrangement, it is generally insufficient to demonstrate that there is a close relationship such as parent and subsidiary or employer and employee; the evidence must be “specific and compelling”.

No control over the documents under Saudi law

The question of control fell to be determined by Saudi law as it governed the employment relationships in question. On the basis of the expert evidence on Saudi law, the judge concluded that there was nothing under Saudi law or in the individuals’ employment contracts which conferred on the defendant the right to take possession of, or to access or inspect, the documents on their phones.

An order compelling best endeavours, absent control?

Given that the mobile phones were not within the Defendants' control, the Judge held that the Court had no jurisdiction to require the Defendant to exercise best endeavours to obtain or request its ex-employees to produce those documents for disclosure.

In doing so, the Judge stated:

That such an order of best endeavours might well be made if the requisite "control" is established (as in Phones 4U (in administration) v EE Ltd [2021] EWCA Civ 116 in which the Court of Appeal ordered the defendants to request the employees and ex-employees to deliver up personal devices that were within the defendant's control).
However, absent control:
The Judge was not aware of any authority which required a party to exercise best endeavours to obtain or to request a third party to provide documents for disclosure under the Disclosure Pilot (PD 51U), or generally under Civil Procedure Rule (CPR) 31.
The Court's jurisdiction is derived exclusively from statute or delegated legislation, namely the CPR. The CPR made no provision for such a power.
The express power under CPR 58.14 to require a party to exercise best endeavours to obtain documents from third parties, even though the documents are not in that party's control, is limited to marine insurance proceedings only.

The Judge observed that even if he was wrong on this point he would nevertheless decline to exercise his discretion to compel the Defendant to use best endeavours in this case as the associated cost and practical problems would not justify the disclosure of the material, especially where much of this material could be obtained from other sources.

Conclusion

This case confirms that the ultimate test for disclosure remains that of control. The question as to whether or not the documents were within the party's control, in this case, turned on Saudi law. However, the answer is likely to be different under English law, as a principal is entitled to have access to documents held by its agent relating to the principal’s affairs, even after the termination of the agency relationship (Fairstar Heavy Transport NV v Adkins & Anor [2013] EWCA Civ 886). In any event, this case presents helpful clarification that there is no power to order a party to seek disclosure of documents that are not within its control, absent a third-party disclosure order.

(1) [2021] EWHC 2904 (Comm)

Recent judgment on ad hoc admission of overseas counsel tells of wider COVID-19 story

Fri, 10 Dec 2021 10:01:00 Z

Re Robertson QC¹, is the latest reported judgment dealing with an application for ad hoc admission to the local bar, pursuant to section 27(4) of the Legal Practitioners Ordinance (Cap. 159). The applicant, a leading Queen’s Counsel (barrister advocate) specialising in public and administrative law matters, sought admission for the purpose of advising and representing a local barrister in the defence of disciplinary proceedings before the barristers disciplinary tribunal and in any court challenges arising out of the proceedings. The application was not opposed by the Bar Association but it was opposed by the Secretary for Justice, whose role is to act as the guardian of the public interest in such applications. The court refused the application. There appears to have been fewer applications by Queen’s Counsel (QC) based in England for ad hoc admission to the local bar in 2021, as was the case in 2020 – therein lies a COVID-19 story of (among other things) ongoing travel and quarantine restrictions for those wanting to visit or return to Hong Kong.

Background

The background to the underlying disciplinary proceedings, in respect of which the applicant sought to appear to defend the barrister, goes back over the course of several years. The applicant appears to have been advising the barrister on a pro bono basis from as early as 2017. The barrister faced a number of disciplinary complaints for alleged misconduct, including a complaint that he had allegedly failed to respond promptly to requests for information arising out of earlier disciplinary proceedings and regarding some anonymous complaints made against him for his alleged involvement in the departure from Hong Kong of “a person of considerable international interest”². The anonymous complaints had apparently been made in two identical letters from “a large group of exasperated barristers”³.

The applicant applied for permission to be admitted in Hong Kong on an ad hoc basis, in order to represent the barrister in his defence before the barristers disciplinary tribunal and in any related court hearings arising out of those proceedings.

Applications for ad hoc admission to appear in proceedings in Hong Kong are made pursuant to section 27(4) of the Legal Practitioners Ordinance (the Ordinance) and determined according to the public interest as set out in well-established case law. In short, the courts try to balance the need for a strong and independent local bar with the desirability of allowing eminent visiting QCs to appear before local courts and tribunals in cases that could have a significant impact on the development of local jurisprudence⁴. Section 27(4) of the Ordinance gives the High Court (usually the Chief Judge sitting at first instance) the power to admit an applicant as a barrister on an ad hoc basis – namely, to advise and appear with respect to a particular “case or cases” in Hong Kong, including tribunal proceedings.

Up until a few years ago there used to be between approximately 25 to 50 applications per year by English QCs to be admitted on an ad hoc basis for the purpose of appearing in proceedings in Hong Kong. While several English QCs have appeared in local proceedings on an ad hoc basis since the outbreak of the COVID-19 pandemic in Hong Kong in January 2020, the number of applications appears to have decreased. While a few applications may have proceeded by consent before the courts, with the agreement of the parties (including, the Bar Association and the Secretary for Justice), Re Robertson QC is one of the few reported judgments in 2021 arising out of a contested application for ad hoc admission by an overseas barrister.

The applicant’s legal representatives advanced the application on several grounds.

Issues of difficulty and complexity

It was contended that the disciplinary tribunal proceedings faced by the barrister would give rise to several complex and important legal issues, including:

whether the legislative regime underpinning the prosecution of barristers’ disciplinary proceedings in Hong Kong is sufficiently independent and impartial;
whether the appropriate standard of proof to be applied in disciplinary proceedings should be a criminal standard (of beyond reasonable doubt) as opposed to a civil standard (on a balance of probabilities); and
whether the barristers disciplinary tribunal chair and members had conflicts of interest.

Difficulty with instructing suitable local barrister

It was argued that the barrister would have difficulty in instructing a local barrister in his defence because:

a substantial number of local senior barristers had been officers or council members of the Bar Association (and, therefore, had been part of its governing body) at material times⁵;
several local senior barristers had apparently attended a Bar Association annual general meeting at which adverse remarks had allegedly been made about the barrister;
given the anonymous nature of some of the complaints it was difficult to determine whether any given local senior barrister was impartial as regards the proceedings against the barrister; and
given the nature of the barrister’s challenge to the disciplinary proceedings and the tribunal, a local senior barrister may feel inhibited from defending the barrister to the best of their ability. In contrast, the applicant would feel no such inhibition.

Bar Association taking neutral stance

It was also argued on behalf of the applicant that the fact the Bar Association did not oppose the application (and took a neutral stance) and that the applicant had been advising the barrister on a pro bono basis since about 2017, were relevant factors in favour of allowing the application. Normally, in practice, the Bar Association would lead any objections to an application for ad hoc admission – although, it does give its consent where it consider that an application meets its own guidelines for ad hoc admission⁶. In this case, the Bar Association took a neutral stance given the nature of underlying proceedings for which the applicant sought ad hoc admission. However, the Secretary for Justice opposed the application.

Judgment

The court dismissed the application for ad hoc admission and does not appear to have accepted any of the arguments put forward on behalf of the applicant.

Issues of difficulty and complexity

The court noted that the underlying proceedings for which the applicant sought to be admitted concerned a disciplinary tribunal and not a court. This had a bearing on the court’s approach to whether the proceedings were likely to give rise to difficult and complex issues and make a significant contribution to local jurisprudence.

As regards the constitutionality of the legislative framework for barristers’ disciplinary proceedings, the court stated:

“In the first place, it does not seem to me that the Barristers Disciplinary Tribunal would be a suitable or appropriate forum for the making of such a challenge. Nor does it seem to be, on the materials put before me, that such a challenge would have realistic prospects of success. I therefore do not attach much weight to it”⁷.

As regards the appropriate standard of proof, the court did not think that it could seriously be disputed that the appropriate standard was a civil standard and, in this regard, the applicant’s legal representatives’ arguments appear to have been tentative.

The court also noted that as regards alleged conflicts of interest on the part of a tribunal member, these were matters that could be dealt with by established principles and did not appear to raise issues of unusual difficulty or complexity.

Difficulty with instructing suitable local barrister

The court acknowledged that any senior barrister who had served as an officer or a council member of the Bar Association at relevant times would have a conflict of interest and could not act for the barrister in the disciplinary proceedings and neither, in practice, could any barrister who had taken a position that was adverse to the barrister’s interests. However, the court did not consider that this meant that there were no available local senior barristers to represent the barrister.

In response to a suggestion that approximately 80-90% of local senior barristers would be unable to act properly for the barrister (because all senior barristers who were in the same chambers as officers or council members of the Bar Association at relevant times would allegedly have a conflict of interest), the court stated:

“I do not agree that this is the correct basis on which to proceed. It is well known that barristers operate as sole practitioners, and that membership of the same chambers does not give rise to a conflict of interest between them when it comes to acting for opposing parties in legal proceedings, so that it is quite proper (and indeed common) for opposing parties to be represented by barristers from the same set of chambers”⁸.

The court was equally dismissive of the argument that the nature of the anonymous remarks about the barrister or the alleged inhibitions of local senior barristers made it impossible for the barrister to safely instruct a local senior barrister to defend him.

Bar Association taking neutral stance

The court rejected the argument that the Bar Association’s neutral stance was a factor in favour of granting the application. Indeed, the court considered that given the underlying proceedings before the barristers disciplinary tribunal would be brought by the Bar Association it was proper for it to take a neutral stance as regards the application. The fact that the applicant was willing to act for the barrister on a pro bono basis was not a significant factor.

Comment

Applications for ad hoc admission, pursuant to section 27(4) of the Ordinance, are fact dependent and the relevant legal principles are well-established. The application of these principles in Re Robertson QC, in the context of an application to appear before a professional disciplinary tribunal, is interesting even if the outcome is unsurprising. The disciplinary proceedings of themselves are unlikely to raise unusually difficult and complex legal issues that will (at the disciplinary stage) significantly contribute to local jurisprudence. A barrister dissatisfied with the findings or order of the barristers disciplinary tribunal has a right of appeal to the Court of Appeal⁹ – the applicant is not prevented from applying again to represent the barrister at an appeal stage, in the event that (for example) complex legal issues arise that would benefit from the significant contribution of a leading QC specialising in public and administrative law.

In the meantime, while Re Robertson QC is an application for ad hoc admission (and no more), the court’s general observation that membership of the same set of chambers did not give rise to a conflict of interest such as to make it inappropriate for a particular senior barrister (who was not an officer or a council member of the Bar Association at relevant times) to act for a barrister in disciplinary proceedings, should be welcomed by the profession – confirming, as it does, what is the conventional thinking¹⁰. The court’s other general observation that, on the materials before it, a legal challenge to the constitutionality or legality of the legislative framework for barristers’ disciplinary proceedings did not appear to have a realistic prospect of success is also worth noting¹¹.

Notes

1. [2021] HKCFI 3434, 25 November 2021.
2. Supra note 1, at paras 4(3) and 9(4).
3. Supra note 1, at para 5.
4. For example, Re Flesch QC [1999] 1 HKLRD 506, Re Perry QC [2016] 2 HKLRD 647.
5. At present, there are approximately 105 “Senior Counsel” (SC) in Hong Kong.
6. “Revised Practice Guidelines for Ad Hoc Admission of Overseas Counsel” (July 2015). While the Bar Association consents to most applications, all applications are required to be approved by court.
7. Supra note 1, at para 13.
8. Supra note 1, at para 24.
9. Section 37B (“Appeal to Court of Appeal”) of the Legal Practitioners Ordinance.
10. Supra note 1, at para 24.
11. Supra note 1, at para 13.

Summary judgment application does not amount to submission to English jurisdiction

Thu, 09 Dec 2021 15:47:51 Z

This recent interlocutory decision in The Deposit Guarantee Fund for Individuals (" the DGF") v Bank Frick & Co AG ("Bank Frick") & Anor deals another blow to the DGF in its recent attempts to pursue claims in England which allegedly arise following the 2014-15 banking crisis in Ukraine.

Background

The underlying proceedings between the DGF, which is acting as liquidator of the PJSC National Credit Bank (the "Bank") and Liechtenstein-based Bank Frick arise from six pledge agreements entered into between Bank Frick and the Bank between 2013 and 2014, pursuant to which the Bank pledged funds as security for various loans made under agreements with several entities incorporated in the UK, including the second defendant.

The DGF alleges that the debtor entities did not carry on any legitimate business and that the loan proceeds which it transferred to them were dissipated shortly afterwards. The debtors subsequently failed to repay the loans and, shortly thereafter, Bank Frick enforced the pledge agreements in order to obtain US$25.8 million held by the Bank in an escrow account. The DGF is pursuing these monies via a claim under sections 423 – 425 of the Insolvency Act 1986, alleging that they constitute a transaction defrauding creditors.

The applications

Bank Frick acknowledged service of the DGF's claims in late June 2021, stating its intention to contest jurisdiction, and shortly afterwards issued an application which sought orders (i) staying the claim in favour of arbitration pursuant to section 9 of the Arbitration Act 1996 (the "1996 Act") and, alternatively and only in the event that the first application was unsuccessful, (ii) striking out the claim or granting summary judgment on the basis that the DGF had shown no reasonable grounds to bring it.

Bank Frick's first application sought to make clear its view that the summary judgment application should not be construed as a substantive step in the proceedings (which would have voided its attempt to seek a stay on the basis of section 9(3) of the 1996 Act) as it was "made solely in the alternative" to the stay application. The Bank was initially invited to agree to this assertion, and also to consent to the summary judgment application being heard before the stay application on that basis, but declined. Bank Frick therefore issued a second application seeking a declaration in relation to both requests.

The issues for the Court to consider were therefore:

Whether Bank Frick's attempt to pursue the determination of the summary judgment application first could be considered a step in the proceedings to answer the substantive claim; and
If not, whether the summary judgment application should be listed to be heard before the stay application.

Conditional summary judgment application not a "step in the proceedings"

Somewhat unusually, both the applicant and the respondent relied upon Capital Trust Investments Ltd v Radio Design TJ AB [2002] EWCA Civ 135in support of their positions. It was common ground between the parties that neither (i) an application for strike out or summary judgment which is made expressly conditionally on the failure of a stay application or (ii) seeking a hearing and making submissions at the hearing of such an application, would amount to a step in proceedings. However the DGF submitted that Bank Frick's attempt to have the summary judgment application determined first was a waiver of its objection to the jurisdiction.

Having considered these arguments, Master Clark found that Bank Frick's application for summary judgment was expressly conditional on the outcome of the stay application (in the same way as the equivalent application was in Capital Trust) regardless of the order in which it sought the applications to be heard. It could therefore not result in a submission to the jurisdiction, nor was it a step in the proceedings for the purposes of the 1996 Act.

Stay application to be heard first

Having regard to both the risk of unnecessary costs and the complexity and length of the respective applications, the correct order of proceedings was for the stay application to be heard first. In Master Clarke's view, this was clearly also the logical approach given that the summary judgment application was expressly predicated on the outcome of the application for a stay. It was also noted that, unlike in Capital Trust, there was no common issue which would favour both applications being heard together.

Commentary

The High Court's decision to grant Bank Frick's first declaration, but refuse the request to list the summary judgment application ahead of the stay application, is perhaps not a surprising one. The Court has rightly followed the logic of Capital Trust to preserve a defendant's right to make an application which is expressly conditional on the outcome of their attempt to seek a stay, without causing undue prejudice to a legitimate jurisdiction challenge. However, the case is perhaps most interesting as another example of recent attempts by the DGF to place its claims in the English courts, despite the real issues of forum non conveniens arising from the underlying contracts. The outcome of the stay application will be watched with interest by those who have recently been threatened with similar proceedings.

What's up with disclosure? The pilot goes into a new phase from November

Wed, 17 Nov 2021 12:01:32 Z

The main change is the addition of a new "Less Complex Claims" route, but there are also amendments to accommodate multi-party litigation, as well as various other changes to streamline the list of issues for disclosure, DRD, and use of models. Particular emphasis is also given to disclosure guidance by the court, which can now take place on the papers as well as in a hearing.

True to its "living pilot" status, this revision of PD 51U addresses feedback given by court users. The changes have been packed into a relatively speedy practice direction update, with a short turnaround time from the proposals of the Disclosure Working Group to the official practice direction update which came into force on 1 November 2021. Below we give an overview of the most important changes to the rules, and also consider what may be next for the disclosure pilot.

New Less Complex Claims route

There is a new Less Complex Claim route under PD 51U with a simplified disclosure procedure. Only Models A, B or D can be used, and there is a maximum of five issues for disclosure. A Less Complex Claim is a "claim which by virtue of its nature, value, complexity and the likely volume of Extended Disclosure may not benefit from the full procedure set out in the main body of PD51U" and/or the value is less than £500,000 (see new Appendix 5). There is also a new form DRD for the Less Complex Claims Route.

Multi-party cases – PD 51U procedure can be flexible

For multi-party cases, there is now clarification in the rules that PD 51U does apply, but also that the court can vary the timetable and procedure to meet the needs of such a case. Any application to the court in this regard should be made at an early stage. Parties should discuss and seek to agree whether it is appropriate for all of the disclosing party’s documents to be given to all of the other parties or to some only. This is intended to ease the burden of multi-party disclosure in appropriate cases.

Streamlining the list of issues for disclosure

There are several changes to how the parties must deal with the list of issues for disclosure. Two of these appear to incentivise parties to act within the cooperative spirit of PD 51U: when agreeing the list of issues for disclosure, reasonable and proportionate efforts must be made. There is also now an explicit requirement that the list of issues for disclosure should be as short and concise as possible.

Other changes are more practical. Any draft list of issues for disclosure now needs to identify disclosure model(s). As for timing, a party served with a draft list of issues for disclosure now has 21 days to respond (this was previously only 14 days). Where a claimant fails to prepare and serve a list of issues for disclosure, this now means that any defendant can do this instead.

For efficiency, a list of issues for trial can now be used in place of a list of issues for disclosure. It is also worth noting that the list of issues for disclosure now explicitly does not bind the parties at trial.

More flexibility for the DRD

The changes also specify more flexibility with regard to the DRD. In a complex case, the DRD can be shortened or lengthened. Parties can revise the questions in s2 of the DRD or add new questions. The parties can also agree a revised timetable for completion of the DRD as long as the CMC is not affected.

Use of models

PD 51U now emphasises that moderation must be exercised in the number of models used. At the same time, different models can be applied to different types of documents, eg one model for physical documents and another model for electronic documents.

Various miscellaneous changes come into play in relation to Models C and D. It is now explicitly required that Model C issues for disclosure should be limited in number, focused in scope and concise – likely a response to excessively long lists seen in some cases. Also, it is now explicit that Model C requests should not be used in a tactical or oppressive way. Previously, there was a requirement that a party proposing Model C had to fill in section 1B and provide the DRD to the other parties no later than 28 days after the defendant's response to the claimant's draft list of issues for disclosure. This requirement has now been removed.

In relation to Model D, narrative documents now do not necessarily need to be excluded where the court has not specified in the order whether to include or exclude narrative documents. The intention appears here to save costs where the splitting out of narrative documents would prove to be complicated.

Court guidance

There are new provisions setting out detail on court control over disclosure, and clarification that disclosure guidance can be given by the court in a hearing or on the papers. This may be a response to limited uptake of disclosure guidance hearings.

More evolution of the pilot in the future?

While the changes clearly constitute a significant update to the workings of PD 51U, it could also be said that some changes, such as the changes to accommodate multi -party litigation, only codify what has happened in practice already to make the pilot work.

Further evolution of the pilot seems to be highly likely in the future. The Disclosure Working Group is planning to engage with the judiciary and court users later this year, with the prospect of reverting to the CPRC with possible further amendments in 2022 (see the CPRC Minutes 10 September 2021). So far, the CPRC has generally followed the recommendations put before it when it comes to revisions to the pilot.

PD 51U is set to be in force until December 2022. There is no clarity as yet as to whether it is set to replace the "regular" rules for disclosure under CPR 31 from 2023. It has been made clear that continuous feedback from those using the pilot is welcomed by the Disclosure Working Group, so that those who would like to influence the future of disclosure rules are well advised to give their feedback while PD 51U is still in the pilot phase.

English Commercial Court upholds the validity of swap contracts entered into by an Italian local authority

Fri, 12 Nov 2021 15:34:10 Z

This is the first occasion on which the English Court has had to grapple with the 2020 Cattolica judgment of the Italian Supreme Court which caused some controversy as it had determined , in the context of a similar derivative contract, that the derivative contract was invalid and could not be enforced against the local authority (Deutsche Bank v Busto di Arsizio [2021] EWHC 2706 (Comm)).

No limitation on the capacity of the local authority to enter into mirror swap and interest rate swap

The present case related to a mirror swap and interest rate swap which Deutsche Bank (DB) and Busto Arsizio (Busto Arsizio) had entered into in 2007. The swaps were documented under an ISDA Master Agreement and contained terms providing that the swaps were governed by English law and subject to the jurisdiction of the English Court. In common with many such swaps, the fall in interest rates following the financial crisis of 2007-2008 resulted in the swaps becoming very expensive for Busto Arsizio. DB issued proceedings for declaratory relief, seeking declarations of the sort commonly seen in such cases, including that the swaps were valid and binding and that Busto Arsizio had the necessary capacity to enter into them.

In response, Busto Arsizio raised a number of arguments, including that:

Busto Arsizio lacked capacity to enter into the swaps as Article 119 of the Italian Constitution only permitted local authorities to resort to "indebtedness" if it was in order to finance investment expenditure.
Busto Arsizio lacked capacity to enter into the swaps because they were 'speculative' rather than for 'hedging' purposes. Here Busto Arsizio relied upon Cattolica which it said had made it clear that local authorities only had capacity to enter into derivative contracts if they were for 'hedging'.
Busto Arsizio lacked capacity to enter into the swaps because DB had failed to provide mark to market valuations and probabilistic scenarios at the time the contract was entered into. Again Busto Arsizio relied upon Cattolica in relation to this argument although, as explained below, there was considerable ambiguity as to the scope of the Cattolica judgment's findings in this area.

As to the first argument, which fell to be resolved as a matter of statutory interpretation of Article 119 of the Italian Constitution, the Commercial Court concluded that Article 119 itself did not impose any limitation on the capacity of an Italian local authority to enter into derivatives contracts. The Commercial Court also concluded that the swaps in question did not amount to "indebtedness" for the purposes of Article 119.

Where Article 119 itself did not impose any limitations on a local authorities capacity to enter into derivative contracts, the Commercial Court was then required to assess whether the Cattolica judgment had determined that Italian local authorities lack capacity to enter into derivative contracts that (i) are ‘speculative’, rather than for ‘hedging’ purposes; and/or (ii) do not provide the mark-to-market and probabilistic scenarios of the relevant swap.

On the hedging versus speculative argument, the Commercial Court found that Cattolica had indeed determined that Italian local authorities lacked capacity to enter into speculative derivative contracts (although it was noted that the Italian Supreme Court had not pointed to any authority for this conclusion or provided any guidance on the distinction between speculation and hedging). However, after assessing the relevant mirror swap and interest rate swap in the round, the Commercial Court had no doubt in concluding that they were classic hedging products such that Busto Arsizio had not lacked capacity to enter into them.

Busto Arsizio's further argument was that in Cattolica it had been found that an Italian local authority could only enter into derivative contracts if, at the time they entered into the contract, the relevant financial counterparty had provided them with mark-to-mark values, probabilistic scenarios and details of any hidden costs. There has been considerable debate and commentary in Italy regarding the nature of the findings in Cattolica in this regard and a key question for the Commercial Court to determine was whether the section of the Cattolica judgment dealing with these issues was concerned with the capacity of Italian local authorities to enter into derivative contracts absent the provision of this information or, instead, was solely concerned with the elements of a valid contract under Italian law. Following a detailed analysis, the Commercial Court concluded that the Cattolica judgment was discussing the Italian law requirements for a contract, rather than making a broader finding regarding local authorities' capacity to enter into derivative contracts. The significance of this finding was that, where the swaps between DB and Busto Arsizio were governed by English law, any Italian law requirements that a financial institution provide mark-to-market valuations and probabilistic scenarios were inapplicable and could be disregarded by the Commercial Court.

In light of these findings, the Commercial Court found in DB's favour and concluded that the swaps were valid and binding on Busto Arsizio and that Busto Arsizio could not avoid its liabilities thereunder.

Commentary

As the first occasion on which the English Court has analysed the Cattolica judgment, this judgment represents interesting reading for anyone who has been involved in the now long list of Italian swap cases. It will be welcomed by London-based financial institutions which have entered into derivative contracts with Italian local authorities, although not by their counterparties.

While Cattolica was a judgment of the highest court in Italy, there was some uncertainty regarding whether Cattolica was authority for the proposition that Italian local authorities lacked capacity to enter into certain derivative contracts or, alternatively, had made narrower findings that a derivative contract would be invalid under Italian law if the derivative fell to be characterised as 'speculative' and/or if the financial institution providing the swap did not disclose details of the mark to market valuations and probabilistic scenarios at the time the contract was entered into. This prompted a number of Italian authorities to try and rely upon Cattolica and argue that derivative contracts which they had previously entered into were void and/or unenforceable.

The Commercial Court's finding that the Cattolica judgment was primarily concerned with the elements of a valid contract under Italian law, rather than broader questions of the capacity of local authorities to enter into derivative contracts removes a well-trodden avenue for trying to avoid obligations under English law governed swaps entered into by Italian local authorities.

A significant number of similar claims by other Italian local authorities remain in progress (both in the English and Italian Courts) and the arguments raised by the Italian local authorities may now need to evolve as they attempt to find novel ways of relying upon Cattolica in order to raise arguments regarding their capacity to enter into derivative contracts.

Opening the gateway: Supreme Court favours wide interpretation for service out of the jurisdiction and clarifies rules of pleading foreign law

Thu, 11 Nov 2021 11:59:45 Z

The UK Supreme Court has confirmed that the initial or direct damage, which gives rise to the claim, need not have occurred in England for the English courts to have jurisdiction. The Supreme Court also clarified the scope of two distinct rules on applying foreign law: the default rule and the presumption of similarity.

The facts

Lady Brownlie had booked a holiday to Cairo for her family, including a luxury safari excursion. During the safari tour, the vehicle in which she and her family were travelling crashed. Lady Brownlie was injured and, sadly, her husband was killed along with his daughter.

Lady Brownlie brought an action in the English courts in 2012 against the operator of the hotel seeking damages for her own injuries, for her husband's wrongful death and for bereavement and loss of dependency. She claimed that the Egyptian hotel operator, FS Cairo (Nile Plaza) LLC, had breached an implied term of the contract to take reasonable steps to ensure their safety and also alleged negligence on the part of the hotel operator and the staff operating the tour.

The High Court found that it had jurisdiction to try Lady Brownlie's claims in contract and tort and granted her permission to serve the claim in Egypt. (1) FS Cairo appealed to the Court of Appeal, which affirmed the High Court's decision.(2) FS Cairo appealed to the Supreme Court.(3)

The relevant jurisdiction issue: where was damage sustained?

FS Cairo challenged the application of the jurisdictional gateway in respect of the claims in tort.

Broadly speaking, where a claimant seeks to bring a claim against a defendant domiciled outside England, the common law rules will apply in the absence of a choice of court agreement.

The claimant must satisfy the court that there is a real issue to be tried, that their claim has reasonable prospects of success and that the claim falls under one of the jurisdictional gateways outlined in Civil Procedure Rule 6.37(3) and Practice Direction 6B. Permission will not be granted unless the court is satisfied that England (or Wales) is the proper place in which to bring the claim.

For a tort claim to be served out of the jurisdiction, the claimant must first show either a) that damage was sustained in England or, b) that damage has resulted from an act committed in England.

While here the "act committed" – the car crash – occurred in Egypt, Lady Brownlie argued that she had suffered damage in England: physical pain resulting from her own injuries, and bereavement and financial loss resulting from her husband's death.

FS Cairo submitted that damage was sustained at the place of the initial or direct damage, i.e. the place where the car crash which caused the harm occurred, and that the jurisdictional gateway did not extend to the place at which any further consequences or indirect damage may have been suffered.

The decision on jurisdiction

By a 4 to 1 majority, the Supreme Court rejected FS Cairo's appeal and held that the English courts had jurisdiction.

The court emphasised that the test was where "damage" was sustained, not where "the damage" was sustained. The court considered that the drafters had deliberately omitted the definite article to reflect a previous decision of the Court of Appeal that it is sufficient that some significant damage was sustained in the jurisdiction. In this case, Lady Brownlie had suffered physical and emotional pain and financial loss in England.

The Court also rejected FS Cairo's submission that the English courts should distinguish between direct and indirect damage. Whilst this distinction was present in the EU system, fundamental differences between that system and the English domestic rules made it inappropriate to import the distinction into English law.

There are additional protections in the tort gateway to protect against inappropriate exercise of jurisdiction. The claimant must satisfy the court that England is the proper place to bring the claim and the court has discretion to refuse jurisdiction if it considers the claim would be better heard in another jurisdiction.

Clarification on pleading foreign law: the default rule and the presumption of similarity

The court also shed light on how a party should plead foreign law. The parties were agreed that Egyptian law was applicable. However, FS Cairo contended that Lady Brownlie had failed to adduce evidence of the relevant Egyptian law for certain aspects of her claim, and for those gaps it was wrong in principle to apply English law or any presumption that the applicable foreign law is similar to English law.

Lady Brownlie argued that as Egyptian law had not been shown to differ materially from English law and it was not disputed that the claims had reasonable prospects of success if English law was applied, the claim was sufficiently pleaded for service out of the jurisdiction.

The Court found for Lady Brownlie and clarified the scope of two distinct rules on applying foreign law:

1. The default rule: Neither party is obliged to plead foreign law. There might be practical and cost reasons for not doing so if it would produce the same result as applying English law. A case should generally be tried on the parties' statements of case. If neither party pleads foreign law, the court will apply its own law.

2. The presumption of similarity: This is a rule of evidence concerned with what the content of foreign law should be taken to be. An English court will presume that foreign law is the same as English law where it is fair and reasonable to do so and only in the absence of better evidence. This presumption is rebuttable by either party.

Here, the parties agreed that Egyptian law was applicable. Therefore, there was no scope for applying English law by default. However, in the absence of any evidence of Egyptian law, Lady Brownlie was entitled to rely on the presumption of similarity to show that her claims had real prospects of success (at this early stage of the proceedings) and therefore the claim could be served out of jurisdiction.

Comment

This is an important decision on jurisdiction, particularly since, as a result of Brexit and the fact that the UK has not acceded to the Lugano Convention, these common law rules on jurisdiction apply to a much larger number of claims than before. The court has confirmed the width of the gateway for defendants who are injured abroad but suffer the consequences at home to bring a claim in the English courts. This will not be limited to cases of personal injury, but to all tortious claims. The main brake on the English courts' taking jurisdiction in such cases now appears to be whether they consider that England is the proper place to bring the claim (the "forum conveniens").

In this respect, the common law rules (which, absent a choice of courts agreement, now apply to disputes involving EU member states) are now clearly wider than the Brussels Regulation, which previously governed such disputes, such that the English Court may now take jurisdiction over cases which it might previously have declined under the Brussels Regulation. The Brussels Regulation allows the courts of an EU Member State "where the harmful event occurred or may occur" to take jurisdiction in matters of tort, but the Court of Justice for the EU has held that this extends only to the place where direct, rather than indirect, damage occurs.

In relation to foreign law, the court's distinction between the default rule and the presumption of similarity provides a useful guide for litigants looking to save time and costs when litigating an issue, which may be subject to foreign law, in the English courts. That said, the court did suggest that it may be precarious to rely on the presumption later in the proceedings, particularly at trial.

(1) [2019] EWHC 2533 (QB)
(2) [2020] EWCA Civ 996
(3) FS Cairo (Nile Plaza) LLC v Lady Brownlie (as Dependant and Executrix of Professor Sir Ian Brownlie CBE QC) [2021] UKSC 45

Court of Appeal holds that uncontroverted expert evidence can be rejected

Thu, 04 Nov 2021 16:11:33 Z

How an expert report will be treated will depend on all of the circumstances of the case, the nature of the report and the purpose for which it is being used in the claim (Griffiths v TUI (UK) Limited(1)).

Background

Mr Griffiths suffered a serious gastric illness, allegedly as a result of consuming contaminated food or drink at a hotel while on an all-inclusive package holiday. He brought a claim against the holiday provider, TUI, in contract and pursuant to the Package Travel, Package Holidays and Package Tours Regulations 1992.

TUI put Mr Griffiths to proof as to when, where and how he fell ill. Mr Griffiths relied on a short expert report from a consultant microbiologist addressing causation which found that, on the balance of probabilities, he fell ill after consuming contaminated food or fluid from the hotel. Mr Griffiths also relied on the expert's answers to questions put by TUI pursuant to CPR 35.

TUI did not call or cross-examine the expert or serve expert evidence of its own. TUI did, however, make closing submissions to the effect that the expert report was insufficient to enable Mr Griffiths to prove that his illness had been caused by contaminated food or drink at the hotel.

County Court decision

The trial judge identified serious deficiencies in the expert's report and CPR 35 answers. The judge found that some of the expert's assertions were bare ipse dixit, with no reasoning to support them, and emphasised that the court is not a rubber stamp that simply accepts what experts say. As Mr Griffiths had not proved causation on the balance of probabilities, the claim was dismissed.

High Court decision

Mr Griffiths successfully appealed. The High Court found that as the expert report was "truly uncontroverted" (with no factual evidence undermining it, no competing expert evidence and no cross-examination of the expert), the judge erred in rejecting it. If an uncontroverted expert report "substantially" complies with CPR PD 35, it must be accepted by the court, and CPR PD 35 does not require experts to set out reasons for their conclusions. The court did not accept that the report was a mere ipse dixit.

TUI appealed.

Court of Appeal decision

The question for the Court of Appeal was whether, and if so in what circumstances, the court can evaluate and reject uncontroverted expert evidence.

The court held that there is no rule preventing an uncontroverted expert report which complies with CPR PD 35 from being impugned in submissions or ultimately rejected by the judge. If such a rule existed, the court would be bound by any uncontroverted expert report which satisfied CPR PD 35, even if the conclusion was only supported by nonsense. The court agreed that it is not a rubber stamp: a trial judge must evaluate all the evidence before them and decide the weight to give to the evidence. That obligation does not fall away if evidence is uncontroverted; all evidence must be assessed in the context of the circumstances of the case. Uncontroverted evidence may be compelling, or it may not be: it may be inherently weak or unhelpful or of little weight for other reasons.

In some circumstances expert evidence might be very brief or ipse dixit and still be acceptable. For example, a report addressing whether a certain chemical was present in a compound might acceptably span only a few sentences. But where expert evidence is an evaluative opinion, the expert must explain the basis for their conclusions, as a mere assertion will carry very little weight.

The extent of the reasoning required will depend on the circumstances. Here, it would not have taken much to rectify the deficiencies identified by the trial judge. For example, instead of properly answering one of TUI's CPR 35 questions regarding the range of opinion, and the facts and matters relied on by the expert, the expert simply set out the approach that experts would take and stated that he did the same. Failing to properly answer this question created an important deficiency in his evidence. Adding just a few sentences explaining the range of opinions on various matters, and where the expert's opinion stood within each range, may have meant the burden of proof was satisfied.

Mr Griffiths argued it was unfair for TUI to only challenge the expert's evidence in closing submissions. He relied on the principle in Browne v Dunn: if a party intends to suggest that a witness is not telling the truth, they must give the witness an opportunity to provide an explanation. But in this case, the expert's credibility was not in issue. There was no question of the expert being disbelieved. In its closing submissions, TUI had not suggested that the expert report was necessarily wrong, just that it did not enable Mr Griffiths to prove causation.

Provided that an expert's veracity is not challenged, a party may reserve its criticisms of a report until closing submissions. A defendant cannot be prevented from submitting that the case has not been proven because some of the evidence is in an uncontroverted expert report. It was right (and indeed "essential") that the trial judge engaged with TUI's submissions to this effect and determined whether causation had been proved. Rather than deciding that the expert was wrong, the judge found that the report was insufficient to prove causation and set out good reasons why.

Of course, it will not always be open to the court to reject uncontroverted expert evidence. Evidence from a joint expert which goes to the relevant issues and contains logical conclusions would be very difficult to challenge. So would coherent reports produced by two experts which cover the relevant issues and are agreed. In these circumstances it would be rare for expert evidence to be rejected and the court would need cogent reasons to do so.

Comment

At least where expert evidence involves an evaluative opinion, for a court to accept the conclusion reached or for the evidence to satisfy the burden of proof, some chain of reasoning must support the conclusion, even if it is short. Parties relying on expert evidence should be careful to ensure sufficient reasoning is included. It is their responsibility to ensure all relevant matters are covered and that the content of the report is sufficient to satisfy the burden of proof.

A party wishing to suggest that expert evidence does not satisfy the burden of proof may wait until closing submissions to do so. However, any suggestion that an expert is wrong would generally be subject to the Browne v Dunn principle and could not permissibly be raised for the first time in closing speeches. Bean LJ, in dissent, viewed this distinction as "hair-splitting", and concluded that the court is generally bound to accept uncontroverted expert evidence if the opposing party could have cross-examined the expert on the point but chose for tactical reasons not to. Noting that the courts "should not allow litigation by ambush", Bean LJ found that "Mr Griffiths did not have a fair trial". Whether the Court of Appeal's decision will be subject to further appeal on that basis remains to be seen.

(1) [2021] EWCA Civ 1442

Stating the not-so-obvious: the importance of highlighting onerous standard contract terms and the perils of e-signing (Blu-Sky Solutions Limited v Be Caring Limited)

Thu, 28 Oct 2021 16:28:00 +0100

Facts

The claimant, a supplier of mobile phones and telecommunication services, brought an action against the defendant, a social care provider, in which it claimed £180,000 plus VAT.

On 14 February 2020 the defendant signed the claimant's order form for the provision of connections for 800 mobile phones. The claimant contended that the contract was concluded when the defendant signed the order form and that the contract incorporated the claimant's standard terms and conditions (STCs). On 26 February 2020, the defendant emailed the claimant to cancel the order. Pursuant to clause 4.6 of the STCs an "administration charge" of £225 for each of the 800 connections was payable in the event of cancellation before connection.

Decision

The defendant made several key arguments. It argued that

the STCs had not been incorporated into any contract
clauses 4.6 and 4.8, as "unusual or onerous" terms, were penalty clauses and therefore void
the claimant had not suffered any loss due to the cancellation of the defendant's order, and
the defendant's signatory believed she was signing the equivalent of a heads of terms and not an "immediately binding agreement".

The judge dismissed as irrelevant as a matter of law the defendant's argument that its signatory believed she was signing the equivalent of a heads of terms, where there was no evidence that this belief was communicated to the claimant.

The judge also held that the STCs had been incorporated into the contract because the defendant could have accessed these via the claimant's website when e-signing. Had it done so and had it had "a reasonably quick look", then it would have had "no reason to think" that the STCs were not applicable.

However, the judge decided that clauses 4.6 and 4.8 of the STCs were penal. In reaching this decision, the judge referred to views expressed by Mr Fancourt QC in Vivienne Westwood Ltd v Conduit Street Development Ltd, that the individual obligations within a clause can and should be considered separately and, if appropriate, severed.

The judge noted that clause 4.6, for example, could be divided into four separate sub-clauses (cancellation, disconnection, downwards migration and upgrading) and that it therefore made sense to ask whether the clause was penal "in its application to the specified situation…namely cancellation" as opposed to considering whether or not the clause was penal as a whole. The judge concluded that the £225 cancellation charge per connection posed "a detriment out of all proportion" with the claimant's legitimate interests. Further, the judge explained that while this was a contract between two commercial entities, the offending terms were concealed within detailed terms and conditions, making it very hard to see "the important from the unimportant". The judge found that the case came very close to a misrepresentation.

Given that clauses 4.6 and 4.8 were both found to be penal, the judge held that they had not been incorporated into the contract since they were "unduly onerous" and had not been "fairly and reasonably drawn to the defendant's attention". Further, even if they had been incorporated into the contract, they were void. In addition, the judge decided that it was "not possible" for the claimant to have made a confident representation that the defendant would not have to pay any additional charges (he also held that such representation was made negligently) and so any claim for damages would have failed.

Commentary

This decision reinforces the importance of drawing a customer's attention to any onerous terms in the standard terms, even where the contractual relationship is between commercial entities and there has been ample opportunity for the customer to access and consider the STCs. If a particularly onerous clause is not highlighted, this could even amount to misrepresentation.

It also serves as a warning to customers when e-signing contracts. Incorrect belief as to the nature of a document is not likely to be considered a relevant reason for not taking appropriate steps (for example, reading accompanying documentation). In the world of hybrid working it can be all too easy to simply "click to sign" without taking the time to navigate through the various platforms and links available (in this case clicking through to the STCs on the claimant's website).

High Court finds agency relationship and 'control' for purposes of disclosure where third party not authorised to sign contract for principal

Thu, 28 Oct 2021 16:16:00 +0100

Facts

The decision arises from a disclosure application in a long-running dispute between a lender (Quartz) and a consortium-owned SPV (Kestrel), which centres on the Defendant's alleged breach of its exclusivity obligations in relation to the financing of its acquisition of a majority interest in an Australian coal mine. Following the execution of a commitment letter which bound the parties to enter into a mezzanine lending facility, the Defendant agreed terms with an alternative provider and sought to withdraw from the existing agreement with the Claimants. The Claimants argue that these actions constitute both misrepresentation and a breach of the terms of the commitment letter.

The Claimants made an application for additional disclosure pursuant to PD51U, para 17.1(2), which allows a court to make further orders as to disclosure in circumstances where there has been failure to adequately comply with an order for Extended Disclosure. Amongst other issues, the application included a request for direction that the Defendant's disclosure should extend to documents held by a third party, Emindobiz Advisory PTE ltd ("Emindobiz"). The Claimant argued that the documents were relevant to certain of the twelve issues for disclosure specified in the court's original disclosure directions and that they should be treated as relevant and within the Defendant's control.

Emindobiz was an advisor to the Defendant and had been "centrally involved" in identifying potential mezzanine lenders for the acquisition, both before and after the parties had entered into the commitment letter. These actions had ultimately led to the replacement of the Claimants with an alternative finance provider. As such, it was common ground that certain documents created by the company were relevant to the claim. However, the Defendant submitted that such documents were not within its control on the basis that Emindobiz was not its agent. The key factors in this submission were that:

(i) Emindobiz carried out its work pursuant to a retainer which contained a "no agency" clause that prohibited it from entering into or signing any document on behalf of the Defendant.

(ii) Payments under the retainer were made to Emindobiz by a member of the consortium behind the acquisition, rather than the Defendant itself.

The Claimants submitted that the nature of the retainer did not prevent Emindobiz from negotiating on the Defendant's behalf or potentially altering legal relations between the Defendant and a third party, and that the judge should therefore look beyond the retainer to consider the true nature of the relationship.

Decision

The High Court granted the Claimants' application for additional disclosure in relation to the documents held by Emindobiz.
Citing the 2021 White Book (Volume 1, Note 31.8.2) the judge confirmed that "control" for the purposes of CPR 31.8 included circumstances where documents were in the possession of a servant or agent, and went on to consider two key authorities on the nature of agency:

(i) Citing Bowstead and Reynolds on Agency (22nd Edition), the judge noted that agency principles are likely to apply where there is evidence of authority being conferred to alter a principal's legal relations:

"Notwithstanding its voluntary nature, where there is evidence of a conferral of authority to alter a principal's legal relations, the normal incidents of agency are, prima facie, likely to apply even if the parties' contract expressly disavows one being the agent of the other."

(ii) The judge also referred to Marcus Smith J's obiter comments in Pengelly v Finance 4 [2020] EWHC 2002 (Ch), that "it is perfectly possible for an agent to affect the principal's legal relations with third parties in ways other than the conclusion of a contract." The judgment in Pengelly also makes clear that courts should look to the substance, not the form, of the parties' relationship:

"The fact that a person adopts or is given the label "agent" – or, conversely, seeks to avoid it – cannot be determinative. That is why [it is] necessary to focus on the functions that the agent is performing."

On the basis of these authorities, the judge found that Emindobiz was acting as the Defendant's agent. The judge noted that he had considered the nature of the retainer and found the Claimants' submission that Emindobiz was able to negotiate contracts on behalf of the Defendant to be "clearly correct". Emindobiz's position enabled it to affect the Defendant's legal relations by making representations during negotiations which would be binding at the conclusion of the contract, and the fact that it had no power to bind its principal to the contract itself was not a deciding factor.

Further, the Defendant had the legal right to access documents held by Emindobiz and was therefore clearly in a position to procure and disclose such documents if required.

The decision also clarified that the question of whether the Defendant was paying Emindobiz for its work directly was of little consequence. The judge noted that such arrangements are common and should not detract from the analysis of the true nature of a retainer when determining whether an agency relationship exists.

Commentary

This decision reiterates that, when it comes to the question of agency, the court will primarily focus on the substance and not the form of relationships between parties, and confirms that agency may be established even where an agent does not have the power to bind its principal to a contract. Parties involved in proceedings where there might be agent / principal relationships should therefore be mindful of such issues when considering their disclosure obligations.

Choose your words wisely: waiving privilege in witness evidence

Wed, 27 Oct 2021 16:56:27 +0100

Facts

Scipharm, a pharmaceutical company, and Moorfields, an NHS hospital trust, were parties to a pharmaceutical development agreement. Scipharm alleged that Moorfields had breached the terms of the pharmaceutical development agreement by losing its "good manufacturing practice status". Consequently, Moorfields was unable to enter into a commercial manufacturing agreement. Scipharm alleged that it had incurred significant losses as a result of Moorfields' breach.

During the proceedings, the parties had exchanged witness statements. In one witness statement, Mr Beckers, a witness for Scipharm, referred to a discussion between Scipharm's solicitor and Ms Beveridge, an employee of Moorfields, in his witness statement. In particular, the statement said "Our solicitor spoke to Margaret Beveridge, who is referred to in paragraph 3 and onwards of the particulars of claim. … Moorfields solicitors wrote in their letter dated 5 March 2018 that SciPharm … was not prepared to commit to non-refundable reservation and cancellation costs given the uncertainty in timing and success of obtaining market authorisation. Ms Beveridge confirmed to our solicitor that in reality Moorfields did not consider cancellation fees to be appropriate given the size of its manufacturing business. I do not know who gave this incorrect information to Moorfields solicitors in March 2018."

Application for disclosure

Mr Beckers' witness statement made no reference to written records of the discussions between Ms Beveridge and Scipharm's solicitor, but Moorfields assumed that they existed. It applied to the High Court under CPR 31.14 for disclosure and inspection of the 'attendance notes or similar documents' arising from Ms Beveridge's discussions with Scipharm's solicitor, which Moorfields argued had been referred or alluded to in Mr Beckers' witness statement.

Scipharm then disclosed a statement that it had obtained from Ms Beveridge three years before, which had not been referred to in Mr Beckers' witness statement. Moorfields argued that the statement was inconsistent with what Mr Beckers alleged Ms Beveridge had told Scipharm's solicitor. Moorfields further argued that it would be unfair to refuse disclosure of the requested documents because of this inconsistency.

Decision
The court accepted that any note of discussions with Ms Beveridge would normally "be plainly a document which was protected by litigation privilege". In order to determine whether to order disclosure nevertheless, the court had to decide:

Had the relevant documents been sufficiently 'mentioned' so that a right to inspect them arose under CPR 31.14?
Had there been an express or implied waiver of privilege sufficient to permit inspection?
Would it be fair to order disclosure?

1. Had the attendance notes been mentioned?

Referring to NCA v Abacha,(2) the court accepted that the issue depended on whether there had been a "sufficiently direct allusion" to the document in the body of the witness statement. Since there was no evidence as to how the information came to be incorporated into Mr Beckers' witness statement, the court inferred was that it "must have been by reference to an attendance note containing the relevant information". In addition, the court held that it was "unreal to suppose it was based on memory given the passage of time and the lack of any qualification to the effect that what is said is based on unassisted memory". Accordingly, even though Mr Beckers had not referred to any attendance notes at all, the court held that there was sufficient mention of them.

2. Had privilege in the attendance notes been waived?

The court noted that the law takes privilege extremely seriously as a matter of policy. The court looked to Magnesium Elektron v Neo Chemicals and Oxides (Europe) Limited,(3) where it had been held that the general rule was to ask whether the contents of the document in question had been "deployed" (i.e. relied upon) rather than merely referenced.

The court held that, as Mr Beckers sought to set out what Ms Beveridge's confirmation as to the position in relation to cancellation charges was, the relevant extract in Mr Beckers' witness statement was clearly an attempt to rely upon the material as opposed to making a mere reference in passing to the existence of the attendance notes.

3. Would disclosure be fair?

Given that the information included in Mr Beckers' witness statement was inconsistent with information provided by Ms Beveridge previously, the court held that, in the circumstances, it would be unfair to allow Mr Beckers to make the assertions in his witness statement without disclosing the records of what Ms Beveridge had, in fact, said.

As all three issues had fallen in Moorfields' favour, the court ordered disclosure.

Comment

This decision serves as a valuable reminder of the risk of waiving privilege when relying upon privileged material in statements of case or witness statements. Litigators should proceed with caution when making direct or indirect reference to privileged material in statements of case or witness statements. Even where there is no direct reference to such material, the court may find that it is clear, as in this case, that the information referred to must have been derived from a privileged document. Litigators must also carefully consider when they are drafting whether they are in fact "deploying" or relying upon, rather than merely referring to, the privileged information.

(1) Scipharm SARL v Moorfields Eye Hospital Foundation Trust [2021] EWHC 2079
(2) NCA v Abacha [2016] EWCA Civ 760, [2016] 1 WLR 4375, see para 23
(3) Magnesium Elektron v Neo Chemicals and Oxides (Europe) Limited [2017] EWHC 2957

Access all areas? Privilege, the loss of confidentiality and a missed opportunity

Thu, 21 Oct 2021 11:28:56 +0100

Background

The application arose in the context of litigation between a buyer and seller of certain companies in the North Sea oil industry. The buyer was granted access to certain documents and emails during and after the sale; specifically, email accounts of employees of the seller's subsidiaries as they became employees of subsidiaries of the buyer. The email accounts were later copied to the buyer's subsidiaries wholesale, although the buyer did not examine them in detail.

The seller claimed legal professional privilege over certain documents within those email accounts. The buyer challenged this on the basis that confidentiality in the documents had been lost as against the buyer (rather than as against the whole world) as a result of the access to, and copying of, the email accounts. Somewhat unusually in the context of a privilege dispute, both the seller and buyer had access to the documents which were the subject of the application, although the buyer agreed not to examine them until the privilege dispute was resolved.

The court's decision

Confidentiality

Providing access to entire email accounts carries a high risk that confidentiality could be lost, but the question to be answered was whether it had been lost. Confidentiality can be preserved impliedly (rather than simply expressly) and context is key to determining whether or not it has been successfully preserved.

The relevant provisions in the contractual agreements allowed for broad but not unlimited access to the documents in question. In particular, the contractual framework provided wholesale access (to ensure the efficient working of the underlying business) but not for any purpose, and not for the purpose of the subject litigation. As such, confidentiality was preserved.

Timing

The parties' respective solicitors had been in correspondence over this privilege issue in early 2020; on 19 February 2020 (over a year before the trial) the seller "put its position clearly and powerfully to the buyer". The court was satisfied that it was clear to each party at this stage that there was a difference of position. The buyer, however, did not raise its challenge to the claim to privilege after that correspondence, or in the Disclosure Review Document, or at the Case Management Conference.

The application was not heard until approximately one month before the start of the trial in May 2021.
It had therefore been made so late that the court did not believe that it was reasonable within the phrase "reasonable and proportionate" to grant the type of relief sought at this very late stage in the litigation.

The court concluded that in circumstances where the implications of granting the application would disrupt preparation of both sides for trial, it was "just too late" to do so. It also reminded the parties that "it is part of the very purpose of case management in this court, to avoid that type of disruption as the parties approach a trial which is significant for both of them".

Comment

This decision reinforces the position that although wholesale access to material may be provided, parties must separately consider the purpose and prevailing circumstances in which such access is granted (which may impose express or implied confidentiality obligations) despite the free provision of access to material.

It is also a reminder that outstanding interlocutory skirmishes should be resolved well in advance of trial. Parties often trade correspondence on disclosure issues well before final hearing, but this decision highlights the need to make applications at that stage, rather than in the scramble of late pre-trial preparation. The courts will take a dim view of belated applications, particularly when the respective positions have been clearly articulated for some time, and where the issues were not raised before the court in the usual case management framework.

(1) 3 WLUK 524

High Court refuses permission for unissued contempt application where breach of freezing order only technical

Thu, 14 Oct 2021 15:38:31 +0100

Facts

The claimant alleged that some of its employees, the defendants, had committed fraud by using fake invoices to misappropriate company funds. The defendants argued that they were whistle-blowers and that the fraudulent transactions were actually carried out by one of the company directors to illegally export goods to Iran. A freezing order was granted against the defendants in February 2018 to prevent them from disposing of or dealing with assets located within the jurisdiction up to a value of £500,000. The claimant was also awarded judgment in its favour on the main claim in January 2020.

Following this, it came to the claimant's attention that unilateral notices had been registered against the defendants' property by two individuals. These individuals, who were friends of the defendants, had entered into loan agreements with the defendants at their request to assist their families living in Iran. The defendants agreed to repay the loans with interest, but were unable to do so, resulting in the notices against their property for repayment. When the claimant became aware of the notices, it threatened to bring contempt proceedings on the grounds that the defendants had breached the freezing order by entering into the loan agreements.

The claimant originally raised a contempt application in draft form before the court in July 2020. At the time, the judge struck the unissued application out on the basis that it was intended to harass the defendants and amounted to an abuse of process. The claimant appealed the decision but the Court of Appeal refused it, directing that they apply instead to the High Court again to vary or set aside the order.

Decision

The High Court refused the claimant's application to seal and issue the contempt application. The judge decided that any breach of the freezing order by the defendants was merely technical, as the defendants were, in reality, unable to use the monies freely. The judge made the following key points:

The loan agreements designated the monies advanced for a specific purpose (to provide financial assistance to the defendants' families in Iran) and so were not at the defendants' disposal to use in any other way. Indeed, the judge suggested that it was "perfectly arguable as a matter of law" that the monies subject to the loan agreements would not be caught by the freezing injunction at all as the defendants were not free to use them as they wished.

In addition, the defendants had been made bankrupt by their own petition since the notices had been registered against them and a trustee in bankruptcy had been appointed. Under the Insolvency Act 1986, this meant that the defendants' estates immediately vested in the trustee, so they would be unable to deal with or dispose of their assets.

Moreover, the judge emphasised the principle set out in Sectorguard plc v Dienne plc that contempt applications would be construed as an abuse of process if their potential outcome (if successful) was so small in value to the claimants "to make the exercise pointless, viewed against the expenditure of court time and the parties' time and money".(2) As the defendants did not have assets at their disposal, and the claimants were not contending that the loan agreements were for any purpose other than to assist the defendants' families, then there would be no real benefit to granting the contempt application to force the defendants' compliance with the freezing order. The judge did not make a decision on the claimant's motive behind the application but had in mind the findings of the judge in the first instance decision, who had decided that the application had been brought vindictively, without a legitimate aim, and with the intention of harassment.

Given the technical nature of the alleged breach, and the principles governing contempt proceedings, the judge felt that it would be inappropriate to seal and issue the claimant's contempt application.

Comment

This decision illustrates that the courts will likely view contempt applications through a "real world" lens and will be reluctant to allow such applications where the relevant breach is technical and of no real effect. Those making contempt applications should therefore be careful to present a strong case, and not pursue mere technical breaches. Further, while not explicitly decided here, the courts will likely attach weight to the motive behind a contempt application: where it amounts to harassment of the defendant, the courts may not look kindly upon such behaviour.

(1) Pharmagona Limited v Taheri & Anor [2021] EWHC 2537
(2) Sectorguard plc v Dienne plc [2009] EWHC 2693 (Ch)

Security for costs – through what lens is the enforcement criteria viewed?

Wed, 22 Sep 2021 16:51:07 +0100

In September 2020 the claimant, Syed Aminul Haque, brought an action on behalf of the unincorporated association known as the Muttahida Quami Movement Pakistan ("MQM Pakistan"), against an unincorporated association based in London known as the Muttahida Quami Movement ("MQM London"). Both MQM Pakistan and MQM London claim their organisations stem from the Muttahida Quami Movement ("MQM"), a political party which was founded by the first defendant in Pakistan in about 1984.

Dispute

The claimant asserts that MQM Pakistan is the beneficial owner of six properties, the legal titles to which are in the names of the defendants, and additionally that MQM Pakistan is entitled to the proceeds of sale of a seventh property. The defendants, meanwhile, assert that MQM London is the beneficial owner of these properties and the proceeds of sale.

Security for Costs

An application for security for costs was made by the first defendant under CPR25.13. The relevant provisions state that the court may make an order if it is satisfied, having regard to all the circumstances of the case that it is just to make such an order, and that one of the conditions in CPR25.13(2) is satisfied. One such condition is that the claimant is resident out of the jurisdiction but not resident in a State bound by the 2005 Hague Convention, as defined in section 1(3) of the Civil jurisdiction and Judgments Act 1982. Having satisfied herself that this condition was so satisfied, the master noted that where this ground is relied upon, impecuniosity would be relevant to the exercise of the Court's discretion only to the extent that it would serve "(i) to preclude or hinder or add to the burden of enforcement abroad against such assets as do exist abroad or (ii) as a practical matter, to make it more likely that the claimant would take advantage of any available opportunity to avoid or hinder such enforcement abroad" (1). The claimant had not provided evidence as to his means in either Pakistan or the UK, and the master proceeded on the basis that the claimant personally would not be able to satisfy a costs judgment made against him.

Legal Obstacles to Enforcement

Although there is a legal framework to enforce English judgments in Pakistan, the first defendant argued that there were certain provisions in the Civil Procedure Code of Pakistan 1908 that would give rise to obstacles to the enforcement of a judgment against the claimant in this case. However, the master rejected these arguments, stating that they fell short of showing a "real

risk" of substantial obstacles to enforcement. A key factor in the master's conclusion on this point was the lack of expert evidence relating to Pakistani law in relation to these provisions.

The first defendant argued that because the representative claimant did not have any apparent means to fulfil a costs judgment against him, the only realistic route to recovery was by seeking to enforce against other members of MQM Pakistan, and that this would be an additional risk and burden of enforcement. Relying on the English law position, CPR 19.6(4) would require the defendants to seek the permission of the Court prior to enforcement, and it would then be open to any non-party to put forward special reasons why the costs order should not be enforced against them (2). Additionally, in Pakistan, it was contended that other members of MQM Pakistan would try to prevent enforcement by suggesting that they had never approved of the English action or had insufficient knowledge of the costs implications of the case. The master rejected both of these arguments, stating again that there was insufficient evidence in relation to Pakistani law and the difficulties in recovering costs could be attributed to the representative nature of the claim rather than the jurisdiction. Additionally, the mere fact that CPR 19.6(4) would need to be fulfilled was equally not enough of a barrier to enforcing an order against the claimant.

Political/Practical Obstacles to Enforcement

The master found that there were four key features of the claim and in the evidence indicating that, in her judgment, showed that there would be a real risk of substantial obstacles to enforcement of a costs order by the defendants against the claimant:

(1) the claimant's status as a government minister, in his capacity as a member of MQM Pakistan;

(2) MQM London's status as a political party which (for whatever reasons) is effectively outlawed in Pakistan;

(3) the first defendant's status as a high profile and controversial political figure, who has been accused of serious criminal offences including money laundering (and convicted in Pakistan, in his absence, of murder), as well as facing criminal charges in London pursued with the co-operation of the Government of Pakistan; and

(4) the material from [the] two watchdog organisations as to the level of corruption in the court system generally, and specifically of the politicisation of the judiciary." (3)

A "Certificate of Guarantee" offered by the claimant as security for the defendants' costs was similarly found to face the same political obstacles to enforcement as a judgment would.

Comment

In exercising her discretion and making an order for security for costs in relation to the claim, the master found that political obstacles to enforcement, rather than legal obstacles to enforcement, were key factors in her decision. The judgment also reinforces the message that evidence relating to the law of another jurisdiction should be presented by an expert in the field, or risk being deemed to be inadmissible.

Endnotes

(1) Mance LJ, [62] in Nasser v United Bank of Kuwait [2002] 1 WLR 1868; [2002] 1 All ER 401, CA
(2) Howells v Dominion Insurance Company [2005] EWHC 552 (QB) at [25] & [28].
(3) Haque v Hussain and others [2021] EWHC 2347 (Ch) [52]
(i) [2021] EWHC 2347 (Ch) [52]

Exceptional Circumstances: CPR 52.30 and a lesson on drafting grounds of appeal from the Court of Appeal

Wed, 22 Sep 2021 16:36:05 +0100

A group claim was issued in England in 2018 by 200,000 claimants, including individuals, businesses, churches, organisations, municipalities and indigenous people affected by the 2015 Fundão dam disaster in Brazil against the joint venture that owned and operated the dam. It was thought to be the largest group claim ever brought in England.

Prior to issue of the English claims, a separate group claim in the Brazilian courts had led to the creation of the Renova foundation, which was intended to provide compensation for individuals, while another, larger, group claim, had been stayed since January 2017.

The defendants applied for the claims in England to be struck out or stayed. The application was heard by Mr Justice Turner in July 2020, who found that the claims should be struck out as they were so "irredeemably unmanageable" as to be an abuse of process, and futile, in light of the parallel group claims in Brazil. The judge went on to say that if the claims had not been struck out, they would have been stayed under Article 34 of Brussels I Recast and on forum non conveniens grounds.

Permission to appeal the judge's decision to strike out the claims was refused on paper by Coulson LJ. The claimants applied to re-open that refusal to grant permission to appeal under CPR 52.30. The bar under r.52.30 is a high one: the court will not re-open a decision unless it is necessary to avoid real injustice, the circumstances are exceptional and there is no alternative remedy. The provision has accordingly very rarely been used successfully.

The application was heard by Sir Geoffrey Vos MR, Lord Justice Underhill, and Lady Justice Carr at an oral hearing in the Court of Appeal.

Decision

The Court of Appeal found that Coulson LJ had failed properly to grapple with the four main points raised by the Claimants' application for permission to appeal:

The judge had had no legal basis to strike out the claims as an abuse of process on the ground of "irredeemable unmanageability". He did not explore whether or not a finding of unmanageability could justify a claim's strike out at all, or only in circumstances where, as the claimants argued, it had not been shown that full redress had been secured in Brazil.
The judge had elided the principles applicable to abuse of process and to jurisdiction so as to invent a concept of "jurisdictional abuse", whereby the risks associated with having parallel proceedings in Brazil were recognised as making the English proceedings an abuse of process. The Court of Appeal expressed concern about the brevity of Coulson LJ's treatment of this point but did not think that the CPR 52.30 challenge could succeed on this ground alone.
The judge had had no basis to strike out claims brought as of right against defendants duly served within the jurisdiction and had ignored Article 4 of Brussels I Recast which provides that, subject to the other provisions of the Regulation, a person domiciled in a Member State shall be sued in that Member State. The Court of Appeal was more troubled by Coulson LJ's treatment of this point, saying that "it is not an answer to the argument that a claimant, who is not suing elsewhere, has the right to sue a defendant who can properly be served within the jurisdiction, to say that the proceedings are unmanageable or complex."
The judge had misapplied the principles in Henderson v Henderson (1843), so as to prevent numerous claimants who had not made claims in Brazil from bringing claims in England. This was a subset of the Article 4 point above that Coulson LJ had failed to grapple with; unmanageability or complexity was not an answer to the claimants who had brought no other claims.

In light of the above, the Court of Appeal decided to re-open Coulson LJ's refusal under CPR 52.30 on the basis that the points he had failed to address were fundamental to the permission decision and, had he grappled with them, there was a strong possibility that he would have granted permission. The panel went on to grant permission to appeal the judge's strike out ruling.

Commentary

This was a highly unusual case in which the Court of Appeal re-opened an appellate judge's decision to refuse permission to appeal under CPR 52.30. However, the circumstances were "truly exceptional" and must be seen in that light: this is unlikely to herald a more liberal attitude towards the use of this provision in the future.

Instead, the most important practical implications of this case arise from the guidance the Court of Appeal gave to practitioners regarding drafting the grounds of appeal. The structure of the grounds of appeal (including the accompanying particulars which elaborated on those grounds) and the skeleton argument may have contributed to the failure of the appellate judge to understand the main points raised. Indeed, the court noted that it is far too often presented with grounds which are "over-lengthy and ill-focused" and where the distinct roles of the grounds and skeleton argument are not observed. It therefore advised appellants to:

keep advocacy in the skeleton and out of the grounds. The grounds are an analytical tool to enable the court to identify the issues it is being asked to decide;
clearly and concisely articulate the specific errors the court below is alleged to have made in the grounds; and
separately number each ground, make clear how they interrelate, and specifically identify the passages in which the judge appealed is said to have gone wrong.

(i) [2021] EWCA Civ 1156

Forum conveniens – English High Court decides that parallel proceedings are not a "trump card" when determining jurisdiction

Thu, 12 Aug 2021 16:13:06 +0100

Hot on the heels of another recent decision on forum conveniens, PJSC National Bank Trust v Mints(1) (see our article on this decision), the English High Court has re-affirmed that the risk of irreconcilable decisions from parallel proceedings in other jurisdictions is not a "trump card" in determining the proper forum for a dispute. In reaching this conclusion, the court declined jurisdiction over what was "in essence a Russian case", despite there being separate ongoing proceedings in the English courts (VTB Commodities Trading DAC v JSC Antipinsky Refinery & ors).(2)

Facts

VTB, the claimant, is a commodities trader and began multiple LCIA arbitrations in April 2019 against the defendant, Antipinsky, a now-insolvent operator of a large Russian oil refinery. VTB claimed for breach of contract based on Antipinsky's failure to deliver certain oil products or to reimburse VTB's pre-payments for the products. Relying on section 44 of the Arbitration Act 1996, VTB also commenced English court proceedings in April 2019 in support of the arbitrations, securing an interim worldwide freezing order over Antipinsky's assets and an injunction requiring the delivery of a cargo of vacuum gas oil (VGO) by Antipinsky to VTB. VTB gave cross-undertakings that it would compensate any third party that suffered loss as a result of the orders.

In May 2019, Petraco, a Swiss oil trader, intervened and applied to vary the court orders, seeking damages under VTB's cross-undertakings and claiming that it was entitled to receive the VGO cargo. At a hearing in May 2019, VTB's injunction was set aside and the worldwide freezing order was varied to remove the prohibition on Antipinsky delivering the VGO to third parties. The VGO cargo was sold and the proceeds were paid into court. At VTB's and Petraco's request, directions were also given at that court hearing for an expedited trial before the High Court of the rights and obligations of VTB, Antipinsky and Petraco in respect of the VGO cargo (the Cargo Trial). That trial is yet to take place.

VTB issued an application in August 2019 to start a CPR Part 20 claim against Sberbank (which provided finance to Antipinsky) and MachinoImport within the Cargo Trial in respect of a "double selling scheme" that VTB alleges was put in place by these parties, so that VGO cargo destined for VTB was also sold to Petraco. VTB also sought permission to serve out of the jurisdiction. CPR Part 20 allows a defendant to bring counterclaims against the claimant or additional claims against any person (whether or not they are party to the proceedings). VTB contended that the proposed claims against Sberbank and MachinoImport almost entirely overlapped with the issues in the Cargo Trial. In May 2020, the court decided that Sberbank and MachinoImport were proper parties to the "counterclaim" made by VTB and that England was the forum conveniens because it was desirable to have all claims in a single set of proceedings. Sberbank and MachinoImport sought to set aside that decision and challenged the jurisdiction of the English court.

Decision on the jurisdictional challenge

Before determining the proper forum for VTB's claims against Sberbank and MachinoImport, the court concluded that, as CPR Part 20 is only available to defendants, VTB was not entitled to bring a Part 20 claim because it could not be regarded as a defendant. Sberbank's and MachinoImport's jurisdictional challenge therefore succeeded on this basis. The court also doubted whether proceedings in support of arbitration claims could give rise to Part 20 proceedings at all, given the court's more limited, supervisory function over ongoing arbitrations.

Forum conveniens for the claims

The court and the parties accepted that there were significant factors pointing to Russia being the forum conveniens, such as the location of the parties (mostly Russian businesses), the relevant events (relating to a Russian oil refinery), the witnesses (mostly in Russia), the documents (predominantly located in Russia and often in the Russian language), and the existence of complex Russian law issues. On the other hand, the connections with England were "virtually non-existent".

The court explored whether or not the Cargo Trial acted as a trump card necessitating England as the forum conveniens, given the desirability of hearing all related claims in one forum. The court accepted that some of VTB's claims would necessarily continue in England regardless of the court's decision (because VTB was required to bring its claims against Antipinsky in London based arbitrations) but recognised that there was only a limited overlap between those claims and the claims against Sberbank and MachinoImport.

The court concluded that the Cargo Trial was not a trump card and the risk of irreconcilable decisions across multiple proceedings could only be a factor to be considered alongside other relevant factors.

Having weighed the various factors in favour of Russia as the forum conveniens, the court found that the factors in favour of Russia were "so heavy" that only Russia could be the forum conveniens; even if it had reached a different decision on the use of the Part 20 procedure, it would have concluded that the burden of establishing that England was "clearly and distinctly" the most appropriate forum had not been discharged.

Comment

This is a further helpful decision on the Court's approach to forum conveniens, which has taken on significantly more importance generally post-Brexit.

While decisions on forum conveniens will always be context specific, this decision provides a useful reminder to parties of the balancing act performed by English courts, and the various factors they will consider, when determining jurisdiction.

It also provides a useful insight into the court's approach to the risk of irreconcilable decisions arising from parallel proceedings in different jurisdictions and to the weight to be given to that risk when determining the forum conveniens. Whilst it is a factor to be considered by the court, parties should remember that it is not a trump card requiring the hearing of all parallel claims in a single forum.

(1) [2021] EWHC 692 (Comm)
(2) [2021] EWHC 1758 (Comm)

When will the court step in to correct a contractual mistake?

Thu, 05 Aug 2021 15:22:50 +0100

Factual Background

Woden Park Limited ("the Landlord") leased 15 acres of land near Cardiff to MonSolar IQ Ltd ("the Tenant") for use as a solar farm. The 25-year lease provided for a starting rent of £15,000 and included a formula for calculating future rents that referenced the General Index of Retail Prices (or RPI).

The effect of the formula was not to increase the rent annually in line with RPI, but (assuming RPI generally increased) to increase the rent at a much higher rate. Assuming an annual increase in RPI of c.3%, the effect of the literal interpretation of the formula would be for the year 25 rent under the lease to increase to £76 million, as opposed to £30,000 if the rent increased in line with RPI.

The dispute concerned the effect of that calculation. The Tenant claimed that there was a clear drafting mistake. The Landlord argued that it was neither clear that the formula contained a drafting error, nor clear, if there were an error, what that error was.

Decision

The case reached the Court of Appeal, which found for the Tenant. The rent review formula should be corrected as a matter of construction under the so-called "Chartbrook principle" whereby clear drafting mistakes can be resolved; in this instance the calculation should be construed so that the rent increased in line with RPI.

The Court of Appeal endorsed both the reasoning and conclusion of the judge at first instance. To displace the literal meaning of a contractual provision under the "Chartbrook principle", it must be clear both

that a mistake has been made and
what the provision was intended to say.

The formula contained a mistake; it was objectively intended to increase or decrease the rent on the review date "in accordance with any proportionate change in the RPI during that year." As such, it was possible to determine the true construction of the formula, with an order being made on such terms.

In upholding the decision at first instance, the Court of Appeal rejected the Landlord's submission that the "Chartbrook principle" was qualified by the expressions of judicial restraint found in the later decision of Arnold v Britton(2), which emphasised that commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision in question.

The Court of Appeal noted that the context for these remarks in Arnold v Britton was that whilst parties cannot control the circumstances surrounding their contract, they can control the language of their contract, which is where the reasonable reader would expect to find reflected what the parties intended. That does not apply in cases involving alleged mistake, where the very question is whether the language of the contract reflects what the parties intended.

The Court of Appeal re-articulated that the Courts cannot illegitimately re-write the parties' bargain in the name of commercial sense (as both Arnold v Britton, and Chartbrook(3) itself suggest), however there was a distinction between "commercially unattractive and even unreasonable" cases in which judicial restraint is required, and cases involving "nonsensical or absurd" provisions which the Courts are able to correct through applying the "Chartbrook principle."

Comment

Though the decision in this case upholds a construction of a contract contrary to its literal meaning, the judgment ultimately reinforces the language as actually used in contractual provisions as the starting point for interpretation. The judgment suggests that the Court cannot depart from the words as actually used in the contract unless the provisions are nonsensical or absurd. Contracting parties should continue therefore to ensure that the language of their agreements accurately reflect the intended terms.

(1) [2021] EWCA Civ 961
(2) [2015] UKSC 36
(3) [2009] 1 AC 1011

The current state of service

Thu, 29 Jul 2021 11:43:31 +0100

Facts

General Dynamics, a global defence conglomerate, was contracted by the sovereign state of Libya to provide it with communications systems. The systems were provided but General Dynamics claimed not to have received full payment. Arbitration proceedings were commenced and, in 2016, an ICC Tribunal awarded General Dynamics £16 million (plus interest and costs). Libya, however, took no steps to pay.

As a result, in 2018, General Dynamics issued proceedings in the High Court to enforce the arbitral award in England pursuant to section 101 of the Arbitration Act 1996. At first instance, the High Court exercised its discretion to dispense with formal service of the arbitration claim form and enforcement order; according to General Dynamics, Libya was well aware of the arbitral award and the ongoing civil war in the country presented many difficulties – the fact that there were two entities claiming to be the legitimate Libyan State being the most serious.

Libya, however, applied to the High Court seeking to vary the enforcement order and requiring the arbitration claim form to be served, formally, in accordance with section 12 of the State Immunity Act 1978 (SIA). This section requires service of "any writ or other document required to be served for instituting proceedings against a State" to be transmitted to that country's Ministry of Foreign Affairs by the UK's Foreign, Commonwealth and Development Office (FCDO). Libya succeeded and the order giving permission to enforce the arbitral award was set aside.

The Court of Appeal restored the High Court's initial order and considered that section 12 of the SIA only applied to a document that instituted proceedings and was required to be served. In this case, since Libya was aware of the arbitral award, the Court of Appeal considered that the arbitral claim form did not need to be served and therefore no service was required via the FCDO.

Libya appealed to the Supreme Court.

Decision

With a 3:2 majority in its favour, Libya's appeal succeeded on the three issues of principle in dispute.

Issue 1: Was the claim form or the order permitting enforcement of an arbitral award a document "required to be served for instituting proceedings" under section 12(1) of the SIA?

The Supreme Court held that the words of the section were wide enough to apply to all documents by which notice of proceedings in the UK is given to a defendant State. In the context of this case, it meant the claim form or otherwise the order enforcing the arbitral award.

Issue 2: If the answer to Issue 1 was yes, would such document cease to be one "required to be served" if, in exceptional circumstances, the court decides to dispense with service under CPR 6.16 or 6.28?

No. The Supreme Court held that the CPR do not supplant the requirements of section 12(1) of the SIA. The section must be considered mandatory for service against a State and the role of the FCDO essential in transmitting the documents.

Issue 3: Must section 12(1) of the SIA be interpreted as allowing the court to make alternative directions as to service in exceptional circumstances where the claimant’s right of access to the Court would otherwise be infringed, in accordance with s3 of the Human Rights Act 1998 (HRA)?

No. The Supreme Court held that section 12(1) of the SIA offers a proportionate and workable method for service against a foreign State. Due to the mandatory nature of section 12(1) and the role of the FCDO, allowing substituted service would "go against the grain" of the legislation, as Lady Arden described it.

Comment

General Dynamics' attempt to dispense with formal service of the arbitration claim form and the enforcement order ultimately backfired. The consequences have been to delay enforcement of the arbitral award, increase costs, and confirm that formal service through the FCDO is required. The company still faces its original difficulty – service in a dangerous and difficult jurisdiction.

Although it is not uncommon for the High Court to vary service requirements where service on private parties may be difficult or even impossible, the courts must be particularly mindful of the privileges of States. One lesson from this case is that simply because formal service can be hard to undertake does not give a claimant licence to dispense with it.

That is not to say that the rules always require precisely the same process to be followed. In Certain Underwriters at Lloyd’s v Syrian Arab Republic [2018] EWHC 385 (Comm) the claimant complied with the SIA by obtaining agreement for the FCDO (then known as the Foreign & Commonwealth Office) to courier documents to the Syrian Ministry of Foreign Affairs in Damascus. This scenario was probably not what was envisaged during the drafting of the SIA – a courier delivery has less formality than a diplomat flashing his credentials to a guard outside a palace compound and solemnly serving the documents. However, the Court approved, the FCO provided a certificate of service and the method accorded with the SIA's demand that documents by "transmitted" through the FCO.

What is the broader relevance of this, otherwise niche, case? It serves as a reminder to all claimants that strict compliance with the rules is key. A hitherto unresponsive defendant, as in this case, will readily challenge any perceived procedural flaw to disrupt a claim. A claimant may have only one opportunity to serve correctly; it cannot afford to let it slip.

General Dynamics United Kingdom Ltd v State of Libya [2021] UKSC 22

Expert evidence is not an absolute right: High Court issues stark reminder that breaches of rules on expert evidence will not be tolerated

Thu, 15 Jul 2021 10:01:56 +0100

In the recent case of Dana UK AXLE Ltd v Freudenberg FST GmbH [2021] EWHC 1413 (TCC), the Court excluded expert evidence during trial as a result of serious and unexplained breaches of the terms of a court order and the basic principles of CPR 35.

Facts

The claim arose out of the alleged premature failure of pinion seals manufactured by FST and supplied to Dana from around September 2013 to February 2016.

The parties were given permission to serve expert evidence in the fields of engineering and materials/polymer science. FST did not serve its expert reports until 8 days after the deadline and failed to apply for relief from sanctions. Notwithstanding this, Dana did not object to FST being granted relief provided that various defects in the reports were remedied, namely:

none of FST's reports identified the documents on which the experts had relied;

FST's experts had undertaken site visits to its factories without notice to Dana and without affording Dana’s technical experts a similar opportunity to inspect FST’s operations; and

when referring to data or other information, FST's reports did not always provide a reference to the document or source of data relied upon.

At the PTR, The Court granted relief from sanctions in respect of the late service of the reports and held that FST would be permitted to rely on them at trial provided that they served versions with the outlined defects rectified that were therefore fully compliant with CPR 35.

FST served amended versions of the reports. However, Dana considered that these failed to satisfy the conditions imposed by the PTR Order. Ultimately, on day 7 of the trial, Dana made an application for FST's reports to be excluded entirely from the proceedings.

Decision

The Court granted Dana's application and excluded FST's reports on the basis that there had been multiple "serious and unexplained" breaches of the PTR Order:

There had been a "serious breach" of the requirement for FST to provide full details of all materials provided to its experts. It was essential for the Court to understand what information and instructions had been provided to the experts in order to understand whether they were operating on a level playing field.

It was "entirely unacceptable" that, not only had FST's experts engaged in site visits without informing Dana's experts and without keeping records, but it also became clear during trial that more site visits had taken place than had been disclosed in the reports.

The expert reports contained several opinions which were based on verbal evidence from individuals at FST or at which had not been verified, which was “a paradigm example of what can go wrong if an expert is left to obtain information direct from his clients without legal involvement”.

The Court agreed with Dana that these breaches were unlikely to have been inadvertent given that FST could not have complied with the PTR Order without revealing multiple and serious breaches of CPR 35.

The Court commented that FST had committed "particularly serious" breaches of CPR 35, which in themselves would have been sufficient to justify the exclusion of the reports:

There had been a free flow of information between FST's experts and in-house technical specialists with no, or very little, oversight from FST's solicitors and it is inevitable that the experts had been privy to information that had not been shared with Dana's experts.

FST had been involved in the preparation of the reports. The notes to CPR 35 and the TCC Guide make clear that the parties' legal advisers should not be involved in the negotiation or drafting of expert reports, and the same prohibition applies to the parties.

The experts' opinions appeared to have been directly influenced by FST, which at the very least called into question the independence of the reports and the extent to which they provided objective and unbiased opinions.

Comment

This decision is a stark reminder that admission of expert evidence is a matter of the Court's discretion. The rules on expert evidence are there to ensure a level playing field and to uphold the fair administration of justice. The Court's permission is conditional on compliance with these rules, and this decision highlights the fact that breaches will not be tolerated.

It also serves asa valuable reminder of the important role that parties' solicitors play in the provision of expert evidence. It is crucial that solicitors exercise appropriate oversight and control over experts, including by keeping clear records of all information provided to experts and all communications between the expert and the client.

Never too late: English court issues anti-suit injunctions despite foreign proceedings reaching Supreme Court

Wed, 30 Jun 2021 11:33:29 +0100

Facts of the case

UAU and HVB entered into a farmout agreement in relation to their participation in an oil and gas block, offshore of Equatorial Guinea. The agreement included an arbitration clause governing "any dispute", incorporating the LCIA rules, and designating London as the seat of any arbitration.

A dispute arose. Contrary to the arbitration clause HVB issued proceedings in Equatorial Guinea's Court of First Instance in November 2020. UAU challenged the court's jurisdiction. Following an administrative failing by the court (which resulted in the dismissal of UAU's appeal to the Provincial Court on the jurisdiction point), UAU found itself appealing to the Supreme Court of Equatorial Guinea on 18 March 2021. Meanwhile the Court of First Instance had further ordered UAU to make an interim payment of nearly $8.5m to a third party.

UAU's appeal to the Supreme Court was still outstanding when it applied to the English High Court for an anti-suit injunction in April 2021.

When will the English courts will intervene? A question of comity

Based on principles of courtesy and respect (as opposed to any legal requirement) English courts are reluctant to interfere with the processes, decisions, and jurisdiction of foreign courts. This general concept is known as 'comity'.

However, there are well-established principles under English law as to when a court might grant an anti-suit injunction to enforce an exclusive London arbitration agreement:

Where foreign proceedings have been brought in breach of an agreement to arbitrate an injunction may be granted, unless there is a 'good reason' not to. The courts will uphold parties' agreements not to sue each other.
The burden of providing a 'good reason' against an injunction falls on the party in breach of the agreement to arbitrate (in this case HVB).
However, an anti-suit injunction should be sought promptly and before the foreign proceedings are too far advanced. While there is no hard and fast rule as to what constitutes "excessive delay", it will be relevant if any delay increases the perceived interference with the process of the foreign court. The later the foreign proceedings are abandoned the more of the foreign court's resources will have been wasted.

Decision

The English court granted injunctions (i) preventing HVB from taking further steps in the Equatorial Guinea proceedings and (ii) compelling HVB to discontinue them.

The following factors were in UAU's favour:

In issuing the Equatorial Guinea proceedings HVB was very clearly in breach of the arbitration clause under the farmout agreement;

HVB submitted no good reason against granting the injunctions or why it should not arbitrate the dispute in accordance with the arbitration clause;

At no point had UAU engaged with any of the Equatorial Guinea courts on the merits of HVB's substantive claim; all of its representations had been to dispute jurisdiction;

The English court found that, "given the advice of its lawyers in Equatorial Guinea, [UAU] reasonably believed that the jurisdiction issue could be dealt with effectively in Equatorial Guinea and that its appeal to the Provincial Court had good prospects of success". It was reasonable for UAU to delay English anti-suit proceedings (which might otherwise have proved a waste of time and money) in circumstances where the jurisdiction challenge before the Equatorial Guinea courts were still pending;

The costs that HVB will have wasted as a result of abandoning the Equatorial Guinea proceedings were only incurred because of its refusal to adhere to the arbitration clause; and

Even if the injunctions were not obeyed by HVB, and the Equatorial Guinea proceedings continued, they would nevertheless afford UAU protection if HVB attempted to enforce any Equatorial Guinea judgment in England.

Conclusion

The English courts are willing to protect parties who have agreed to arbitrate disputes within their jurisdiction, regardless of how far any foreign proceedings might have proceeded; such injunctions might be sought during the course of a trial or even after a foreign judgment has been given.

For any party faced with proceedings issued in breach of an agreement to arbitrate in England, the take-aways from this case are clear: make sure the dispute and its subject matter are subject to a London-seat arbitration; it is reasonable and permissible to appear before a foreign court to challenge its jurisdiction as long as you do not submit to its jurisdiction by engaging with it on the merits of the dispute itself; and, ultimately, delay in applying for an anti-suit injunction is not fatal if the steps you have taken are reasonable, are designed to save time and costs, and have been informed by legal advice.

High Court reminds us of the principles of res judicata and abuse of process

Thu, 03 Jun 2021 11:23:32 +0100

Facts

This claim is the latest instalment in a series of claims between Elite Property Holdings Limited (Elite) and Barclays Bank plc (Barclays) relating to several interest rate hedging products (IRHPs) that Elite entered into with Barclays that were ultimately subject to investigation as part of a review mandated by the FCA (then FSA) into the alleged mis-selling of IRHPs. In response to the review, Barclays made various basic redress offers to Elite that Elite rejected.

Eventually, in 2014, Elite accepted revised redress offers from Barclays that recognised that the basic redress payments were in full and final settlement of all claims connected to the IRHPs, excluding any consequential loss claims (the Agreements). Separately, Elite submitted its consequential loss claim to Barclays. This was rejected and Elite issued court proceedings against Barclays in respect of its consequential losses (the Original Action). Much of Elite's claim was struck-out and summary judgment was given in favour of Barclays.

In this claim, Elite alleged that Barclays were in breach of:

the Agreements relating to the alleged consequential loss suffered; and
an oral agreement allegedly made between it and Barclays, in which Barclays promised not to take any enforcement action against Elite.

Barclays applied to strike out the claims on the grounds of res judicata and abuse of process, arguing that the claims were an attempt to re-hear matters that should have been raised in the Original Action and were therefore barred by cause of action estoppel and / or issue estoppel. In the alternative, it argued that the claims fell within the Henderson v Henderson principle as the issues raised were directly relevant to the Original Action.

High Court decision

The Court struck out Elite's claim on the grounds of res judicata and / or abuse of process stating that it was "at most, a different way of putting the same claim as was brought in the Original Action. The same essential factual basis applies as in the Original Action." With regards to res judicata and abuse of process, the judgment lists the key principles.

Cause of action estoppel: the principle that once a cause of action has been held to exist or not to exist, that outcome may not be challenged by either party in subsequent proceedings.
Issue estoppel: where an issue is necessarily common to both the earlier and later proceedings and was decided in the prior proceedings, this will remain binding on the parties. Issue estoppel extends to cover not only the case where a particular point has been raised and specifically determined in the earlier proceedings, but also where in the subsequent proceedings it is sought to raise a point which might have been but was not raised earlier in relation to an issue that has already been finally determined.
Henderson v Henderson: This principle precludes a party from raising in subsequent proceedings matters which could and should have been raised in earlier proceedings.
Abuse of process: The court has an inherent power to prevent misuse of its procedure where the process would be manifestly unfair to a party or would otherwise bring the administration of justice into disrepute among right-thinking people.

Comment

This judgment is reassuring for companies faced with duplicative claims involving the same cause of action, or matter determined in previous proceedings. It provides comfort that the Court will use its powers to strike out such claims. The decision is also a clear warning to claimants who try to bring duplicative claims or claims based on issues not raised or determined in previous proceedings which, in the court’s view, could and should have been raised then.

(1) [2021] EWHC 772 (Comm)

Exceptions to the without prejudice rule – another retrenchment

Thu, 20 May 2021 15:33:00 +0100

The without prejudice rule

The without prejudice rule protects statements made in the context of a without prejudice discussion or negotiation from being relied upon in later legal proceedings. The principle facilitates the settlement of disputes, by encouraging the parties to speak freely and frankly without fear that statements made in the course of a without prejudice situation might be later be used against them. The rule is grounded in public policy and the protection it offers is not to be easily overridden.

Unless all the parties to the without prejudice situation agree to waive without prejudice privilege, what was said or stated remains protected unless one of the well-established exceptions to the without prejudice rule set out in Unilever plc v The Proctor & Gamble Co⁽³⁾ (Unilever) applies. In this context, it makes no difference whether a party is seeking to rely on a statement it made in the without privilege situation or whether the statement was made by the other party.

The Unilever exceptions

The Court in Unilever set out six established exceptions to the without prejudice rule. Whilst these are not exhaustive, it is generally accepted that any extensions or additions to them should be narrowly drawn, so as to maintain the policy objective of facilitating the amicable settling of disputes.

Without prejudice communications are admissible in these circumstances:

Settlement - to determine whether the communications have resulted in a concluded compromise agreement and if so, the terms of that agreement;
Fraud/misrepresentation/undue influence - to show that an agreement apparently concluded between the parties during the negotiations should be set aside on these grounds;
Giving rise to an estoppel – to give evidence of a clear statement made by one party to the negotiations on which the other party is intended to act and does in fact act;
Impropriety – to provide evidence of what the other party said or wrote in a without prejudice context if the exclusion would act as a cloak for perjury, blackmail or other unambiguous impropriety;
Delay - to explain delay or apparent acquiescence;
The Muller Exception.

The factual context

Berkeley Square, the claimants, were the legal owners of a substantial property portfolio in Central London. The portfolio was asset managed by the First Defendant (Lancer) from 2005 to 2017 and a Dr Al Ahbabi was appointed as the claimants' representative in respect of the portfolio. Lancer made substantial payments to a company beneficially owned by Dr Al Ahbabi called Becker Services Limited (Becker).

In 2015, Dr Al Ahbabi was removed from his post, and in 2017 Lancer's mandate to asset manage the portfolio was terminated. In September 2018, the current proceedings were issued, in which the claimants alleged that the payments by Lancer to Dr Al Ahbabi were a fraud on the claimants, and that they did not learn of them until 2017. In its defence, Lancer relied on statements made in mediation position papers relating to a separate dispute between the same parties in 2012 in which reference was made to Lancer's payments to Becker. Berkeley Square applied to have references in the defence to the mediation position papers struck out on the basis that they were protected by without prejudice privilege.

At first instance, Lancer relied on three Unilever exceptions; "Fraud", "Estoppel" and "the Muller exception". Mr Justice Roth found that the Fraud and Muller exceptions were applicable but not that relating to estoppel. The claimants appealed.

The Court of Appeal decision

The Court of Appeal agreed that the Fraud exception applied to the mediation statements Lancer wished to rely on; if Lancer had misled the claimants by misrepresenting the position concerning Becker at the mediation, Berkeley Square would have been entitled to refer to the statements made at the mediation to impugn the validity of the settlement agreements reached as a result. Here, Lancer wanted to do the opposite – it wished to rely on the mediation statements to establish what Berkeley Square knew about Becker (and therefore to rebut a case that the claimants were deceived and that Dr Al Ahbabi accordingly had no authority to bind the claimants to the settlement). Lancer's argument was that these were two sides of the same coin. If it is permissible to allow reference to without prejudice material to set aside an agreement, it would be illogical to treat references intended to uphold an agreement as impermissible.

Berkeley Square argued that this interpretation of the Fraud exception is an extension of that exception, as stated in Unilever, and that extensions should be principled, incremental and analogous to the existing exceptions. While the Court of Appeal agreed that extensions should be principled, as in this case, it did not agree that extensions to an exception could only be incremental or analogous to already existing exceptions. This would create an inappropriate fetter on the law's ability to react to new facts or circumstances that do not fit neatly in the already established exceptions. Accordingly, the Court of Appeal upheld Mr Justice Roth's decision on the Fraud exception; this was sufficient to dispose of the appeal.

In light of that decision, the Court did not need to determine the other two exceptions relied on; the question as to where or not the Estoppel exception should be extended to any type of estoppel should be explored in a case that turns on that particular issue.

The Muller exception

Whilst the decision in Muller has not been overruled, the reasons given for the decision cannot now stand. This makes the exception difficult to apply to anything but identical facts to those in Muller. In Muller, the court ordered disclosure of the claimant's settlement negotiations with a software company in circumstances where the claimant had relied on the settlement as reasonable mitigation of the loss that it claimed from the Defendants, its former solicitors.

Recent first instance decisions, including in Berkeley Square, had attempted to apply the decision to factual scenarios far removed from the facts in Muller and whilst the Court did not overturn those decisions, it certainly raised doubts about them.

Related to that, the Court also questioned whether the Muller exception could apply to a two-party case, when Muller was a three-party case; a two-party scenario is quite different, thus deviating from the factual matrix in Muller. Also, in a two-party case, the Muller exception is arguably not necessary because the parties to the proceedings are the same as the parties to the without prejudice situation and can therefore agree to waive privilege in the without prejudice communications. That is not an option where the parties to the proceedings are distinct to the parties to the without prejudice situation. This analysis is supported by another distinction, which is that in Muller, it was the without prejudice negotiations themselves that were in issue, whereas in subsequent cases, it was statements made at the without prejudice negotiations that were in issue.

The Court also considered where a party puts in issue a point that is not fairly justiciable without reference to without prejudice material. Was this a standalone aspect of the Muller exception, or one of the strands or factors that were taken into account in the round? An exception framed by reference to what was fairly justiciable might be viewed as shorthand for "what justice requires", and that in turn might be so wide as to encroach on the public policy principle of protecting without prejudice communications from disclosure so as to facilitate amicable settlement. As it was not necessary to determine the point, the Court decided not to.

Conclusion

Although the Estoppel and Muller exceptions were fully argued and raised difficult points which were ripe for determination, the Court of Appeal declined to do so, given its decision on the Fraud exception. In effect this left open the possibility of further argument on the scope and application of each of those exceptions, in circumstances where the ambit of the Muller exception, in particular, has been far from clear for some time. The Court did express concern at what it viewed as attempts to widen the ambit of the established exceptions to the without prejudice rule. However, it is regrettable that the Court declined the opportunity to provide much needed clarity to this difficult area of law.

NB: RPC acted for the Defendant, Lancer Property Asset Management Ltd.

⁽¹⁾Muller v Linsley and Mortimer [1996] PNLR 74

⁽²⁾[2021] EWCA Civ 551

⁽³⁾[2000] 1 WLR 2436

Hand in your notice - how to bring a successful warranty claim

Thu, 13 May 2021 18:28:16 +0100

Claiming under a warranty

Warranties encourage sellers to disclose known issues in the due diligence process and provide buyers with a remedy if certain facts upon which they have based their investment decision turn out to be untrue. However, claims arising from warranties can only be brought in the circumstances prescribed in the contract.

Background

The buyer purchased a company providing fleet management solutions for taxi and courier businesses. It claimed that the seller had breached various warranties in the SPA; in particular, the target company had been using an address database in breach of a single user licence.

The SPA allowed the seller to release funds from the retention account unless the buyer had provided notification of a warranty claim, including full particulars, within 16 months of completion. The buyer notified, reserving its rights and indicating that it was possible that a warranty claim might be brought. The buyer claimed that this notice, and its claim in misrepresentation for breach of the same warranties, prevented the seller from releasing retention funds.

The court's approach

The commercial purpose of notification requirements is to give the seller the opportunity to make financial provision for any warranty claims and, if the requirements are not followed, the seller is not liable. In construing a notice, the court should ask how a reasonable recipient with knowledge of the context in which it was sent would have understood it. While minor defects will not invalidate notices if the recipient would have understood the message being conveyed(2), notices must comply with formal contractual requirements in relation to timing, form and service.

The court decided that the buyer's notice did not comply with the SPA requirements because the notification did not include full particulars of the claim, nor did it specify that a claim was actually being made; it only referred to the possibility of such a claim. The notice was also sent one day late, over 16 months after completion. The judge concluded that the notice was an unsuccessful "last minute tactic" to prevent the release of funds.

The buyer argued the notification requirements did not apply to its claim for misrepresentation arising from the alleged breach o the warranties, and its misrepresentation claim also prohibited the release of funds. But the court decided that only validly notified contractual warranty claims could prevent the release of retention funds and that misrepresentation claims could not be set off against those funds.

The court also confirmed that, in any event, warranties cannot amount to representations and instead are a contractual promise which provide buyers with a particular (contractual) remedy. Previous authorities which had suggested that warranties in transaction documents could provide a basis for a claim in misrepresentation should not be followed. As such, if a buyer wishes to bring a claim for misrepresentation, it must identify specific pre-contractual representations which are not captured by entire agreement or non-reliance clauses.

Comment

The case is a salutary reminder of the importance of complying with contractual warranty provisions, and the difficulties of bringing a misrepresentation claim where warranties have superseded any pre-contractual discussions. As well as providing sufficient information about their claim, buyers should also be aware that there are other hurdles to bringing successful claims and it is recommended that buyers:

Follow provisions concerning the method, time and place of service. Notification should be made within prescribed time limits. If the SPA is outdated (for example because the seller has moved offices), notice should still be served in accordance with the SPA, with a copy of the notice sent to the seller's current address so they are aware of the claim.
Check whether information was disclosed against the warranty and whether there are any financial caps on claims.
Ensure that the seller was or should have been aware of the facts which form the basis of the warranty claim, and that the relevant events do not post-date completion.
Consider whether an indemnity from the seller covers the same loss. This may provide an easier route to recovery.

(1) [2021] EWHC 829
(2) Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19

Forum conveniens – context is key

Thu, 06 May 2021 11:17:00 +0100

The alleged conspiracy

The Claimants allege that the seven defendants conspired to bring about transactions in which approximately US$800m of well performing, secured loans, which had been made by the Claimants to a company ultimately owned or controlled by the first four defendants (the Mints), were repaid with the Claimants' own money and replaced with illiquid, unsecured, non-income producing long-term bonds worth a fraction of the price the Claimants paid for them. At the time, the fifth to seventh defendants (D5-D7) were Chairmen, CEOs and/or shareholders of the Claimants. The Claimants allege that the Mints dishonestly procured the transactions in conspiracy with the banks' then controllers (D5-D7) to the benefit of the Mints' company and at the expense of the Claimants.

Permission to serve out on Russian defendants granted

Initially, the Claimants issued proceedings against only the Mints who were based in England. However, they later applied for permission to serve the proceedings against the further three defendants, D5-D7 who were based in the US, Israel and Russia). This was on the basis that they were necessary or proper parties to the claim against the Mints, who were the "anchor defendants". The High Court Judge granted permission.

However, D5-D7 sought to have permission set aside on the basis that England was not the appropriate jurisdiction to hear the dispute.

What was the forum conveniens for the claims?

The Court accepted that the case before it was "essentially a Russian dispute".(2) The Claimants and Defendants were all Russian, the alleged wrongdoing occurred in Russia (save for at least one meeting in France), the alleged losses were sustained in Russia, the causes of action relied upon were "creatures of Russian law", and most of the documents were in Russian.(3)

However, the Court nonetheless allowed the English proceedings to proceed against D5-D7.

The Court accepted the Claimants' argument that D5-D7 should be parties to the English proceedings to avoid the risk of inconsistent decisions if they were instead sued in separate proceedings elsewhere. In doing so, the Court acknowledged that there already was a risk of inconsistent judgments as a consequence of extant proceedings relating to the same claims in other jurisdictions (such as Russia, Cyprus, and New York). However, the Court considered that the risk would be materially increased if it declined jurisdiction over D5-D7, and that increased risk was "something which is capable of causing great difficulty not only for the individuals affected but also for the judicial systems of England and Russia". It therefore concluded it should be avoided.(4)

D5-D7 had argued that because the risk of inconsistent judgments had arisen only as a result of the Claimants’ own decision to sue the Mints in England, the Claimants could not rely on that to contend that England was the forum conveniens. The Claimants had chosen to sue the Mint Defendants in England because they expected to face challenges with enforcing a Russian judgment against the Mints in jurisdictions abroad. Conversely, an English judgment would be more easily enforceable in other jurisdictions (such as the Cayman Islands which is where the Claimants would seek to enforce it) and was, therefore, more attractive.

The Court accepted the Claimants' position that no rational claimant would have chosen to sue the Mints in Russia. Taking into account the full picture (being, the Claimants' reason for choosing to sue in England, and the material increase in the risk of multiple proceedings and of inconsistent judgments), the Court therefore held that England is the forum in which the claims against D5-D7 can be "suitably tried for the interests of all the parties and for the ends of justice".(5)

Comment

This decision illustrates that even though key legal, factual and practical aspects of a dispute favour another jurisdiction, the English Court may still find the forum conveniens to be England where the risk of multiplicity of proceedings and issues of enforceability of judgments are at play.

That said, clearly the jurisdictional position in any given case will turn on the precise circumstances, and so claimants ought of course to consider carefully where to bring their claims taking account of the whole picture.

(1) PJSC National Bank Trust v Mints [2021] EWHC 692 (Comm) [37].
(2) [37].
(3) [37].
(4) [73].
(5) [77].

When can "deliberate concealment" postpone limitation periods?

Thu, 29 Apr 2021 10:42:18 +0100

Facts

Ms Potter entered into a loan agreement with Canada Square for £16,953 in July 2006. Canada Square suggested that Ms Potter buy a PPI policy to ensure the loan was repaid in the event she could no longer make the payments herself. They acted as intermediary in arranging the policy on Ms Potter's behalf. The "payment protection premium lent" was £3,824 and, given that this sum was added to the loan, interest was charged on this amount at the same rate as for the rest of the loan. Ms Potter completed all payments due and the loan agreement came to an end in March 2010.

In fact, only around £182.50 (4.7%) of the £3,824 paid represented the actual premium. The rest was Canada Square's commission on the sale of the policy. Ms Potter had, therefore, paid interest on Canada Square's substantial commission.

In April 2018, Ms Potter brought a claim, alleging that Canada Square's non-disclosure of the very high commission made their relationship "unfair" within the meaning of s.140A Consumer Credit Act 1974. Canada Square argued that Ms Potter's claim, bought nearly 12 years after the loan was entered into, was time-barred. However, Ms Potter argued that the relevant limitation period started to run when she discovered the truth about the amount of the commission, in/around November 2018. She argued that Canada Square had deliberately concealed a fact relevant to her right of action (under s.32(1)(b)) and Canada Square deliberately commissioned a breach of duty where it was unlikely to be discovered for some time (in relation to s.32(2) Limitation Act 1980).

Ms Potter won at first instance and, after a subsequent appeal was dismissed, Canada Square appealed to the Court of Appeal on the following issues:

whether the creation of an "unfair relationship" under s.140A is a "breach of duty" for the purposes of s.32(2);
whether s.32(1)(b) can apply in circumstances where there is no active concealment. If so, whether this is limited to when there is a free-standing legal duty to disclose;
the meaning of "deliberate" in s.32(1)(b) and s.32(2).

Court of Appeal decision

The Court of Appeal dismissed the appeal, considering the following:

Whether the creation of an "unfair relationship" under s.140A is a "breach of duty" for the purposes of s.32(2)

Canada Square's creation of an unfair relationship was a breach of duty under the meaning of s.32(2). Legal wrongdoing of any kind which gives rise to a right of action is sufficient for s.32(2).

Whether s.32(1)(b) can apply in circumstances where there is no active concealment. If so, is this limited to when there is a free-standing legal duty to disclose?

The Court decided that s.32(1)(b) was not limited to circumstances where active concealment had occurred. Further, it held that s.32(1)(b) did not only apply in the absence of active concealment where there was a free-standing legal duty of disclosure. The correct question to ask is not whether there is a contractual obligation to disclose, but rather whether there was enough of an obligation to disclose, to mean that a failure to disclose amounted to a concealment for the purposes of s.32(1)(b).

The Court further overruled the finding at the previous appeal that Ms Potter could only rely on s.32(2) and not s.32(1)(b) because Canada Square's conduct could not act as both the basis of her cause of action under the Consumer Credit Act 1974 and also the basis by which the limitation period is postponed under s.32(1)(b). The Court asked "why as a matter of principle the claimant should be in a worse position when seeking to establish concealment of a fact when the right of action turns on that very act of concealment, than he is where concealment is not an element in the right of action".

Applied the facts, the Court decided that Canada Square owed a duty to Ms Potter to disclose the commission to her and their failure to do so amounted to concealment of that commission within the meaning of s.32(1)(b).

The meaning of "deliberate" in s.32(2) and s.32(1)(b)

The Court defined "deliberate" by identifying the "necessary mental element" for the purposes of s.32(2) and s.32(1)(b). There were four possible options:

subjective knowledge or actual awareness within Canada Square;
subjective knowledge which includes wilful blindness;
recklessness with both a subjective and objective element(2); or
recklessness with a subjective element only.

For the purposes of s.32(2), Canada Square must have had the "necessary mental element" in respect of the fact that their conduct gave rise to a breach of duty. For s.32(1)(b), Canada Square must have had the "necessary mental element" in respect of whether they realised they should have told Ms Potter about the commission but decided not to. After analysis of case law relating to the old Limitation Act 1939 and materials relating to the enactment of the Limitation Act 1980, the court decided that the relevant "necessary mental element" was c) above.

Applied to the facts, the Court formulated the relevant tests as follows:

s.32(2) - Canada Square realised that there was a risk that their failure to disclose the fact and extent of the commission resulted in their relationship with Ms Potter being unfair within the meaning of s.140A, and it was not reasonable for them to take that risk of creating an unfair relationship.
s.32(1)(b) - Canada Square realised that there was a risk that they had a duty to tell Ms Potter about the commission charge, such that their failure to do so meant that they deliberately concealed that fact from her.

Comment

The Court of Appeal's decision is significant in clarifying that for s.32(1)(b) to apply there need not be "active steps of concealment" and the conduct giving rise to the cause of action need not be separate to the act of concealment. Additionally, the Court has shed light on the meaning of "deliberate concealment" under both s.32(2) and s.32(1)(b); "deliberate" does not require a claimant to prove actual knowledge on the part of a defendant and so the burden on claimants is easier to overcome.

(1) [2021] EWCA Civ 339.
(2) R v G and anor [2003] UKHL 50, [2004] AC 1034.

Parental Guidance from the Supreme Court: When may a UK domiciled parent company owe a duty of care to individuals affected by the acts of its foreign subsidiary?

Thu, 15 Apr 2021 16:12:08 +0100

This decision on jurisdiction provides helpful guidance on the circumstances in which a UK domiciled parent company may owe a common law duty of care in respect of the actions of a foreign subsidiary company.

Background to the Dispute

The claimants, comprising a group of 42,355 individuals from the Niger Delta region, brought a claim in negligence against Royal Dutch Shell Plc (RDS), incorporated in England, and one of its Nigerian subsidiaries, Shell Petroleum Development Company of Nigeria Ltd (SPDC).

In summary, the claimants alleged that they had suffered substantial environmental damage as a result of oil spills and pollution from pipelines operated by SPDC in Nigeria such that natural water sources used for drinking water, fishing, agricultural, washing or recreational purposes, were no longer safe to use. The claimants argued that RDS owed them a common law duty of care on the basis that it exercised a significant degree of control over material aspects of SPDC's operations, as well as assuming responsibility for SPDC's operations through RDS group-wide policies (and those policies had failed to protect the claimants from the risk of foreseeable harm arising from SPDC's operations).

The Dispute

The claimants served the proceedings on RDS within the jurisdiction, relying on RDS’s English domicile. The claimants obtained permission ex parte to serve SPDC out of the jurisdiction on the basis that it was a "necessary and proper party" for the purposes of the jurisdictional "gateway" set out in paragraph 3.1(3) of Practice Direction 6B.

The defendants brought applications to challenge the jurisdiction of the English court and set aside the service of the claim out of the jurisdiction.

The Decision of the Lower Courts

At first instance, Fraser J concluded that although the court had jurisdiction to try the claims against RDS on the basis that it is incorporated in the UK, it was "not reasonably arguable" that RDS owed any duty of care to the claimants as limbs 2 (proximity) and 3 (reasonableness) of the Caparo v Dickman(2) test were not made out. Fraser J therefore held that the claimants had failed to satisfy the conditions set out in paragraph 3.1(3) of Practice Direction 6B in respect of RDS, as the anchor defendant, and the court therefore declined jurisdiction over the claim against SPDC.

The claimants appealed and, in a majority decision, the Court of Appeal upheld the first instance decision.

The Supreme Court Decision

Following the Court of Appeal's decision, the Supreme Court handed down the much anticipated judgment in Vedanta Resources PLC and another v Lungowe and others(3) (Vedanta), in which the Court confirmed that a duty of care can exist between a parent company and those affected by the operations of its subsidiaries.

Unsurprisingly, the claimants placed significant reliance on the decision in Vedanta in their appeal to the Supreme Court.

The Supreme Court was required to consider two issues in this appeal. The first was whether the Court of Appeal had erred in law. Here, the Supreme Court held that:

The Court of Appeal materially erred in law by conducting a mini-trial of substantive factual issues; the relevance of likely future disclosure was inappropriate in an interlocutory application. It had therefore failed to focus on the pleaded case and whether that showed the claimants had an arguable claim;
In relation to the question of control, the court should have examined "the extent to which the parent did take over or share with the subsidiary the management of the relevant activity [in this case, the operation of the pipeline]." The Court further noted that the "control of a company and de facto management of a part of its activities are two different things";
The Court of Appeal erred when it held that the promulgation of group-wide policies or standards could never in itself give rise to a duty of care;
The Court of Appeal had further erred when it had applied a general presumption that parent companies will not be liable for their subsidiaries as the Supreme Court in Vedanta had confirmed that no such presumption exists; and
The Court of Appeal had also erred when it approached the issue of parent company liability in negligence as a special category of liability. Again citing Vedanta, the Supreme Court noted that normal principles of negligence applied when determining questions of parent liability for the actions of a subsidiary.

On the basis of its findings in relation to the first issue, the second issue for the Supreme Court to determine was whether the Court of Appeal was wrong to decide that there was no real issue to be tried. Again, the Supreme Court disagreed with the Court of Appeal and held that there was a real issue to be tried, and it was reasonably arguable that RDS owed the claimants a duty of care, based on the case set out in the pleadings, factual witness evidence and the real prospect of relevant and significant future disclosure. Two internal RDS documents, (the "RDS Control Framework "and the "RDS HSSE Control Framework"), gave weight to the claimants' case; the RDS Control Framework showed that the Shell Group was organised along "Business and Functional lines, rather than simply according to corporate status".

These two RDS internal documents showed that the Shell Group has a vertical organisational structure involving significant delegation, such that whilst formal decisions are taken at subsidiary corporate level, these decisions are generally taken on the basis of prior advice and consent from the vertical organisational authority. Therefore, how this organisational structure worked in practice, and the extent to which RDS was involved in relation to the operations of SPDC, raise triable issues for which proper disclosure is needed.

On this basis, the Supreme Court decided unanimously that the claimants' appeal should be allowed.

Comment

It is important to note that this is an interlocutory decision on jurisdiction, so these issues have not yet properly been tested in the courts. However, when read alongside the Supreme Court decision in Vedanta, this decision is potentially of real importance to UK domiciled holding companies, particularly those who may be at risk of claims alleging a duty of care in relation to the actions of their foreign subsidiaries or branches. It is unlikely to open the floodgates for claims against parent companies in the English courts at this stage, but it does provide helpful clarification on the potential liability of English domiciled parent companies. It further highlights the importance of giving careful consideration to the way in which parent companies exercise (or purport to exercise) control over the actions of their subsidiaries, for example by way of reference to management structures, policies and practices. Whilst there remains uncertainty as to the precise circumstances in which a parent company will be deemed to hold a duty of care (which will be addressed when this case and Vedanta proceed to trial), with each case being examined on its own facts, this Supreme Court judgment suggests that we will certainly see more cases proceed to trial.

A Lack of List of Issues for Disclosure is not a bar to specific disclosure under the Disclosure Pilot Scheme

Thu, 08 Apr 2021 10:02:00 +0100

Background

Briefly, the appellants are a number of companies within the GE Group (GE). The respondents are HM Revenue and Customs (HMRC). In 2005, the parties entered into a series of settlement agreements in relation to GE's tax liability. On 16 October 2018, HMRC sent a letter to GE rescinding the settlement agreements based on misrepresentation and/or material non-disclosure and issued a claim for around £650 million.

A year later, HMRC issued an application to amend their Particulars of Claim (Amendment Application) to, amongst other things, allege fraud. GE denied the allegation of fraud and resisted the application. At the Case Management Conference, the court made a direction for extended disclosure under paragraph 6 of the Practice Direction 51U (PD 51U) in the form of Model D and while the parties liaised with a view to agreeing a draft List of Issues for Disclosure, not all the proposed issues were agreed.

In its Amendment Application, HMRC filed evidence that the team dealing with the GE matter had on two occasions referred the case to HMRC's Fraud Investigation Service (FIS), the specialist body responsible for investigating taxpayer fraud at HMRC. Following this, GE's solicitors asked HMRC for copies of the documents relating to the FIS to support their application. HMRC declined to produce the documents, so GE issued a specific disclosure application under paragraph 18.1 of PD 51U requiring HMRC to provide specific disclosure of the FIS Documents(2).

The Disclosure Pilot Scheme does not include the rule for specific disclosure contained in CPR 31.12, but Paragraph 18.1 of PD 51U provides:

"The court may at any stage make an order that varies an order for Extended Disclosure. This includes making an additional order for disclosure of specific documents or narrow classes of documents relating to a particular Issue for Disclosure."

Paragraph 18.1 is similar to the power under CPR 31.12; however, an important difference is that any such additional order for disclosure of specific documents must relate "to a particular Issue for Disclosure."

Deputy Master Nurse dismissed the application, on the basis that there could be no order for disclosure within an Order for Extended Disclosure unless and until there exists a List of Issues for Disclosure. That List cannot include "Issues" not identified within the Statements of Case.

Appeal

On appeal, the High Court explored two questions;

Are Issues for Disclosure limited to issues which can be identified within the statements of case?

Paragraph 7.3 of the DPS defines "Issues for Disclosure" as (with underlining added) "only those key issues in dispute which the parties consider will need to be determined by the court with some reference to contemporaneous documents in order for there to be a fair resolution of the proceedings. It does not extend to every issue which is disputed in the statements of case by denial or non-admission."

The High Court said that it is right that Issues for Disclosure "does not extend to every issue which is disputed in the statements of case by denial or non-admission". However, just because not all issues in the statements of case are Issues for Disclosure, it does not follow that all Issues for Disclosure have to be issues in the statements of case(3) - it is enough for that issue to be something which will need to be determined by the court in order for there to be a fair resolution of the proceedings as a whole.(4)

The High Court held that in the present case, the proposed amendments alleging fraud, while not yet issues identifiable on the face of the statements of case, were clearly issues which would need to be determined by the court in order for there to be fair resolution of the proceedings as a whole.(5)

Are "Issues for Disclosure" and "List of Issues for Disclosure" distinct concepts?

The DPS allows for variation of an order for Extended Disclosure. It therefore follows that, in order for the power to arise, there must already be in place an order for Extended Disclosure.(6) There was such an order in the present case.

It also must relate "to a particular Issue of Disclosure". The concept of "Issues for Disclosure" is defined at paragraph 7.3 (above). Paragraph 7.2 introduced the tool of the "List of Issues for Disclosure". The High Court held that the List of Issues for Disclosure is an important tool, but it is only a tool. It is the Issues for Disclosure that is the key concept which informs all concerned with the scope of disclosure.(7) In respect of jurisdiction under paragraph 18, the High Court held at [65]:

"Importantly, however, the power is not limited or restricted by reference to the tool of the List of Issues for Disclosure. It does not matter if a List is in place or not. What does matter is that there is an existing order for Extended Disclosure and that the new disclosure relates to an Issue for Disclosure."

Having held that the Court did have jurisdiction to grant GE's application for disclosure pursuant to paragraph 18.1, the Judge exercised his discretion in favour of making an order. It was reasonable and proportionate to make the order as HMRC had already searched for and collated the documents sought. Secondly, the amount of money involved was substantial and therefore the proposed amendment is one which justified a high level of scrutiny.(8)

Comment

The Pilot Scheme is still only a pilot, having only commenced on 1 January 2019. Therefore, there is little authority on the relevant provisions. In recognising that this was an important point in the context of a relatively new procedural model, Deputy Master Nurse granted permission to appeal to the High Court and in doing so, noted that the lack of reported authority on the application of paragraph 18 was a compelling reason.(9) The decision provides clarification as to the Court's jurisdiction to vary orders for Extended Disclosure. It also confirms that where parties have yet to agree a List of Issues for Disclosure, it will not prevent the Court making an order to vary a pre-existing order for Extended Disclosure.

(1) [2020] EWHC 1716 (Ch)
(2) HMRC at [17] per Pickering J
(3) HMRC at [51] per Pickering J
(4) HMRC at [57] per Pickering J. His Honour also referred to the case of Rome v Punjab National Bank [1989] 2 All ER 136, which reinforced his view that it did not matter that the issue was not a pleaded issue within the statements of case. What was important was that the issue was one which arose within the action in a wider sense, see [52] – [56].
(5) HMRC at [68] per Pickering J
(6) HMRC at [63] per Pickering J
(7) HMRC at [61] per Pickering J
(8) HMRC at [74] per Pickering J
(9) HMRC at [18] per Pickering J

Does an expert owe a fiduciary duty to its client?

Thu, 04 Mar 2021 15:11:13 Z

While this case involved an unusual set of circumstances, it provides an interesting review of the duties owed by expert witnesses to their clients and the Court, and highlights important considerations for those engaging expert witnesses and drafting engagement letters Secretariat Consulting Pte Ltd, Secretariat International UK Ltd, Secretariat Advisors LLC v A Company.(1)

Facts

Secretariat Consulting Pte Ltd (SCL) provides expert litigation and arbitration support services to the construction industry. Based in Singapore, it is an entity within a larger group (the Group). SCL was approached by the solicitors for an organisation involved in a dispute (the organisation) to provide arbitration support and expert services in Arbitration 1 (one of two relevant arbitrations) on delay and disruption. SCL ran a conflict check across all entities in the Group, and confirmed it was clear. A confidentiality agreement was signed.

A third party later commenced Arbitration 2 against the organisation, which included a claim for fees in part relating to the delay at issue in Arbitration 1. The organisation counterclaimed in Arbitration 2 for the cost consequences of the third party's failure that led to the relevant delay. The third party sought to engage another part of the Group, SUIL, in the UK as experts in Arbitration 2. Given the nature of the dispute in Arbitration 2, if engaged, SUIL would be effectively acting adverse to the organisation.

After SUIL ran a conflict check which revealed SCL's engagement, SCL wrote to the organisation's solicitors, saying that SUIL's engagement by the third party (which they characterised as being across two offices on different matters) 'would not constitute a "strict" legal conflict'. The organisation's solicitors expressly disagreed but SUIL proceeded to act for the third party on Arbitration 2.

The organisation issued an urgent ex parte application for interim injunction against three members of the Group, claiming breach of fiduciary duty. The issue found its way to the Court of Appeal.

Fiduciary duty?

The Law

There was no prior English authority on the issue of whether an expert owes a fiduciary duty of loyalty to its client. The Court considered cases from Australia(2) and Ireland(3), but noted that there was no guiding precedent in this respect. Fiduciary duties normally arise in settled categories of relationship where there is a high degree of mutual trust and confidence between the parties (trustee and beneficiary, solicitor and client or an agent and its principal by way of example), and where one party is in a position to exercise judgment and make discretionary decisions on the part of the principal, acting solely in the interests of the principal.(4)

Reasoning

The Court of Appeal considered and dismissed the appellant's submission that an expert's overriding duty to the court or tribunal precluded a finding of fiduciary duty on the basis that it negated the requisite duty of undivided loyalty to the client. An expert's overriding duty to the court could be said to be one of the main reasons why the expert may owe a duty of loyalty to the client, as it is in the client's best interests for an expert to provide measured and objective evidence which will be given greater weight than if the expert is perceived to be lacking in objectivity.

Although the Court rejected this argument, it was 'reluctant' to conclude that there was in fact a fiduciary duty owed (as the first instance decision had concluded) in circumstances where the finding was not necessary for the disposition of the appeal.

Contractual duty?

It was common ground that two letters of engagement between SCL and the organisation's solicitors constituted a contract. The engagement letters referred to the CIArb Expert Witness Protocol and expressly stated that SCL had 'confirmed you have no conflict of interest in acting for [the organisation] in this engagement. You will maintain this position for the duration of your engagement' (emphasis in judgment).

The Court was satisfied that SCL owed the organisation a clear contractual duty to avoid conflicts of interest for the duration of their retainer.(5)

Was that same duty owed by the other entities in the Group? The key points considered by Lord Justice Coulson were:

The initial conflict check was carried out in respect of all the entities, and on the face of it, SCL was giving an undertaking on behalf of those entities;
The Group marketed itself under one brand name, and that it was the Group that was considered by clients to be the expert, not an individual entity working within the Group under a slightly different name or structure; and
In this case, it is not commercially sensible to suggest that an undertaking and confidentiality agreement could bind only one 'office' within a 'global firm', particularly when the conflict check was carried out across the Group, which in itself would have breached the pre-existing confidentiality agreement (if such agreement were narrowly construed).

The Court concluded that on the facts the overlaps in this case (including the identities of the parties, the experts' roles, the specific project, and the subject matter of the dispute itself) were so 'all-pervasive' that they clearly gave rise to a conflict of interest and dismissed the appeal.

Comment

Although the Court of Appeal did not rule on the existence of a fiduciary duty, the door remains ajar for argument. The Court did comment, when considering Sweeney, that 'the relationship between a client and an expert witness does have at least some characteristics of a fiduciary relationship (in particular an obligation of loyalty), even if it is not itself a fiduciary relationship'.(6)

The Court also took pains to note that its construction of the effect of the contractual agreement as applying to the Group did not pierce the corporate veil, because it turned on how the Group chose to present itself (a global firm providing services in a variety of offices in different jurisdictions). Lord Justice Males suggested that any concerned entities should take care in drafting their conflict searches and contracts to ensure that any undertaking given is limited to (for example in a group company situation) the particular company being instructed (to the extent prospective clients would accept such a carve-out).(7)

(1) [2021] EWCA Civ 6
(2) Wimmera Industrial Minerals Pty v Iluka Midwest [2002] FCA 653 - relating to one party's use of an expert in a patent dispute after the expert had previously done consultancy work with the other party. The Court held no duty could be implied on the facts because the experts were 'independent contractors performing specific work' and the claimant knew the expert had worked for the respondent.
(3) Sweeney v The Voluntary Health Insurance Board [2020] IECA 150 at [91] to [93] - relating to the engagement of an economic expert in competition law actions who was and continued to be retained by the respondent in connection with related pleadings. The Court concluded there was a significant conflict of interest, but neither party alleged the existence of a fiduciary duty. The Court noted in obiter that establishing a fiduciary duty would have far reaching implications and put an expert witness in an impossible position'.
(4) Sheikh Al Nehayan at [159].
(5) Secretariat at [72] per Coulson LJ.
(6) Secretariat at [38] per Coulson LJ.
(7) Secretariat at [101] per Coulson LJ and [123] per Males J.

A new cause of action can only be introduced by amendment if it arises out of substantially the same facts that remain in issue at the time of the amendment

Tue, 02 Mar 2021 16:53:57 Z

Background

The claim arises out of a failed joint venture between the parties to build a shopping centre in Hertfordshire, England. The claimants' amended particulars of claim was struck out by the judge at first instance on the basis that there was no reasonable prospect of any of the claims succeeding. However, the claim form was not struck out in order to give the claimants the opportunity to reformulate their claims in a viable manner.

These amended claims were "new claims" and therefore arguably statute-barred, but the claimants applied to amend their particulars of claim on the basis that a new claim can be pleaded after the limitation period has expired providing that it arises out of the same facts, or substantially the same facts, as an ongoing claim (CPR 17.4). The first instance judge allowed the amendment on the basis that the "new claims" arose out of the same facts those pleaded in the previously struck out claims.

The defendants appealed the first instance decision and were granted permission to appeal the decision on a single ground: that the Court had no power to grant permission to the claimants to amend their claim because there were no claims "in issue" in the case (providing facts from which a new claim could arise), as all of the claims had been struck out.

The Court of Appeal decision

The Court of Appeal allowed the appeal, unanimously finding that:

Whilst the words "in issue" do not appear in CPR rule 17.4, section 35 of the Limitation Act 1980, which does contain those words, should be read into CPR rule 17.4;
Once pleaded facts have been struck out from a pleading, they cease to be "in issue" or "already in issue"; and
Consequently, the claimants' amendment sought to introduce a new claim arising out of facts which had been struck out by the time the amendment was being considered.

However, by way of a majority decision, the Court of Appeal allowed the claimants to amend their claim under the "slip rule" in CPR 40.12 that allows for a mistake in an order or judgment to be corrected. The first instance judge had clearly intended to give the claimants the opportunity to reformulate a claim against the defendants based on facts in the re-amended particulars of claim; the order had failed to give effect to his intention because of the way in which the striking out and amendment appeared in the order. Therefore, the facts in the amended particulars of claim were not considered struck out, and the "new claim" could be introduced by the claimants as it would arise out of existing facts in issue in the dispute.

Comments

The Court of Appeal decision makes clear two key issues:

Parties cannot seek to introduce new claims after the expiry of the relevant limitation period if those claims arise out of facts which are not in issue in the dispute, irrespective of whether they had been in issue previously
The "in issue" wording of section 35 of the Limitation Act 1980 should be read into CPR rule 17.4.

Consequently, parties looking to discontinue a claim or defend a strike-out application should consider carefully the implications a strike-out could have on any future claims they may want to introduce by amendment.

The jurisdiction eagle has landed…in the Courts of England & Wales

Thu, 11 Feb 2021 17:38:16 Z

Background

Lyle & Scott Limited and American Eagle Outfitters Inc are both well-known clothing brands. Lyle & Scott is incorporated in England and American Eagle Outfitters is incorporated in Delaware. Both companies use a branded flying eagle image on their clothing, Lyle & Scott since at least 1968, and American Eagle since 1982. Although there are certain differences between the eagles, they are "closely similar".

Following a discovery that American Eagle had been using the image on clothing sold in the UK and EU, Lyle & Scott contended that American Eagle had infringed its registered trademarks in the UK and EU. Parties then met in London to negotiate the use of the image, and a hand-written memorandum was drawn up setting out an agreement that American Eagle would sell clothing with the branded device only to American Eagle stores, stores within stores or on the American Eagle website. Negotiations subsequently broke down, and a declaration was sought by American Eagle that the hand-written memorandum drawn up constituted a valid and binding agreement. This was ultimately upheld by the United States Court of Appeals for the 3rd Circuit.

Dispute

On 4th August 2020, Lyle & Scott brought proceedings against American Eagle, alleging that American Eagle were selling clothing with the eagle image on UK websites ASOS and Zalando, in breach of contract and in an act of passing off.

Serving the claim form out of the jurisdiction

Lyle & Scott served the claim out of the jurisdiction in Pennsylvania, having been granted permission, and American Eagle applied to set aside that order. The appeal was rejected.

The relevant principles to be applied when seeking permission to serve a claim outside of the jurisdiction, are set out in CPR 6.37, summarised as follows(2):

a) there is a serious issue to be tried on the merits. This is the same as a test for (reverse) summary judgment;

b) there is a good arguable case that the claim falls with one of the jurisdictional gateways; and

c) in all the circumstances of the case England and Wales is clearly or distinctly the appropriate forum for the trial of the dispute, and that in all the circumstances the court ought to exercise its discretion to permit service of the proceedings out of the jurisdiction.

It was agreed that the second limb had been met as the agreement had been made within the jurisdiction, and that it was sufficiently arguable that damage incurred as a result of the passing off claim would be sustained in the jurisdiction. However, American Eagle argued that the first and third limbs had not been successfully met.

A real prospect of success

The test under the first limb was "whether there is a real (as opposed to fanciful) prospect of success. Miles J concluded that the two images were closely similar and there was indeed potential for confusion between them. At a trial the court would be able to assess through evidence any factual assumptions made by American Eagle, for example about customers' knowledge and understanding of both brands, amongst other issues. An absence of evidence about actual confusion did not assist American Eagle on the current state of the evidence and concluded that the passing off case raised a serious issue to be tried.

The clearly or distinctly appropriate forum

The third limb of the test was also satisfied; England & Wales was the appropriate forum for the case. The judge explored the various factors that played into his decision.

Governing Law under Rome II

It was likely that the governing law in this cause of action would be English law, in accordance "Rome II(3). The claim of passing off fell within Article 6(2) of Rome II (on unfair competition affecting the interests of a specific competitor), rather than Article 8 (on infringement of intellectual property rights). Consequently, the default applicable governing law was that of the country in which the damage occurred (the test to determine governing law under Article 4). The test under Article 8 differs, as it judges governing law on the law for which protection is claimed. Passing off did not require infringement of an intellectual property right as defined in the recital, as the purpose of the cause of action is to protect the goodwill of traders against deceptive conduct, and goodwill is not an intellectual property right.

Other factors

Other important factors included that the tort had been committed within the jurisdiction and the claim related to damage of the goodwill of Lyle & Scott, a territorial concept. Furthermore, at trial, the passing off claim would likely involve factual or expert evidence about consumers based in the UK, which would favour the jurisdiction of England & Wales. Additionally, any injunctive relief would be granted in respect of conduct taking place in the UK (i.e. American Eagle would be required to stop selling clothing on UK third party websites). The judge did note, however, that the parameters of the dispute extended beyond the UK, as the outcome of the proceedings would have ramifications for both parties throughout the world. Any contract claim would be governed by Pennsylvania law. On balance, however, the connecting factors were found to be in favour of the claim being appropriately tried in the courts of England and Wales.

Comment

When determining the governing law of a passing off claim under Rome II, it will fall under the umbrella of Article 6 as an act of unfair competition rather than Article 8. This decision remains relevant to English law in light of Brexit, as the UK has legislated(4) to incorporate Rome I and II into English law, following the end of the transition period.

(1) [2021] EWHC 90 (Ch)Case No: IL-2020-000084

(2) Altimo Holdings and Investment Ltd v Kyrgyz Mobil Tel Ltd [2011] UK PC 7 at [71]

(3) Regulation (EC) 864/2007 on the law applicable to non-contractual obligations

(4) Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019

When is an error a serious irregularity? The English court demonstrates its approach to correcting arbitration awards

Thu, 11 Feb 2021 17:03:50 Z

On the basis of this, the English court remitted an arbitration award to the tribunal for correction so that the tribunal would have the room to carry outs its stated intention to award substantial damages to one of the parties.

Facts

In February 2015, Mikhail Khabarov and Alexander Bogatikov entered into a Call Option Deed that granted Mr Khabarov the option to buy 30% of Mr Bogatikov's company, DL Management Limited for $60 million. Following a disagreement, Mr Khabarov started arbitration proceedings under the LCIA Rules. It was common ground that Mr Bogatikov had repudiated the Call Option Deed, so the only substantive issue was the value of DLM at the relevant time in order to establish Mr Khabarov's loss caused by being denied the opportunity to purchase the shares.

The parties drew up an 'agreed model' for calculating the value of DLM on the relevant date. Though they and their experts differed (sometimes drastically) as to the values of the various inputs and adjustments to the Agreed Model, they did agree on the mechanics of the calculation; this included, amongst other things, the generation and application of an EBITDA profit/revenue ratio and the subtraction of historic tax liabilities from the overall valuation.

In its final award, the tribunal awarded $58 million to Mr Khabarov as compensation for his loss by using the Agreed Model. Doubt was expressed over the reliability of the EBITDA generated by the Model; in that it may have undervalued DLM (and therefore undercompensated Mr Khabarov). However, the tribunal did not feel justified in substituting its own higher EBITDA figure because the final output of the Agreed Model was not, in its view, wildly wrong. Importantly, the tribunal also mistakenly added the value of DLM's historic tax liabilities rather than subtracting it. On its face, this mistake led to Mr Khabarov being overcompensated by $54 million.

Mr Bogatikov's request to correct the mistake was refused by the tribunal. In its response to the request, the tribunal admitted that adding rather than subtracting the tax liabilities was an error but said it had not applied the Agreed Model in a mechanistic manner and had reached the final loss figure via an iterative process.

Mr Bogatikov subsequently challenged the award in the English Court on the basis of "serious irregularity" (section 68 of the Arbitration Act 1996).

Decision

The judge remitted the award back to the tribunal for correction. The tribunal's response to Mr Bogatikov's application to correct the award could be used as evidence of its admission of the mistake and therefore there had been a serious irregularity within the meaning of s 68(2)(i) of the Act. Mr Bogatikov had overcome the high hurdle of demonstrating that the serious irregularity had caused (or will cause) substantial injustice to him; the judge simply statied that it could not be permitted for an award which is enforceable in other jurisdictions to contain a computational error, which may lead to a significant difference in the damages payable, to go uncorrected.

The judge remitted those parts of the award that dealt with the historic tax liabilities (in order that the computational error be corrected) but also, importantly, the parts dealing with the EBITDA value. It did so due to the tribunal's concerns that the EBITDA may have undervalued DLM and because the tribunal had failed to fully interrogate those concerns only because the overall outcome provided by the Agreed Model seemed a fair one. In essence, this provided a route for the tribunal to issue a new award that would reflect its intention to award substantial damages to Mr Khabarov but by means of a corrected calculation.

Comment

This is an interesting and unusual case. It is quite rare for section 68 challenges to be successful and even rarer for an English court judge to find that there has been a serious irregularity that caused or will cause substantial injustice in such a straightforward manner. This is undoubtedly because of the very unusual circumstances in which a tribunal had admitted an error in its award but refused to correct it.

The judge's approach demonstrates the tightrope that the English court must walk when dealing with these challenges: it must uphold the integrity of the arbitral process by not allowing serious mistakes to go uncorrected but it must do so by intervening as lightly as possible in order to maintain that process's independence from the court. It may be for this reason that the judge refrained from remitting the award for the simple correction of the identified error (which would, in the tribunal's own view, have cut across its intentions) but re-opened just enough of the award to allow the tribunal to correct the error while maintaining control of the ultimate outcome. This is therefore a good example of the court's nuanced role in maintaining the integrity and independence of arbitration in England.

Beware of trying to address gaps in your evidence during trial: High Court refuses permission to rely on a new witness statement prepared part-way through trial

Thu, 07 Jan 2021 12:32:56 Z

Background facts

Tatneft, the claimant, filed an application partway through a ten-week trial seeking permission to rely on the witness statement of Ms Savelova, a lawyer at Tatneft, and to call Ms Savelova to give oral evidence at the ongoing trial.

The deadline for service of witness statements had passed some six months earlier and most witnesses had finished giving their evidence and being cross-examined by the time the court gave judgment on the application.

Ms Savelova described her position as Head of Legal in the Strategic Planning Department of Tatneft. She also claimed to have been closely involved in the issues leading up to the proceedings and to have been following the trial remotely online.

Tatneft claimed that it had not previously served a witness statement from Ms Savelova because she had been unwilling to give evidence due to fears for her personal safety. The defendants denied that there was any substance to those safety concerns. Ms Savelova said that she was now willing to give evidence as she was concerned that suggestions made by the defendants - that she had acted in bad faith by deliberately not giving evidence - could create a misleading impression of her and Tatneft. Tatneft argued that the evidence would enable it to rebut the adverse inference from Ms Savelova's absence that the defendants were seeking to draw.

It was common ground that relief from sanctions would be required for the evidence to be admitted. CPR Rule 3.9 requires a court to consider all the circumstances of a case, so as to deal justly with the application, including considering the need for litigation to be conducted efficiently and at proportionate cost and to enforce compliance with rules, practice directions and orders. It was agreed that the three-stage test laid down by the Court of Appeal in Denton v White should be followed when applying this rule.

Decision

Having considered each element of the Denton test, the judge refused the application and held that the admission of Ms Savelova's evidence would be contrary to the interests of justice:

First, on the facts, the breach was serious and significant.

Secondly, the judge considered why the failure or default occurred. The judge noted Ms Savelova's comments about fears for her safety but observed that these concerns had not previously been raised in the proceedings, which had been ongoing since 2016. There was no credible explanation as to why Ms Savelova's willingness to provide evidence had now changed and, therefore, there was no good reason for the original failure to serve a witness statement.

The third limb of the Denton test requires the court to consider "all the circumstances so as to enable it to deal justly with the application." While Ms Savelova's evidence was likely to be relevant to and supportive of the claimant's case, the inevitable extension of the trial timetable, and Tatneft's failure to "foreshadow" the application, meant that the defendants would be prejudiced by needing to spend time preparing for Ms Savelova's cross-examination. Further, the evidence did not go to a new issue which had arisen in the course of the trial.

Whilst these considerations under the Denton test are fact specific, the judge provided helpful comments of general application for parties that find themselves in similar situations, including that:

the risk of adverse inferences being sought if a witness was not called to give evidence was "a common feature of commercial litigation" and the answer to rebutting such a proposed adverse inference "cannot be that a witness who is previously absent is then allowed to turn up part way through the trial." There was no doubt that Tatneft's "highly experienced legal team" knew there was a risk of such an adverse inference being sought; and

where a witness has heard nearly all evidence given by other witnesses in cross-examination, there is a "substantial risk" that the witness's evidence, "both in the witness statement and orally, is and will be framed in a way which seeks to respond to the evidence." This would effectively allow Tatneft "to seek to bolster its case by producing a witness to address gaps in their case." The judge found that these risks were unlikely to be addressed through cross-examination as there would be "no reliable way of assessing whether the evidence reflected the independent recollection of the witness".

Comment

Parties should always consider what evidence is required to support their case at an early stage, as it may be difficult to remedy shortcomings and rebut adverse inferences through witness evidence served after the deadline for service of witness evidence has passed.

There are inherent risks in a new witness being present during the cross-examination of other witnesses at trial. New evidence from such a witness may be seen as being tailored to fit the current state of a party's evidential case and it is unlikely to be admitted. If parties think they may need to rely on new evidence in such circumstances, they should bring this to the attention of other parties and the court as soon as possible.

(1) PJSC Tatneft v Gennadiy Bogolyubov & Ors [2020] EWHC 3250 (Comm)

The Court of Appeal provides useful reminder of the force of the "subject to contract" label in the context of settlement negotiations

Thu, 17 Dec 2020 10:19:23 Z

The underlying dispute

Joanne Properties Limited owned a building in Wandsworth. It borrowed money from Moneything Capital Limited secured by a charge on the property. Joanne fell into arrears under the charge and Moneything appointed LPA receivers.

Joanne challenged the appointment of the receivers on the ground that both the loan agreement and the charge had been procured by undue influence, and on 20 December 2018 issued a claim to set both aside, also claiming an injunction against the receivers preventing them from taking further steps to realise the security.

In January 2019, the parties compromised the injunction application. They agreed that the property should be sold and an order made for distribution of the proceeds of sale. After payment of the costs of sale and the capital advanced under the loan agreement, £140,000 of the sale proceeds were to be "ring-fenced" and payable to either party subject to the terms on which the underlying claim was resolved. Both parties signed a formal written agreement to this effect.

The Court of Appeal considered whether a further binding agreement had been reached as to how the ring-fenced sum of £140,000 was to be shared between the parties.

The further settlement communications

During the negotiations that flowed back and forth between solicitors, the correspondence was marked variously "subject to contract" and "without prejudice and subject to contract".

On 19 June 2019 a formal written offer headed "without prejudice save as to costs" was also made, believed by both sets of solicitors to be a valid Part 36 offer capable of acceptance. It was not accepted.

An agreement was apparently subsequently reached, with both parties still marking their correspondence "subject to contract".

Joanne's solicitor was replaced and Moneything's solicitor forwarded a consent order to the new lawyer containing a number of terms not previously discussed. When Joanne's solicitors fell silent, Moneything's solicitor issued an application for an order on the terms he had set out. This finally prompted a reply from Joanne saying that there had been no binding settlement because negotiations had been conducted "subject to contract".

The judge at first instance found that despite the correspondence being marked "subject to contract" an agreement had been reached, principally because the only issue in dispute was the ring-fenced £140,000, and a final rather than partial settlement of this issue was envisaged, albeit with certain non-material administrative matters still to be agreed.

The Court of Appeal decision

The Court of Appeal allowed Joanne's appeal, holding that the judge at first instance had seriously undervalued the force of the "subject to contract label" on the legal effect of the negotiations. The question of whether parties intended to enter into a legally binding contract is to be determined objectively, with the context being all important.

Where negotiations are expressed to be "subject to contract" it means that neither party intends to be bound unless and until a formal contract is made and each party reserves the right to withdraw until such a binding contract is made. That condition is carried all the way through the negotiations, unless the parties expressly agree that it should be expunged or if such an agreement was to be necessarily implied.

The Court of Appeal held that there was undoubtedly no express or implied agreement that the "subject to contract" qualification should be expunged in the course of negotiations between Joanne and Moneything. In the context of negotiations to settle litigation which are expressly made "subject to contract", the consent order is the equivalent of the formal contract.

Moneything submitted that the effect of the purported Part 36 offer was to recalibrate the discussions between the parties which thereafter proceeded on the basis of offers and counter-offers capable of acceptance. The Court of Appeal accepted that a Part 36 offer is not like an offer in the ordinary law of contract, which once rejected cannot subsequently be accepted. Unlike ordinary contractual offers, a Part 36 offer may be accepted even after the offeree has put forward a different proposal: it is in effect, a free-standing offer. However, it is not a legitimate inference that the making of such an offer recalibrates attempts to compromise a dispute which are taking place in parallel. Even if the purported Part 36 offer did recalibrate the discussions such that they were no longer taking place beneath the "subject to contract umbrella", the use of such terminology in the subsequent correspondence reinstated the "subject to contract" qualification.

Comment

This decision reassures lawyers that they can continue to conduct "subject to contract" negotiations on behalf of their clients without any undue risk of being bound by what is discussed in the course of those negotiations. The decision also serves as a useful reminder to disputes lawyers in particular of the significance of the consent order in conclusively settling negotiations which are expressed to be "subject to contract": the consent order is the contract for these purposes.

Late service of evidence requires relief from sanctions

Wed, 16 Dec 2020 14:30:00 Z

Facts

Ms Langhelle was the substituted petitioning creditor for the winding up of the appellant company, Wolf Rock, under section 122(1)(f) of the Insolvency Act 1986 (company unable to pay its debts). She claimed that Wolf Rock had failed to pay her salary and other expenses she incurred had on its behalf, and to repay loans she had advanced. Wolf Rock denied these claims.

The district judge gave directions as to the service of evidence, which included an extension of time for Wolf Rock to file and serve a witness statement to 16 August 2019.

On 22 November 2019, Wolf Rock filed and served three further witness statements (the).

At the substantive hearing of the petition, Wolf Rock sought permission to rely on the November Witness Statements. The district judge refused, drawing a parallel with an application for relief from sanctions under CPR rule 3.9 and finding that the appropriate Denton/Mitchell principles were not satisfied.

Appeal

On appeal, Wolf Rock argued that the district judge wrongly refused to admit the November Witness Statements, that they were served in accordance with rule 7.16 of the Insolvency (England and Wales) Rules 2016, and therefore not in breach of any relevant court order. As such, there was no need for an application for relief from sanctions.

Decision

The judge dismissed the appeal. He stated that no specific sanction is prescribed for breach of the orders, but that in recent years case law has built up the concept of the "implied sanction", to which the Denton/Mitchell principles are equally applicable.

In practice, this means an application for relief from the consequences of breach of a rule or order which contains no express sanction should be treated analogously to an application for relief from sanctions if either:

the intention of the rule-maker or judge is to impose a sanction which has not been expressed, and the court has construed the rule or order as impliedly containing one; or
the rule-maker or judge had no intention of imposing a sanction, but for policy reasons the case is treated as one of relief from sanctions.

On the facts, the judge held that the district judge was exercising his case management powers under CPR 32.1 in giving directions as to evidence and requiring that in order for the evidence to be admissible it had to be filed and served in accordance with a prescribed timetable. Accordingly, the "obvious inference" was that that November Witness Statements would not be admitted without the court's permission. No specific sanction was laid down except in the sense that if permission were not obtained, the evidence could not be admitted. This was directly comparable to the case of Sayers(i), where an appellant could not appeal without permission to file its appellant's notice late and the case of Altomart(ii) where a respondent could not rely on additional grounds for the decision under appeal without permission to file a respondent's notice late. As such, for the same policy reasons set down in earlier case law, the test for giving permission for evidence not filed and served in accordance with the court timetable was to be the same test for relief from sanctions under CPR 3.9.

The Court also dismissed Wolf Rock's submission that the district judge failed to properly apply the Denton/Mitchell principles – his decision could not possibly be characterised as "perverse", irrespective of whether the present court would have come to a different decision on the facts. Accordingly, the district judge's application of the principles could not be challenged.

Comment

The decision suggests that the court may imply a sanction for policy reasons even where there was no intention on the rule-maker or judge to impose a sanction for breach. Therefore, there is a real risk that parties who fail to comply with a time limit may be heavily penalised or even have their claim or defence struck out. To avoid an application for relief from sanctions for non-compliance with time limits, parties should take practical steps including setting a realistic timetable at the outset, agreeing a buffer order if you think there may be difficulties in complying with a deadline, applying for an extension of time early, and obtaining the court's approval for consent orders where parties have agreed an extension of time.

(i) Sayers v Clarke Walker [2002] 1 WLR 3095
(ii) Altomart Ltd v Salford Estates (No 2) Ltd [2015] 1 WLR 1825

Largest 'white elephant' in history of group actions

Thu, 03 Dec 2020 14:33:51 Z

Background
In November 2015, the Fundao Dam in south-eastern Brazil collapsed. Over 40 million cubic metres of iron ore mine tailings escaped into the Doce River, with catastrophic environmental consequences. The pollutant travelled to the Atlantic Ocean, 400 miles away, destroying or contaminating everything in its path. Nineteen people died and entire villages were obliterated. Individuals, corporates and institutions from Brazil brought one of the largest group litigation proceedings ever brought in England. They contended that the defendants were liable to compensate them for losses sustained as a result of the collapse. The defendants denied liability and persuaded the court that the case against them should not be allowed to proceed.

Abuse of process
The judge's findings in relation to abuse of process are fact-specific. Overall, he held that "the claimants' tactical decision to progress closely related damages claims in the Brazilian and English jurisdictions simultaneously is an initiative the consequences of which, if unchecked, would foist upon the English courts the largest white elephant in the history of group actions". The claimants did not suggest any "workable procedural mechanism for resolving the claims" and should not be allowed to "outsource" this to the court. The Court did not accept that the claimants could not access redress in Brazil and it would be "manifestly unfair to the defendants to be required to engage in massively expensive and protracted litigation devoid of any realistic promise of substantive advantage to the claimants". The judge struck out the proceedings on this basis.

Jurisdictional grounds
Alternatively, the judge would have stayed the proceedings on jurisdictional grounds. His findings in relation to Article 34 and forum non conveniens are less fact-specific so apply more widely.

Article 34
Article 34 gives the court discretion to stay proceedings where an identical or related action is pending in a non-member state court, but only if the non-member state action was first in time and if other conditions (such as the judgment being capable of recognition and enforcement in the member state) are satisfied. BHP Group plc is domiciled in England so could argue that Article 34 applied. The judge found that:

The Brazilian proceedings were "considerably more advanced" than in England, with the court and legal teams already "immersed in the facts of the matter";
The Brazilian and English proceedings were related to a "very close" degree and there was a real risk of irreconcilable decisions between them; and
It would be "the very antithesis of the proper administration of justice" to let the claims proceed in parallel.

The judge stated that had he not struck out the claims against BHP Group plc, he would have stayed the claims against it under Article 34.

Forum non conveniens
This common law doctrine allows the court to dismiss a civil action, even though the forum is proper and the court has jurisdiction, where an appropriate and more convenient forum exists and the action can be tried there. BHP Group Ltd is domiciled in Australia. Whilst not being able to rely upon Article 34, it was able to rely on the doctrine. The claimants argued that it would be "inappropriate" to consider a "hypothetical application" of the doctrine but the judge disagreed. He found that:

It was "cumulatively significant" that the tort took place in Brazil, the governing law would be Brazilian law and the English court would be less accessible for the majority of the parties and witnesses;
It was not true that "substantial justice" could not be done in Brazil; and
The claimants' evidence fell "far short" of establishing that impecuniosity would be a major factor in stifling legitimate claims. There was no cogent evidence to support this finding.

The judge indicated that if he had not struck out the claim against BHP Group Limited, he would have stayed the claim against it under the doctrine of forum non conveniens.

Summary
The judgment reaffirms that the leading test for establishing forum non conveniens is still Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460. The court was not satisfied that part one of the test was met: England was not the "natural" forum for the dispute. Despite evidence from the claimants that the Brazilian courts could take more than a decade to reach a judgment and that the compensation offered would fall far short of the damage which occurred, the judge found that this was not "cogent" evidence that they would not obtain justice in the foreign jurisdiction and part two of the test was not satisfied. Whilst the significant nature of the proceedings would have raised the profile of England as a forum for group litigation, it was not ultimately a case which fell within the generous parameters which currently exist for the Court to have accepted jurisdiction. Municipio de Mariana must continue their fight in Brazil.

(1) Municipio de Mariana v BHP Group plc and BHP Group Ltd [2020] EWHC 2930 (TCC)

Can an appeal court order repayment after it has reversed the relevant order?

Mon, 30 Nov 2020 16:05:47 Z

Facts

Delta Petroleum (Caribbean) Ltd (Delta) and British Virgin Islands Electricity Corporation (BVIEC) entered into a contract for the supply of oil.

A clause in the contract permitted Delta to claim "performance relief" if the refinery from which Delta obtained the oil closed. This meant that Delta would be able to either suspend the supply of oil to BVIEC or terminate it altogether. Following the closure of the refinery, however, Delta continued to supply fuel from an alternative source at an increased price to offset its increased costs. At the same time, Delta sought an increased price from BVIEC to offset the increased costs of doing so.

The negotiations failed and Delta informed BVIEC that it could no longer supply fuel under the contract on the basis that it had not been able to find a supplier who could supply the oil on terms similar to the original refinery.

BVIEC objected to Delta's attempt to rely on the "performance relief" provisions in the contact; Delta had waived its right to do so by continuing to supply fuel from an alternative supplier.

BVIEC secured an interim injunction from the High Court of the Eastern Caribbean Supreme Court (the "High Court"), forcing Delta to continue the oil supply. At trial, the High Court granted a final injunction that was then upheld by the Court of Appeal.

Waiver by election

The Privy Council held that on a proper reading of the contract, Delta was not required to make an election and had not waived its right to claim performance relief by continuing to supply fuel from an alternative source. In order to claim "performance relief", Delta did not need to make an immediate choice between terminating the contract or treating it as still binding.

The continued supply of fuel from an alternative source did not prevent Delta from ceasing to supply fuel at a later stage because of the closure of the refinery and the inability to mitigate the consequent loss.

Inherent power of an appellate court to restore property transferred under an order which it has reversed

In accordance with normal practice, BVIEC had not given a cross-undertaking in damages when the final injunction was made.

Having reviewed the relevant case law, the Privy Council held that an appellate court can, under its inherent power, order a respondent to restore to an appellant any money paid or property transferred under an order which the appellate court has reversed.

Such an award can include interest. However, it is not necessary for the appellate court to compensate a party for all the loss that it may have suffered by complying with the order of a lower court.

The Privy Council ordered BVIEC to pay Delta the difference between the value of fuel transferred to BVEIC pursuant to the original order and the contract price paid for the fuel together with interest. The precise amount to be paid by BVIEC to Delta would need to be determined by the High Court.

Conclusion

This decision will be of comfort to parties who have been ordered by a first instance court to pay money or transfer property and who believe that they have strong grounds for appealing the decision.

Such parties may comply with the court's order in the knowledge that if they are successful on appeal, the court will order that any money or property be returned to them and, if appropriate, that interest be paid. The court will not, however, compensate a party for all the loss that it may have suffered by complying with the order of the lower court.

The judgment is also a salutary reminder that a waiver by election in respect of a contractual right does not occur simply because a party does immediately seek to rely on that right. Whether a waiver by election has occurred will depend on a close reading of the contract.

Although decisions of the Privy Council are not usually binding precedent in England, its decisions are afforded great weight and persuasive value. The English courts are therefore highly likely to follow this decision.

More is more when giving a notice of claim under an SPA

Thu, 19 Nov 2020 14:17:51 Z

Background

UGLH purchased all the issued shares in Outfit 7, the holding company of a group of companies specialising in mobile device applications. The consideration paid for the shares was USD1 billion.

USD100 million of the purchase price was to be held in escrow, to be released in two tranches of USD50 million on 31 December 2018 and 1 July 2019 respectively. If UGLH made a claim against the sellers under the share purchase agreement before a tranche was due to be released, that tranche would be held in escrow until the claim was resolved; if UGLH was successful, the claim would be satisfied out of the escrow account.

The SPA required UGLH to give written notice to the sellers of any claim, stating in reasonable detail the matter giving rise to that claim, its nature and (so far as reasonably practical) the amount claimed. In the tax covenant, the sellers agreed to reimburse UGLH for any tax liabilities of the Outfit 7 group that arose before completion of the transaction.

Tax investigation

In July 2008, the Slovenian tax authority started to investigate the transfer pricing practices of one of the group companies, Ekipa2 d.o.o. (Ekip). Several of the seller's representatives knew about the investigation and saw relevant documents.

As the draw down date for the second tranche drew closer, on 24 June 2019 solicitors for UGLH sent a letter to the sellers purporting to give notice of a claim under the tax covenant. The claim related to the Slovenian tax authority's investigation into Ekip's transfer pricing practices and set out a chronology of the investigation. It alluded to the fact that the investigation was ongoing and explained that the amount of any tax liability remained contingent on the outcome of the investigation; it was not therefore possible to quantify the value of the claim at that stage.

The claim

This notice having been given, the remaining USD50 million was not released from the escrow account to the sellers. The sellers applied to the court for declarations that UGLH's notice of a claim did not comply with the claim notification provision under the SPA. The letter dated 24 June 2019 was defective because it failed to quantify the claim or provide reasonable detail about the matter that gave rise to the claim.

ULGH resisted the application on the grounds that the notice was adequate for the purposes of the SPA and that even if it did not provide reasonable detail about the matter giving rise to the claim, the sellers and their representatives knew about the investigation.

It was common ground that the 24 June 2019 letter provided reasonable detail of the nature of the claim.

Decision

The deputy judge found that the 24 June 2019 letter failed to give reasonable detail about the matters that gave rise to the claim, so did not satisfy the notice requirements of the SPA.

(i) Failure to quantify the claim

The obligation in the notice provision was qualified by the words "so far as reasonably practical", meaning that if it was not reasonably practical to quantify the claim, no claim value need be stated in the notice. That was consistent with the terms of the SPA which recognised that the sellers' liability for a claim might still be contingent and that the sellers would not be liable "unless and until the liability… becomes capable of being quantified."

Given the qualification of the notice provision, the deputy judge found that the absence of an estimate of the value of the claim did not of itself render the notice invalid.

(ii) Failure to give reasonable detail about the "matter giving rise to the claim"

ULGH's case was that sufficient detail of the matter giving rise to the claim had been given; the "matter" was the tax investigation into Ekip's transfer pricing practices. The 24 June 2019 letter identified that "matter" and provided a clear chronology of the key milestones. The knowledge of certain of the sellers' representatives meant that they understood what the matter was.

The sellers' case was that the notice lacked any detail of the matter giving rise to the claim; specifically, the underlying facts, events and circumstance giving rise to (or which may in the future give rise to) any tax liability.

The deputy judge agreed with the sellers. On a fair reading of the relevant paragraph of the SPA, the "matter giving rise to the claim" required ULGH to set out the factual basis of the claim. This conclusion was based on the following points:

1. The recipient would want to know, at least in general terms, the factual basis, the legal basis and the quantum of the claim insofar as it was possible to do so and was in accordance with the terms of the notice provision.

2. The use of the phrase "giving rise to" meant setting out the factual reasons why a pre-completion tax liability had or might accrue.

3. The purpose of the notice is to inform the receiving party of what facts discovered during the tax investigation are relied upon by the notifying party in support of its claim for breach of the tax covenant. It is not sufficient for the relevant facts relied upon to be inferred by the receiving party.

4. The information in the notice must also allow the receiving party to determine, at least in general terms, whether the facts as alleged give rise or might give rise to a liability for a breach of the tax covenant.

5. The purpose of the notification is to enable the recipient part to deal with the claim, for example by investigating the matters which allegedly gave rise to the claim.

A valid notice would have set out the specific transfer pricing practices or transaction that ULGH relied upon in support of its claim against the sellers. The 24 June 2019 letter did not do so.

Relevance of the sellers' knowledge

UGLH argued that the sellers' representatives were aware of the tax investigation and that on receipt of the 24 June 2019 letter the sellers would have been aware of the matter giving rise to the claim. Their case was that in order to interpret the 24 June 2019 letter the court must take into account what the sellers or their representatives knew. However, the deputy judge was persuaded by the sellers' argument that irrespective of the state of knowledge of the sellers' representatives about the tax investigation, this did not rectify the want of reasonable detail required by the notice provisions of the SPA.

Conclusion

Buyers should consider carefully the terms of the notice requirements and follow these rigorously. Where the notice requirements call for full details of a claim, buyers should not rely on the recipient having this information through other sources.

The deputy judge considered that recent cases concerning the validity of claims notices establish that notice of claims clauses are based on the need for commercial certainty and they should be construed with that in mind.

When is an Application to Court an Abuse of Process?

Thu, 12 Nov 2020 14:34:45 Z

Background

VTB brought proceedings in England based on previous Russian judgments. Its target was the chairman of various companies to which VTB had provided loans. The chairman, Mr Skurikhin ("S"), had signed personal guarantees for those loans.

In 2014, VTB was granted separate summary judgments and had secured a worldwide freezing order ("WFO") against S. VTB intended to sell three properties used by S. The properties were located in Italy and the registered owner was an English LLP ("Pikeville"). Pikeville's membership shares were originally held on trust for S but since 2010 have been held for a foundation incorporated in Liechtenstein ("Berenger"). Berenger was believed to be connected to S, although the precise nature of the connection was unclear.

The WFO had explicitly identified that S's beneficial interest in and/or right of control over i) the properties ii) Berenger and iii) the membership interests in Pikeville or Pikeville itself were subject to the WFO.

Following this, VTB successfully applied for receivers to be appointed over Pikeville's membership shares (the "Receivership Order"), and subsequently proceedings began in Italy to obtain possession of the properties.

In August 2017, Berenger's board resolved to irrevocably exclude S from Berenger's class of beneficiaries. Berenger applied to the Commercial Court in summer 2018 for the Receivership Order to be discharged. The grounds of Berenger's application were that S's exclusion as a beneficiary of Berenger was a material change of circumstance or, alternatively, that the Receivership Order should never have been granted by the Court. VTB contested the application on the ground that a material change of circumstance can only arise in respect of matters over which the applicant has no control.

Commercial Court Decision and Subsequent Appeal

The Commercial Court dismissed Berenger's application, holding that the application on the basis of change of circumstances was an abuse of process. The change had been brought about by Berenger itself (and likely at S's instigation or at least with his knowledge or approval) in order to obstruct enforcement of the summary judgments and VTB's attempts to recover sums through bankruptcy proceedings in Russia.

Even if the decision to exclude S from the class of beneficiaries had not been implemented at S's instigation, Berenger's conduct had "something of the quality of an abuse of process" in that it had stood by for three years while the receivers sought to realise the assets, before then excluding S and seeking to lift the Receivership Order as soon as the receivers were close to successfully doing so.

Berenger was granted permission to appeal the "change of circumstances" ground. It argued that an application could not be treated as an abuse where nothing unlawful had been done and there had been no misuse of procedure (such as an attempt to re-try an issue already determined); further, motive and intention were irrelevant in considering whether an abuse had occurred (relating to the first instance judge's consideration of the reasons why S had been excluded as a beneficiary).

VTB argued that the exclusion of S as a beneficiary amounted to a breach of the WFO and the Receivership Order; accordingly, Berenger was in contempt of court. Berenger's stance was that this new point should not be permitted on appeal where it might have changed the course of evidence given or might require further factual enquiry.

Court of Appeal Decision

The Court of Appeal dismissed Berenger's appeal.

Lord Justice Phillips gave the main judgment. He stated that proceedings can be struck down as an abuse of process where there has been no unlawful conduct or breach of procedural rules, no collateral attack on a previous decision or dishonesty or other reprehensible conduct.

Lord Justice Phillips confirmed that in principle it may be an abuse of process for a party to attempt to reopen an interlocutory order on the basis of a material change of circumstances wholly within that party's control. He stated that the first instance judge's approach did not amount to a new or freestanding aspect of abuse, but rather a recognition that such conduct might well fall within one or more of the "broad rubrics" of abuse which were already established.

Lord Justice Phillips agreed with Berenger that the motives for asserting rights are themselves irrelevant, absent any malice. In such circumstances, motives cannot make a legitimate action abusive. However, it is far from the case that a party's purpose in taking action cannot render that action an abuse. Relevant considerations include whether the use of proceedings for the intended purpose is abusive, adopting a multi-factorial approach. Similarly, a delay in pursuing or taking proceedings is not in itself an abuse. However, such a delay with a particular purpose (for example, having no intention to proceed to trial) might be an abuse.

Lord Justice Phillips further allowed VTB to advance its additional argument that Berenger had breached the WFO and the Receivership Order, finding amongst other things that oral evidence which Berenger asserted was necessary was in fact not relevant to the argument. He found that Berenger was in breach of the WFO when its board resolved to exclude S as a beneficiary and, therefore, that it was an abuse for Berenger to attempt to discharge the Receivership Order on that basis. Having decided that, Lord Justice Phillips stated that it was unnecessary also to consider whether Berenger had breached the Receivership Order.

Comment

Parties should not assume that they will be immune to a finding of abuse of process purely because they have not done anything unlawful or dishonest. Exploring the context of such actions is key. Furthermore, parties should carefully analyse their positions before making any applications for interlocutory orders to ensure their actions may not be characterised as abusive.

To MAE or not to MAE? Commercial Court hands down preliminary issues judgment in first Covid-19 Material Adverse Effect case

Thu, 05 Nov 2020 14:08:58 Z

Facts

WEX Inc had agreed to purchase the parent companies of two B2B payments companies specialising in the travel sector, eNett International (Jersey) Limited (eNett) and Optal Limited (Optal), from the claimants (the Sellers) pursuant to a Share Purchase Agreement dated 24 January 2020 for a total consideration of approximately US$1.7 billion.

The SPA included conditions to WEX's obligation to close the transaction, including that "there shall not have been any Material Adverse Effect and no event, change, development, state of facts or effect shall have occurred that would reasonably be expected to have a Material Adverse Effect.”

In early May 2020, WEX formally notified the Sellers of its view that an MAE had occurred due to the impact of the Covid-19 pandemic and claimed that it was therefore not obliged to close the transaction. The Sellers responded that there had not been an MAE and that the condition to closing was satisfied, and then issued claims for a declaration that there had been no MAE and for specific performance under the SPA.

Following an expedited hearing, the Commercial Court determined certain preliminary issues between the parties focusing on the proper construction of the definition of an MAE in the SPA in the context of the current pandemic.

Key issue considered by the Court

The dispute between the parties arises from the fact that the MAE definition contains:

(i) exceptions to the general definition of an MAE for effects from particular causes including specifically “conditions resulting from … pandemics” (the Carve-Out), and

(ii) an exception to the carve-out (the Carve-Out Exception) providing that even if an adverse event otherwise falls within the Carve-Out, an MAE may nonetheless exist if the adversity has had “a disproportionate effect on" the eNett or Optal groups "taken as a whole, as compared to other participants in the industries in which [they] operate”.

As such, for there to have been an MAE, the conditions resulting from the pandemic must have caused a disproportionate effect on either of the eNett or Optal groups as compared to other participants in the industries in which they operate.

The key issue considered by the Court was the identification of the relevant "industries" under the Carve-Out Exception. The Sellers argued that the relevant industry was the travel payments industry, whereas WEX argued that there was no travel payments industry and the appropriate comparator was the B2B payments industry.

The Court's findings

The Court held that WEX's construction was correct and the appropriate comparator was the wider B2B payments industry. In reaching this decision, the Court considered both a textual analysis of the MAE definition, and interpretative considerations arising from arguments about its commercial purpose.

Textual analysis

The Court found that a pure textual analysis favoured WEX's broader interpretation. In particular, the parties had chosen the word "industries", as opposed to "markets", "sectors", "competitors" or an identified pool. "Industries" was a broader word and its natural and ordinary meaning captured a group of participants in a broad sphere of economic activity. This was supported by expert evidence heard by the Court, and by the usage of the words "industry" and "businesses" elsewhere in the SPA.

In reaching this conclusion, the Court noted that, whilst the wording was standard boilerplate, this was nonetheless a heavily negotiated contract where it could be assumed that all the wording had been carefully scrutinised by lawyers and was used wittingly and advisedly.

Commercial purpose

The Sellers argued that the definition of an MAE had to be interpreted in light of its commercial purpose as a matter going to the factual matrix against which the objective intentions of the wording had to be assessed. The Sellers sought to argue that the commercial purpose was to isolate "firm-specific" risks, i.e. the risks facing eNett and Optal in particular, as opposed to those facing the wider industry or sector in which they operated. In response, WEX argued that the commercial purpose extended beyond that to capture risks relating to broader sector in which the Sellers predominantly operated.

Given the lack of English authority on MAC/MAE clauses in SPAs, the Court was taken to US case law (particularly from Delaware) and academic articles. Those materials supported a view that MAC/MAE clauses tend to be interpreted as allocating general market or industry risks to the buyer, and more company-specific risks to the seller. However, they did not provide any clear guidance as to precisely where the line was drawn when it came to risks affecting companies operating in particular markets or sectors within a wider industry.

The Court then went on to consider whether the purpose of the transaction was the acquisition of a travel business or a wider payments business. It found that the transaction did not have a single objective purpose. Optal and eNett's businesses were primarily focused on the travel sector, but WEX's case that it saw future value in extending their reach into other sectors and markets was accepted.

The meaning of 'industries'

In the end, the Court found that the commercial purpose points did not provide any convincing reason to depart from the ordinary reading of the language used.

The Court found that the Sellers had failed to establish the existence of a specific travel payments industry, and that it was at most a market, sector, or 'vertical' within the wider B2B payments industry (itself a subset of the wider payments industry).

For the Carve Out Exception to operate therefore required the pandemic to have disproportionately impacted eNett and Optal as compared to the payments industry (generally) and the B2B payments industry (more specifically). Given the specific impact it has had on the travel sector, this finding will significantly assist WEX in its efforts to show that eNett and Optal had suffered disproportionately compared to their relevant peers.

Comment

While the issue of whether there has in fact been an MAE remains to be determined, this judgment provides important guidance on how the Court will approach the interpretation of MAE clauses in the context of the pandemic.

In circumstances where the Carve-Out Exception was not specific as to the comparator to be used, the Court conducted a multi-layered analysis focusing on the precise wording and the commercial purpose of the definition. The parties' choice of the word "industries" (as opposed to "markets", for example) was significant, especially where it could be assumed given the nature of the contract that the wording had been heavily scrutinised and used advisedly. This is a valuable reminder that, when negotiating these clauses, parties should very carefully consider the words used and their likely objective meaning and seek to address any potential areas of uncertainty in the contract. Otherwise, the Court will be forced to fashion an objective intent which may never have been subjectively shared between the parties, a situation which it expressly noted would only arise if renegotiations aimed at seeking to resolve the subjective differences of view failed.

Issues in relation to existing contracts will require equally careful and nuanced assessment. The painstaking care with which the parties and the Court worked through all angles of these construction arguments is reflective of both the criticality of the current economic conditions and the powerful economic risk allocation functions played by MAE/MAC clauses.

(1) [2020] EWHC 2670 (Comm)

LIBOR: Litigation risks in the endgame?

Wed, 04 Nov 2020 12:09:00 Z

So as well as welcoming in a new rate, will we also be greeting a period of risk and turbulence caused by this transition? In this short note, we explore why this change may give rise to new claims and how those claims might be framed.

Hidden owners, ostensible authority and the Duomatic principle

Mon, 26 Oct 2020 16:55:00 Z

A company's director and registered agent were not in breach of their tortious duties of care to the company, where they were acting on the instructions of an agent who had ostensible authority.

Background

A BVI company called Ciban Management Corporation (Ciban) was the claimant and appellant before the Privy Council, though at the time of the events which gave rise to the proceedings the relevant company was called Spectacular Holdings Inc (Spectacular) (Ciban and Spectacular having merged in 2012 and the former having taken over the proceedings from the latter). Citco (BVI) Ltd (Citco) was Spectacular's registered agent and Tortola Corporation Company (Tortola) was its corporate director.

An individual, B, was the beneficial owner of Spectacular having purchased it from C. B did not want his identity to be public knowledge and so had arranged his holding in Spectacular to be held, through bearer shares, by a lawyer on his behalf. B conducted Spectacular's business through C who in turn gave instructions to Citco and Tortola to issue powers of attorney in favour of various lawyers to act on Spectacular's behalf.

The dispute

In 2001, certain sums fell due from B to C (i) under a loan agreement and (ii) in respect of salary. To pay these sums and without B's knowledge, C instructed Citco to issue a new power of attorney authorising the sale of Spectacular's property. C informed B of his actions only after the property was sold.

There were apparently various 'red flags' in respect of the way in which the instructions were given by C (for example, that C had asked for the invoice for the power of attorney be sent to him; that his email about the power of attorney came from his personal account; that his son paid that invoice) but these were ignored by Citco and Tortola.

B revoked the power of attorney and unwound the sale, and brought proceedings in the BVI through Spectacular against Citco and Tortola alleging that both entities were in breach of their tortious duties of care as agent and director respectively owed to Spectacular because they failed to check whether C had authority to instruct them to issue the new power of attorney.

The case reached the Privy Council where Spectacular appealed on two grounds:

Whether Tortola had breached its duty of care in failing to take heed of the red flags.
Whether C had ostensible authority to act on Spectacular's behalf under the Duomatic principle.

What is the Duomatic principle?

If members of a company can do something via formal resolution at a general meeting, they can also do that thing informally, if all of them agree(1).

Appeal

The Privy Council dismissed Spectacular's appeal on both counts.

It was reasonable, in context and given the pattern of dealings to date (in which powers of attorney had been authorised by B but Tortola had been instructed by C), for Tortola to accept instructions from C. B evidently expected the Tortola to follow C's instructions even though he had never issued a document to that effect. It was for B to bear the risk that C would disobey him or breach his trust. As to the red flags, it was held that there was nothing particularly unusual about them in the context of the pattern of behaviour to date. Objectively, Tortola had little reason to believe anything was amiss.

As to authority, Tortola could reasonably have expected that C had authority, because of the context described above: to date, Tortola had been expected to take instructions from C; B evidently wished to remain 'in the shadows'; and B had never raised any complaints about C's giving of instructions before. Accordingly, Tortola could reasonably assume that C had B's ostensible authority to act.

The claimant and appellant was Spectacular, however – not B. The Privy Council therefore had to ask: did C have ostensible authority from B to act on Spectacular's behalf (recalling that B was the only shareholder of Spectacular)? It is here that the Duomatic principle becomes relevant.

Spectacular would have been bound had B actually consented to C's giving of instructions in relation to the relevant power of attorney (and it was not disputed that he had done so – and so Spectacular could be bound – in relation to the previous powers of attorney). B had clearly not given actual authority in relation to the relevant power of attorney. However, the Privy Council decided that C had ostensible authority. The question then became whether the Duomatic principle could apply to ostensible authority. The Privy Council explored two recognised qualifications to the principle:

The principle cannot apply where the shareholder/s have not consented to the underlying act. In this case, there was an argument that B had not consented to the issuance of the relevant power of attorney. However, the Privy Council rejected this on the basis that – as set out above – B's pattern of conduct meant he could not deny that authority had been given to C. Betrayal by C was a risk he was evidently prepared to take.
The principle cannot apply where there is relevant dishonesty. The Privy Council rejected this as well, on the basis that nothing about the sale or the power of attorney was inherently dishonest or allowed any fraud to be committed. In any event, the Privy Council found that the "whole of [B's] set up – and the clothing of [C] with ostensible authority - was taking the risk on behalf of the company, albeit informally, that [C] would use that apparent authority for his own purposes, including dishonest purposes."

Accordingly, the Duomatic principle did apply and so the ostensible authority conferred by B was counted as ostensible authority conferred by Spectacular.

Comment

The case helpfully clarifies that the Duomatic principle can apply to ostensible authority as well as actual authority. It also provides an interesting insight in circumstances where arrangements cloaking the beneficial owner/s of in particular offshore companies are relatively common. Part of the Privy Council's decision making rested on the fact that owners who seek to disguise themselves in this manner take the risk of being disobeyed by the people or entities they instruct, and the beneficial owners should not be allowed to transfer that risk to others. In those circumstances, their only recourse is to sue the rogue agent.

(1) In re Duomatic Ltd [1969] 2 Ch 365

Hold on to your seats: UK Supreme Court ends the argument about the law governing arbitration agreements

Thu, 22 Oct 2020 10:00:09 +0100

For example, depending on which law applies, the clause may be valid or invalid, awards made pursuant to that clause may be enforceable or unenforceable, and particular disputes arising between the parties may or may not be within its scope.

Laymen might roll their eyes and ask why this is an issue at all, noting that the parties could just specify which law governs the clause.

It is a fair point. Why not just put the question beyond doubt, especially if the law governing the arbitration clause is intended to be different from the law governing the contract as a whole, or the clause specifies arbitration in a third-party jurisdiction chosen because it is deemed safe and neutral?

Well, they can, and the Hong Kong International Arbitration Centre, for example, has express language in its standard administered arbitration clause to that effect, but still most parties do not take this simple step.

It should be remembered that dispute resolution clauses are generally regarded as "midnight clauses", drafted or inserted after everything else has been agreed, and frequently little or not attention is paid to this point.

Whatever the rights and wrongs, the UK Supreme court has now rendered a majority judgment in Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38 which not only ends years of argument on the issue in England, but – because it was decided in accordance with English common law principles, rather than on the basis of EU law – will have implications for the common law world generally, including in Hong Kong and Singapore.

The majority's decision in this case runs to 64 pages (and the minority judgment adds another 49) but a helpful summary of the main principles – reading almost as if it were a restatement - is provided. These are:

The law applicable to the arbitration agreement will be:

(a) the law chosen by the parties to govern it, or

(b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.
Whether the parties have agreed on a choice of law to govern the arbitration agreement is ascertained by construing the arbitration agreement and the contract containing it, as a whole,applying the rules of contractual interpretation of English law (or Hong Kong, Singapore etc law) as the law of the forum.
Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract as a whole will generally apply to an arbitration agreement, which forms part of the contract.
The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.
Additional factors which may, however, negate such an inference and may in some cases imply that the arbitration agreement was intended to be governed by the law of the seat are:

(a) any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration will also be treated as governed by that country’s law; or

(b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective.

Either factor may be reinforced by circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration.
Where there is no express choice of law to govern the contract, a clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of that place.
In the absence of any choice of law to govern the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.
The fact that the contract requires the parties to attempt to resolve a dispute through good faith negotiation, mediation or any other procedure before referring it to arbitration will not generally provide a reason to displace the law of the seat of arbitration as the law applicable to the arbitration agreement by default in the absence of a choice of law to govern it.

Of these factors, the most significant are, first, the somewhat obvious, but no less significant for that, point that if the contract as a whole is governed by, say, Hong Kong law, yet the seat of arbitration is identified as Singapore, then the starting point is that the arbitration agreement remains governed by Hong Kong law, and the choice of Singapore as the seat does not in principle change that.

Second, if there is no choice as to the governing law of the arbitration agreement, then the clause will be governed by the law of the place where the seat is located.

Despite the detailed analysis in the majority judgment, these are, ultimately, simple rules to live by. It still does not excuse the parties from adding a few simple additional words to their contract, for instance "The law of this arbitration clause shall be Hong Kong (or English or Singapore) law".

As the majority judgment in Enka points out, the case got from the High Court to the Supreme Court in breakneck speed. But think how easily the uncertainty and expense endured by both parties could easily have been avoided by some additional drafting, even if it was at midnight.

The LCIA Rules 2020 – what's new?

Thu, 08 Oct 2020 12:35:06 +0100

Greater scope for consolidation of different arbitrations, an early determination procedure and permission for parties to start multiple arbitrations under a single request are some of the key changes.

The new rules came into force on 1 October 2020 and are likely to apply to most requests for arbitration that are filed with the LCIA on or after that date. They replace the LCIA Arbitration Rules 2014 (the LCIA Rules 2014).

We consider these changes in further detail below.

Consolidation

Disputes under joint venture, finance and construction documents are often complex and multi-contractual. As such, they can be the subject of multiple concurrent arbitration proceedings, resulting in sometimes contradictory awards. In a change that brings the LCIA closer into line with other major arbitral institutions such as the ICC and SIAC, the tribunal may now order consolidation of arbitrations started under the same or compatible arbitration agreement and between the same disputing parties or "arising out of the same transaction or series of related transactions" (Article 22.7(ii)).

However, the wording of Article 22.7(ii) appears to contemplate parties being denied the opportunity to nominate arbitrators if the arbitration to which they are party is consolidated into an existing arbitration to which they are not party. This raises the obvious concern that any subsequent awards may be unenforceable in jurisdictions where equality of treatment in the appointment of arbitrators is seen as a fundamental right. For this reason, tribunals and the LCIA Court are likely to apply Article 22.7(ii) cautiously in some cases.

In addition, Article 22.7(iii) expressly permits arbitrations to be heard concurrently where:
• the same arbitral tribunal is constituted in respect of each arbitration;
and
• where that arbitration is also:
o subject to the LCIA Rules 2020;
o commenced under the same arbitration agreement or any compatible
arbitration agreement(s); and
o either between the same disputing parties or arising out of the same
transaction or series

Early determination

A new power to make an "Early Determination" will be welcomed in appropriate cases:

"The Arbitral Tribunal shall have the power… after giving the parties a reasonable opportunity to state their views…to determine that any claim, defence, counterclaim, cross-claim, defence to counterclaim or defence to cross-claim is manifestly outside the jurisdiction of the Arbitral Tribunal, or is inadmissible or manifestly without merit; and where appropriate to issue an order or award to that effect"(Article 22.1(viii)).

Some caution may be necessary when exploring this as a means of dispatching unmeritorious claims; the New York Convention provides that a contracting state need not recognise or enforce an award if a party was "unable to present his case" (Article V 1 (b)).

Some tribunals may therefore prioritise producing robust awards that can withstand challenges either at the arbitral seat or in any enforcement jurisdiction over any perceived advantages of getting a weak claim thrown out early on in the proceedings. For this reason, early determination in LCIA arbitrations is unlikely to become as frequent as analogous procedures in national courts (such as summary judgment or strike out in England).

Starting multiple arbitrations under a single request

The English High Court does not permit parties to start multiple arbitrations under a single request under the LCIA Rules 2014(i). Instead, parties had to file individual requests for each arbitration agreement under which there was a claim.

The LCIA Rules 2020 expressly permits a claimant to serve a composite request in respect of multiple arbitrations, providing that the usual requirements for a valid request are met (Article 1.2). However, each arbitration will proceed separately unless the LCIA Court or tribunal determines otherwise.

This is a welcome change that will save parties time and cost in multi-contractual disputes.

Other key changes

• Applications to state courts

The LCIA Rules 2020 contain clearer wording to the effect that the right of appointment of an emergency arbitrator under Article 9B, and the power of a tribunal to order interim or conservatory measures under Article 25.1, is not intended to restrict a party’s right to apply to a state court for such measures in the circumstances set out in the rules (Articles 9.13 and 25.3).

• Data Protection

There is an express requirement that the tribunal consult with the parties on appropriate measures in relation to the processing of personal data produced or exchanged in the arbitration, and the adoption of information security measures to protect shared information (Article 30.5). The tribunal and the LCIA are granted the express power to issue directions on data protection and information security binding on the parties, and on the parties and tribunal, respectively (Article 30.6).

• Electronic communications and use of technology.

Requests for arbitration and responses are to be submitted by electronic means (Articles 1.3, 2.3 and 4.1), and there is express reference to the use of communications technology for hearings (Articles 14.3 and 19.2). Awards may be signed electronically (Article 26.2).

(i) A v B [2017] EWHC 3417 (Comm)

Overseas In-house lawyer's advice covered by legal advice privilege

Thu, 08 Oct 2020 11:00:27 +0100

The requirement for legal advice privilege to attach to communications is that the advisor was acting in their capacity as a lawyer. The court confirmed these tenets of English legal advice privilege in PJSC Tatneft v Gennady Bogolyubov & Ors.

Facts

Igor Kolomoisky, the second defendant, filed an application arguing that Tatneft, a Russian company, incorrectly asserted legal advice privilege over communications between employees/officers of the company and Russian lawyers who were members of its in-house legal team.

He asserted that legal advice privilege had been incorrectly claimed because in Russia in-house lawyers are not members of the Russian Bar and their activity is not subject to the Federal Law regulations governing advocates. The closest equivalent to legal advice privilege in Russia is "advocate's secrecy", which applies to advocates but not to non-advocate in-house lawyers.

Further, as a matter of English law, legal advice privilege could not apply to communications with and documents generated by the in-house lawyers at Tatneft as they are not “appropriately qualified” foreign lawyers. Under English law legal advice privilege only applies to (a) “professional lawyers” i.e. legal advisers who are professionally qualified and members of a professional body, (b) in-house lawyers if they are admitted to practice and regulated, and (c) foreign lawyers if they are “appropriately qualified”.

Tatneft accepted that the relevant individuals were not advocates under Russian law, but submitted that as a matter of English law, legal advice privilege applied: there is an in-house legal department at Tatneft and legal advice privilege attaches to communications between its members and employees of Tatneft on the basis that as a matter of English law, legal advice privilege applies to advice obtained from foreign lawyers including in-house lawyers. Tatneft contended that the Russian law of advocates’ secrecy was irrelevant in this situation.

Decision

Mrs Justice Moulder held that it was the "function" of the relationship that was important and not the "status" of the lawyer. The only requirement for legal advice privilege to attach is that the person giving the advice should be acting in the capacity or function of a lawyer.

The judge noted that it would be unfair for the court to hold that legal advice privilege did not extend to in-house lawyers in Russia on the basis that they, as a matter of local law, cannot be advocates. The implication would be that legal advice privilege could never extend to communications with them, despite the fact that the category of in-house lawyers has been accepted, as a matter of English law, as being covered by legal advice privilege.

Comment

This decision helpfully clarifies the scope of legal advice privilege and its application to in-house foreign lawyers. The decision will provide comfort to foreign parties litigating in the English courts that their confidential, privileged communications with their legal advisors will be protected. It confirms that foreign parties will not be disadvantaged when providing disclosure due to the qualifications of, or regulations relating to, their in-house legal advisors under local law.

The Quincecare duty bowls out HSBC

Thu, 01 Oct 2020 14:22:47 +0100

Facts

Stanford International Bank Ltd (SIB) was an Antiguan bank run and beneficially owned by Mr Robert Allen Stanford, which went into liquidation following a fraud and attracted wide publicity at the time. SIB sold certificates of deposits to investors promising generous rates of interest. The view of SIB's joint liquidators is that the entire bank was a Ponzi scheme, which survived by securing new investors and using their money to pay out the old investors who wished to redeem their investments. Mr Stanford was convicted of fraud in the United States in 2012 and sentenced to 111 years' imprisonment. SIB is estimated to be insolvent to the tune of £5bn with over 80% of the monies contributed by investors misappropriated.

HSBC Bank PLC was a correspondent bank for SIB from 2003 onwards and operated four accounts in various currencies: sterling, dollar, euro and Swiss franc. Between August 2008 and February 2009, HSBC paid out £118m from the accounts. Save for one payment of £3m, which was made to the England and Wales Cricket Board, all payments were made to investors. It is not known whether SIB was under an obligation to make the payment to this cricket board.

SIB's claim and HSBC's application

SIB, through its liquidators, alleges that HSBC owed a duty to it to take sufficient care that monies paid from accounts under its control were properly paid out (the Quincecare duty(2)). SIB alleges that HSBC had a duty to freeze payments out of its accounts when it realised that something was not right. The date that the accounts should have been frozen, according to SIB, was 1 August 2008. The accounts were in fact not frozen until February 2009, when Mr Stanford was charged by the US authorities. SIB claimed that if the accounts had been frozen on 1 August 2008, there would have been an additional £118m available to creditors.

HSBC's position is that a claim for breach of the Quincecare duty is a common law claim for breach of an implied contractual duty (effectively a duty of care), or a tortious duty of care, meaning that the appropriate remedy would be damages. It is trite law (with some exceptions) that a claim for damages has to give credit against the loss suffered for any benefits that have been obtained by virtue of the wrong that is claimed. In this case, HSBC argued that whenever a payment was made by SIB, the reduction in assets (i.e. the payment to investors) equally reduced SIB's liabilities to its investors. On this argument, even if HSBC had breached any duty of care, SIB had suffered no loss as a result.

It was on this basis that HSBC made an application for strike out or summary judgment against SIB, arguing that on a net asset basis, SIB was in an equal position and had not suffered any loss.

Decision

Mr Justice Nugee dismissed HSBC's application for strike out or summary judgment.

In determining the existence of loss, the judge distinguished between solvent and insolvent companies. He gave the example of a solvent person (or a solvent corporate entity). If £100 of that person's money is taken and used to discharge a debt owed by that person, the person would be no worse off overall. They may not have the money which they had previously, but they would not have the liability which they had previously either, and their net asset position would be the same.

However, the judge held that the position would be different in the case of an insolvent individual or company, such as SIB. Taking the above example again, an insolvent company paying £100 on the one hand reduces its assets, but that does not have a neutral effect on its net asset position because it has no net assets. Only its net liabilities are reduced.

SIB alleged that HSBC should have frozen its accounts on 1 August 2008, which is when, according to SIB, HSBC should have known that SIB could not repay its certificates. As at 1 August 2008, SIB had £80m available to it in its accounts. The judge queried whether the true value of the claim should therefore be £80m (being the amount in the accounts when the balloon should have gone up) rather than £118m but said that as it had not been argued before him, it was not for him to decide. In any event, the judge acknowledged that SIB potentially would have had £80m less liabilities if the accounts were frozen on 1 August 2008 but was not willing to accept HSBC's argument that any payments out after that point did not constitute a loss.

In examining the nature of the Quincecare duty, the judge noted that the duty is owed to the company and not to the creditors. He held that the correct question was whether the company was worse off by having £118m (or £80m) of its assets wrongfully extracted from its bank accounts. The judge concluded that it was. No credit was to be given for the fact that SIB was able to reduce some of its liabilities, as it was still insolvent in any event.

If SIB had the £118m or £80m, it would have had money available for liquidators to pursue such claims as they thought they could usefully pursue for distribution to creditors. In the judge's view, this was a real loss. To say otherwise, was "contrary to one's instinctive and common-sense reaction to the facts".(3)

For the reasons given above, the judge dismissed the application for summary judgement or strike out of the Quincecare loss claim for the balance over and above the payment to the England and Wales Cricket Board.

Comment

The Quincecare duty has gained increasing profile in recent years, including as the subject of a Supreme Court judgment in 2019.(4) This judgment provides a useful review of the application of the duty and introduces the interesting suggestion that damages may be assessed differently where an individual or company is "hopelessly and irredeemably insolvent". This may give liquidators an additional avenue to pursue lost monies beyond the realm of Quincecare claims.

The judge noted that while this was only an application for strike out or summary judgment and that HSBC may choose to pursue the same arguments at trial, he hoped the views expressed would be of assistance. Expect further judgments to come on the scope and application of the Quincecare duty.

(1) [2020] EWHC 2232 (Ch)
(2) Barclays Bank Plc v Quincecare Ltd [1992] 4 AER 363
(3) Barclays Bank Plc v Quincecare Ltd [1992] 4 AER 363, para 41
(4) Singularis Holdings Ltd (In Official Liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50

CFH Clearing Limited v Merrill Lynch International [2020] EWCA Civ 1064

Thu, 24 Sep 2020 10:23:58 +0100

Fact timeline

In 2011 the Swiss National Bank declared a floor on the EUR/CHF exchange rate at 1.2 CHF, thereafter intervening in the market to buy unlimited amounts of EUR at that rate to maintain that floor.

15 January 2015

At 9.30 am CET - the floor was unexpectedly removed, which led to an immediate and massive strengthening of the Swiss Franc against the Euro, causing severe fluctuations in the foreign exchange (FX) market for about 40 minutes.
At 9.47 am - CFH Clearing Limited (CFH) through its automated clearing system placed a total of 348 orders to liquidity providers in the FX market, including 27 electronic market orders with Merrill Lynch International (MLI) to trade a total of €20,479,000 for Swiss Francs at the next available price. MLI's automated system filled the orders almost instantaneously at an extremely low average rate of 0.1821969 CHF and executed the trades. On the main platform for EUR/CHF trading, the "official low" was declared at 0.85.
Later that day, Barclays, UBS and JP Morgan, the other liquidity providers that CFH had placed orders with during the period of volatility, each confirmed that any trade executed with CFH below 0.85 CHF would be re-booked at that rate to reflect the official low. MLI however did not agree to adjust the rate for the 27 transactions to 0.85 CHF

16 January 2015

MLI offered to change the rate to 0.75 CHF after first making a margin call based on the average rate of 0.1821969 CHF. It then notified CFH that MLI was terminating its prime brokerage relationship with CFH, with the effect that CFH had to agree a final settlement with MLI so that it could transfer its remaining balance to another prime broker.

19 January 2015

CFH reluctantly accepted the adjustment of the rate for the 27 transactions to 0.75 CHF.

19 September 2018

CFH issued a claim against MLI, contending that the effect of clause 7 of MLI's Terms and Conditions of Business (MLI's Terms) was to import into the transactions a contractual obligation to comply with "market practice", so as to require MLI to re-price the 27 transactions at 0.85 CHF, the "official low" of the market range, or otherwise to cancel them.

First Instance

The disputed transactions were concluded on the basis of a 2002 ISDA Master Agreement and schedule between CFH and MLI dated 27 June 2013 (the ISDA Master Agreement), supplemented by MLI's Terms. Clause 7 of MLI's Terms (Clause 7) stated that "all transactions are subject to all applicable laws, rules, regulations…and, where relevant, the market practice of any exchange, market…including the FSA Rules."

CFH argued that Clause 7 amounted to an express contractual term that the parties would act in accordance with market practice. Moulder J rejected CFH's interpretation of Clause 7, holding that as a matter of construction, Clause 7 did not impose a contractual obligation to act in accordance with market practice but intended to relieve a party of contractual obligations where it was unable to perform those obligations because of relevant market practice (a workable construction). In reaching this conclusion, Moulder J considered that if the words "subject to" in Clause 7 had the effect of incorporating all applicable laws, rules, regulations and market practices into the contract between CFH and MLI, as CFH contended, this would result in an unworkably uncertain contract. As such, Moulder J found that CFH had no real prospect of success on the issue and dismissed their claim.

The Appeal

CFH appealed Moulder J's decision, principally on the basis of what it submitted to be the true construction of Clause 7. CFH submitted that Clause 7 was an express recognition that there might be a conflict between the terms of the transactions between MLI and CFH on the one hand and market practice on the other. In that context, the clear intention of the phrase "subject to" in Clause 7 was that market practice would be binding. CFH therefore submitted that market practice was incorporated into the transactions and was not merely a "get out clause."

The Court of Appeal dismissed CFH's appeal. The starting point for the contractual analysis was that the parties had agreed that their FX transactions would be governed by a standard ISDA 2002 Master Agreement and a specifically negotiated schedule, which permitted them to provide for market disruption. The contractual documentation extended to 42 pages of detailed provisions, including in relation to illegality and force majeure events. That documentation did not incorporate "market practice" and neither did the parties adopt any of the options for dealing with market disruption, despite incorporating the 1998 FX and Currency Option Definitions.

Phillips LJ held that there was no arguable basis for finding that the parties had agreed to incorporate "market practice" generally, given that this was not reflected in the ISDA Master Agreement. MLI's Terms stated at the very outset that their application was "subject to…documentation relating to a specific transaction or transaction", meaning that notwithstanding anything in MLI's Terms, the 27 transactions remained governed by the terms of the ISDA Master Agreement. MLI's Terms would apply to the broader aspects of the relationship with CFH and to any transactions which were not covered by the terms of the transaction-specific documentation. It followed, therefore, that CFH's contention that "market practice" was incorporated into the 27 transactions, overriding the express pricing and settlement provisions of the ISDA Master Agreement, failed on the basis of the express scope of MLI's Terms as set out in their pre-amble.

The Court of Appeal agreed with Moulder J that Clause 7 could not be read as incorporating market practice into the transactions between CFH and MLI, and that the alleged market practice was too vague and uncertain to be incorporated as a contractual term. Accordingly, CFH's appeal was dismissed.

Comment

The desire to maintain the certainty and stability of the relationship between those contracting on the basis of the ISDA Master Agreement underpins the Court of Appeal's decision in this case, and therefore explains the court's unwillingness to find that a party to such a contract should be required to act in accordance with a concept as potentially broad and uncertain as "market practice.

Security for costs not ordered despite looming economic downturn caused by COVID-19

Thu, 17 Sep 2020 16:21:00 +0100

The Dispute

The Claimant and the First Defendant provided products and services for the maintenance and repair of pipelines for the oil and gas industry. Shortly after negotiations over the Twelfth Defendant's acquisition of the Claimant failed, the First Defendant was established as a business. It is alleged that some of the Claimant's employees (which are Defendants in the proceedings) created and implemented a business plan for the First Defendant and amongst other things, conspired to poach the Claimant's customers and employees, used the Claimant's confidential information, and copied the Claimant's products, materials and business.

Relevant test for Security for Costs Application

Civil Procedure Rule 25.13 sets out the conditions to be satisfied before security can be ordered. The condition relied on in this case was that there was reason to believe that the Claimant would be unable to pay the Defendants' costs if ordered to do so. In addition, the Court must be satisfied, having regard to the circumstances of the case that it is just to make an order that security be given.

A defendant need only show that there is a reason to believe that the claimant will not be able to pay at the time when the order is made; not that a claimant will not, on the balance of probabilities, be able to pay.(2)

Court not persuaded by impact of looming economic downturn

The Defendants pointed to the current COVID-19 pandemic and the looming economic downturn, amongst other things, to attempt to persuade the Court that there was reason to believe that the Claimant would fail to meet an adverse costs order of £800,000 to £900,000 of likely costs in October/November 2021.

The Defendants submitted evidence of the impact of the economic downturn on the oil exploration industry, and referred to compounded instability in the oil market, such that the financial position of the Claimant's third-party financial backers may deteriorate. The Claimant itself admitted that the COVID-19 pandemic had led to an approximately 10% drop-off in inquiries but asserted that it was in a good financial position and expected to continue to trade well.

The Court accepted that the Claimant's business was a successful one and that it expected to continue to make money. Whilst it was fair to say that it was impossible to know what was going to happen at any point in time, the Court was not persuaded by the Defendants' evidence on the impact of the pandemic on the oil exploration industry, as the Claimant operated in pipe maintenance and repair.

Ultimately, the Court held that there was no reason to believe that the Claimant would be unable to pay the Defendants costs if ordered to do so, and that having regard to all the circumstances, it was not just to make an order for security for costs.

This decision demonstrates the Court's willingness to take into consideration the impact of the COVID-19 pandemic, and the looming economic downturn in considering a party's financial viability for the purposes of a security for costs application. However, general evidence of the economic impact of the pandemic will not suffice, and any evidence must be precise and specific to that particular party's industry in order to persuade the Court that there is a real risk of non-payment.

(1) [2020] EWHC 1602

(2) [2020] EWHC 1602 [15]-[16]

Stick to the process – a further reminder of how useful a process agent clause can be, especially following Brexit

Thu, 10 Sep 2020 13:48:15 +0100

In Banco San Juan Internacional, Inc. v Petroleos De Venezuela, S.A.,⁽¹⁾ the English court explored whether a borrower had been validly served, when the borrower had failed to comply with its contractual obligation to ensure that a process agent remained in place at all times.

Facts

The Puerto Rican bank, Banco San Juan International SA (BSJI) and Venezuelan oil company (PDVSA) entered into two loan facility agreements dated 2016 and 2017 respectively. These facility agreements contained identical process agent clauses, very common in cross-border finance transactions and consistent with the provisions of the Loan Market Association's standard documentation, structured as follows:

PDVSA is obliged forthwith to appoint a process agent to be an authorised agent for service of proceedings in England.
If for any reason the process agent ceases to be such an agent, then PDVSA must forthwith appoint a new agent and notify that appointment within 30 days of the previous agent ceasing to be agent.
If PDVSA fails to comply with its obligation to appoint a new agent for the service of process, the lender may appoint an agent for service of process on PDVSA.

PDVSA appointed a process agent, as required by the 2016 facility agreement, but this appointment lapsed in 2019 and PDVSA failed to appoint a replacement. As regards the 2017 facility agreement, no process agent was ever appointed by PDVSA.

A dispute subsequently arose between BSJI and PDVSA and, in the absence of any process agent appointed by PDVSA, BSJI itself appointed a new process agent on behalf of PDVSA and duly purported to serve proceedings on the new agent. PDVSA failed to acknowledge service and, when faced with an application by BSJI for summary judgment, argued that the sending of the claim to the new process agent had not constituted good service on PDVSA.

Analysis

PDVSA ran the following arguments:

BSJI had appointed the new process agent directly and without the approval of PDVSA, so the new process agent could not be said to be an "authorised agent", as required by sub-clause (i) of the process agent clause.
The process agent clauses did not survive after the date on which BSJI had refused to advance further sums to PDVSA under the terms of the facility agreements.
As regards the 2017 facility agreement only, no process agent had ever been appointed in respect of that facility, so it could not be said that PDVSA had failed to appoint a "new" process agent; BSJI should not be entitled to appoint an agent on behalf of PDVSA.

The Judge rejected these arguments:

The requirement for an "authorised" agent meant authorised under the terms of the facility agreements. The facility agreements expressly provided for BSJI to appoint a process agent on behalf of PDVSA if PDVSA failed to comply with its obligation to appoint a new one when necessary; when PDVSA failed to do so, then BSJI's agent was properly "authorised". Any finding to the contrary would have meant that the contractual provision entitling BSJI to appoint a process agent was obsolete.
The Judge also rejected an argument by PDVSA that a valid appointment needed PDVSA's approval; to imply such a term was inconsistent with the whole purpose of a process agent clause which is to speed-up and simplify the service of proceedings.
The Judge also had no difficulty rejecting PDVSA's argument that the provisions of the facility agreements entitling BSJI to appoint its own process agent ceased to have effect when BSJI refused to advance further monies to PDVSA. PDVSA had not fulfilled its primary obligation to repay the loans, so it was clear that the facility agreements had not been terminated. It was in precisely such a scenario - where a dispute had arisen between the parties – that a process agent clause of this nature was of value and it would be uncommercial if such a clause ceased to have effect at the point in time at which it was needed the most.
Finally, in relation to the 2017 facility agreement in respect of which no process agent had ever been appointed by PDVSA, BSJI's appointment of a process agent had been equally valid. While the wording of the process agent provision might be said to pre-suppose that a process agent had been appointed at the outset, such that PDVSA was not in breach of its obligation to appoint a "new" agent, that was not how the clause should be construed. Such a construction would have allowed PDVSA to frustrate the operation of the clause by failing to appoint a process agent at the outset, thereby profiting from their own breach of contract.

Accordingly, the Court rejected PDVSA's arguments and concluded that BSJI had validly effected service on PDVSA by appointing a process agent itself and serving that agent with the relevant documents.

Comment

The Court's decision shows that it will adopt a commercial approach to the interpretation of process agent clauses and, where possible, it will give effect to such clauses' primary purpose of allowing a speedy and certain means of service. This judgment is also a further reminder of the significant benefits conferred on a party able to rely upon a process agent clause and, had it not been for the inclusion of a process agent clause here, there would likely have been significant delay and costs associated with attempting to serve in Venezuela.

The benefits of including a process agent are likely to be of even wider application following Brexit. At present, English proceedings can be served on defendants in other EU Member States under the EU Service Regulation, which is generally relatively quick and efficient. However, following Brexit, the UK will no longer be party to the EU Service Regulation and, depending on the outcome of Brexit negotiations between the UK and the EU, it may have to rely on the slower and more cumbersome Hague Service Regulation. While the final outcome of Brexit negations will need to be closely monitored, UK parties to transactions with counterparties in EU member states would be well advised to consider adding process agent clauses allowing them to effect service on a process agent in England and Wales.

⁽¹⁾[2020] EWHC 2145

Hong Kong Courts – COVID-19 and Typhoon "Higos"

Wed, 02 Sep 2020 03:34:00 +0100

Wed, 02 Sep 2020 03:34:00 +0100Commercial disputesCarmel GreenAt 1.30 am on 19 August 2020, the Hong Kong Observatory raised the typhoon no. 9 signal (the second highest storm warning) for the first time since Typhoon "Mangkhut" in September 2018. As a result, Hong Kong came to a standstill and the courts closed for the day (although, the court registries did open at 2 p.m.).

Save for a couple of days in July, the courts have generally remained open since the end of the three-month general adjourned period ("GAP") on 3 May 2020, during which the courts were closed save for urgent and essential business. Since the end of the GAP, the number of reported cases of COVID-19 in Hong Kong has approximately quadrupled. The fact that the courts have remained open recognises the essential public service they perform and that the judiciary administration and court users are learning to operate alongside the pandemic.

August 2020

During parts of the summer the number of reported infections remained stubbornly high at over 100 cases per day. At the time of writing, this has come down to below thirty reported cases per day and the general trend appears to be in decline. However, this trend is part of a "third wave" of infections and there is still a great deal of anxiety in the community. Perhaps, somewhat serendipitously, by forcing most people to stay indoors, "Higos" may have done its bit to help reduce the number of cases of infection.

Hong Kong remains in partial lockdown and employers have been urged to allow staff to work from home as far as possible. There is still no visibility on when schools might resume face-to-face learning. Stringent social distancing measures remain in place; as does the compulsory wearing of face masks in all indoor and outdoor public spaces. This general state of affairs looks like it could continue for some weeks.

The government apparently has ambitious plans to conduct COVID-19 testing among much of the population (totalling approximately 7.5 million people), starting in September 2020. According to some media reports, the aim is to test up to five million residents during the course of a few weeks. Testing will be voluntary at numerous designated testing centres located throughout the territory, although it is by no means clear how many people will volunteer to turn-up. Indeed, the risk of testing positive and being taken into isolation at a hospital or government quarantine centre may put some people off, especially in respect of testing young children.

Update

The enhanced social distancing measures within the court buildings, intended to reduce crowds gathering and improve the flow of people in court premises, remain in place; as does reduced seating capacity in the public gallery of courtrooms and reduced operating hours of court registries and accounts offices¹.

At the time of writing, the most recent judiciary announcement confirmed new crowd management measures for the operation of the District Court Registry and accounts office².

As if to emphasise how persistent the COVID-19 virus is, the otherwise busy Probate Registry of the High Court was closed for a day on 17 August 2020 for deep cleaning, having been visited on 30 July 2020 by a court user who is understood to have later tested positive for the virus.

Contact Us

Please contact us if you have any queries regarding the issues raised in this article, or if you wish to consider any commercial dispute resolution matters in Hong Kong.

¹ Judiciary Announcement, dated 28 July 2020. Also see our Update, dated 10 August 2020 ("Hong Kong Courts – COVID-19 Update).
² Judiciary Announcement, dated 12 August 2020 and Judiciary Administration Notice re "Crowd Management Arrangements", 14 August 2020.

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HMRC Crackdown on Facilitation of Tax Evasion

Tue, 01 Sep 2020 16:11:50 +0100

The offences were introduced on 30 September 2017, by Part 3 of the Criminal Finances Act 2017. The provisions make corporate entities with a UK connection (referred to as "relevant bodies") criminally liable where they fail to prevent persons associated with them from criminally facilitating tax evasion, whether the tax evaded relates to the UK or another jurisdiction. A person is “associated” with a relevant body if they are an employee, agent, intermediary or other person who performs services for, or on behalf of, the relevant body.

HMRC confirmed on 25 August 2020, in response to a Freedom of Information request, that as at 31 July 2020, they currently have 10 live CCO investigations with a further 22 live opportunities "under review". To date no charging decisions have been made. These investigations cover sectors including financial services, oil, construction, labour provision and software development. Specifically, twelve investigations or opportunities relate to businesses in the financial sector – the part of the UK economy which provides financial services to commercial and retail customers.

Although the legislation has been in force for almost three years, there has yet to be a prosecution. But the position may be about to change, with the need to boost HMRC coffers to pay for the Government's various schemes to kickstart a post COVID-19 recovery.

The corporate offence is a strict liability offence, and the relevant body will therefore be liable unless it can demonstrate that it had "reasonable prevention procedures" in place to prevent the facilitation (or in rare cases that it was not reasonable to expect it to have such procedures in place). The procedures should be based on six guiding principles which we discussed in detail in our previous blog on this subject. The fines for those found guilty of the offence are potentially unlimited. Aside from the implications of a prosecution, or resulting regulatory action, the reputational risk could adversely impact on the profitability of the business concerned.

If you have not yet considered the CCO rules, or are unsure whether your current policies and procedures are sufficiently robust, now is the time to take action as it is only a matter of time before HMRC brings a prosecution for failure to prevent.

Privy Council gives a lesson on the remoteness of damage in contract law within a judgment on damages for breach of separate but related contracts

Thu, 27 Aug 2020 15:25:11 +0100

The Privy Council has also summarised the law in respect of remoteness of damage for breach of contract in Attorney General of the Virgin Islands v Global Water Associates Ltd.⁽¹⁾

Background

The BVI government entered into two contracts with Global Water Associates Ltd ("GWA") relating to a proposed water reclamation treatment plant:

a Design Build Agreement ("DBA") under which GWA agreed to design and build the plant; and
a Management, Operation and Maintenance Agreement ("MOMA") by which the government engaged GWA to manage, operate and maintain the plant once it had been built pursuant to the DBA.

The government breached the DBA by failing to provide a prepared project site to enable the installation of the plant. As a result, GWA was not able to earn the profits which it would have made during the 12-year term of the MOMA. GWA terminated the DBA and referred a claim for damages for loss of profits under the MOMA to arbitration.

The arbitrators found that GWA's claim for damages related to the MOMA were too remote to be recoverable; the parties had chosen to enter into two separate contracts and an award for damages for breach of the DBA was confined to sums payable for the performance of works under that agreement. Following a series of appeals through the BVI courts, the claim found its way to the Privy Council.

Privy Council decision

The Privy Council found for GWA. The judgment provides an overview of the case law on the remoteness of damage in contract law, including Hadley v Baxendale,⁽²⁾ Victoria Laundry (Windsor) Ltd v Newman Industries Ltd, ⁽³⁾ and Koufos v C Czarnikow Ltd ("The Heron II"),⁽⁴⁾and summarises the law as follows:

In principle the purpose of damages for breach of contract is to put the party whose rights have been breached in the same position, so far as money can do so, as if their rights had been observed.
The party in a breach of contract is entitled to recover only such losses as were reasonably contemplated as liable to result from the breach at the time the contract was made. To be recoverable, the type of loss must have been reasonably contemplated as a serious possibility.
What was reasonably contemplated depends upon the knowledge which the parties possessed at that time (or which the party who later commits the breach then possessed).
The test to be applied is an objective one. What must the defendant be taken to have had in their contemplation, rather than what did they actually contemplate? In other words, one assumes that the defendant at the time the contract was made had thought about the consequences of their breach.
The criterion for deciding what the defendant had in their contemplation as the result of a breach of contract is a factual one.

Applying those principles to the facts, the Privy Council found that the losses resulting from an inability to earn profits under the MOMA were within the reasonable contemplation of the parties to the DBA when the contract was made:

the contracts were entered into between the same parties on the same day, they both related to the plant and it was clear from both contracts that the parties "envisaged the completion of the DBA to lead seamlessly into the operation of the MOMA"; and
there was no express term in the DBA which limited the government's liability in damages to GWA's loss of earnings under the DBA, and no finding that such a term was to be implied.

Comment

As well as providing a useful higher court summary of the law in respect of the recoverability of damages in contract, this decision makes it plain that, where parties have entered into separate contracts, a breach of one does not necessarily preclude the wronged party from recovering damages under another. The court will consider whether the type of loss was in the reasonable contemplation of the defendant as a serious possibility at the time the contracts were entered into assuming that, at that time, the defendant had thought about the breach.

⁽¹⁾[2020] UKPC 18

⁽²⁾ [1854] 9 Exch 341

⁽³⁾ [1949] 2 KB 528

⁽⁴⁾ [1969] 1 AC 350

Disputes, disputed: The court’s approach to competing dispute resolution clauses in successive agreements

Thu, 20 Aug 2020 16:11:56 +0100

The background facts

On 31 January 2018, Albion agreed to sell a 20% interest in an oil firm to EIGL under a share purchase agreement (SPA) for $100m. EIGL paid the first two instalments but then made a claim and notified Albion that it intended to withhold the outstanding amount payable. Subsequently, EIGL agreed to pay $20m of the outstanding amount unconditionally, with the remaining $13.3m (Escrow Amount) to be held in escrow per an agreement dated 22 January 2019 (Escrow Agreement).

The SPA contained a clause requiring the parties to submit to the exclusive jurisdiction of the courts of England and Wales. The Escrow Agreement, however, contained a jurisdiction clause stipulating that disputes must be settled by arbitration (Arbitration Agreement).

In the present claim, Albion issued proceedings for the Escrow Amount (the outstanding purchase price). EIGL applied for a stay under s.9 Arbitration Act 1996 (s.9)(1), stating that the dispute over the Escrow Amount arose out of the Escrow Agreement, which contained the Arbitration Agreement. If EIGL’s application succeeded, then Albion’s claim would be а matter for arbitration. Albion countered that the dispute arose out its entitlement to be paid under the SPA and therefore the Court had jurisdiction.

The approach to competing jurisdictional clauses

The Court has previously considered competing jurisdictional clauses in agreements entered into simultaneously (but to give effect to one overall transaction): BNP Paribas v Trattamento(2): (i) a jurisdiction clause in one contract was probably not intended to capture disputes more naturally seen as arising under a related contract(3); ii) a broad, purposive and commercially-minded approach is to be followed(4); (iii) the competing clauses should be interpreted in the light of the transaction as a whole(5); sensible businesspeople are unlikely to intend that similar claims should be the subject of inconsistent jurisdiction clauses(6); (v) competing clauses are to be interpreted on the basis that each deals with its own subject matter and they are not overlapping, provided the language and surrounding circumstances allow(7); and (vi) the language and surrounding circumstances may, however, make it clear that a dispute falls within both clauses (and the result may be that either clause can apply rather than one clause to the exclusion of the other(8)).

The present case involved competing clauses agreed in two separate contracts, spaced one year apart. The Court acknowledged that it would be possible to show that the second contract superseded the first, such that the parties intended it to displace the original for all purposes; in that case, bar some clear wording, it seems likely that the second contract’s jurisdictional clause would take precedence over the first(9).

Here, the parties clearly contemplated that both agreements would subsist together and for different purposes, albeit that the Escrow Agreement was entered into a year following the SPA and was not anticipated at the time of the SPA. The Court therefore considered that the approach identified in Trattamento remains a helpful guide; applying this, it held that Albion’s claim did not fall within the Arbitration Agreement, and thus the application for a stay under s.9 by EIGL failed. This is because:

There is nothing particularly surprising in parties stipulating different dispute resolution provisions in principal and security agreements, given the different purposes of those agreements. It was more likely that the Arbitration Agreement was intended to address the security and other ancillary obligations created by that agreement, rather than to displace (at least so far as the outstanding payment was concerned) the choice of jurisdiction under the SPA.
The drafting of the Arbitration Agreement(10) suggested it was for obligations created by the Escrow Agreement (“this letter”) rather than disputes as to the interpretation or performance of the SPA. Moreover, payment into the Escrow Agreement was “without prejudice to [...] any other rights which Albion [...] may have under the SPA”.
The Escrow Agreement concerned only 3 of the 6 parties to the SPA. The parties (as sensible businesspeople) likely intended the Arbitration Agreement to have a localised effect to avoid the position where claims between some of the parties to the SPA were subject to High Court jurisdiction, and other related claims under the SPA were subject to arbitration.

Comment

This decision reminds us that care must, as ever, be taken in the drafting of jurisdictional clauses. In particular, parties must bear in mind that the Court will not adopt a blanket approach to jurisdiction but will, where appropriate, carve out disputes arising out of separate agreements into their respective jurisdictions even where disputes arise out of a later agreement not contemplated at the time of the first. The Court will look behind the intention of a later agreement and will determine whether the dispute is in relation to the second or the first. This is of particular importance where a party believes that a later arbitration agreement will supersede such that a dispute would be confidential: the present decision shows that is not necessarily the case.

(1) S.9 allows a party to apply to stay the proceedings in favour of arbitration, and the Court is required to grant the stay unless “satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed” .

(2) BNP Paribas v Trattamento Rifiuti Metropolitani SpA [2019] EWCA Civ 768.

(3) Trust Risk Group at [48]; Dicey, Morris & Collins at § 12-110.

(4) Trust Risk Group at [48]; Sebastian Holdings at [39] and [50].

(5) UBS v Nordbank [2009] at [83]; Trust Risk Group at [47]; Sebastian Holdings at [40].

(6) UBS v Nordbank at [84], [95]; Sebastian Holdings at [40]; Savona at [1].

(7) Monde Petroleum at [35]-[36]; Savona at [1].

(8) Savona at [4] and [31].

(9) However, contrast this with the position in Satyam Computer Services Ltd v Upaid [2008] EWCA Civ 487 in which the Court held that claims under an underlying agreement that was preserved by a later settlement agreement did not “relate” to the settlement agreement and must therefore be subject to the underlying agreement’s jurisdictional clause.

(10) In particular its reference to, “any dispute or difference […] arising out of or in connection with this letter (including any question regarding its existence, validity, interpretation, performance or termination)” [emphasis added].

LIBOR claim by US agency will continue in London

Mon, 10 Aug 2020 16:26:27 +0100

In a judgment by Mr Justice Snowden, the Court denied UBS's application to strike out a claim brought by a US government agency which alleges that it and several other banks had colluded to suppress LIBOR between 2007 and 2009: the proceedings will therefore continue.

The claim was brought in March 2017 by the Federal Deposit Insurance Corporation (FDIC) acting as receiver for 39 failed US banks. FDIC claims that banks including Barclays, RBS, Lloyds, Rabobank, Deutsche Bank, and UBS colluded to suppress the level of LIBOR by 'lowballing' submissions to the British Bankers' Association between August 2007 and the end of 2009.

UBS applied to strike out the claim because the conduct in question had taken place before March 2011, i.e. six years before the claim was issued, and was therefore time-barred. It also argued that there was publicly available commentary which raised concerns about LIBOR before March 2011, based on which FDIC could have brought its claim earlier. FDIC argued that its claim was not time-barred because it only became aware of the conduct in question in 2012, following regulatory findings by the FSA in the UK, both the Commodity and Futures Trading Commission and Department of Justice in the US, and the Financial Market Supervisory Authority in Switzerland.

The Court refused UBS's application. It found that none of the financial commentators UBS drew attention to had concluded that there must have been collusion between the banks or even that collusion was the most likely explanation for the sustained low levels of LIBOR. It was therefore realistic for FDIC to contend that the 2012 regulatory findings provided the evidence it needed to displace its natural assumption that the sustained low level of LIBOR had an innocent explanation and for it to bring its claim only once those findings had been made. FDIC's claim will therefore continue.

The full judgment can be read here.

Hong Kong – Refusal to regrant injunction that lapsed during general adjournment successfully appealed

Mon, 10 Aug 2020 05:47:23 +0100

The plaintiff has appealed that decision. While the Court of Appeal agreed with the lower court's reasoning (namely, that the injunction orders had lapsed immediately after the "return date"), the plaintiff has successfully appealed the lower court's refusal to regrant the injunction orders as a matter of discretion. It appears that the Court of Appeal considered that the lower court had erred in taking an unduly restrictive approach in ruling that once the injunction orders had lapsed there was "nothing which can be continued"¹ – when, as the Court of Appeal saw things, the plaintiff was not merely seeking to continue the injunction orders but was also, as a matter of substance over form, seeking the grant of new orders which justified a fresh exercise of the lower court's discretion.

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Please contact us if you have any queries regarding the issues raised in this article, or if you wish to consider any commercial dispute resolution matters in Hong Kong.

¹ Essilor Manufacturing (Thailand) Co. Ltd v Wong [2020] HKCA 351, CACV 71/2020, 21 May 2020, at paragraph 42.

Hong Kong Courts – COVID-19 Update

Mon, 10 Aug 2020 04:01:53 +0100

All civil court hearings scheduled to take place on 20 and 21 July 2020 (save for urgent matters) were adjourned, while hearings from 22 July 2020 generally proceeded as scheduled with enhanced, more stringent social distancing measures in place which the judiciary deems sufficient to enable the courts to carry on business safely, at least for now. For now, the courts remain open although the next few weeks will be crucial in determining whether the partial lockdown measures recently implemented have been effective in curbing the spread of the virus, subject to which court users face the possibility of another GAP.

General Adjourned Period

The GAP ran from 29 January 2020 to 3 May 2020, although for a brief spell in March some court registries re-opened on the back of an initial decline in reported infections, before Hong Kong experienced a second wave of imported infections as residents returned to Hong Kong from overseas. By the time the GAP came to an end, the rate of reported COVID-19 infections in Hong Kong had fallen to zero, with few fatalities, such that the judiciary deemed it safe to re-open the courts for general business.

By July 2020, it was clear that Hong Kong was dealing with a third, more aggressive wave of infections, seemingly attributable to certain categories of persons (including aircrew and seafarers) having been granted exemption from quarantine upon arrival in Hong Kong. The virus has since escalated in such a manner that the health authorities are now unable to trace the source(s) of many reported infections. The territory is now in partial lockdown and employers have been urged to allow staff to work from home as far as possible. Stringent social distancing measures are in place and the wearing of face masks in all indoor and outdoor public spaces has become compulsory.

Update

After a short adjournment of civil cases for two days, the judiciary announced on 21 July 2020 that court hearings and registry business would generally resume on 22 July, subject to enhanced social distancing measures being implemented within the court buildings, intended to reduce crowd gathering and the flow of people in court premises¹. A further announcement made on 28 July 2020 confirmed further adjustments, including reduced capacity limits and admission controls in various parts of the court premises, and reduced capacity seating in the public gallery of courtrooms and reduced operating hours of court registries and accounts offices².

Inevitably, these changes have significantly reduced the volume of business being handled by court and tribunal registries and account offices. While parties have been informed that they should proceed on the basis that court hearings will proceed as scheduled (unless directed otherwise by the court), some hearings will inevitably be postponed. However, the extent of the disruption is not yet known.

Comment

It is notable that the judiciary has (thus far) declined to reinstate the GAP, notwithstanding that the GAP was previously imposed on the back of far less significant changes in rates of infection than Hong Kong is currently experiencing. This decision seemingly recognises that the COVID-19 pandemic could last for a prolonged period and the general closure of court business, itself an essential public service, during this time is not sustainable. The judiciary therefore need to find ways for the court to operate alongside the pandemic; it does not have the luxury of waiting for the virus to subside.

The courts are still catching up on the significant backlog of cases caused by the GAP, during which time it is thought that approximately 25% of the courts' annual caseload was believed to be affected. A further adjournment would only exacerbate the situation.

As has previously been reported, the courts are increasingly conducting civil hearings using videoconferencing facilities and, where possible, determining interlocutory matters based on paper submissions and documentary evidence alone³. It is too early to formulate any conclusions as to the extent to which these measures will help alleviate the backlog of cases but it is a move in the right direction.

In the meantime, the Court Proceedings (Electronic Technology) Bill received its second and third readings in the legislature, between 15 and 17 July 2020, and the Ordinance was gazetted on 24 July 2020. The legislation provides for (among other things) a phased implementation of an integrated court case management system and for the electronic filing of court documents. The legislation takes effect on a date to be announced in the government gazette. The operative date is unlikely to be for at least 12 months, allowing for subsidiary court rules to be prepared and for various "pilot runs" to be undertaken.

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Please contact us if you have any queries regarding the issues raised in this article, or if you wish to consider any commercial dispute resolution matters in Hong Kong.

¹Judiciary Announcements dated 19 July and 21 July 2020.
²Judiciary Announcement dated 28 July 2020.
³For further details see, "Further guidance on remote court hearings", 10 July 2020.

Supreme Court reflects on a narrower interpretation of "reflective loss"

Fri, 07 Aug 2020 11:12:21 +0100

This is a rule of company law designed to prevent the same loss being claimed for twice; any loss claim by a shareholder must be separate and distinct from the damage suffered by the company i.e. "reflective" of the loss caused to the company (see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204). This principle has been extended over the years to encompass a wider principle on the law of damages to avoid double recovery (see Johnson v Gore Wood & Co [2002] 2 AC 1) which has prevented certain claims by creditors or employees of a company even if they were not shareholders. In order to allow claims that would otherwise be prevented due to the wider reflective loss principle, the court has explored potential exceptions to the rule to largely avoid injustice. The Supreme Court has now addressed this (Sevilleja v Marex Financial Ltd [2020] UKSC 31) and confirmed that the reflective loss principle is confined to the narrow point of company law thereby restricting the scope of the rule debarring recovery of reflective loss.

The Supreme Court majority made clear the need to distinguish “(1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss”. The first kind of case is the proper domain of the reflective loss principle laid down in Prudential. According to the analysis of the majority, a shareholder has no legal or equitable interest in the company's assets and it is only the company which has a cause of action in respect of its loss. A shareholder entrusts the decision making of the company to the management of the company and has other remedies, such as unfair prejudice claims or derivative actions (unlike a creditor or an employee) if it didn’t like the actions of the company, for example if the company failed to bring a claim. In the second kind of case, recovery is permissible in principle (and it certainly was on the facts of Sevilleja), although these types cases might raise issues of double recovery.

It is interesting that the Supreme Court minority would have gone further and preferred to overturn the reflective loss principle in its entirety and thought that Prudential went too far when it indicated that a shareholder could never recover damages for a fall in value of its shares. The minority indicated that a shareholder might well be able to plead and establish a personal loss that is different from that of the company. The main issue in this case would be one of double recovery and their preference was to deal with these matters with case management powers and procedural tools rather than having a "bright line" rule of debarring claims for reflective loss.

The case has provided much needed clarity on the scope of reflective loss, although given the minority judgment there may be scope in the future for a brave shareholder to overturn the reflective loss principle in its entirety.

Courts reach a landing on the test for jurisdiction over co-defendants

Thu, 06 Aug 2020 14:33:29 +0100

The court only has jurisdiction to hear a claim against a non-UK defendant under Article 8(1) of the Recast Brussels Regulation if the claim against the UK domiciled anchor defendant is sustainable. In Senior Taxi Aereo v Agusta Westland(1) the High Court has thereby brought some clarity to the rules applicable to defendants domiciled in states that are party to the Recast Brussels Regulation.

Background

Senior Taxi Aereo (STA) purchased a helicopter from one of the defendants, an Italian manufacturer. The helicopter was involved in a fatal crash, and STA claimed from the defendants compensation payments they had made; the defendants included an English company in the same group as the Italian manufacturer. The English company was the claimants' anchor defendant. STA argued that the court had jurisdiction over the Italian manufacturer under Article 8(1) of the Recast Brussels Regulation. That states that a claim can be brought in the UK against entities domiciled in other EU member states where:

the claim is closely connected to a claim against a UK domiciled defendant; and
it is necessary to hear the claims together in the UK to avoid the risk of irreconcilable judgments.

Did the court have jurisdiction?

STA argued that the English court should assert jurisdiction over the Italian helicopter manufacturer under Article 8(1) but this was rejected by the court; the claimants had to demonstrate that their claim against the UK domiciled anchor defendant was "sustainable". They had failed to do this.

Before Senior Taxi, the sustainability of the claim against the non-UK defendant was irrelevant in determining whether a court had jurisdiction under Article 8(1). However, it was an open question whether a claimant had to show that the claim against a UK anchor defendant was sustainable.

It was accepted by the parties that if STA brought proceedings against the English defendant purely to bring the Italian manufacturer into the jurisdiction, or knew that the claim against it was hopeless, then they could not rely on Article 8(1). The court decided that in addition it was only possible to rely on Article 8(1) if the claim against the English defendant was in fact sustainable.

If the claim against the English defendant was not sustainable, there was no risk that a judgment would be obtained against it in the English courts, which could be inconsistent with a judgment against the Italian defendant elsewhere. As such, there was no risk of irreconcilable judgments and Article 8(1) was not engaged. The court left open the possibility that if the claim against the anchor defendant was prohibited by a procedural rule, as opposed to being unsustainable on the merits, Article 8(1) may still apply.

The future

Whilst the Recast Brussels Regulation will cease to apply when the UK leaves the EU, it is likely that the Senior Taxi test will continue to apply where jurisdiction is sought over EU domiciled co-defendants. The UK intends to accede to the Lugano Convention which contains a similar provision to Article 8(1) and which is likely to be interpreted consistently with the Recast Brussels Regulation.

The decision in Senior Taxi has also created a degree of consistency in the approach to claims against non-anchor defendants in other jurisdictions. Claims can only be commenced against co-defendants in states which are not party to the Recast Brussel Regulation if, amongst other things, the claim against the UK anchor defendant has a real prospect of success(2), which is similar to the Senior Taxi test.

Now that the court has reached a landing on the requirements of Article 8(1), where it is used as a basis to join an EU domiciled defendant to proceedings parties should carefully consider the merits of the claim against the UK anchor defendant.

⁽¹⁾[2020] EWHC 1348

⁽²⁾Practice Direction 6B paragraph 3.1(3)

Orders for pre-action disclosure – exceptional in a commercial context?

Wed, 22 Jul 2020 14:10:09 +0100

Background

The case^[1] arose out of the well-publicised collapse of Carillion plc in 2018. Up until 2017, KPMG LLP and KPMG Audit plc (collectively KPMG) had been Carillion plc's auditors.

By late 2019, Carillion's office-holders had formed a settled intention to commence proceedings against KPMG alleging negligence. The pre-action protocol for professional negligence (the Protocol) would therefore apply to the intended claim. The aim of the Protocol is for the case against the professional on breach, causation and loss to be set out in writing at an early stage, with information about the expert instructed to investigate, and key documents. This would allow the professional to understand the potential claim and to provide relevant documents, which, in turn, should lead to a narrowing of the issues in dispute.

That is the theory. The reality in this case is that Carillion's first correspondence with KPMG was a request for voluntary disclosure of a vast array of documents, but without Carillion disclosing its key documents, or formulating its intended claim against KPMG in any detail. KPMG asserted that Carillion had not complied with the Protocol in its approach, and that the document request went beyond what was envisaged by the Protocol. KPMG declined to make the voluntary disclosure requested.

Extensive, protracted and ultimately unsuccessful correspondence followed, leading to Carillion's office-holders applying for an order for pre-action disclosure under CPR 31.16.

Pre-action disclosure under CPR 31.16

Pre-action disclosure will be ordered only where:

both parties are likely to be parties to subsequent proceedings;
the documents sought fall within the scope of the standard disclosure the respondent would need to give if proceedings were issued; and
pre-action disclosure is desirable either because it could dispose fairly of the anticipated proceedings, or would assist in the resolution of the dispute without proceedings being issued or would save costs (CPR 31.16(3)).

Even if all these jurisdictional requirements are met, the judge has a discretion, bearing in mind the over-riding objective. A factor to take into account is whether the claimant is able to articulate its case without the benefit of pre-action disclosure. In addition, the request for pre-action disclosure must be highly focussed and confined to what is strictly necessary.^[2]

Pre-action disclosure in a commercial context is unusual even if not exceptional;^[3] the case must be outside the usual run^[4] for pre-action disclosure to be ordered.

The decision

While the judge was willing to accept that the jurisdictional requirements in CPR 31.16 had been met, he refused exercise his discretion to make the order, for the following reasons:

Carillion could plead its case without pre-action disclosure on the basis of its own records.
Carillion wanted a level of assurance and certainty in respect of its experts' views even before proceedings had been issued; this was inappropriate. The exchange of information and expert evidence should take place in the normal way in the course of the litigation.
As Carillion had confirmed that proceedings would be brought against KPMG in any event, in which extended disclosure far beyond the disclosure sought pre-action is likely to be ordered, the proper course is for disclosure to be given in the usual way, once proceedings have been issued.
Given the high profile nature of the case, the sums involved and the complexity of the issues, it is likely that the case will develop further, with amendments to pleadings almost inevitable.That being the case, pre-action disclosure would not eliminate the need for further amendment, particularly as Carillion had yet to confirm that the scope of the intended claim was confined to the matters addressed in its existing correspondence with KPMG.
Carillion had tried to suggest that KPMG had failed to comply with the Protocol and this took the case outside the usual run. The judge disagreed, partly on the basis that Carillion had issued a number of partial letters of claim, had not confirmed that the intended claim was confined to that articulated in the partial letters of claim, and had made document requests that extended far beyond the key documents envisaged by the Protocol. These were not minor or technical breaches of the Protocol by Carillion. In those circumstances, KPMG's refusal to provide the disclosure sought by Carillion's document requests was not a breach by KPMG of the Protocol.
The over-riding objective or efficient case management would not be furthered by granting the application.

Instead, the judge invited Carillion to get on with the case in the usual way by setting out its case in a pleading.

Comment

Even though the judge was prepared to accept, albeit with some hesitation, that the jurisdictional threshold for making an order had been met, the application was unsuccessful. This does suggest that it would be a very unusual case, potentially an exceptional case, before pre-action disclosure is ordered in a commercial setting.

There does also appear to be a tension between on the one hand requiring the claimant to articulate the issues sufficiently clearly so that an assessment of whether the documents would fall within standard disclosure can be made, and on the other declining to order pre-action disclosure if the claimant is able to plead its case without it.

Either way, a claimant would be well advised to focus any request for pre-action disclosure on only those documents that are strictly necessary to enable the claimant to plead its case, and to give careful thought as to why disclosure in advance of issuing proceedings is in the interests of efficient case management and consistent with the over-riding interest. The court will expect to be satisfied that there are compelling and cogent reasons to justify deviation from the usual course.

^[1] Carillion plc (in liquidation) v KPMG LLP and KPMG Audit plc [2020] EWHC 1416 (Comm)

^[2] Hutchinson 3G UK Limited v O2 (UK) Limited [2008] EWHC 55 (Comm); Snowstar Shipping v Graig Shipping [2003] EWHC 367 (Comm)

^[3] Assetco plc v Grant Thornton UK LLP [2013] EWHC 1215

^[4] Hutchinson

El Dorado in the Commercial Court: Domestic Law, Foreign Law and Foreign Relations

Fri, 17 Jul 2020 09:31:11 +0100

The recent decision in Deutsche Bank AG London Branch v Receivers Appointed by the Court¹explored the interface between domestic law, foreign law and foreign relations and the impact of the "one voice" and "act of state" doctrines.

Background

The US$1 billion of gold reserves were held by the Bank of England for the Central Bank of Venezuela. In addition, Deutsche Bank was obliged to pay the proceeds of a gold swap contract to the Central Bank of Venezuela in the sum of about US$120 million, being held by court appointed receivers.

Mr Maduro claimed to be the President of Venezuela — on the ground that he won the 2018 presidential election — and that the Board of the Central Bank of Venezuela appointed by him was authorised to give instructions to the Bank of England and to Deutsche Bank. Mr Maduro sought to repatriate the assets, which he claimed were required to fight the COVID-19 pandemic.

Mr Guaidó claimed to be the Interim President of Venezuela on the grounds that the 2018 election was flawed, that on that account there was no President and that, under the Venezuelan Constitution, the President of the National Assembly, Mr Guaidó, was the Interim President of Venezuela, pending fresh presidential elections. He opposed the assets being returned to the Maduro regime. Mr Guaidó claimed that an ad hoc Board of the Central Bank of Venezuela and a Special Attorney General, both appointed by Mr Guaidó as Interim President, were authorised to give instructions on behalf of the Central Bank of Venezuela to the Bank of England and to Deutsche Bank, respectively.

The Bank of England and Deutsche Bank needed to know which, if any, instructions they should obey. Which appointee(s) had the requisite authority?

The answer turned on the "Recognition Issue" and the "Justiciability Issue".

The Recognition Issue

Had the UK Government recognised Mr Guaidó as Interim President of Venezuela? Was such recognition as Head of State or Head of Government; and was any such recognition conclusive pursuant to the "one voice" doctrine?

The "one voice" doctrine requires the courts to accept as conclusive an unequivocal statement by the Government recognising a foreign sovereign state or the leader or government of a foreign sovereign state. It is a prerogative power of the Crown, acting through the Government, to make statements of recognition, and the courts and the executive must speak with one voice. A statement issued by the UK Foreign Secretary on 4 February 2019 was held to be recognition of the legal status of Mr Guaidó as President of Venezuela. This recognition was as Head of State and was held to be conclusive pursuant to the "one voice" doctrine.

The Justiciability Issue

The second issue was whether the Court could entertain any challenge to the validity under Venezuelan law of the legislative or executive acts by which the relevant appointments were (purportedly) made. Mr Guaidó's submission was that neither his appointment of the ad hoc Board of the Central Bank of Venezuela and the Special Attorney General, nor the legislation under which those appointments were made, could be challenged in the English courts. Did the Court have to accept those executive and legislative acts as valid and effective without inquiry?

Teare J held that various challenges to the validity of Mr Guaidó's appointments, and their legislative basis, were not justiciable because they sought to challenge acts of the Venezuelan state. The Court therefore lacked jurisdiction because of subject matter immunity.²In a 2017 Supreme Court judgment on the "act of state" doctrine, Belhaj v Straw,³Lord Neuberger PSC had identified three rules of the doctrine, two of which Teare J considered in detail in this context:

courts will recognise, and will not question, the effect of a foreign state’s legislation or other laws in relation to any acts which take place or take effect within the territory of that state; and
courts will recognise, and will not question, the effect of an act of a foreign state’s executive in relation to any acts which take place or take effect within the territory of that state.

The most significant point of law in Teare J's decision was whether the second rule only applied to valid acts of the executive of the relevant state. The Supreme Court had not decided this issue in Belhaj. Teare J followed the obiter remarks of Lord Sumption JSC in Belhaj, holding that the Court would not question the validity or effect of the relevant acts of Mr Guaidó as interim President of Venezuela even if they were unlawful or of no effect in Venezuelan law.

Comment

The Bank of England as a trusted repository for foreign national gold reserve assets will not have welcomed being caught in the political crossfire of this dispute, but the decision shows the English Commercial Court's "stakeholder" procedures in action, providing parties with the cloak of judicial authority for actions which would otherwise be of uncertain legality and lawfulness.

In the event of an appeal from this decision, the question of whether the "act of state" doctrine applies only in relation to executive acts which are valid under the domestic law of the relevant state is likely to feature prominently, as a point not decisively dealt with in the most recent Supreme Court authority on the doctrine. Given the urgency with which the Commercial Court heard the matter, the higher courts may find themselves addressing this question sooner rather than later.

¹[2020] EWHC 1721 (Comm).

²Teare J also considered whether the "one voice" doctrine precluded the Court from inquiring into the legality under Venezuelan law of the relevant executive and legislative acts, holding that it did so in respect of decisions of the Venezuelan Supreme Tribunal of Justice that were based upon the premise that Mr Guaidó was not interim President, but that further determination of this question was unnecessary.

³[2017] UKSC 3, [2017] AC 964.

It's good to talk

Thu, 16 Jul 2020 16:08:29 +0100

Mr Wales, an independent financial adviser, brought a claim for unpaid commission against CBRE and Aviva in relation to his services for CBRE's group pension scheme.

The claim was dismissed and, notwithstanding its successful defence of the claim, the High Court penalised CBRE for refusing to engage in alternative dispute resolution. Mr Wales' solicitors had indicated a willingness to participate in a mediation on several occasions, including in two letters of claim.

When Mr Wales formally proposed that the parties hold a tripartite mediation, CBRE refused to participate at that stage and carried on resisting. In November 2018, CBRE's solicitor filed a witness statement to confirm that CBRE considered it was "premature" to "consider arranging a mediation" pending the conclusion of pleadings.

In February 2019, CBRE made an offer which was stated to be "without prejudice save as to costs" and "subject to contract and an agreed form of Tomlin order", and to settle on the basis that Mr Wales withdrew his claim and each party would bear its own costs. Mr Wales did not accept the offer. Just prior to trial, Mr Wales again proposed holding a mediation. CBRE contended there was then insufficient time to prepare and the trial went ahead in July 2019.

The Court's decision on costs

In the view of the Judge, CBRE’s actions were unreasonable⁽¹⁾. The refusal to engage in mediation prior to the commencement of proceedings was compounded by its failure to provide a detailed response to the suggestion of ADR in the letters of claim. That constituted a breach of the Pre-Action Protocol.

The Judge was also critical of CBRE’s refusal to participate in the mediation proposed shortly before trial: “There is nothing to suggest that the solicitors instructed by Mr Wales or Aviva considered that they had insufficient time to do so, indeed they evinced a willingness to proceed with such a mediation.” There was also no evidence to support the suggestion that they would have had insufficient time to prepare for the forthcoming procedural steps.

There was nothing in the nature of the dispute which made it unsuitable for mediation. In particular, the Judge noted that in view of the parties' longstanding commercial relationship, mediation would have had a reasonable prospect of success.

Accordingly, exercising its discretion under CPR 44.2, the Court disallowed 50% of CBRE’s costs from 11 November 2016 (when CBRE’s solicitors confirmed that it would not take part in ADR) and 14 February 2019, and 20% of its costs from 17 June 2019.

Comment

The Court's approach is consistent with two other recent cases⁽²⁾, in which the Courts awarded indemnity costs against litigants that had failed to follow directions or even to give serious consideration to the obligation to engage in ADR.

We first saw the Courts taking a stand against parties who failed to engage in ADR back in 2004 with the seminal Court of Appeal decision in Halsey v Milton Keynes General NHS Trust(3), which established the position that Courts strongly encourage parties to engage in ADR (including imposing costs sanctions for unreasonable refusals to mediate), albeit this encouragement stops short of compelling unwilling parties to do so.

The judges in these recent cases echo the sentiment in Halsey and stressed that the mere fact that a defendant believes they have a strong defence is not a sustainable basis for refusing to participate in some form of ADR.

⁽¹⁾ [2020] EWHC 1050 (Comm)

⁽²⁾ DSN v Blackpool Football Club Ltd (Rev 1) [2020] EWHC 670 (QB); and BXB v Watch Tower and Bible Tract Society of Pennsylvannia & Ors [2020] EWHC 656 (Admin).

⁽³⁾ [2004] 1 WLR 3002

Hong Kong Courts – Further guidance on remote court hearings

Fri, 10 Jul 2020 09:56:00 +0100

Phase 1

Phase 1 was an important development in the courts' adoption of increased IT for civil hearings, introduced during the General Adjourned Period (GAP) in response to the COVID-19 public health emergency, during which time the courts were generally closed, save for urgent and essential court business. The GAP came to an end on 3 May 2020.

That said, phase 1 was limited in scope. Even if the courts approved the use of videoconferencing facilities with respect to civil hearings, their use was generally limited to interlocutory applications or appeals in the Court of First Instance and the Court of Appeal. Such remote hearings tended to be limited to those matters that could be disposed of by concise oral submissions.

Further, the technical specifications under phase 1 were limited to hardware videoconferencing facilities that were compatible with the courts' facilities.

Phase 2

Phase 2 provides for remote hearings using expanded videoconferencing facilities and telephone. The intention is to replicate, so far as possible, the environment of a physical court hearing and simultaneously remove the risks that physical hearings pose to public health and safety.

Some of the major initiatives adopted pursuant to phase 2 are as follows.

Expanded court coverage

Phase 2 expands the use of videoconferencing facilities to all of the principal civil courts in Hong Kong. In addition to the High Court (namely, the Court of First Instance and the Court of Appeal), therefore, this will include the Competition Tribunal (presided over by a High Court judge), the District Court and the Family Court. The use of remote hearings is also extended to civil hearings conducted by judicial officers such as masters in the High Court and in the District Court.

Expanded matters

Under phase 1, the types of matter considered suitable for disposal using remote hearings were interlocutory matters or a limited range of civil appeals, provided that they could be concluded by oral submissions within two hours.

Under phase 2, the courts will also consider whether some first instance civil trials, or parts of those trials, are suitable for remote hearing. Where the remote hearing involves taking evidence from a witness outside Hong Kong, the party calling that witness is responsible for ensuring that the remote location from which the witness is to give evidence is suitable for a remote hearing.

Interlocutory applications and appeals to the Court of Appeal will now be considered suitable for remote hearings by videoconferencing if the court considers that the oral submissions can be concluded within one day.

Technical specifications for remote hearings and functional requirements

The guidance note for phase 2 gives much more detail on the necessary technical specifications. They identify the type of IT equipment needed to participate in remote hearings, including a videoconferencing unit, laptop computer, display unit, camera, speaker system and microphone. The technical specifications also set out the standard functional requirements for each piece of IT equipment.

As of 15 June 2020, it is possible to connect to the courts' videoconferencing facilities using hardware or software options. For hardware options, court users can continue to connect using suitable videoconferencing equipment. For software options, court users can use computer devices with the appropriate software installed. Participants using software options participate by using a valid meeting ID and passcode.

Telephone hearings

Phase 2 also gives details of the types of matters that may be suitable for disposal using remote telephone hearings. These include routine directions hearings and matters in the courts' daily "three-minute" list. The guidance note includes standard directions for when a matter is to be conducted by a remote hearing using videoconferencing facilities (Appendix A) or telephone (Appendix B), together with an attendance sheet (Appendix C). The attendance sheet is important because, in addition to the identification and authentication requirements, the courts will want to record who is attending the remote hearing.

Comment

The phase 2 guidance note is a welcome development. It represents the most recent initiative in the courts' adoption of IT following the COVID-19 public health crisis. Such initiatives were necessary in any event and now form part of the courts' gradual and incremental approach to the use of IT.

Under the phase 1 guidance note, the decision of whether to dispose of a matter by remote hearing was a matter to be decided by the courts and an exercise of case management discretion. Under phase 2, the parties themselves may apply to have a hearing disposed of using videoconferencing facilities. The initiative for telephone hearings still rests with the courts for now.

Some logistical issues remain a work in progress. The broad presumption is that court hearings in Hong Kong are open to both the public and the media. However, given the public health restrictions that remain in place, there are limitations on space in the courtrooms from which a remote hearing may be conducted. This should not prevent the hearing taking place, but it may restrict the principle of "open court" in some civil hearings. By way of comparison, in certain jurisdictions (such as England and the USA), members of the public can listen to and observe some civil hearings that are "live-streamed" on the internet.

As a matter of court process, there appears to be no restriction on an advocate or legal representative attending a remote hearing while being located outside Hong Kong. This is a topical issue, particularly given lockdown restrictions in those jurisdictions that are worse affected as a result of COVID-19, while jurisdictions such as Hong Kong are considering easing some travel restrictions for its residents.

In the meantime, it is hoped that the Court Proceedings (Electronic Technology) Bill, introduced into the local legislature in January 2020, will have its second and third readings in July 2020 before the legislative recess. The bill provides for an integrated court case management system and electronic filing of court documents with broad legislative support. Indeed, it has assumed higher priority for court users given the GAP and the consequences of another general adjournment in the event of a further spike in local reported COVID-19 cases. However, given the current political climate in Hong Kong, the bill's legislative passage before the summer recess is far from certain. If passed during the current legislative session, it is hoped that the legislation will come into effect in 2021.

Contact Us

Please contact us if you have any queries regarding the issues raised in this article, or if you wish to consider any commercial dispute resolution matters in Hong Kong.

A version of this article was originally published in the Litigation Newsletter of the International Law Office - www.internationallawoffice.com

Click here to view Guidance Note for Remote Hearings for Civil Business in the Civil Courts (Phase 2)

Waiving goodbye to privilege – reliance is key

Thu, 02 Jul 2020 11:45:18 +0100

Reference to the fact of the advice may not be sufficient but reliance upon that advice is likely to be. Also, a limited waiver of privilege over certain documents did not mean that those documents were irrelevant from a privilege point of view thereafter and that their subsequent deployment could not result in collateral waiver. These issues are explored in PCP Capital Partners v Barclays Bank.⁽¹⁾

Background facts

Barclays Bank PLC needed to raise at least £6.5 billion in funding back in 2008; PCP Capital Partners LLP agreed to contribute £3.25 billion. A disagreement followed as PCP alleges that Barclays had represented at the time that PCP would receive "the same deal" as the state of Qatar, which also invested. PCP brought a High Court claim challenging the advisory services agreements entered into by Barclays and the Qataris. PCP is claiming losses of up to £1.6 billion.

Meanwhile, in 2016 during a set of criminal proceedings brought by the Serious Fraud Office (SFO) against Barclays and four of its former executives, Barclays provided certain privileged documents to the SFO under what was described as a "limited waiver of privilege". Some of these documents were referred to in open court and were provided to PCP in these proceedings.

Further disclosure

PCP clearly believed that it had an incomplete picture of the circumstances around the advisory agreements and in May 2020, it applied to the High Court for disclosure of documents that Barclays were withholding on the grounds of privilege, no doubt in the expectation that they might shed further light. The backbone of their claim was that Barclays had waived privilege over these documents by referring in witness statements to relevant legal advice obtained and therefore all the otherwise privileged documents relating to the advisory services agreements should be disclosed.

How did Barclays resist the application?

Barclays relied on four grounds:

There had been no waiver of privilege;
Even if there had been, the references only related to the documents previously provided to and deployed by the SFO; and PCP already possessed these documents. Once SFO deployed these documents in open court, these documents were no longer privileged documents so to deploy them in these High Court proceedings could not amount to a further waiver.
The scope of the documents sought was too wide.
The order sought by PCP was disproportionate and unduly burdensome on Barclays as trial was due to begin in a week.

The Court rejected Barclays' submissions and made the disclosure order sought by PCP.

What amounts to waiver of privilege?

A succinct and clear definition of when a waiver arises is not easy to find. However, the judge noted that at its core was the following:

A sufficient reference to the legal advice; and
the waiving party must be relying on that reference to support their case.

When is meant by "reliance"?

A mention of giving of legal advice would not constitute a waiver because that alone does not amount to reliance. Contrast “My solicitor gave me detailed advice. The following day I entered into the contract”, with “I entered into the contract as a result of that legal advice”. The difference between the two statements being that the former does not express reliance on the advice whilst the latter does.

Distinction between "effect" and "contents" of advice

Prior case law had drawn a distinction between the "effect" of the legal and its "contents"; the judge noted that there was no mechanical way to apply this distinction.

Detailed references in Barclays' witness statements to the involvement of lawyers and to taking comfort from their advice amounted to more than simply referring to the fact of the advice. Despite acknowledging that the references were to the effect rather than the contents of advice, he determined that they amounted to waivers of privilege when the aforementioned factors were applied in context; the witnesses were relying on the advice to improve Barclays’ case on the issues surrounding the advisory service agreements.

Collateral waiver and reliance on once-privileged documents

Barclays submitted that all of the references to legal advice concern the once-privileged documents which have already been disclosed to PCP on the basis that the SFO referred to those documents in open court; Barclays argued that deploying those documents in the High Court proceedings cannot therefore lead to any collateral waiver, as those documents were no longer privileged. The judge rejected this submission, stating that it cannot be the case that a once-privileged document which has lost that status because it has been deployed on one occasion becomes irrelevant from a privilege point of view thereafter and for all purposes, because that would allow a party to avoid the consequences of any waiver by intentionally making open the documents to which that waiver relates.

The judge also rejected Barclays' factual submissions on this issue, finding that: 1) Barclays was involved in the deployment of the once-privileged documents and therefore, it could not argue that it was the SFO and not Barclays that deployed those documents; and 2) disclosure of those documents could not be withheld on the basis that the SFO had sight of all the privileged documents and would have deployed in the criminal proceedings any other adverse documents if such documents existed - PCP should not be bound by the actions of the SFO.

Was it necessary to explore each individual reference?

Barclays had asked the judge to consider each individual reference to legal advice which was deemed a waiver in order to determine the particular transaction to which it related. The judge decided this was unnecessary as the truth was that Barclays was relying on all the references to legal advice (to make its point that the advisory services agreements were lawful) and it would not be possible to question the witnesses about their belief that their legal advisors approved all of the transactions without full disclosure of all of the legal advice. Legal advice was not produced in a vacuum and it would have been based on the entirety of the instructions received.

Additional disclosure and proportionality

The judge dismissed Barclays' argument on proportionality on the basis that the additional disclosure exercise would be very modest in proportion to the value of the case. Barclays' argument that the disclosure request was made too close to trial was also rejected on the grounds that it could not have been brought until witness statements were filed and that the documents to be provided would only be needed for cross-examination of witnesses which was weeks away.

Comment

The key question in determining if privilege has been lost is whether there has been any reliance on legal advice, irrespective of whether it is on the contents or merely the effect or conclusion of that advice. Therefore, any reference to legal advice could lead to privilege being lost over swathes of legal advice, even where the reference does not betray the content of any advice. For example, in this case, the witnesses' reference to taking comfort in legal advice was considered to be a waiver of privilege even though there was no reference to the contents of the legal advice.

Therefore, parties should take great care when drafting statements to ensure that references to legal advice are only included if absolutely essential and where the risks of privilege being waived over the entirety of the legal advice has been carefully assessed.

⁽¹⁾[2020] EWHC 1393 (Comm)

Privileged but admissible? When can without prejudice material be pleaded in statements of case?

Fri, 26 Jun 2020 11:11:05 +0100

Factual overview
The Claimant companies own a portfolio of London properties with an approximate total value of £5 billion. In 2005 Lancer Property Asset Management, the First Defendant, became the asset manager of the portfolio for which it was to receive various fees for its services. The relevant agreement was signed on behalf of the Claimants by Dr Mubarak Al Ahbabi who was responsible for the management of the Claimants' beneficial owner's private assets at the time.

Lancer's fees were later increased by a side letter, approved by Dr Al Ahbabi on the Clamaints' behalf. A portion of the increased fees received under the side letter were paid by Lancer to Becker Services Ltd, a company beneficially owned by Dr Al Ahbabi. It is these payments to Becker that are at the heart of the current proceedings.

By early 2012, a dispute had developed over Lancer's entitlement to certain fees under the side letter. The parties went to mediation and in its mediation papers Lancer referred to its arrangement with Becker in relation to the side letter fees, the sums paid under that arrangement, and Becker's ownership. The dispute was settled shortly after the mediation.

In 2018, the Claimants began separate proceedings in the English High Court. One allegation was that Lancer and Dr Al Ahbabi had been complicit in a fraud on the Claimants, the main instrument of which had been the side letter: the Claimants' case was that they were not aware of the sums paid by Lancer to Dr Al Ahbabi (via Becker) until 2017. Lancer's defence to these allegations, is that the payments to Becker were authorised by the beneficial owner of the claimants, were subsequently ratified by the claimants and, that the claimants knew of Dr Al Ahbabi's interest in Becker long before 2017. It was in this context that Lancer wished to refer to relevant passages of its 2012 mediation papers.

It was common ground between the parties that the mediation papers came within the Without Prejudice Rule but were the key passages admissible anyway under one or more of the exceptions to that Rule?

What were the exceptions?
The Judge was at pains to reinforce that the Without Prejudice Rule is founded on the important public policy of encouraging litigants to settle their differences before trial.⁽²⁾However, justice demands that it is not an absolute rule and is subject to exception in limited circumstances; six such exceptions were set out in Unilever.⁽³⁾ The Unilever exceptions are capable of incremental, principled extension, where absolutely necessary.⁽⁴⁾

The relevant passages of the Lancer mediation papers fell into two exceptions and were therefore admissible;

Fraudulent misrepresentation
That a party to a concluded settlement agreement can rely on preceding Without Prejudice discussions to demonstrate that the agreement was reached following a fraudulent misrepresentation by the other party is well established as an exception to the Without Prejudice Rule. Here, Lancer was seeking to rely on preceding Without Prejudice discussions to demonstrate that there had been no misrepresentation on the other party. In other words, it wished to uphold, rather than undermine the settlement agreement using an exception to the Without Prejudice Rule.
The Judge found that either the existing exception covered this situation, or that a small and principled extension to the exception was required to serve the interests of justice: "if you can use the antecedent negotiations to prove a misrepresentation and thereby rescind an agreement, it is illogical to say that you cannot use them to disprove a misrepresentation and thereby uphold an agreement" [52].
Issues and evidence – Muller⁽⁵⁾
If a party puts a point in issue, it cannot then rely on the Without Prejudice Rule to exclude evidence, the hearing of which is required for the issue to be fairly justiciable^.(6)

In this case, the Claimants' contention that they did not know about the payments to, or of Dr Al Ahabi's interest in, Becker until 2017 was fundamental to their allegation of fraud. Their case relied heavily on this lack of knowledge such that this issue would not be fairly justiciable if Lancer were not able to put in evidence of what it told the Claimants in its mediation papers in 2012.

When deciding if the relevant passages of the Lancer mediation papers fell into this exception, the Judge looked at these factors:

Lancer was not relying on any admission by the Claimants in the mediation (on the contrary, it was what was said by Lancer that was relevant); and
the relevant passages were included in the Lancer mediation papers by way of background and were largely irrelevant to the 2012 dispute itself.

So, there was no serious risk that the application of this exception to the Without Prejudice Rule would fetter future free and open exchanges between parties exploring settlement of their dispute. The balance therefore weighed in favour of admitting the passages so as to avoid the risk of the Court being misled.

Comment
This judgment is a deft foray into a very complicated area of law and a useful reminder of the importance of the Without Prejudice Rule: while it is not absolute, the Court will only make exceptions to it in limited circumstances. In such cases, the Court must balance the policy justification of the Without Prejudice Rule on the one hand with the interests of justice on the other. Unsuprisingly, where that balance lies will depend on all the circumstances of each case though it is clear that the public policy of encouraging parties to speak freely in without prejudice discussions will not be easily outweighed.

RPC acted for the successful party in this application.

⁽¹⁾ [2020] EWHC 1015 (Ch)
⁽²⁾Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 at [1299].
⁽³⁾Unilever plc v Proctor & Gamble Co [2001] 1 WLR 2436 at [2444-2446].
⁽⁴⁾Single Buoy Moorings Inc v Aspen Insurance Ltd [2018] EWHC 1763 (Comm) at [54].
⁽⁵⁾ So-called after the case in which the exception was first formulated, Muller v Linsley & Mortimer [1996] PNLR 74.
⁽⁶⁾ [2019] EWHC 102 (Ch).

Freezing orders: risk of dissipation? Get real

Thu, 18 Jun 2020 17:29:02 +0100

Facts

Sheikh Salah Hamdan Albluewi, a Saudi national, had been a member of a members' club and casino owned by Les Ambassadeurs for around 26 years. Given his longstanding membership, Les Ambassadeurs provided Mr Albluewi with a cheque cashing facility. In September 2019, this was extended to £2 million on a temporary basis and Mr Albluewi utilised the full amount.

However, these cheques were dishonoured and during Les Ambassadeurs' attempts to recover the outstanding amount over the following months, Mr Albluewi travelled back to Saudi Arabia where gambling debts are unenforceable. It also became apparent that Mr Albluewi had significant outstanding gambling debts with other casinos.

Les Ambassadeurs secured a WFO, which was subsequently continued at a hearing with the parties present. Les Ambassadeurs then applied to continue the WFO on the basis that was it necessary to prevent Mr Albluewi from dissipating his assets; Mr Albluewi applied to discharge the WFO because: (i) there was no real risk of dissipation; (ii) the WFO was not just and convenient; and (iii) Les Ambassadeurs had failed to make full and frank disclosure at the without notice application.

What did the court explore?

Was there a real risk of dissipation?

Les Ambassadeurs argued that there was a real risk of dissipation because:

Mr Albluewi had provided 17 cheques, all of which were dishonoured;
despite assurances, Mr Albluewi had made no payment in the four months since the debt arose;
Mr Albluewi was a Saudi national whose assets and businesses were international, so he could easily move them around and make them unavailable for enforcement; and
Mr Albluewi was a high-profile player at casinos around the world, who spent considerable sums and failed to repay gambling debts.

Mr Albluewi's behaviour was therefore indicative of a person lacking in "commercial probity" and these factors, when taken together, provided solid evidence from which a real risk of dissipation could be inferred.

Mr Albluewi argued that none of the individual factors identified by Les Ambassadeurs provided a basis to infer a real risk of dissipation. Even in a case based on fraud or dishonesty there was a question over whether that alone would provide a basis for real risk of dissipation. In this case, Les Ambassadeurs had confirmed that it was not alleging dishonesty but rather a lack of "commercial probity".

The Court stated that all the circumstances of the case must be considered together and that the key question was how far the alleged lack of commercial probity went and, critically, whether in all the circumstances it showed a real risk of dissipation. The further removed the allegations were from dishonesty in terms of low commercial morality, the more difficult it would be to rely upon the relevant conduct as giving risk to a real risk of dissipation. In this case, the lack of commercial probity was at the lower end of the scale. Les Ambassadeurs had therefore failed to establish a real risk of dissipation.

Further important considerations were that:

Mr Albluewi had substantial assets outside of Saudi Arabia that could be enforced against due to reciprocal enforcement regimes;
the nature of those assets was such that dissipation was not a risk (including because they amounted to tens of millions of pounds, which was much larger than the debt, and there had been no evidence of dissipation to date); and
Mr Albluewi had very substantial connections with London.

Les Ambassadeurs' application to continue the WFO was therefore dismissed. The final two grounds therefore fell away; however, Mr Albluewi had alleged that Les Ambassadeurs had not given a fair presentation of the case at the without notice hearing by failing to provide the full and frank disclosure required in applications for WFOs.

Full and frank disclosure?

While the Court found that there had been two relevant breaches of the duty of full and frank disclosure, since no real risk of dissipation had been established there was no need for the Court to consider whether the WFO would be regranted if discharged on this basis.

The Court did note that it should be good practice in most cases for a transcript to be obtained by a party making an allegation of material non-disclosure so that the Court is properly equipped to deal with it. In most cases, absent particular urgency, the applicant's note of the hearing will not suffice.

Comment

This judgment is a valuable reminder of the importance of WFO applicants having robust evidence of a real risk of dissipation. Without it, the Court will discharge a WFO and order the applicant to pay the respondent's costs. It is well-established that evidence of dishonesty alone is not enough, and this case shows that conduct falling short of dishonesty (such as a lack of "commercial probity") is even less likely to suffice. This can be contrasted with cases where the alleged dishonesty goes to the heart of the question of the risk of dissipation, as was the case in Lakatamia Shipping Company Limited v Morimoto^(1).

Two further important lessons arising from this judgment are:

when considering the question of whether a WFO is just and convenient, the Court will expect to be provided with evidence of its utility going forward; and
when making an allegation of material non-disclosure, it is good practice to obtain a transcript of the without notice hearing so that the Court is properly equipped to consider the issue.

⁽¹⁾[2019] EWCA Civ 2203

Hong Kong Courts – Expansion of use of remote hearings

Wed, 17 Jun 2020 09:01:02 +0100

While the courts are gradually getting back to normality, the priority is to conduct court business in a way which minimises public health risks as far as possible. While confirmed reported cases of COVID-19 remain very low, the authorities are still reporting a small number of imported cases involving returning residents and occasional local clusters.

Expansion of use of remote hearings

It is against this background that the judiciary has announced that it will soon expand the use of videoconferencing facilities for more types of civil hearings in the High Court. To date, under Phase 1 of the Guidance Note, remote hearings using videoconferencing facilities have focused on civil hearings in the High Court involving interlocutory applications or appeals that can be decided on documents and legal submissions, as opposed to requiring live oral evidence – these remote hearings have generally involved oral submissions that can be concluded within two hours.

Given the environment in which the courts are operating and the public health measures that are likely to remain in place for some time, however, the judiciary is due to announce a Guidance Note (Phase 2) extending the use of remote hearings to civil cases in the District Courts and the Family Court of Hong Kong.

To date, the videoconferencing facilities used by the judiciary have only been accessible through connections using videoconferencing hardware, as opposed to compatible software solutions. In a change of pace, however, the judiciary has announced that, from later this month, court users should be able to access the courts' videoconferencing facilities using alternative resources, including software-server solutions with password authentication. It is understood that this option will allow court users to use personal devices (which have the appropriate software installed) to connect to the courts' videoconferencing facilities using a valid meeting ID and passcode.

For now, commercial online real-time videoconferencing facilities that involve the use of cloud services will not be used by the courts until certain security issues have been addressed.

Comment

Hong Kong has been slow to embrace technology in the judicial system and is therefore behind the curve compared with most other principal common law jurisdictions. COVID-19 has, perhaps, provided a much-needed catalyst for change in this respect. That said, these developments are consistent with the judiciary's gradual and incremental approach to the development of IT and videoconferencing facilities in the courts.

Developments are very much a work in progress but, in the current climate, where the Hong Kong government is facing a ream of other, more serious and pressing, issues, they point to the way forward. Such are the backlog of civil cases and waiting times for court hearings, it is hoped that there will be greater use of videoconferencing facilities and (where appropriate) disposal of matters based on the papers going forward.

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Please contact us if you have any queries regarding the issues raised in this article, or if you wish to consider any commercial dispute resolution matters in Hong Kong.

A version of this article was originally published in the Litigation Newsletter of the International Law Office - www.internationallawoffice.com

Minority shareholder oppression and the proper plaintiff rule – it gets personal

Thu, 04 Jun 2020 17:24:21 +0100

The Singapore Court of Appeal has consistently upheld the proper plaintiff rule by distinguishing such minority oppression claims from statutory derivative actions brought under Section 216A. This distinction was recently affirmed in the recent decision in Ng Kian Huan, Edmund v. Suying Design Pte Ltd and others and another appeal [2020] SGCA 46.

Introductory Facts
The plaintiff and the 3rd defendant were both directors and shareholders of Suying Metropolitan Studio Pte Ltd (“SMSPL”).¹Their shareholdings in SMSPL were 35% and 40% respectively. It was the plaintiff’s position, amongst other things, that the 3rd defendant had acted in an oppressive manner by allegedly misappropriating SMSPL’s funds and withholding payments which the plaintiff was entitled to.

The plaintiff had resigned from SMSPL’s employ and he acknowledged that he had done so due to personal reasons. The plaintiff’s case was that his resignation prompted the 3rd defendant to engage in a series of oppressive acts in order to prevent him from realizing the fair value of his shares in SMSPL, and that he has unknowingly been the subject of oppression throughout his tenure in SMSPL. The trial judge divided the alleged series of oppressive acts against the plaintiff into “personal wrongs”, ie, wrongs committed against the shareholder personally, and claims with overlapping features of corporate and personal wrongs, ie, a mixture of wrongs committed against a company and personal wrongs. Personal wrongs are generally pursued under section 216 of the Companies Act, while corporate wrongs are vindicated under section 216A of the Companies Act (otherwise known as the proper plaintiff rule).² In this regard, the Singapore Court of Appeal has consistently upheld the proper plaintiff rule by distinguishing such minority oppression claims from statutory derivative actions brought under Section 216A.³

The trial judge’s decision
The trial judge found that a case of oppression had been made out against the 3rd defendant. Amongst other things, the trial judge found that the 3rd defendant’s action in relation to the personal wrongs to be commercially unfair to the plaintiff.

The trial judge also held that the plaintiff’s reliance on the overlap claims with features of corporate wrongs was not an abuse of process. He referred to the Court of Appeal’s reasoning in Ho Yew Kong v Sakae Holdings Ltd and another appeal and other matters [2018] SLR 333 (“Sakae Holdings”), where the Court of Appeal set out an analytical framework to determine the appropriateness of a minority shareholder claim:

a) Injury

i. What is the real injury that the plaintiff
seeks to vindicate?

ii. Is that injury distinct from the injury to the company and does it amount to commercial unfairness against the plaintiff?

b) Remedy

i. What is the essential remedy that is being sought and is it a remedy that meaningfully vindicates the real injury that the plaintiff has suffered?

ii. Is it a remedy that can only be obtained under section 216 (eg, a winding-up order or a share buyout order) and not under section 216A of the Companies Act? The trial judge reasoned that the injury which the plaintiff sought to vindicate was that to his investment in SMSPL. In the same vein, the overlap claims concerning the 3rd defendant’s misappropriation of SMSPL’s were breaches of the plaintiff’s legitimate expectation as a shareholder of SMSPL that funds would not be siphoned away, which in turn had a direct impact on his interests in SMSPL.

Decision of the Court of Appeal
The Court of Appeal observed that the alleged oppressive acts must be viewed in light of the commercial relationship between the parties and the expectations they were entitled to hold at the material time. Having considered each claim of alleged personal wrongdoing against the plaintiff, the Court of Appeal found that these claims, when considered cumulatively, did not establish oppression.

In relation to the non-personal oppression claims, ie, the overlap claims, the Court of Appeal found that, while the plaintiff may have been entitled to expect that SMSPL’s funds would not be siphoned away, the breach of this expectation did not in itself constitute a distinct injury under section 216 of the Companies Act. Any such wrongdoing was one done to the company, and should have been pursued under a different cause of action such as a derivative action under section 216A of the Companies Act.

The trial judge’s orders in respect of the plaintiff’s claim for minority oppression were therefore set aside.

Observations by the Court of Appeal
The Court of Appeal emphasised the distinction between “corporate wrongs” and “personal wrongs”. As mentioned above, Section 216 of the Companies Act was intended for minority shareholders to pursue personal wrongs (“Minority Oppression Claim”), while pursuant to the proper plaintiff rule, the company was the proper party to vindicate corporate wrongs.
The Court of Appeal reiterated its view in Ng Kek Wee v. Sim City Technology [2014] 4 SLR 723 that “it would be an abuse of process to allow an essentially corporate wrong to be pursued under s 216.”⁴If a minority shareholder wished to vindicate corporate wrongs, its recourse would be to commence a derivative action under Section 216A of the Companies Act (“Statutory Derivative Action”).

The following observations were also made:

A corollary to the proper plaintiff rule is the no reflective loss principle - Where a minority shareholder’s loss merely reflects the company’s loss, the company is the proper party to recover that loss provided that the company is able to enforce its rights
For instance, where a company’s assets are allegedly misappropriated, a minority shareholder cannot commence a Minority Oppression Claim simply by the fact that the value of its shareholding has decreased due to the misappropriation. The loss to the minority shareholder (ie, the diminution of share value) is a reflection to the loss to the company
A director’s breach of fiduciary duties is a corporate wrong and the proper plaintiff would prima facie be the company
A Minority Oppression Claim can only be used to vindicate personal wrongs, and not corporate wrongs. It is irrelevant if the relief sought in a Minority Oppression Claim can be drafted such that there is no overlap between what is recovered by the minority shareholder and the company
The main issue to be determined in a Minority Oppression Claim is “whether the plaintiff shareholder is relying on unlawful conduct and conduct that constitutes commercial unfairness to found his claim of oppression”.⁵The question of whether or not there was commercial unfairness depends on the legitimate expectations of the minority shareholder in every case. A minority shareholder cannot rely on a Minority Oppression Claim simply because he unilaterally wishes to withdraw from his investment
There will be cases involving “overlapping wrongs”, ie, circumstances which could plausibly be categorized as both corporate wrongs and
personal wrongs. The Court of Appeal emphasised that in such cases, the minority shareholder (in maintaining a Minority Oppression Claim) would be required to prove that: (a) it suffered an injury due to the overlapping wrong which is distinct from that suffered by the company; and (b) the distinct injury amounted to commercial unfairness against the minority shareholder.

Conclusion
In light of the Court of Appeal’s decision, it would be prudent for minority shareholders to be more circumspect in categorising wrongful acts by the majority shareholders as personal wrongs, corporate wrongs or overlapping wrongs. If a minority shareholder commences a Minority Oppression Claim to enforce a corporate wrong or an overlapping wrong without suffering a distinct injury to that suffered by the company, it risks having its claim struck out by the Courts.

^1.The authors of this article were the solicitors for Suying Metropolitan Studio Pte Ltd at the High Court trial of this dispute.
^2. The proper plaintiff rule in Foss v. Harbottle (1843) 2 Hare 461 provides that in an action to remedy an alleged wrong to the company, the proper plaintiff is prima facie the company itself.
^3.Ho Yew Kong v. Sakae Holdings Ltd and other appeals and other matters [2018] SGCA 33; Ng Kek Wee v. Sim City Technology [2014] 4 SLR 723.
^4. Paragraph 31 of the Judgment.
^5. Paragraph 32 of the Judgment.

The commission omission? English High Court balances text and context in contractual interpretation

Thu, 28 May 2020 11:40:40 +0100

Background

Under a consulting agreement, Clark Street Associates (CSA) provided consultancy services to Norsk Titanium (Norsk), which carries out 3D printing of titanium components for the aerospace industry. CSA was to help Norsk obtain federal, state or other funding to establish a manufacturing facility in the United States.

During the first 18 months of the contract, one of Norsk's wholly-owned subsidiaries, Norsk US, concluded an alliance agreement with FSMC, an agency associated with the State of New York. That agreement provided that FSMC would receive funding from the State of: (a) up to $50 million to construct a manufacturing facility, and (b) $75 million to purchase manufacturing equipment. FSMC would then lease to Norsk US the manufacturing facility and equipment, each at a nominal yearly rate for 10 years, and the two parties would enter into joint manufacturing operations.

Following conclusion of the alliance agreement, the State approved $125 million for release to FSMC. FSMC ordered almost the entire $75 million-worth of manufacturing equipment from Norsk Equipment, another wholly-owned subsidiary of Norsk. It is expected that the full $50 million will have been spent to build a permanent manufacturing facility by the end of 2020.

The consulting agreement provided that, in addition to consultancy fees, Norsk would pay CSA commission calculated as a percentage of any "Award" received by Norsk as a result of CSA's services. The consulting agreement defined six different categories of "Award", including:

"any monetary grant… actually received by or granted to [Norsk]";
"any… monetary grant… actually received by or granted to any other Entity that, in connection with or as a result of an Award, provides any services for [Norsk's] benefit to a monetary value equal to the grant";
any "non-monetary grant awarded to [Norsk]… that… provides any services for [Norsk's] benefit…";
any "non-monetary grant awarded to any other Entity that… provides any services for [Norsk's] benefit…";
any loan or other form of debt financing; and
any tax credits.

CSA claimed that the $125 million approved for release to FSMC was an Award under category (B), and that it was therefore entitled to commission. Norsk denied that the $125 million constituted an Award within the wording of category (B), so CSA was not owed the commission it claimed.

Approach to contractual interpretation

The Court summarised English law's approach to contractual interpretation, referring to the leading Supreme Court case of Wood v Capita⁽²⁾. The Court must use the complementary "tools [of textualism and contextualism] to ascertain the objective meaning of the language which the parties have chosen to express their agreement" and adopt an "iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated".

As well as considering "the possibility that one side may have agreed to something which with hindsight did not serve his interest", the Court's analysis will take into account the sophistication, complexity and other circumstances affecting the quality of drafting.

Overall, the Court will balance a "close examination of the relevant language" with the factual background and the commercial consequences of competing constructions, to determine objectively what the parties agreed.

Judgment

The Court considered the following key questions in interpreting the definition of a category (B) Award under the consulting agreement:

Was the economic support provided by FSMC to Norsk US, rather than to Norsk directly, "for Norsk's benefit"?
The consulting agreement was clear on this question. Whereas the grants defined in Award categories (A) and (C), for example, were narrowly required to be awarded "to Norsk", the services included within category (B) only had to be "for Norsk's benefit", contemplating that services could be received by another entity (such as Norsk's wholly-owned subsidiary, Norsk US) but still give rise to commission if they benefitted Norsk.
Did leasing the manufacturing facility and equipment to Norsk US at a discount constitute "services"?
The Court held that context was key here, both: (a) the context of the word "services" itself, which was preceded with the word "any" and not used in a narrow sense (such as in strict contrast to "goods"), and (b) the context of the consulting agreement itself, which specifically concerned arrangements that provided economic support to Norsk to establish its US facility. The discounted leasing arrangements under the alliance agreement fell within that broad definition of "services".
Did the services provided have to be of a monetary value "equal to the grant"?
Norsk argued that, under a category (B) Award, the monetary grant received by FSMC had to be exactly equal to the value of any services FSMC in turn provided for Norsk's benefit. In this way, the monetary grant actually received by FSMC could be "deemed" to have been received by Norsk. However, if the benefit received by Norsk was less than the value of the monetary grant, Norsk should pay commission only on the value of services it received (under one of the other Award categories), not the total funds received by the direct grantee. In the present case, Norsk said, the value of the manufacturing facility and equipment which FSMC purchased using the $125 million grant far outweighed the benefit Norsk US had received by leasing the facility and equipment at a discount for only 10 years, so Norsk should not pay commission on the full value of the grant.

The Court observed that Norsk's argument was a "careful construct, but not one that is suggested by the language used by the parties". The definition in category (B) focused on benefit to Norsk, not to Norsk US, as was central to Norsk's argument. Further, while Norsk had presented persuasive reasoning based on commercial context relating to the parties and the consulting agreement, the Court preferred CSA's competing evidence about the commercial context, which also more naturally complemented the contract's wording.

While the drafting of the consulting agreement had certainly left room for argument, the Court ultimately held that CSA was entitled to commission calculated at $12.05 million.

Comment

Although the parties are companies incorporated and operating in other countries, they chose English law to govern their contract. The Court's decision is logical and sensible, both by reference to the commercial context of the case and the wording of the contract, and exemplifies the benefit of choosing England as the forum for resolution of disputes under the contract. As the Court commented: "One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation."

However, the case also serves as a lesson in the importance of clear and comprehensive drafting of commercial contracts at the outset, to avoid disputes arising later. The consulting agreement contained more than 12 different sections of terms and conditions as well as a statement of services, where the six different categories of Award were defined. Despite all of that, the drafting failed clearly to provide for the circumstances which led to the dispute between the parties. Had it done so, the parties might have saved the considerable time and cost of litigation.

⁽¹⁾Clark Street Associates LLC v Norsk Titanium AS [2020] EWHC 1038 (Comm)

⁽²⁾ Wood v Capita Insurance Services Ltd [2017] UKSC 24

Hong Kong Courts – Closing the GAP

Fri, 22 May 2020 12:55:26 +0100

On 22 April 2020, the judiciary announced that the GAP would cease effective 4 May 2020 and, since then, the civil courts have resumed normal business, subject to certain public health measures remaining in place. The significant backlog of civil cases will, however, take considerable time to clear, not least because the courts’ resources were already stretched before COVID-19. In the meantime, lessons as to the increased use of IT in the courts have, hopefully, been learnt and further developments in this regard can be expected.

Resumption of court proceedings
Details of the general resumption of court proceedings in the High Court were set out in a notice to court users dated 29 April 20201. The main objective was to resume all court proceedings as safely as the circumstances permitted. This has involved adopting measures such as social distancing within the precinct of the courts, avoiding crowding in courtrooms and registries and ensuring that every visitor entering a court building has their temperature taken and is wearing a surgical face mask. Such measures have become routine across Hong Kong when entering buildings open to the public.

For civil hearings listed in the Court of First Instance to 15 May 2020, and in the District Court to 22 May 2020, parties have generally been given a 7-day lead in time for hearings of interlocutory matters (not involving oral evidence) and a 14-day lead in time for trials, subject to any direction given to the contrary. A party which is not ready should seek an adjournment by way of application on paper, giving reasons. Judges can continue to give directions for lodging legal submissions using one-way “no-reply” email accounts with the judiciary administration and, in certain cases, via the court e-lodgement platform. Assuming that the courts can address the court backlog, civil hearings (including trials) listed from 18 May 2020 (in the High Court), and from 25 May 2020 (in the District Court), are due to proceed as scheduled, unless directed otherwise. Meanwhile, the civil courts continue to explore the possibility of using alternative modes of hearing, including disposing of applications on the papers and conducting hearings using video conferencing facilities and (in simpler cases) by telephone conference. For the Court of Appeal, cases listed in May 2020 are due to proceed as normal unless a court direction to the contrary is given. The Court of Appeal is similarly considering the options for hearing appeals other than in-person.

The different court and tribunal registries began to open at different stages, and in a staggered manner, as from 6 May 2020, with the main High Court and District Court registries resuming normal business as from 8 May 2020. The opening of the registries was not without its difficulties and in the first few days long queues and waiting times were common.

Comment
Experience shows that directions will likely be given for some interlocutory hearings in civil matters to be resolved on the papers even though hearing dates in, for example, June 2020 had been fixed long before the commencement of the GAP. This is symptomatic of the general backlog of cases, irrespective of the impact of the GAP. An increase in matters being disposed of on the papers should improve matters although, currently, we have yet to see this practice being adopted across the board. It will take considerable time for the impact of the GAP to be fully made up.

As for the greater use of IT in conducting court business, the judiciary has adopted an incremental approach – starting with the use of telephone conference hearings for simple directions hearings and the adoption of a Guidance Note for Remote Hearings for Civil Business in the High Court (Phase 1). The judiciary is also considering implementing a Phase 2 for remote hearings – this is likely to cover the High Court and some other civil courts. To date, the feedback with respect to those hearings or appeals that have been disposed of using video conferencing facilities is broadly satisfactory, which will help support their wider implementation.

It is also hoped that the Court Proceedings (Electronic Technology) Bill, introduced to the local legislative council in January 2020, will be passed this year. The Bill, together with its subsidiary legislation, gives legislative backing for the introduction of an integrated court case management system (iCMS) – to be implemented in phases, starting with the District Court and part of the Magistrates’ Courts.

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To perform or not to perform? When tendering performance means actual performance

Thu, 21 May 2020 11:45:45 +0100

Background

Mr Bains had been appointed under an agreement to provide various financial services to Arunvill Capital Ltd. The agreement stated that it could be terminated by a party "in the event of the other Party having materially breached any of the provisions of this Agreement and not having remedied such breach within 21 days after the service of written notice by the first Party requiring the same to be remedied" (clause.3.4).

The timeline of events was as follows:

5 April 2016 - Arunvill gave notice to Mr Bains that he was in material breach of the agreement as he had both verbally and in writing indicated that he did not intend to perform his contractual obligations. Mr Bains was requested to remedy the breach within 21 days of receipt of the letter.
20 April 2016 - Mr Bains' solicitors responded stating that he did not accept that he was in breach and "[w]ithout prejudice to the above, Mr Bains confirms that he does intend to perform his contractual obligations under the … Agreement and therefore you should consider a breach (if any) remedied."

Arunvill asserted that, as Mr Bains did not in fact work nor attempt to do so, the contract was terminated on 26 April 2011, 21 days after the service of notice.

Mr Bains commenced proceedings.

The High Court held that there had been a material breach of contract because Mr Bains had clearly refused to provide any further services and had asserted an intention to no longer perform his contractual obligations; "[T]he proper remedy in the circumstances of this case is not merely the communication of an intention to work in an unspecified way, but it is to continue to provide the services which the claimant was contracted to provide".

The issue before the Court of Appeal was whether Mr Bains' solicitors' letter of 20 April 2016 had remedied the material breach within the required 21-day period. If it had not, Arunvill was entitled summarily to terminate the Agreement; if it had, then Mr Bains was entitled to a termination payment equal to 6 months' remuneration.

Court of Appeal – had the breach been remedied?

The Court of Appeal confirmed that in these cases a simple two-step process should be followed, namely (1) has there been a material breach and (2) if so, has it been remedied. It held that the specified breach was the "refusal to work" which was "a refusal to provide the services in clause 2.1".

That refusal to work was an "actual state of affairs" and not merely a theoretical threat of how Mr Bains might, or proposed to, act at some point in the future; it was a threat which he had carried out, and continued to carry out until the expiry of the 21-day period, by not providing the contracted Services. It had not been remedied by the 20 April 2016 letter containing the withdrawal of the refusal to work and the intention to perform the contractual obligations.

Therefore, the remedy was, as held by the courts below, for Mr Bains to have provided the required Services (which he had not).

The appeal was therefore dismissed.

Comment

This decision, like several cases on the right to terminate for material breach, turned on its facts. It nevertheless provides practical guidance on responding to notices of material breach and illustrates that a mere willingness to perform may not be adequate tender of performance.

⁽¹⁾ [2020] EWCA Civ 545

When will reference to a document in a witness statement waive privilege in that document

Thu, 14 May 2020 15:28:37 +0100

Background

TMO was a company in liquidation and in May 2016. It is claiming against five defendants for breach of contract or fiduciary or statutory duties, which TMO alleged had caused it to enter administration and then liquidation. TMO's draft particulars of claim put the losses at £19.5m.

One defendant, upon receiving the draft particulars of claim, queried this figure. TMO replied:

"…Without any waiver of privilege in the advice obtained…, we confirm that for the purposes of preparing the draft particulars of claim, we have obtained advice from a reputable valuation expert with considerable experience of valuing companies in the renewable energy sector…"

The claim was then issued. In the course of a subsequent dispute about security for costs, one defendant questioned the valuation, indicating that they did not believe it credible that the liquidators thought the business was worth £19.5m. That figure was, they said, "unexplained and unsupported".

TMO's liquidators took issue with this. In a responsive witness statement they made plain the circumstances in which the valuation had been arrived at; the liquidators had obtained a preliminary market valuation report from an accountancy firm. The paragraph named the author and gave some details of how the valuation was carried out. It noted that it was not "waiving any privilege in the report", and explained that the accountants had used a "discounted cash flow methodology" to carry out the valuation "in a range of different scenarios". It stated that "The figure of £19.5m is derived from that valuation". The liquidator therefore concluded that on the basis of this report, he was confident in the valuation.

The defendants' solicitors then requested a copy of the report on the basis that it had been deployed by the liquidator in his witness statement. TMO refused stating that the passage in the witness statement was a reference, not a waiver of privilege.

Nearly nine months later, when preparing for a CMC, the defendants renewed their request for the report in the context of a security for costs dispute which was again refused. The defendants then applied for production of the report.

The key principles

Under paragraph 21 of Civil Procedure Rules Practice Direction 51U, unless a right to withhold production, such as privilege, is claimed, parties may require copies of documents "mentioned" in witness statements. As the report had been "mentioned" in the witness statement, the dispute turned on whether it remained privileged or whether the comments in the witness statement about the report had waived privileged in it.

A mere reference to a document or its effect will not waive privilege in it, but deploying it in court, by relying on its content or by using it to persuade the court to take a particular view of the merits of the case at any stage, will do so. Had the liquidator's witness statement deployed the report?

The first judgment

The deputy master concluded that TMO had deployed the report and ordered that it should be produced to the defendants. His reasoning was that:

Elsewhere in his witness statement, the liquidator had referred to legal advice in a more careful manner.
When the liquidator said in his witness statement that the valuation "derived from" the report, although he may have had in mind case law which suggests that this is different from referring to the contents of a document, that phrase in this context meant 'contained in' or 'part of the contents of'.
The words "without waiving any privilege" were not effective – the liquidator could not rely on the £19.5m valuation but preserve privilege in respect of the rest of the report.
The liquidator had clearly tied his conclusion that he was confident in the valuation to the report.
Accordingly, the liquidator had waived privilege by deploying part of the report.

Appeal

TMO appealed on the basis that the report had not been deployed. TMO argued that the reference had been made purely to rebut the argument that the liquidator could not have believed the valuation: not on any wider basis related to any alleged lack of merit of the pleaded losses. The defendants argued that the liquidator had made more than a 'bare' reference to the report – the witness statement had contained a summary of its contents, and the issue (the valuation) went to the heart of damages and quantum. Instead of simply saying a report had been obtained, the liquidator went further than he needed to. The valuation was, the liquidator had said, 'derived' from the report.

The court did not agree with all of TMO's arguments, but did agree that the reference to the report had been narrow and only for a specific purpose. It was also persuasive that the report would not be relied upon at trial, and the context in which the report was referred to (a security for costs dispute) did not engage the underlying merits of the claim. The court found that the deputy master had not taken these points into account, but that he should have.

Further, the court did not agree that just by naming the accountancy firm and the author of the report, this necessarily meant the report had been 'deployed'. The further references to methodology and the range of different scenarios "took it somewhat further", but still did not constitute deployment – it was simply the liquidator setting out the effect of the report to justify his belief in the valuation. Referring in two sentences to a very complex report cannot properly be seen as a reference to the report's contents.

Accordingly, the order for production was set aside.

Comment

The guidance given on the difference between references to a document's effect and a document's content is useful, and demonstrates that in some scenarios it is possible to refer in limited detail to a document without waiving privilege. That said, it will always be safer, if possible, to avoid going into detail in order to avoid a privilege dispute. Merely stating that privilege is not waived will not protect the document if other factors point in the opposite direction.

What are good grounds for appeal in insolvency applications?

Wed, 06 May 2020 17:01:30 +0100

Background

Mr Zheng was a shareholder in, and creditor of, Gate Ventures plc. He sought and failed to obtain an administration order against Gate Ventures plc on the basis of a £2.5 million debt (the First Application).

Gate Ventures plc told the court that it would be receiving quarterly payments of £50,000 from another company, Ginger & Moss Limited. Those payments were shown in its cash flow forecast which formed part of a plan to pay off its creditors. When asked at the hearing why the first payment had not yet been received, Gate Ventures plc said that it was because of the fact of the First Application having been made.

At the hearing of the First Application, Judge Prentis concluded that Gate Ventures plc was insolvent on a cash flow basis, but not on a balance sheet basis, and although there was a reasonable prospect of the purpose of administration being achieved, as a matter of discretion he refused to make the administration order. Gate Ventures plc had a better prospect of being able to trade out of its cash flow difficulties if it remained outside a formal insolvency process. That was based on evidence presented by Gate Ventures plc which included its plans for trading out of its difficulties and incorporated the cash flow forecast which demonstrated its ability to do so. Permission to appeal the decision of Judge Prentis was refused on the papers by Roth J on 2 December 2019; Mr Zheng therefore pursued an application for permission before Zacaroli J which was refused on the grounds of appeal then relied on.

New evidence was uncovered showing that the quarterly payments of £50,000 from Gate Ventures plc were not obligation but a payment plan that had merely been discussed, Mr Zheng applied to amend his grounds of appeal/seek permission to appeal on that basis and on the basis that Gate Ventures plc deliberately misled the court.

Decision

The criteria that must be satisfied for an appeal⁽²⁾ are:

The evidence could not have been obtained with reasonable diligence for use at trial.
The evidence is such that it would probably have an important influence on the result of the case, although it may not be decisive.
The evidence must be such as is presumably to be believed.

Zacaroli J was satisfied that there was a real prospect of successfully establishing that, had the new evidence been available to the judge at the time of the hearing, it would probably have had an important influence on him when weighing up the reliability of both parties evidence.

As to Mr Zheng's allegation that Gate Ventures plc had deliberately misled the court, Zacaroli J decided that it was not something he could determine without cross-examination. However, he thought there is a real prospect of establishing on appeal at least a prima facie case that the court was misled.

On that basis Zacaroli J granted permission to appeal on both grounds of the application.

Comment

Applying for permission to advance fresh evidence on appeal is a tricky application, which has had varying degrees of success in the courts. This case is a useful example of the application of the criteria. Zacaroli J granted permission to appeal as he was satisfied that the evidence could not have been obtained with reasonable diligence for use at a hearing and that there was a real prospect of showing that if the fresh evidence had been available to the first instance judge the decision may have been different.

This case makes it clear that if unreliable evidence is put before the court, decisions based on that unreliable evidence can be challenged on appeal, or by a fresh action being brought. Here, in the case of insolvency proceedings, the company is left in a state of limbo as it continues to fend off applications for administration.

⁽¹⁾ [2020] EWHC 645 (Ch)

⁽²⁾ Ladd v Marshall [1954] 1 WLR 1489

High Court provides a reminder against "over-lawyering" of witness statements

Thu, 30 Apr 2020 10:34:27 +0100

Witness statements should not, it was held, contain argument or references to documents with which the witness had no personal dealing. Further, fraud allegations do not give parties an "increased latitude" concerning what witness statements should (and should not) contain.

Facts

In 2008, during the height of the financial crisis, Barclays Bank plc (the Defendant) sought an emergency capital injection to avoid a UK government bailout. PCP Capital Partners LLP (the Claimant) helped to arrange the investment in the Defendant.

The claim arose from the manner in which it is alleged that the Defendant raised some of its capital. It was alleged that the Defendant made fraudulent misrepresentations as to the terms on which other investors were offering to invest. The Claimant claimed damages in the sum of c.£1.5bn.

Following the conclusion of parallel criminal proceedings brought by the Serious Fraud Office, the civil claim progressed and the Pre-Trial Review (PTR) took place in March 2020, before Waksman J. In a judgment handed down at the PTR, Waksman J considered the parties' objections in relation to their respective witness statements and provided some useful reminders as to what a witness statement should and should not contain.

Decision

Faced with statements from both parties that contained unnecessary material, Waksman J suggested that those who drafted the statements "got somewhat carried away or have forgotten what the role of the witness statement is". He explained that if statements were problematic (as in this case), in terms of including material that should not be included or which would likely prove a distraction at trial (whether that meant increased time spent on a statement by a judge, counsel or unnecessary cross-examination), it was his job to do something about it at the PTR.

Providing a useful reminder of the role of a witness statement, Waksman J explained: "the purpose of the witness statement is in this context to say, so far as the witness can say what happened, what the witness says he or she did, what he or she knew or thought or believed or intended, or, the meaning or content of documents to which they were a party where they can comment properly about them and where the meaning or content of that document has been called into question. Beyond that, they should not go".

Despite the fact that counsel for both sides referred to different parts of the Working Group on Witness Statements⁽²⁾ (of which Waksman J is a party), Waksman J did not consider that there was a binary choice, i.e. that unless a witness statement is riddled with inappropriate content it should be left alone, or, if there is inappropriate content then it should be prevented from being included. He held there was a middle ground that was proportionate in this case.

It was agreed that the content of the passages under consideration should not be reported at this stage. As such, Waksman J provided his comments on specific passages in a separate confidential annex. However, the non-confidential parts of the judgment provide useful guidance on what witness statements should not contain. In particular:

Witness statements should not contain passages which are no more than argument;
Witness statements should not contain references to the contents of documents to which the relevant witness is not a party; and
Fraud allegations do not give parties an "increased latitude" concerning what witness statements should (and should not) contain. Waksman J noted that just because a fraud allegation may be difficult to make out, it does not mean that a particular witness, who has no knowledge of the documents and no involvement therein, should become the "mouthpiece" for those documents.

In terms of what is considered permissible, Waksman J explained that if the odd sentence of a statement is non-conforming, the court was not going to get too excited about it because the time spent would be disproportionate. In addition, he acknowledged that in substantial cases, such as this, with allegations of fraud, he would not be surprised if key witness statements were required to exceed the 30-page limit⁽³⁾.

Further, Waksman J was not concerned with statements to the effect of "I do not recall what I said at the meeting but I have seen the minutes of the meeting and I've no reason to think that they would not be an accurate record of what I would say" or "the content of an email referring to something that I've done, even though I don't recollect it, would seem reasonable enough or likely enough", as such statements still provide evidence.

For the reasons set out above and those provided in a confidential annex, Waksman J ordered the parties to revisit their witness statements within 14 days and remove what he considered to be the offending paragraphs. He did not believe that the "pruning" of those passages would in any way deprive the relevant witnesses of the substance of what they wanted to say or make it difficult for the court to understand the general case.

Comment

This judgment follows a published report by the Working Group on Witness Statements⁽⁴⁾and suggests that the judiciary will be more willing to intervene and order the parties to revisit witness statements and remove what is considered "over-lawyering" or inappropriate. The judgment also provides a useful guide for those drafting witness evidence.

⁽¹⁾ PCP Capital Partners LLP and PCP International Finance Limited v Barclays Bank plc [2020] EWHC 646 (Comm)

⁽²⁾ The Working Group was set up in light of concern from Commercial Court judges that witness statements were not providing "best evidence" at a proportionate cost at trial.

⁽³⁾ Section H1.1(h), Commercial Court Guide, Tenth Edition (2017)

⁽⁴⁾ Witness statement working group final report

General adjournment in Hong Kong does not extend duration of ex parte injunction

Wed, 29 Apr 2020 09:53:35 +0100

Details have been set out in various public notifications issued by the judiciary administration. However, a court has held that the general adjourned period (GAP) does not generally extend the duration of an injunction granted on an urgent basis before the GAP commenced on 29 January 2020 and listed for a return date (for continuation or discharge) during the GAP. In such circumstances, the proper thing for a plaintiff to do is to apply to extend the duration of the ex parte injunction before its expiry on the basis that the application is an urgent matter that may be dealt with during the GAP.

Click the link below to read the article in full.

COVID-19 – Hong Kong Courts set for phased reopening from May

Thu, 23 Apr 2020 09:08:09 +0100

Stressing that the health and safety of court users, the Judiciary's staff and Judges and Judicial Officers ("JJOs") remains paramount, the Judiciary will move to a phased reintroduction of general business. Court proceedings and registries will reopen on a staggered basis from 4 and 6 May 2020 respectively.

The first stage of the re-opening will involve the resumption of both civil and criminal proceedings after an "appropriate buffer period", and the re-opening of court registries starting with the Court of Final Appeal, Court of First Instance and District Court in the week commencing 4 May 2020. The Family Court and Lands Tribunal registries will re-open in the week commencing 11 May 2020, and Magistrates' Courts, Small Claims Tribunal and Labour Tribunal registries (among others) in the week commencing 18 May 2020.

The Judiciary's announcement can be found here.

A phased re-opening

In addition to a staggered resumption of business, in keeping with Hong Kong's continuing practice of social distancing, court business will initially be conducted with reduced capacity and adopting a "flexible and multi-pronged" approach.

The opening hours of the court registries and accounts offices will be reduced to 9:30am to 12:30pm until further notice. Preventative and crowd management measures will remain in place and jury trials will start only "after May".

For civil proceedings, the flexible and multi-pronged approach will include active management by JJOs, including the use of video conferencing facilities ("VCF"), hearings by telephone and disposing of cases on paper as far as possible and where the JJO deems appropriate.

Comment

Those who have been following our updates on the Hong Kong courts (available through the RPC COVID-19 Content Hub), will know that during the GAP the Hong Kong Judiciary has been focusing on hearings and matters it has defined as 'urgent and essential'. It has also adopted a measured increase in the use of video conferencing, telephone hearings and resolving applications 'on the papers' where appropriate.

The Judiciary's latest announcement will be welcomed by businesses and individuals. We have seen an increase in commercial parties re-negotiating their contracts in circumstances where one party has defaulted on its obligations or is on the brink of default or insolvency because of the financial impacts of COVID-19. A resumption of court services will benefit parties that require the assistance or intervention of the Hong Kong courts for matters which do not fit within the definition of 'urgent and essential' business, those with cases currently adjourned, and others who would simply like to be able to back their negotiations with the prospect of pursuing their legal rights through the courts in the normal way.

The buffer period should also be welcomed by lawyers and clients alike as it gives solicitors and counsel time to prepare for resumed hearings. As 30 April and 1 May 2020 are both public holidays in Hong Kong, there are only four business days before the phased re-opening is due to begin.

This plan is, of course, subject to change if Hong Kong experiences a further increase in the number of confirmed COVID-19 infections. The Judiciary previously announced an end to the GAP before Hong Kong experienced a 'second wave' of COVID-19. However, given the consistently low number of confirmed infections in Hong Kong recently (with single digit increases since 13 April 2020), we are hopeful that this time the Courts will slowly begin returning to normal operations.

In the meantime, we will publish relevant updates if anything changes, and are available to assist clients if needed.

COVID-19: Trials - the show must go on

Thu, 09 Apr 2020 15:54:55 +0100

In a judgment handed down on Monday, in the case of the matter of One Blackfriars Ltd, the Court has refused an application to adjourn a five-week trial due to start in June 2020. In the court's judgment, the legislation and the guidance from the courts (click here for our report on this) on dealing with the Covid-19 crisis made clear that as many hearings as possible should be conducted remotely through the use of technology. The Judge therefore order the parties to explore the technological options available to facilitate a remote trial.

The case concerns a claim against the former administrators of a company, claiming over £250m for their alleged mishandling of the administration. A 5-week trial was due to begin in early June 2020, involving factual and expert witnesses.

The claimant submitted that to proceed with the trial would be inconsistent with the Prime Minister's instructions on 23 March 2020 to stay at home and that a remote trial could not proceed without exposing those taking part to an unacceptable risk to their health and safety. They further submitted that the technological challenges of conducting a remote trial were too great and that it would give rise to the potential for unfairness.

In the Judge's view, s.53 to s.56 of the Coronavirus Act 2020 expanded the availability of video and audio links, whilst regs. 6 and 7 of the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 provided that a person could leave their home to attend court or to participate in legal proceedings and allowed gatherings of two or more people where it was reasonably necessary to participate in legal proceedings. These provisions suggested that the Government expected the courts to continue to operate during the current crisis. The new CPR PD 51Y on video and audio made specific provision to allow hearings to be conducted remotely so long as the lockdown lasted, through the use of technology. In the circumstances, the claimant's submission that it would be inconsistent with the Government's guidance on lockdown measures to allow the trial to proceed was rejected. Whilst it was obviously imperative that a remote trial did not endanger the health of those taking part, the trial was not due to start until early June and much could change by then. The claimant had not adduced any detailed evidence to demonstrate that any participants would have particular difficulties in taking part in a remote trial, nor that it was essential to have everyone in the same physical space for the hearing, and the technological challenges of conducting a remote trial were not so great as to warrant an adjournment. The Judge also noted that both parties would face the same challenges with the technology and, given the allegations against the defendants dated back to 2011, it was not in the interests of either party to delay the case any further. The application was therefore refused and the parties were ordered to continue to prepare for trial and to investigate the technology available to facilitate a remote trial, should that be necessary.

So the message, at least in the UK, is that trials must continue, wherever possible. Those who are interested in the position in other jurisdictions can find a helpful guide here.

COVID-19 – Hong Kong Courts handling urgent and essential matters

Thu, 09 Apr 2020 01:46:33 +0100

During the GAP, court registries and offices are, for the most part, closed. However, the GAP does not apply to "urgent and essential court hearings and/or matters".

What "urgent and essential" hearings and matters can still be handled during the GAP?

The list of urgent and essential hearings and matters includes:

• Filing:
- writs and other originating documents where a limitation period may expire during the GAP;
- documents where a time limit imposed by an "unless" order may expire during the GAP;
- applications for leave to apply for judicial review where the time limit may expire during the GAP;
- applications relating to urgent winding up and bankruptcy-related proceedings; and
- applications seeking leave to serve proceedings outside Hong Kong (including the PRC).

• Hearings of "urgent matters" before the Duty Judge, e.g. applications for mareva injunctions and anton piller orders, or the appointment of provisional liquidators, in which case documents may be filed through one-way "no-reply" email accounts and, in some circumstances (in the case of submissions, authorities and hearing bundles), via a new e-Lodgement Platform.

This list may be "subject to change at short notice" so we will keep a close eye on any developments and provide relevant updates.

Need more clarification?

Please speak with us if you have any queries regarding the above. If you wish to make an urgent application to the Courts or are contemplating legal proceedings, the Courts may still be able to deal with your case.

Parental controls: when does standing consent put subsidiaries' documents within its parent's control?

Wed, 08 Apr 2020 15:53:04 +0100

The situation is different when there is standing consent. The High Court has provided useful guidance on the circumstances in which documents held by subsidiaries would be within the parent company's "control" for the purposes of disclosure.

A parent company may have control by virtue of a standing consent, the High Court has found in Roman Pipia v BGEO Group Limited (formerly known as BGEO Group Plc)²

The dispute

At the heart of this dispute were allegations that the Parent (a bank) improperly sold the Claimant's assets when enforcing its security. The Parent applied for a declaration from the court that, for the purposes of disclosure, it did not have control over relevant documents held by its Subsidiaries, and therefore, those documents could not be subject to disclosure. The Claimant argued that the Subsidiaries (which had initially been Defendants to the proceedings) may hold documents relevant to the underlying dispute.

What is control?

"Control" in the context of disclosure is defined sufficiently broadly (in both CPR 31.8 and the Disclosure Pilot (ie, CPR PD 51U)), to require a party to disclose a document even if, at the time that disclosure is being given, that party no longer has any such right of access to it.

In coming to its decision, the High Court distinguished earlier decisions which had held that there was control in the context of arrangements for general unfettered access to documents.³ The High Court took the view that there may be control even if there is no arrangement for wholesale access to such documents; documents could be in a party's control if there is a contractual right to documents, however specific or limited, upon request.

Standing consents – the Court's findings

In the present case, the High Court found that such control was conferred on the Parent by way of two letters to each of the Subsidiaries containing standing consents and counter-signed by those Subsidiaries. They requested all the documents relating to the underlying claim, when requested by the Parent or its advisers.

A standing consent does not have to grant unrestricted access to a third party's documents so that the litigating party may go through them to identify whether they should be disclosed. Indeed, there could be control which extends to a single document only.

In the context of a standing consent, there were three elements to the question of whether a third party's (eg, the Subsidiaries') documents were within another party's (eg, the Parent's) control:

the scope of the consent – this defines the documents over which the party (eg, the Parent) has control;
the type of consent – this defines what the third party (eg, the Subsidiaries) is expected and required to do to meet its disclosure obligations imposed by the standing consent; and
the quality of the consent – if the party (eg, the Parent) has free and unfettered access to the documents covered by the consent, there is "control".

The High Court analysed the express, written standing consent and found that the type of consent given by the Subsidiaries to the Parent was to provide documents on request, and the scope of that consent was to cover documents held by the Subsidiaries pertaining to the underlying claim. Given that the standing consent conferred on the Parent a present right to access such documents, those documents were within the Parent's control.

Why is this important?

Parent companies and subsidiaries should be aware of the arrangements that are in place between them to provide access to documents, and the impact that such arrangements may have on their respective disclosure obligations. This decision highlights the courts' willingness to give a broad interpretation to the term "control" for the purposes of disclosure so it is advisable to seek advice before giving unwittingly broad consent.

¹Lonrho Ltd v Shell Petroleum Co Ltd (No 1) [1980] 1 WLR 627.

²[2020] EWHC 402 (Comm).

³In Schlumberg Holdings Ltd v Electronmagnetic Geoservices AS [2008] EWHC 56 (Pat), the judge found that an arrangement granting general access to inspect and take copies of documents (subject to certain caveats) meant that those documents were within a party's control. Similarly, in Ardila Investments v ENRC [2015] EWHC 3761 (Comm), the judge found that an existing arrangement or understanding is required and the effect of that arrangement or understanding must be that the party to the litigation from whom disclosure is sought has, in practice, free access to the documents of the third party.

COVID-19: Virtual hearings - what we've learned

Fri, 27 Mar 2020 15:55:38 Z

Who sets up the Skype arrangements?

The judge's clerk has, in our experience, set up the Skype call. In one of our cases they emailed Counsel for each party with the Skype details on the basis that they could be shared with others that needed to attend. If Counsel is not instructed it will probably be the solicitors for each party.

Does everyone still dress as they would for an in-person court hearing?

You probably won't get away with audio-only; Judges have seemed keen to see Counsel on video when they are making submissions rather than just having audio, so your favourite Simpsons T-shirt should stay in the cupboard for the duration of the hearing. (That said, solicitors have not tended to have video turned on, so we do not yet know what they have been wearing.)
We have found that attendees have been suited, if perhaps not also booted.

Failing to prepare is preparing to fail…

Test your microphone and speaker set-up beforehand by having a Skype meeting with someone else (if you haven't already). This will uncover any issues with speakers or microphones. For optimum sound quality we would recommend using headphones that have a built-in microphone.
Make sure your internet connection is strong. We also would suggest minimising the number of other applications running so as to reduce the risk of your computer crashing. (We have seen it happen to Counsel as he was being asked a question by the judge.)

Make sure the room behind you looks professional and is well lit (but preferably not with a window right behind you otherwise your face may be shadowy).
Inform family members that you cannot be interrupted unless there is a serious medical emergency or the house is burning down. Pets also need to be informed.

Joining the hearing

To join the hearing just click on the link provided which brings up the Skype video conferencing facility (either in a web browser or via the Skype application if you have it on your computer). We have found that it is exactly the same as attending an internal Skype meeting, and so was very straightforward.
Join early. We have seen a few people having teething issues which, on the whole, have been sorted out before the Judge came online and the hearing started (but we have seen some exceptions where the Judge has needed to intervene).

Speaking during the hearing

Mute your microphone when not speaking. This is obvious but very important
Try not to talk over people. The system struggles with that and usually nobody can hear anybody.

Good luck!

COVID-19 - The official guidance on remote hearings; early engagement is key to success

Tue, 24 Mar 2020 14:14:34 Z

Click here for the relevant document. The key practical points are:

1. early engagement between the parties and the Court as to the upcoming hearing is key (will it go ahead/be adjourned, using what technology, recording of hearing, open to the public, etc?);

2. electronic bundles (only containing documents essential to the hearing);

3. conduct of the hearing itself (making sure the technology works/is robust – the guidance recognises there may be teething troubles, and urges parties to be sympathetic to any difficulties faced).

COVID-19: Impact on court hearings and successful virtual mediations

Fri, 20 Mar 2020 12:00:15 Z

This was announced yesterday by the Lord Chief Justice in a message to judges in the civil and family courts, crucially saying that "the default position now, in all jurisdictions, must be that hearings should be conducted with one or more than one or all participants attending remotely".

The Business and Property Courts have updated their protocol for remote hearings and the judiciary are acting quickly; Mr Justice Teare has very recently refused a request for an adjournment of a trial saying that "it is the duty of all parties to seek to co-operate to ensure that a remote hearing is possible". The court is also working more flexibly to keep the wheels of justice turning; we secured a sealed consent order from the court at 8.30 last night, in relation to a hearing due to take place this morning

There will inevitably be some backlogs and listing issues as the Courts attempt to transition. There will also be some categories of work that will take priority, and there is some commentary on certain litigants in person and whether telephone hearings will work for them. In practice, we are already seeing Court deadlines being extended and some hearings being adjourned by agreement.

Having said that, RPC has participated in (and achieved a settlement at) a virtual mediation this week, where all of the parties and the mediator attended by video conferencing (complete with plenary/group sessions, private rooms, separate discussions with the mediator, etc) – so the technology solutions may well provide the answer in these challenging times.

Quasi-proprietary claims: use of disputed funds to pay legal costs

Wed, 18 Mar 2020 17:30:00 Z

Background

In July 2018, following a 3-month trial of claims of fraud, deceit and breach of fiduciary duty, Kea Investments Ltd (Kea) obtained a significant judgment against Mr Watson; Mr Watson was liable to pay Kea in excess of £40m. Whilst Kea was able to identify, and compel payment from, various assets, and thus obtained comparatively small sums towards the judgment debt it was still owed the vast majority. This was particularly frustrating for Kea as Mr Watson had formerly allowed himself to be represented as one of New Zealand's wealthiest men, but now claimed to be impecunious.

However, Kea identified that a Mr Gibson who was, by his own account, Mr Watson's "right hand man" and had previously worked for Mr Watson, appeared to have access to valuable assets, including a Hong Kong trust which held a BVI company (Ivory Castle), which in turn held valuable assets and interests.

Kea obtained an injunction to restrain the payment to Ivory Castle of certain sums due to it (the Aegean Monies). The terms of the injunction also required Ivory Castle to notify Kea of dealings with any other of its assets. Kea obtained the injunction on the basis that assets held by Ivory Castle were in truth held by it for Mr Watson as bare trustee or nominee, or on terms that they could be made available to him or were otherwise amenable to execution of Kea's judgment debt against him. Kea later obtained a notification injunction against Mr Gibson personally. Each of the injunctions included the usual provisions for Ivory Castle and Mr Gibson to spend money on legal advice.

This article focuses on the application made by Ivory Castle to vary the injunction so as to allow the Aegean Monies to be paid out to fund its own, and Mr Gibson's, legal costs. This raised the issue of whether Ivory Castle and Mr Gibson were obliged to utilise Mr Gibson's own assets to fund their legal costs before resorting to those of Ivory Castle.

Kea's argued that Mr Gibson should be required to spend his own money before spending assets in the name of Ivory Castle, or in his own name, which Kea claimed were held as nominee for Mr Watson and so should remain available to Kea to execute against.

Relevant Principles

It is well established that the "ordinary rule" in a standard (i.e. non-proprietary) freezing injunction generally entitles the defendant to use frozen assets in order to finance a defence, subject to demonstrating they do not have other assets with which to do so, as the injunction only concerns their own assets.

In proprietary injunctions, the position is different as the basis of a proprietary claim is that the particular asset in question is said to belong to the claimant. Accordingly, there is no presumption in favour of the defendant being entitled use that asset(s) to finance its defence.

The parties did not dispute that, where a proprietary injunction is obtained, the relevant principles to be applied to the question of legal costs were:(1)

Does the claimant have arguable ground for claiming the money/asset?
Does the defendant have arguable ground for claiming the money/asset?
Has the defendant shown that he has no other funds available to him for this purpose?
Whether the injustice of permitting the use of the funds held by the defendant is outweighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may, in course, turn out to be a successful defence.

The question in this case was whether Kea's injunctions should be considered as "proprietary", and so whether Ivory Castle and Mr Gibson had to satisfy the more onerous test for use of proprietary assets before being able to access the Aegean Monies.

Standard or Proprietary Injunction

The Court considered two previous conflicting decisions on this issue.

On the one hand, Begum(2). In this case the High Court found that there was a clear and principled distinction between freezing injunctions made in respect of proprietary and non-proprietary claims; accordingly it rejected the idea that there could be a sub-category of "quasi-proprietary" claims in considering the scope of exceptions which should be made for the payment of legal costs.

By contrast, in Ablayzov(3), the High Court found that a claimant could have a claim that is not a proprietary claim but analogous to one, such that the defendant must then satisfy the more onerous four-stage test set out above, before being able to use the disputed funds to meet legal costs.

In deciding which approach to follow, the Court considered the nature of Kea's substantive action, in which it not only brought a claim designed to resolve the ownership of the disputed fund, but also claimed for the appointment of a receiver by way of equitable execution over the fund. Accordingly, if Kea's claim was successful, it would not just obtain relief in the form of a simple money judgment but would obtain actual possession of the fund (through the medium of the receiver).

The Court also considered that the frozen assets were not the undisputed property of the ostensible owner (here Ivory Castle) but were assets the beneficial ownership in which was actively disputed. Therefore, if Kea were to win the substantive action, it would become apparent that the assets were not Ivory Castle's at all, and it therefore will be shown to have had no right to spend them, on legal expenses or anything else.

The Court in this case preferred the approach in Ablyazov and found that a "quasi-proprietary" claim could exist (distinguishing this case from the approach in Begum) and that, in those circumstances it was appropriate to apply the approach used in proprietary freezing injunctions; whilst Kea did not strictly advance a proprietary claim, it was very close to one as "the very gist of the action is to assert a right to possession of the disputed fund".

Quasi-Proprietary Claims: Use of disputed funds to pay legal costs

Applying the principles set out above, the Court concluded:

Kea had an arguable proprietary claim to the money (treating Kea's claim that the Aegean Monies are Mr Watson's as analogous to a proprietary claim for this purpose).
Ivory Castle had arguable grounds for claiming the money itself.
Ivory Castle had shown that it had no other funds available to it for payment of legal costs (save for a £30,000 required minimum bank balance, which it could utilise, albeit with some inconvenience)
The fourth question, whether the injustice of permitting the use of the funds held by the defendant is outweighed by the possible injustice to the defendant if it is denied the opportunity of advancing what may turn out to be a successful defence, was the most complex one, particularly as this was very much a matter of the Court's discretion and requires a "careful and anxious judgment"(4).

On this fourth question, it was material that Ivory Castle and Mr Gibson's position in the litigation was entirely aligned; Kea assert that Ivory Castle is a nominee for Mr Watson; and Ivory Castle and Mr Gibson assert (as did Mr Watson), that Ivory Castle is the owner of the assets. The real dispute in economic terms was therefore between Kea and Mr Gibson. That Ivory Castle was technically a corporate body held by a trust for Mr Gibson's benefit did not make any significant difference. Where the rights to the entirety of Ivory Castle's assets are disputed, the Court found that it was "plainly more just" that the interests of the Defendants should be defended at the cost of Mr Gibson, rather than at the cost of the monies in dispute which is the very subject matter of the proceedings.

The Court then considered the value and nature of Mr Gibson's assets, which were said to be substantial but not readily realisable (and not replaceable if he was successful) – for example, works of art and jewellery. It was suggested that forcing Mr Gibson to realise such items would be unjust. The Court accepted that there would likely be practical difficulties in Mr Gibson raising funds from the non-cash assets, although he could ask a family trust to draw down on a loan facility or raise sums against properties owned by the same trust. Separately, the Court was also satisfied that Mr Gibson's investment in a family member's start-up was not likely to be easy to realise.

A Pragmatic Solution

The Court suggested (but did not order) that the parties should agree an arrangement whereby Mr Gibson or Ivory Castle could have access to the Aegean Monies but only once Mr Gibson undertook a personal liability direct to Kea to pay an equivalent sum, together with interest, if Kea's claims in relation to the disputed assets succeed (to be fortified by adequate security over his, or his family trust's, assets). That would allow Mr Gibson access to funds to defend himself, but on terms that if he lost the costs of his defence would fall on his assets rather than on the disputed monies. The Court adjourned to allow the parties to discuss this proposal.

Whilst it is the practice of the Court in a standard freezing injunction not to cap or limit the amount that the defendant can spend on legal costs, in a "quasi-proprietary" claim, the defendant is not asking to spend what is accepted to be its own money. Accordingly the Court indicated that it would expect the defendants to exercise a measure of control over the quantum of costs that could be spent and that those costs should be reasonable and proportionate.

Comment

This decision provides helpful guidance on the analysis of "quasi-proprietary" claims and the circumstances in which claimants will then be able to insist that defendants meet a more onerous test before using disputed monies over which the claimant asserts ownership to fund their defence.

Balancing the respective rights of the parties in these circumstances raised issues of "some difficulty". However, the Court's suggested solution provides pragmatic guidance as to how that balance might be struck.

(1) Independent Trustee Services Ltd v GP Noble Trustees Ltd [2009] EWHC 161 (Ch) at [6]

(2) HM Revenue & Customs v Begum [2010] EWHC 2186 (Ch)

(3) JSC BTA Bank v Ablyazov [2015] EWHC 3871 (Comm)

(4) Independent Trustee Services Ltd v GP Noble Trustees Ltd [2009] EWHC 161 (Ch) at [6]

Litigation funder liable for uncapped adverse costs

Fri, 13 Mar 2020 09:00:00 Z

In ChapelGate Credit Opportunity Master Fund Ltd v James Money, the Court of Appeal ordered a funder to pay the full amount of adverse costs.₍₁₎ In a significant judgment for commercial litigation funders, the court found that the ‘Arkin cap’ (which can cap a litigation funder's liability for adverse costs to the amount of funding that was provided) is not a binding rule to be applied automatically in every case involving a litigation funder. Instead, the court considered all of the facts of the case and exercised its discretion in determining whether to cap the litigation funder's liability for adverse costs.

Facts

Commercial litigation funder ChapelGate had previously funded a substantial claim in the Companies Court.

Following a lengthy trial, this claim was ultimately unsuccessful and, in light of the nature of the claim and the manner in which it had been pursued (described as "out of the norm"), the claimant was found liable to pay the defendant's costs on the indemnity basis. A substantial costs order was awarded in the defendant's favour. The claimant failed to pay any part of this adverse costs bill, so the defendant sought a third-party costs order against ChapelGate.

ChapelGate accepted that a third-party costs order was appropriate but contended that its liability should be limited to the maximum amount of the funding – namely, £1.25 million. ChapelGate relied on the Arkin cap₍₂₎ and argued that it was a binding rule which should be applied in this case to limit its costs liability.

First-instance decision

At first instance, Mr Justice Snowden disagreed and, rather than capping ChapelGate's liability at £1.25 million, ordered ChapelGate to pay the defendant £4.3 million.

In reaching this decision, Snowden concluded that the Court of Appeal in Arkin had not intended to create a prescribed rule applicable in every case involving commercial funders. Instead, the court retained a broad discretion in respect of costs orders and, while it may be appropriate to apply Arkin in cases with similar facts (eg, where a funder has funded only a discrete area of a case, such as the costs of expert evidence – as in Arkin), the judge was not bound to apply the Arkin cap.

Having concluded that the court retained a discretion regarding costs, Snowden considered the particular facts of the case and determined that there was a clear risk of injustice if the defendant, having been forced to incur significant costs while defending itself, was limited to recovering only a small proportion of its legal costs because of funding arrangements between the claimant and ChapelGate over which it had no control. Accordingly, on the facts of this case, it was not appropriate to apply the Arkin cap. Instead, Snowden held that ChapelGate should pay an increased sum in legal costs.

ChapelGate appealed.

Court of Appeal decision

The Court of Appeal dismissed the appeal. It found that the Arkin cap was not a binding rule which automatically applies in all cases involving funders and instead held that the court retained a discretion not to apply the Arkin cap, depending on the facts of a particular case.

As regards Snowden’s exercise of his discretion, the Court of Appeal found that while a different judge may not have reached the same conclusion, the order made by Snowden was clearly one which was reasonably open to him and therefore should not be disturbed by the Court of Appeal.

The court found that Snowden had been entitled to consider numerous factors, including the following:

Unlike in Arkin, ChapelGate had funded the whole claim, not just a distinct part.
If the claimant had won, ChapelGate stood to receive a substantial upside (500% of the amount that it had committed in funding), in priority to any payment to the claimant. In these circumstances, the court considered that ChapelGate could be seen as the party with the primary interest in the claim.
ChapelGate was aware that the nature of the case being pursued meant that it would inevitably require the defendant to incur legal costs significantly in excess of the amount of funding provided by ChapelGate. It also knew that the claimant did not have after-the-event (ATE) insurance to meet the defendant's legal costs in the event of an adverse costs order (and ChapelGate had not insisted that the claimant take out ATE insurance).

Summarising its assessment, the Court of Appeal stated that:

In the case of a funder who funded the lion’s share of a claimant’s costs in return for the lion’s share of the potential fruits of litigation against multiple parties, it would not be surprising if the judge ordered the funder to bear at least the lion’s share of the winner’s costs, regardless of whether the funder’s outlay on the claimant costs had been a lesser figure.

Significantly, the court also commented on the increasing sophistication and maturity of the commercial litigation funding market, noting that while litigation funding and ATE insurance had been nascent at the time of the 2005 Arkin judgment, they are now much more established. In these circumstances, the court clearly felt that that there was little risk of litigation funders exiting the market because of this judgment (which could give rise to access to justice issues) and that the wide availability of ATE insurance means that funders will remain willing to support good claims.

Comment

This is a significant judgment for the commercial litigation funding market which makes it clear that funders cannot assume that their liability for adverse costs will be capped by reference to their funding commitment.

While the Arkin cap may still be applied by the courts on the facts of a particular case, following this judgment, funders which stand to profit from a high proportion of any damages awarded are now exposed to an increased risk of an uncapped adverse costs orders.

However, it will likely remain rare for a costs order to be made against a sophisticated litigation funder, with such orders arising only in circumstances where a funded claimant is both unable to meet its adverse costs bill and ATE insurance has not been obtained.

Accordingly, this judgment is unlikely to have a material impact on larger and more sophisticated funders which already conduct extensive due diligence and ongoing monitoring in respect of potential claims and claimants and invariably require claimants to take out ATE insurance as a condition of any funding agreement. However, this judgment will increase the pressure on the ATE market, which is already struggling to meet demand on the largest cases.

(1) [2020] EWCA Civ 246.

(2) Per the Court of Appeal in Arkin v Borchard Lines Ltd (Nos 2 and 3) [2005] 1 WLR 3055.

Beware: English jurisdiction clauses do not mean choice of English law

Fri, 06 Mar 2020 09:00:00 Z

Facts

Anglia Autoflow was an English company that made poultry processing machinery. Mr Gough was a British and US dual national resident in Canada.

In April 2009 Anglia and Gough entered into an agency agreement. The agreement said that Gough would set up a company to act as Anglia's exclusive agent in Canada, the United States and the Caribbean. Gough incorporated GDE LLC in Georgia, United States, for that purpose.

The agreement stipulated that in the event of serious disputes, both parties agreed to subject themselves to the jurisdiction of the English court.

In 2017 Gough and GDE issued proceedings in the English court against Anglia seeking damages for repudiatory breach and unpaid commission.

Gough and GDE contended that the agency agreement was governed by English law. Anglia alleged that the agency agreement was governed by Ontario law. As the claim was time barred under Ontario law, this issue was key.

Decision

The court had to consider the Rome Convention on the Law Applicable to Contractual Obligations (Rome Convention). In particular, the court had to consider two key provisions:

Article 3 (Freedom of choice), which stipulates that a contract will be governed by the law chosen by the parties. The choice must be expressed or demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case; and
Article 4 (Applicable law in the absence of choice), which stipulates that if the law applicable to the contract has not been chosen in accordance with Article 3, the contract will be governed by the law of the country with which it is most closely connected (Article 4(1)). It will be presumed that the contract is most closely connected with the country where the performing party has its habitual residence or central administration (Article 4(2)).

Application of Article 3

Since there was no express choice of law, the judge looked at whether the parties had made an implied choice.

The judge found that the Rome Convention adopted a different approach to the common law. Article 3(1) states that an implied choice must be demonstrated with “reasonably certainty” and does not permit the court to infer a choice that the parties might have made where they had no clear intention to make one. Despite various factors connecting the agreement to England, the judge found that there were insufficient grounds to demonstrate a positive choice of English law. Therefore, the judge considered Article 4.

Application of Article 4

Article 4 is intended to determine the country with which the contract is most closely connected. Article 4(2) sets out various connecting factors – for example, the court must first identify the person who is to effect the performance that is characteristic of the contract. The judge found that this related to the position at the date of the contract.

Since GDE had not been incorporated as of the date of the contract, Article 4(2) could not be sensibly applied. The court held that under Article 4(1) the contract should be governed by the law of the country with which it is most closely connected.

In applying Article 4(1), the court had to determine the centre of gravity of the contract on an objective basis and, in doing so, was entitled to consider post-contractual events (applying the European Court of Justice’s decision in Haeger & Schmidt GmbH v Mutuelles de Mans assurances IARD[2])

In determining that Canada (and not England) was the country with which the contract was mostly closely connected, the judge looked at various factors but gave the following the most weight:

Both parties considered that the agency would focus on Canada and on eastern Canada in particular.
Gough lived in Ontario.

The fact that the jurisdiction clause referred to the English courts was irrelevant for these purposes, as was the fact that GDE was incorporated in Georgia, as there was no connection between the agreement and Georgia. Consequently, the country with which the agreement was most closely connected was Canada. Therefore, the court found that the governing law was Ontario law.

Comment

This case is a salutary reminder that that a choice of English courts for resolution of disputes does not necessarily mean a choice of English law. Those entering into contractual agreements should carefully consider a choice of law clause in order to designates the laws of a country that suits them. This will be particularly important when there are competing limitation periods, as demonstrated in this case.

[1] [2020] EWHC 105 (Comm).

[2] Case C-305/13 EU:C:2014:2320.

High Court: Claimants' litigation funder ordered to provide security for costs

Fri, 21 Feb 2020 09:00:00 Z

Background

The Ingenious Litigation arises out of a number of film production partnerships, set up by the Ingenious group in the mid-2000s. Individual investors made capital contributions to the partnerships, which produced a number of leading films including Avatar and Life of Pi. The investors anticipated being able to secure certain tax benefits from their investments.

Several years later, HMRC challenged the tax treatment of the partnerships. A number of investors have brought claims against Ingenious and various financial advisers, alleging (amongst other things) that they entered into their investments as a result of misrepresentations. Most of the Claimants’ costs are funded by third party litigation funders, including an entity forming part of the Therium group.

Security for costs application

The Claimants sought an order that their liability for adverse costs should be several, rather than joint, and allocated pro-rata to the size of their original investments. Ingenious, as well as certain of the financial advisers sought, in turn, an order that Therium provide security for the Claimants’ costs.

Therium's argument in opposition in part focused on the fact that, it said, any adverse costs order would be able to be met by either (i) the Claimants themselves, some of whom were (it said) wealthy; (ii) Therium's own resources; and/or (iii) certain ATE policies taken out by the Claimants.

The Claimants and Therium had declined to provide, in advance of the hearing, full details or comprehensive evidence in relation to any of these three potential avenues of resource. For example, Therium did not provide any financial information about the entity funding the claims; any specific information about the Claimants' assets; or full unredacted details of the ATE policies.

Judgment

Following a three-day hearing in November 2019, Nugee J handed down judgment on 10 February 2020 granting Ingenious' application for security for costs.

Nugee J first held that it is appropriate for the Claimants to have the benefit of several liability, pro-rata to their contributions. He noted that the amount of each claim was relatively small as a proportion of the whole, and the size of the claims varied significantly, so that it would not be appropriate for any one Claimant (or subset of Claimants) to be liable for all the Defendants’ adverse costs.

However, Nugee J then went on to hold that Therium should provide security for costs in relation to the Claimants it was funding. In doing so the Judge:

Rejected Therium's argument that a costs order could be fulfilled by individual Claimants. The evidence before the Court did not "give enough comfort that a costs order in favour of a Defendant would be fully discharged." The Claimants had provided only "ballpark" figures about the net wealth of 33 of the largest Claimants, but the Judge noted that this information was not granular enough: the figures "do not indicate what sort of assets are held by each Claimant, whether permanent or transient, where they are located, or how easy it would be to execute against them, or even if they are held in the name of the individual…a snapshot of a person’s wealth does not give any guarantee that their position will be the same in a number of years’ time when the proceedings have run their course." The effect of the Judge's ruling on liability apportionment also meant that individual Claimants could only ever be liable for their apportioned share anyway, so information about 33 of the Claimants was not sufficient in any event.

Rejected Therium’s assertion that it could be assumed that Therium would fulfil any costs order made against it or the Claimants given its reputation and membership of the Association of Litigation Funders. The Judge noted that, as set out above, "no actual financial information about Therium has been adduced in evidence. The evidence is that if Therium had to put up cash, it would need to make a call on its investors…Nor am I confident that its membership of the ALF…is sufficient to give one enough confidence that if it were facing a large liability for costs at the end of the day, that the money would be forthcoming."

Rejected the Claimants’ and Therium’s argument that certain policies of ATE insurance would constitute adequate security for the Defendants. The terms of the ATE cover suggested that they might not be enforceable by the Defendants. Moreover, the Judge was concerned that one particular clause in the litigation funding agreement between certain of the Claimants and Therium suggested that money recovered by the Claimants under the relevant ATE policies would be immediately held on trust for Therium anyway, suggesting it would not be available to satisfy an adverse costs order in favour of the Defendants. Ultimately, subject to the Claimants procuring certain further assurances and waivers in relation to the ATE terms, and assigning the proceeds to the Defendants, the Judge decided that between half and 2/3 of the value of the policies would be taken into account.
Held that the Defendants had real prospects of securing an order for indemnity costs if the claims were unsuccessful. In the circumstances it was appropriate for them to receive security for 75% of their incurred and estimated costs.
Rejected Therium's argument that it should have a cross-undertaking in damages, on the basis of the losses identified in Therium's evidence (i.e. the Claimants having to pay Therium a larger return than would otherwise be the case, as a result of Therium's provision of security). The Judge did not consider that the function of a cross-undertaking in damages was to "underwrite" the commercial arrangements between claimants and their funder.

Therium was in total ordered to pay approximately £4 million in security, in a form to be agreed. That figure assumes that the assurances and waivers the Claimants need to procure in respect of the ATE policies, mentioned above, are indeed procured. The Judge indicated that if they were not, he would be "prima facie inclined to order Therium to provide security without regard to the value of the ATE policies".

RPC acts for Ingenious in the proceedings.

The judgment citation is [2020] EWHC 235 (Ch).

Equitable compensation for breach of fiduciary duty: a question of loss?

Thu, 20 Feb 2020 09:00:00 Z

Background

Mr Patel, the first defendant, was a director of Auden McKenzie (Pharma Division) Ltd, as was the second defendant, his sister. They were the sole directors and owned all the shares in the company. Between 2009 and 2014, in order to evade corporation tax and income tax, Mr Patel paid out £13.8m against sham invoices raised purportedly for "research and development", for which Auden received no value.
Following investigations by HMRC which resulted in a settlement, Mr Patel paid £14.6m to HMRC in respect of income tax, national insurance contributions, and corporation tax, together with interest and penalties.

Meanwhile, the Patels had sold Auden, which pursued them for "[d]amages and/or equitable compensation for breach of fiduciary duties". There was also a claim, among others, for all "such further orders, accounts, inquiries and declarations as shall be necessary or appropriate in order to fully compensate the Claimants for the Defendants' wrongs".

Auden applied for summary judgment in the sum of £13.1m (the aggregate amount paid against the sham invoices, less agreed credit for corporation tax paid by Mr Patel as part of his settlement with HMRC) plus interest on its claim "for damages and/or equitable compensation for breach of statutory fiduciary duties".

While Mr Patel accepted that he had acted in breach of his fiduciary duties as a director, he argued that Auden had suffered no loss — claiming that, if the payments had not been made unlawfully, the shareholders would have caused the company to make equivalent payments to them as dividends or in some other lawful manner.

The High Court held that Mr Patel could not rely on hypothetical payments in resisting summary judgment, when he had taken no steps to make those payments. Mr Patel appealed.

The Court of Appeal considers the "no loss" argument

The Court of Appeal's starting point on the question of equitable compensation was "the basic rule … that a trustee in breach of trust must restore or pay to the trust estate either the assets which have been lost to the estate by reason of the breach or compensation for such loss".₍₂₎ This rule extends to company directors.₍₃₎ Any compensation figure should be reduced by reference to the loss that flowed directly from the breach of trust.₍₄₎

The Court of Appeal held, as to the misappropriation by Mr Patel of Auden’s funds, that a defence might be open to Mr Patel that, if the misappropriation had not occurred, the funds would have been lawfully transferred to the Patels for no value. The Court stressed that it was "far from saying that Mr Patel has a defence that will succeed if he establishes the facts on which he relies", but nor was it "prepared to say that it is unsustainable in law".

The Court accordingly allowed the appeal and set aside the summary judgment.

Comment

This was a summary judgment application — therefore the issues were not fully ventilated — but the decision reveals a tension between an impetus to punish the director for his breach of fiduciary duty, and the fact that the real loss to the company might have been nil. The Court of Appeal described claims for equitable compensation as a developing area of the law. The facts in this case, described by the Court as "striking" and "stark", may test the willingness of the trial court (due to hear the matter later this year) to develop the equitable remedies for breach of fiduciary duty.

(1) [2019] EWCA Civ 2291.

(2) Target Holdings v Redferns (a firm) [1996] AC 421, 434.

(3) Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453 [34].

(4) Target Holdings v Redferns (a firm) [1996] AC 421; AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58, [2015] AC 1503.

Lenders face more allegations about their actions on restructuring

Fri, 14 Feb 2020 09:00:00 Z

Facts

The claimant comprised current and former shareholders of Bowlplex Ltd, which operated a bowling business at numerous sites across the United Kingdom. The first defendant, the Royal Bank of Scotland (RBS), had provided Bowlplex with banking facilities since 2004.

Following a period of financial downturn, Bowlplex's account with RBS was placed into the bank's turnaround division, known as the global restructuring group (GRG). The now widely reported methods employed by GRG, purportedly to turn around customer businesses, were highly controversial. Specifically, the relationship between GRG and West Register (the division of RBS which acquired and managed the assets of GRG companies and the second defendant in the present case) was found in one report to be inappropriate and gave rise to a series of conflicts of interest.

Around the time of the first restructuring, two important appointments were made:

West Register appointed Kamildeep Sondhi as an observer; and
GRG appointed a turnaround specialist, Sean Cooper, as a non-executive chair.

This restructuring also saw Bowlplex relinquish 35% of its shareholding to West Register.

Bowlplex subsequently recommended to GRG that a company voluntary arrangement (CVA) be considered to allow Bowlplex to continue trading.

The implementation of the CVA included a write-off of £4.5 million of debt owed to RBS, in return for a redistribution of equity holdings that increased West Register's share of Bowlplex to 60%. Subsequently, with RBS's support, Cooper dismissed Bowlplex's managing director and in 2015 Bowlplex's entire share value was sold. This resulted in a return of approximately £22.6 million, of which £13.6 million was paid to West Register in accordance with the reorganised equity holdings.

Claim

Bowlplex's claim against RBS and West Register was that RBS (and Sondhi) took steps to undermine the company's financial position to enable the bank or West Register to acquire 80% of the company's equity at the expense of Bowlplex. The losses claimed were the amounts that the claimants' shares would have been worth had the restructures not occured. Bowlplex contended that:

RBS, West Register and Sondhi were parties to a conspiracy with the unconscionable purpose of undermining Bowlplex's financial position in order to acquire 80% of its equity;
RBS and West Register had become shadow directors of Bowlplex by virtue of their instructions via Sondhi and Cooper; and
the defendants' actions constituted a breach of fiduciary duties owed by directors pursuant to the Companies Act 2006. The defendants were in breach of the act because of their refusal to accept Bowlplex's reasonable proposals that it continue to trade through the financial downturn and their imposition of the restructurings on their terms – which had also prevented Bowlplex from devoting time to finding alternative funding. The claimants pleaded that this had been achieved, in part, by the appointment of Cooper.

Decision

Following a strike-out application, a High Court appeal considered which directors’ duties the defendants owed as shadow directors. It had not previously been definitively determined whether a shadow director could owe the same general duties to a company as a formally appointed director.

In considering the issue, the judge noted the following:

Under Section 170(5) of the Companies Act 2006, a shadow director is "someone in accordance with whose directions or instructions the directors of that company are accustomed to act". Duties owed by shadow directors are limited in extent and reflect the real difference between the positions and responsibilities of shadow directors and directors on the board. ₍₂₎
If instructions are "pervasive and all-encompassing", it is possible that the shadow director may owe the entire range of directors’ duties under the Companies Act. In other instances, the extent and nature of the instructions may be more restricted or "limited to particular aspects of the company's business or affairs".
For a shadow director to be in breach of a fiduciary duty, it must be shown that the failure to act in the best interests of the company was linked to a matter on which the shadow director gave directions or instructions. However, where there is no relationship between the instruction and the act or omission of which a complaint is made, it would be wrong in principle for any fiduciary duty to be owed.

In dismissing the appeal, the court rejected the claimants' argument that the instructions of West Register or RBS were sufficiently linked to the breach. The pleaded acts of Sondhi and West Register did relate to the conduct of board meetings, but they did not amount to an instruction or direction to Bowlplex to implement the restructuring.

Although the appointment of Cooper was a definitive act taken by the defendants as shadow directors, the claimants could not show that either the instruction to appoint Cooper or the subsequent direction to remove the managing director could have caused Bowlplex to enter into either restructuring – the instruction to remove the managing director was not given until the second restructure had been completed. It was further noted that the application of commercial pressure was not the same as giving an instruction or direction from which the status of shadow directorship could flow.

Comment

This judgment helps to clarify the position for those considering claims as a result of allegedly improper treatment by lenders.

Although the appeal was dismissed, the decision did not go so far as to provide wholesale protection to financial institutions which continue to face allegations that the methods employed by representatives of their turnaround divisions following the financial downturn breached duties owed to borrowers.

However, for those which feel that their decision-making processes have been subject to improper intervention by shadow directors, it is now clear that a successful claim must show that a lender's behaviour amounts to far more than the application of commercial pressure in protection of its own interests.

(1) [2019] EWHC 3116 (Ch).

(2) McKillen v Misland (Cyprus) Investments Ltd ([2012] EWHC 521 (Ch)).

Covertly obtained information cannot be deployed until its legitimacy is resolved

Fri, 07 Feb 2020 08:00:00 Z

Fri, 07 Feb 2020 08:00:00 ZCommercial disputesFacts

Mr Kelly (the respondent) sold an interest in various businesses to the appellants for approximately £23 million. When he later became concerned that something was wrong with the transaction, he entered the appellants' premises and placed recording devices in the office of their in-house solicitor. Kelly recorded approximately 40 hours of conversations, all of which were confidential and many of which were privileged, including conversations with the appellants' external solicitor.

The appellants discovered the recording device and began proceedings for harassment and breach of confidence. In the course of the proceedings, Kelly undertook not to make use of the recordings except for the purpose of defending the claims against him.

The parties also agreed to appoint independent counsel to review the recordings in which the appellants asserted privilege.

Kelly subsequently applied to be released from some of his undertakings so that he could use the recordings to support counterclaims against the appellants and claims against third parties relating to the sale of the businesses.

High Court decision

The High Court permitted Kelly to be released from certain undertakings and enter into modified undertakings in their place, so as to enable him to use the recordings to bring a counterclaim or a related claim, on the basis that:

the privilege review conducted by independent counsel was a material change in circumstances; and
the court could effectively case manage the trial to provide balanced protection to both parties.

Court of Appeal decision

Protection of confidential material

The Court of Appeal overturned the judge's decision and reinstated the original undertakings, finding that while Kelly had had the right to use the recordings (to the extent that they were not privileged) to defend himself against the appellants' harassment and breach of confidence claim, the High Court had been wrong to allow him access to the recordings to use them to advance separate claims against the appellants and others before he had established the right to use them for such purposes.

The Court of Appeal considered the Australian case British American Tobacco Australia Ltd v Peter Gordon,₍₂₎ in which it had been found that because of the significance of the order in which the issues were determined, the issue of the confidentiality of documents had to be resolved before they were deployed, and not at the same time or afterwards. The Court of Appeal found that the effect of the High Court's decision was the reverse: Kelly would have been enabled to deploy the confidential information before he had established the right to do so.

Use of case management to secure confidential information

The Court of Appeal described the original undertakings as a "thoroughly sensible and practical way of holding the ring pending the anticipated expedited trial" and held that leaving confidentiality to be addressed through case management at trial would "potentially have been a nightmare".

Comment

Where a party has covertly obtained material and wishes to use it in civil proceedings, any dispute as to the material's confidentiality must be resolved before it can be deployed. Taking this approach preserves the confidentiality of the material and upholds the broad equitable principle that a person who has received information in confidence should not be permitted to take unfair advantage of it. It also avoids any practical case management difficulties which would undoubtedly be caused by failing to deal with questions of confidentiality as a priority.

(1) [2019] EWCA Civ 2256

(2) [2007] NWSC 230]]>

Breaking news - dominant purpose test extends to legal advice privilege

Fri, 31 Jan 2020 11:00:00 Z

The appeal related to a High Court judgment which stated that the Civil Aviation Authority could not claim legal advice privilege over emails sent to an in-house lawyer asking for her views on the basis that it was also sent to non-lawyer staff to seek their commercial views (R (on the application of Jet2.com Ltd) v Civil Aviation Authority [2020] EWCA Civ 35 [23]).

The key findings on legal advice privilege were:

The dominant purpose test, historically considered only in the context of litigation privilege, applies to legal advice privilege, ie a communication between a lawyer and client for the purpose of seeking or giving legal advice will attract legal advice privilege only if that purpose is the primary or dominant purpose. Two equal purposes is not sufficient.
Where a single multi-addressee email is sent to various individuals (including lawyers) for their input, if one purpose is to obtain the commercial views of the non-lawyers, even if another purpose is to obtain legal advice from the lawyers, then legal advice privilege will not attach to that email.
A lawyer's response to such a multi-address email will still be covered by legal advice privilege, providing that it contains legal advice rather than commercial commentary.

The case reinforces the need to keep communications relating to legal advice separate from wider commercial communications – not an easy task for inhouse counsel in today's working world.

Witness evidence reform - evolution not revolution?

Fri, 31 Jan 2020 09:00:00 Z

Concern that current practice in relation to factual witness evidence does not achieve the best evidence at proportionate cost prompted the creation of the group to consider how the current practice could be improved in the business and property courts. The group (consisting of judges, practitioners and court users) has rejected some radical options and focused on ensuring compliance with existing obligations, bolstered by some additional guidance.

Problems with current practice- the basis for a revolutionary change?

Following a survey of lawyers and judges, the Group identified some key problems:

Reliability The courts have cautioned against any wholesale rejection of witness evidence on the basis of the general fallibility of memory₍₁₎ and it is well recognised that giving oral evidence is the best way of ensuring that witnesses provide a genuine recollection of events. The process of producing witness statements can corrupt the witness's memory as they repeat their story and they may be led into recalling a particular version of events which is in fact partially inaccurate. Despite this, oral examination-in-chief is rarely used as an alternative to witness statements due to practitioners' limited experience of it.
Irrelevance Witness statements often cover irrelevant material and opinion. While the courts take a dim view of this practice, there are limited efforts to prevent such material being included. The Commercial Court frequently gives permission for the mandatory page limit for witness statements to be exceeded, which can encourage the inclusion of irrelevant material.
The weakness of cross-examination Lawyers often challenge the detailed contents of a witness statement in cross examination, rather than testing the core aspects of the witness's recollection. This takes up considerable time at trial and causes solicitors to draft witness statements in a way which reduces their susceptibility to being unpicked - inevitably reducing the extent to which the statement is in the witness's own words.
Time and costs The preparation of witness statements is a notoriously costly exercise, which increases the lead in time to trial.

Revolutionary solutions

Though it had identified a number of problems with the process for producing witness statements, the Group ultimately rejected some radical proposals for overhauling it. There was considerable resistance to reliance on oral examination-in-chief as the primary method of obtaining witness evidence and to US style depositions. It was felt that too much would then hinge on how the witness performed on the day.

In the face of overwhelming opposition by survey participants, the Group also declined to propose that privilege should be lifted in respect of the production of witness statements. This would have required witness-lawyer communications and draft statements to be provided to the opposing party, a wholesale change presenting a myriad of practical difficulties.

An evolutionary approach

The Group clearly favoured enhancements to the existing framework that emphasised the enforcement of and compliance with the current rules.

Improved guidance

Whilst different courts may legitimately have their own specific requirements for witness statements, common principles could and should be promoted. The Group recommended that:

An authoritative statement of best practice in relation to the preparation of witness statements is produced.
Court guides should be harmonised in respect of the content and drafting of witness statements.

Encouraging enforcement of the existing rules

To meet the challenge that the rules relating to witness evidence are not usually so stringently enforced, the Group proposed that:

An extension to the page limit for witness statements should rarely be granted, unless a judge has had chance to scrutinise its contents.
Costs sanctions and judicial criticism should be more readily applied for non-compliance with the rules regarding witness evidence.

Promoting compliance

On the basis that one of the most effective ways to ensure that a point is taken on board is to oblige witnesses and solicitors to acknowledge it expressly, the Group recommended that:

Witness statements contain a statement of truth in which the witness confirms that they have had explained to them and understand the objective of a witness statement and the appropriate practice regarding its drafting.
Solicitors responsible for drafting the witness statement should sign a solicitor's certificate of compliance with the rules and the relevant court guide.

Reducing the issues subject to written factual evidence

With a view to narrowing the scope of witness statements, the Group has recommended that courts consider a requirement that parties produce a pre-trial statement of facts setting out their factual case, to be exchanged at the same time as witness statements. Courts should also consider whether oral examination-in-chief should be ordered for specific issues.

The future - a quiet revolution?

The various recommendations are to be welcomed as a pragmatic response to the inherent difficulties in capturing and recording reliable witness evidence. They aim to evolve the guidance and rules without fundamentally altering the existing framework.

In advance of the implementation, judges may feel emboldened to enforce the existing rules and impose penalties for non-compliance. It seems likely that this will, as the Group seems to hope, lead to a quiet revolution in the legal profession and the production of compliant witness statements without judicial intervention.

(1) Julia Kogan v Nicholas Martin and others [2019] EWCA Civ 1645

Full and frank disclosure means more than just putting relevant matters in evidence – a new year warning in UKIP v Braine & Others

Fri, 24 Jan 2020 10:14:00 Z

Background

The dispute concerned applications for election to UKIP's National Executive Committee. UKIP's chairman and party secretary were said to be concerned that supporters of the former party leader (the so called "Batten Brigade") were being inappropriately put forward. Each side tried to remove or suspend members of the opposing faction from their positions within UKIP and made complaints to the police about unlawful access to data.

Against that background, UKIP's then party leader instructed a party member to: "Do a Microsoft Office 365 Evidence scan of the chairman's account and other UKIP.org account [sic] to gain evidence, for use later". Members of UKIP's National Executive Committee subsequently received an email which threatened to release information allegedly collected from their email accounts unless they resigned from the party. The email was sent from an unknown account using the pseudonym "B.B." (which UKIP claimed in its evidence to be a reference to the "Batten Brigade").

The Non-Disclosure Order

UKIP secured a non-disclosure order on a "without notice" basis, the court finding that there was a serious issue to be tried and that UKIP could not be adequately compensated by damages (the test set out in American Cyanamid) (2). The NDO prohibited the defendants from disclosing or publishing information originating from or "…concerning a data breach of a list of 143 email addresses or accounts…".

At the subsequent "on notice" hearing, the defendants opposed UKIP's application to continue the NDO on the grounds that there were serious defects in UKIP's original application, and it had breached its obligation of full and frank disclosure. The court rejected UKIP's application to continue the NDO until the trial of UKIP's claim. However, it also rejected the defendants' application to have the NDO set aside for material non-disclosure.

Full and Frank Disclosure

The judge found that UKIP should have drawn the court's attention to the correct "enhanced merits test" set out in the Human Rights Act 1998 (HRA) (i.e. whether UKIP was "likely" to establish that publication should not be allowed) (3) rather than relying only on the standard American Cyanamid basis. By failing to do so, UKIP had committed a "serious breach of duty".

UKIP had also failed to draw the court's attention to important matters of fact relevant to its original application. For example, UKIP did not refer to a relevant internal report summarising a conversation in which two of the defendants denied any knowledge of what the court described as the blackmail email (although the report was in evidence) and the fact that the threatened deadline had passed without any publication. The court ruled that the obligation of full and frank disclosure (our emphasis):

"… is not limited to not “hoodwinking” the Judge, or avoiding misrepresentations that would change the outcome. Nor is the duty discharged by putting a document in a bundle. The obligation is to disclose that which, if present, the defendants would have wanted the Court to know; and it extends to drawing attention to the most important features of the evidence or law that could undermine the application. "

The court confirmed that non-disclosure of material facts on a without notice application could led to an order being set aside without examination of the merits₍₄₎and that the rule in favour of discharge is an important deterrent. An applicant who has obtained an injunction in breach of its duty of full and frank disclosure should be deprived of any advantage gained as a result.

Notwithstanding its determination that UKIP had breached its duty of full and frank disclosure, the court held that the NDO had no practical impact and refused to set it aside. The defendants did not need to rely on the court's refusal to continue the NDO in order to sanction UKIP. Instead, the most just and proportionate course was to order that UKIP pay its own costs of the original NDO application.

Comment

Without notice applications are subject to strict disclosure requirements and an applicant's duty of full and frank disclosure (and that of its legal advisers) can only be satisfied by drawing the court's attention to legal or factual matters which could undermine its own application. It is not enough to simply put those matters in evidence without referring to them in witness statements or submissions; the applicant is obliged to notify the court of matters which "if present, the defendants would have wanted the Court to know".

The court has a discretion to set aside or continue any order obtained in breach of an applicant's duty of full and frank disclosure but it has no obligation to do so. Instead, it may opt for practical sanctions, such as an award of costs, in order to deter others from following the same course.

(1) [2019] EWHC 3527 (QB)
(2) American Cyanamid Co (No 1) v Ethicon Ltd [1975] UKHL 1 (05 February 1975)
(3) Section 12(3) of the Human Rights Act 1998
(4) Relying upon the consequences of a breach of duty summarised in YXB v TNO [2015] EWHC 826 (QB)

Freezing orders: when will past conduct show a real risk of dissipation?

Thu, 16 Jan 2020 16:38:22 Z

Facts

In 2008 Lakatamia and Mr Su entered into a freight forwarding agreement. Mr Su breached the agreement, causing substantial loss to Lakatamia. Lakatamia brought a claim for damages and obtained a worldwide freezing order (WFO) that prohibited Mr Su from dealing with or dissipating his assets up to the value of $48,842,440.24.

Lakatamia's claim was successful and in 2015 Mr Su was ordered to pay $47.7 million in damages. The judgment debt remained unpaid.

In 2018 the High Court ordered Mr Su to remain in the jurisdiction pending a hearing at which he would be cross-examined as to his assets. After being served with that order, Mr Su attempted to flee the United Kingdom by ferry and was arrested.

Lakatamia then served Mr Su with a committal application notice, alleging that he had sold properties that he owned and dissipated the net sale proceeds of €27,127,855.01, in breach of the WFO. At the hearing, Mr Su implicated his 86 year-old mother, Ms Su, in the alleged dissipation. He gave evidence that she had received the €27,127,855.01 while knowing about the WFO and that she performed a treasury function for the Su family.

Mr Su also gave evidence that his mother owned and ran a company called Great Vision Management Ltd. Lakatamia submitted that this was significant because before the €27,127,855.01 had been dissipated, Great Vision had funded court applications by Mr Su to deal with his assets subsequent to the WFO and had also written to the court in relation to his application for permission to appeal. Accordingly, if Ms Su owned Great Vision, it was likely that she had known about the WFO and judgment debt prior to the dissipation.

Further WFO against Ms Su

Following Mr Su's evidence, Lakatamia issued proceedings against Ms Su and also obtained a WFO against her without notice. Lakatamia claimed that Ms Su, having assisted Mr Su to dissipate €27,127,855.01, was liable in tort for unlawful means conspiracy and for intentionally facilitating the violation of Lakatamia's rights under the judgment debt.

At the inter partes hearing, the judge considered whether to continue the WFO against Ms Su.

Lakatamia argued that there was a real risk that Ms Su would frustrate any judgment against her. It presented evidence that Ms Su:

had conspired to assist Mr Su to dissipate €27,127,855.01;
held a web of offshore companies that could be used to place assets beyond reach;
owned or controlled Great Vision, as well as a company called UP Shipping (which had received a substantial portion of the €27,127,855.01);
performed a treasury function for the Su family and could facilitate large transfers between jurisdictions; and
owned substantial liquid assets.

Ms Su denied these allegations and denied being aware of the first WFO at the time that the €27,127,855.01 was transferred.

The judge discharged the WFO against Ms Su. As Mr Su was a "proven liar" and "serial contemnor", the judge was cautious to accept a case that turned entirely on Mr Su's evidence (although, he appears to have considered at least some other evidence).

In relation to a separate jurisdiction issue, the judge found that there was a serious issue to be tried in respect of Lakatamia's claims against Ms Su, given her assistance in dissipating the €27,127,855.01 and her knowledge of the judgment debt and the WFO against Mr Su. Accordingly, there was a good arguable case against her on the merits. However, the judge held that Lakatamia had failed to demonstrate a real risk of dissipation for the purposes of a WFO.

Lakatamia appealed the judge's decision to discharge the WFO against Ms Su.

Arguments on appeal

Lakatamia argued that where the court accepts that there is a good arguable case that a respondent has engaged in wrongdoing against the applicant, and that wrongdoing is relevant to the issue of dissipation, that will "point powerfully in favour of a risk of dissipation" and, ordinarily, no further evidence of a risk of dissipation will be required. Here, the judge's finding that there was no real risk of dissipation was "fundamentally irreconcilable" with his prior finding that there was a good arguable case that Ms Su had engaged in wrongdoing.

Lakatamia also submitted that the judge had failed to consider evidence of Ms Su's ability to transfer large sums between accounts and jurisdictions, her significant liquid assets and her control of Great Vision.

Ms Su argued, among other things, that a finding of a good arguable case is not necessarily sufficient to show a real risk of dissipation, even in cases involving dishonesty or dissipation.

Court of Appeal decision

The Court of Appeal overturned the judge's decision and found that the WFO should have been maintained against Ms Su.

The Court of Appeal confirmed that an applicant need only establish a good, arguable case that unless the defendant is restrained by the court, there is a real risk that a judgment will go unsatisfied due to the defendant's disposal of assets.

The Court of Appeal largely agreed with Lakatamia's submissions and, in light of the relevant authorities, confirmed the correct approach to be as follows:

Where the court accepts that there is a good arguable case that a respondent engaged in wrongdoing against the applicant, and that wrongdoing is relevant to the issue of dissipation, "that holding will point powerfully in favour of a risk of dissipation".
In such circumstances, further significant evidence in support of a real risk of dissipation may not be necessary. However, "each case will depend upon its own particular facts and evidence".

Here, there was clear scope for an inference of dissipation. The judge had found that there was a good arguable case that Ms Su had helped Mr Su to hide or dissipate €27,127,855.01. This dishonest conduct pointed to the risk of dissipation. However, Ms Su's wrongdoing was not merely dishonest, but "went to the very heart of the question of the risk of dissipation" as it involved the act of dissipation itself. Accordingly, common sense would suggest that there was a risk that Ms Su "would do exactly the same in relation to her own assets" to avoid the enforcement of any judgment against her. The risk of dissipation was therefore plain and obvious.

The Court of Appeal also found that the judge had failed to consider properly Lakatamia's evidence that Ms Su controlled a web of offshore companies, could transfer substantial funds between jurisdictions and held significant liquid assets. The evidence on these points was not limited to the evidence of Mr Su, and the judge had failed to give it sufficient weight or to consider it in the context of the case as a whole.

Further, the Court of Appeal found that Mr Su's evidence regarding his mother's role deserved weight as potential admissions against interest and because it was supported by other evidence that had been put before the court.

Comment

The Court of Appeal is generally reluctant to interfere with the findings of experienced Commercial Court judges as to whether a real risk of dissipation exists, but this decision demonstrates that it will intervene where it is clearly appropriate to do so.

This case is perhaps a paradigm of a respondent engaging in wrongdoing that gives rise to an inference of dissipation given that the wrongdoing directly involved dissipation in breach of an existing WFO. Other cases may not be so clear cut and the Court of Appeal was careful to note that each set of facts must be "scrutinised with care" in order to determine whether an inference of dissipation should be made. However, for parties seeking freezing orders, this case provides helpful guidance as to when a respondent's prior conduct may support a finding that there is a real risk of dissipation and the factors that the courts should consider in this regard.

(1) [2019] EWCA Civ 2203.

Guaranteed to fail? Oral funding arrangements may be enforceable

Thu, 09 Jan 2020 15:18:04 Z

The background facts

Mr Singh had been engaged in extensive litigation against his son (the Singh Proceedings), funded by Mr Abbhi (DA). A few months before trial, Mr Singh changed solicitors and instructed RS to act for him. Mr Singh and RS met on 11 July 2013; the meeting was predicated upon Mr Singh not being able to pay RS' bills if he agreed to take on the case. Subsequently RS agreed orally with DA that DA would pay such fees and disbursements on Mr Singh's behalf or lend Mr Singh enough funds to pay (the Oral Agreement).

DA paid RS £185,000 in fees, leaving £317,823.63 outstanding. Mr Singh then died on 9 February 2015, leaving an insolvent estate.

Primary versus secondary liability

The question before the Court of Appeal was whether the Oral Agreement amounted to a primary obligation to pay RS by DA or a secondary obligation to guarantee the payments by Mr Singh to RS. If it were found to be a primary obligation, or debt, it would be enforceable against DA but if it were a guarantee, it would be unenforceable by virtue of the Statute of Frauds 1677 (the Statute) that states that guarantees are only enforceable if recorded in writing(2).

In submitting that the agreement was a guarantee, DA's counsel argued that a guarantor's liability is secondary to that of some other person, the primary debtor. (Guarantees are to be distinguished from indemnities because indemnities impose a new, primary obligation on the promisor to indemnify without reference to a pre-existing debt)(3). DA's counsel submitted that DA's liability was defined by reference to the liability of Mr Singh to RS and was therefore secondary and fell within Section 4 of the Statute; DA had promised that he would put Mr Singh in funds so that Mr Singh could write a cheque to RS paying his fees and this was therefore a “see to it” guarantee(4). Consequently, counsel for DA submitted, the promise by DA was not actionable until Mr Singh was in default under the retainer and, accordingly, DA's liability was equivalent to the primary liability of Mr Singh.

In arguing that the obligation gave rise to an enforceable debt, RS' counsel submitted that DA said he would pay RS's bills, meaning that he would pay RS on behalf of a man who could not pay. He would put Mr Singh in funds first to enable Mr Singh to write a cheque lawfully; the nature of that agreement was a question of fact and the trial judge had been correct to determine that this imposed a primary obligation on DA to pay Mr Singh's bills in any event(5).

The decision

The Court found that the Oral Agreement was predicated upon Mr Singh being unable to pay the legal fees to fund the litigation. That amounted to a term of the Oral Agreement, under which DA agreed that, in consideration for RS agreeing to act as solicitor, he would pay the legal fees. In other words, he was agreeing to fund the litigation.

DA's obligation under the Oral Agreement was thus not simply a “see to it” guarantee, but an independent, primary and absolute obligation, assumed by DA, to put Mr Singh in funds in sufficient time before the expiry of the grace period to meet any particular bill. Consequently, the Oral Agreement did not fall under Section 4 of the Statute and was enforceable, despite not being in writing.

The critical question which determines whether a contract is one of guarantee within Section 4 of the Statute is not that the promise is to pay another’s debt but whether (a) that promise is to pay if the other does not pay, in which case it is within the Statute of Frauds; or (b) whether it is a promise to put the debtor in funds in any event, in which case it falls outside that piece of legislation(6).

Here, the promise to pay was in any event.

Comment

As with all contracts, recording them in writing gives all parties certainty. In the context of funding arrangements, it is especially important to avoid the possibility of it falling foul of the Statute and the rule on guarantees. If this is not possible, give thought to the nature of the promise made in any oral agreement so as to ensure that the promise to pay is primary and thus ensure that an oral funding contract is enforceable. The Court noted that such cases are always likely to be heavily fact-specific but the key point is to ensure that the nature of the agreement is to pay come what may.

(1) [2019] EWCA Civ 2175.
(2) Section 4 of the Statute of Frauds
(3) Harburg India Rubber Comb Company v Martin [1902] 1 KB 778 at 784-5.
(4) Associated British Ports v Ferryways NV [2008] EWHC 1265 (Comm).
(5) Guild & Co v Conrad [1894] 2 QB 885.
(6) In the words of Lindley LJ in Guild & Co v Conrad.

Oral contract does not prevent agent from being paid in circumstances not catered for in contract

Thu, 19 Dec 2019 15:02:00 Z

Facts

Foxpace Limited owned a commercial property, Nash House, which the applicant, Mr Barton, had unsuccessfully attempted to purchase in July 2013, leaving him £1.2 million out of pocket. Soon after, Foxpace and Barton entered into an oral agreement under which Foxpace agreed to pay Barton £1.2 million if Nash House was sold for £6.5 million to a purchaser introduced by Barton.

Barton introduced Foxpace to a purchaser but the property was sold for £6 million, the price having been reduced as a result of good faith negotiations in which Barton was involved. Having completed the sale at that reduced price, Foxpace refused to pay the £1.2 million Barton claimed he was owed.

High Court decision

In the first instance, the High Court found that Barton's contractual claim for the introduction fee of £1.2 million failed because the property in question was sold for £6 million rather than £6.5 million, contrary to the explicit terms of the oral contract.(2)

The judge also found that Barton's claim under unjust enrichment failed due to the Costello(3) principle (ie, a claim in unjust enrichment should not be allowed to undermine the contractual allocation of risk agreed between parties). Granting relief in these circumstances would amount to imposing an obligation on Foxpace to pay in circumstances different to those agreed in the contract, under which Barton had assumed the risk of Nash House being sold for anything less than £6.5 million.

However, the judge found that had it been been necessary, he would have decided that the value of the benefit to the vendor was 7.25% of the purchase price (ie, £435,000). He decided this by reference to other agreements for introduction fees entered into by Foxpace in relation to failed transactions for the sale of Nash House. He put little weight on the £1.2 million figure, finding that it was related to expenses lost in previous attempted transactions rather than services provided by Barton.

Court of Appeal decision

Partially allowing Barton's appeal, the Court of Appeal found as follows:
Because the first-instance judge had rejected Foxpace's arguments that a fee was payable if and only if Nash House was sold for £6.5 million (indeed, he had noted that it would have been ”bizarre” for Barton to have entered into a contract on those terms), the oral contract did not restrict payment exclusively to the happening of that specific event.

Barton had taken on the risk of there being no sale at all, in which circumstances he would not be paid. He had also taken on the risk of the purchase price being less than £6.5 million, in which circumstances he would not be paid the full £1.2 million fee. However, the contract was silent on the allocation of risk in all other circumstances.
As a result of this silence, nothing would preclude Barton from seeking remuneration on the basis of unjust enrichment. The court would not be undermining the Costello principle because the contract in question did not address the situation that had come to pass.
Barton was therefore entitled to recover the benefit that Foxpace had unjustly gained from being introduced to the purchaser and not paying for the service. The High Court's finding as to the objective market value of that service was accepted.

Comment

It is always commercially sound to explicitly agree (and record in writing) the consequences of all relevant circumstances, not least because remuneration awarded on the basis of unjust enrichment will be evaluated according to the objective market value for those services, which may be significantly less than what can be agreed under contract (as in this case).

This decision will give some comfort to commercial parties that have provided their services having agreed the contractual consequences of only the best case scenario. If those services provide meaningful value but fall short of that ideal outcome, it seems that only explicit agreement to the contrary will prevent the service provider from being paid.

(1) Philip Barton v Timothy Gwyn-Jones [2019] EWCA Civ 1999.
(2) [2018] EWHC 2426 (Ch).
(3) Macdonald Dickens & Macklin (a firm) v Costello [2011] EWCA Civ 930.

Oral contract does not prevent agent from being paid in circumstances not catered for in contract

Thu, 19 Dec 2019 14:54:00 Z

Facts

High Court decision

Court of Appeal decision

Partially allowing Barton's appeal, the Court of Appeal found as follows:

Because the first-instance judge had rejected Foxpace's arguments that a fee was payable if and only if Nash House was sold for £6.5 million (indeed, he had noted that it would have been ”bizarre” for Barton to have entered into a contract on those terms), the oral contract did not restrict payment exclusively to the happening of that specific event.

Barton had taken on the risk of there being no sale at all, in which circumstances he would not be paid. He had also taken on the risk of the purchase price being less than £6.5 million, in which circumstances he would not be paid the full £1.2 million fee. However, the contract was silent on the allocation of risk in all other circumstances.
As a result of this silence, nothing would preclude Barton from seeking remuneration on the basis of unjust enrichment. The court would not be undermining the Costello principle because the contract in question did not address the situation that had come to pass.
Barton was therefore entitled to recover the benefit that Foxpace had unjustly gained from being introduced to the purchaser and not paying for the service. The High Court's finding as to the objective market value of that service was accepted.

Comment

Unfair prejudice saga – Court of Appeal tries to impose some order

Thu, 12 Dec 2019 11:14:24 Z

Thu, 12 Dec 2019 11:14:24 ZCommercial disputesChris Ross, Daniel HemmingSix-year pleading saga

Mr Griffith is a shareholder in two hotel operating companies, G&G and Bankside. Mr Gourgey's sons own 50% of the shares in G&G and a family trust established by Mr Gourgey owns 50% of the shares in Bankside. In May 2013 Mr Griffith presented an unfair prejudice petition in respect of each company, alleging that Mr Gourgey had caused the companies to make improper payments and seeking an order that the Gourgeys buy his shares. The proceedings continued over the ensuing six years, punctuated by various applications by each party:

Between May and September 2013, consolidated points of claim, defence and reply were served.
In September 2013 the Gourgeys failed to respond to a request for further information in respect of their points of defence.
In November 2014 the Gourgeys were given a last chance to reply to the request for further information but failed to respond.
In May 2015 the Gourgeys' points of defence were struck out (although they were not debarred from defending the petitions).(2)
In July 2017 the Gourgeys' appeal on an earlier decided point was dismissed, resulting in further delays.(3)
In May 2018 the sons applied to strike out the relief against them in the G&G petition on the basis that it disclosed no basis for the buy-out order sought against them or, alternatively, for an order that Mr Griffith had properly particularised his claim against them. The application succeeded and Mr Griffith was given the opportunity to apply to amend, which he did.(4) Mr Griffith also applied to amend in relation to Bankside, to plead that he had acquired additional shares from a bankrupt shareholder to enable him to also seek a buy-out order in respect of the additional shares.
In July 2018 permission to amend was granted in respect of G&G and Bankside on the condition that the Gourgeys be permitted to plead full defences, notwithstanding the May 2015 decision striking out their points of defence.(5)
Mr Griffith appealed against the May 2018 and July 2018 decisions.

Court of Appeal takes firm hand

In relation to G&G, the unamended points of claim alleged that "in their breach of their fiduciary duties as directors… Mr Gourgey has… with the support of his sons" caused the alleged improper payments to be made. The petition itself contained no allegation in relation to the sons' support. The Court of Appeal decided, contrary to the view taken at first instance, that this was a proper pleaded basis for a buy-out order against the sons. Although the sons would have been entitled to significant further particulars, they served points of defence in 2013 without seeking them and it was therefore too late to apply to strike out the points of claim on the basis of any lack of particularity. Accordingly, Mr Griffith did not need to pursue his application to amend in relation to G&G, so the issue of the sons being permitted to plead a full defence in response did not arise.

The Court of Appeal also decided that the sons' support should have been alleged in the petition itself, which defined the ambit of the case. However, Mr Griffith was entitled to cure this by amendment and there was no injustice to the sons in that, given that they had known of the case against them since 2013.

In relation to Bankside, the Court of Appeal held that Mr Griffith's proposed amendment simply extended his existing claim for relief to additional shares and did not introduce a new claim for relief. Accordingly, there was no reason to permit Mr Gourgey to plead back and in doing so bypass the order striking out the points of defence. Mr Gourgey was therefore entitled to plead back only to the extent that the extension to additional shares gave rise to new arguments (eg, that Mr Griffith had known of the alleged unfair prejudice when the new shares had been acquired).

Comment

Parties presenting unfair prejudice petitions should ensure that their petition sets out the grounds for relief as these grounds cannot, in general, later be extended in the points of claim. Where points of claim lack particularity or arguably disclose no basis for the relief sought, any request for further information or application to strike out should be brought promptly.

Further, where a party has been subject to a draconian order such as the striking out of their points of defence, the courts will be slow to allow any relief from the consequences of that order, even where there have also been failings by the other party.

The decision concludes with an expression of considerable concern from the Court of Appeal in relation to the resolution of the petitions, with a clear instruction to the courts below to further the overriding objective and control the progress of the proceedings and to the parties to cooperate to achieve a resolution of the dispute or face "stringent orders against them, including as to costs". This shows that (with good reason) the Court of Appeal will not tolerate an unfair prejudice petition being progressed so little in six years.

(1) [2019] EWCA Civ 2046
(2) [2015] EWHC 1080 (Ch)
(3) [2017] EWCA Civ 926
(4) [2018] EWHC 1035 (Ch)
(5) [2018] EWHC 2807 (Ch)

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Prevention principle – can parties sue for breach of contract occasioned by their own breach?

Thu, 05 Dec 2019 09:46:35 Z

Facts

This case centred on a loan agreement entered into in 2009 (and subsequently restated in 2016) by the third and fourth claimants as lenders and the first and second defendants as borrowers. The relevant loan facility of $69 million was for the purchase of two vessels, the Honami and the Philomena. Both vessels were purchased by the borrowers using the loan sums and served as security for the loan.

On 8 September 2017 the second claimant (the security agent for the loan) served a loan-to-value (LTV) notice stating that the fair value of the vessels was insufficient to comply with the terms of the LTV ratio specified in the loan agreement. On 20 October 2017 an acceleration notice was served requiring that the loan sum and accrued interest be repaid immediately. No repayment was forthcoming and following the issue of proceedings in the United States and Singapore, both vessels were arrested and the Philomena was sold at auction.

On the basis of the defendants' failure to repay the sums due under the loan agreement, the claimants applied for summary judgment. One of the bases on which the defendants resisted the application was the prevention principle.

Prevention principle and its application

The ‘prevention principle’ was described in Roberts v The Bury Improvement Commissioner ([1870] LR 5 C P 310) as follows:

it is a principle very well established at common law, that no person can take advantage of the non-fulfilment of a condition the performance of which has been hindered by himself… and also that he cannot sue for a breach of contract occasioned by his own breach of contract, so that any damages he would otherwise have been entitled to for the breach of the contract to him would immediately be recoverable back as damages arising from his own breach of contract.

In this case, the defendants argued that the claimants had committed various wrongful actions, including materially and recklessly overstating the shortfall in the LTV notice, which amounted to a repudiatory breach of the loan agreement and had caused the defendants' inability to repay the loan on maturity. The defendants argued that this fact pattern engaged the prevention principle.

For the purposes of determining the summary judgment application, the claimants agreed the fact pattern put forward by the defendants. Accordingly, the court had to determine whether the prevention principle defence had a real prospect of success, so as to clear the summary judgment hurdle.

The claimants argued that the prevention principle was not applicable; the true basis of the principle is that it is a term implied into contracts and therefore capable of exclusion if inconsistent with another express term of the relevant contract. The principle was inconsistent with the wording of a no set-off clause in the loan agreement, which stated that "all amounts due from the Borrowers… shall be paid (a) without any form of set-off, cross-claim or condition".

The judge accepted that the authorities(2) recognised that the language of a contract could in principle constrain the court to hold that the prevention principle was not applicable.

Looking at the wording of the clause, the judge held that while it would prevent the defendants from resisting liability for amounts due by reason of any alleged set-off or cross-claim, it did not stop the defendants from arguing that the amounts claimed were not due in the first place. Therefore, the judge found that the defendants had an arguable defence and refused the claimants' application.

Comment

This case provides an interesting illustration of the application of the prevention principle, although it is disappointing that the judge did not take the opportunity to clarify the precise legal basis from which it arises.

This case is of further interest as it distinguishes the judgment of Mr Justice Teare in Cargill International Trading Pte Ltd v Uttam Galva Steels Ltd ([2018] EWHC 2977 (Comm)), which also concerned the interaction of the prevention principle with a no set-off clause. In that case, it was held that the relevant clause had excluded the prevention principle. The distinction between the two cases was due to the relevant clause in Cargill being "rather wider in effect than simple no set-off clauses" as it contained an express provision that no default by the claimant of its obligations under the relevant agreement should suspend, terminate or extinguish the defendant's payment obligations.

Contracting parties may wish to consider whether to insert express wording into contracts containing no set-off clauses that would exclude this principle.

(1) [2019] EWHC 2918
(2) Citing New Zealand Shipping Co v Societe des Ateliers et Chantiers e France, [1919] AC 1, which referred to Alghussein

A Litigator's Quiz: First Candle of Advent

Mon, 02 Dec 2019 14:10:00 Z

Legal professional privilege burns bright in the hearts of most disputes lawyers. Does it burn bright enough to light the first Advent candle in 2019?

In house lawyer prevented from relying on a leaked email and an overhead conversation

Thu, 28 Nov 2019 11:30:00 Z

In support of his claim, Mr Curless relied on a leaked email from April 2018 sent by Shell’s Managing Counsel, Ms Alex Ward, to Mr Curless’ manager. In this email, Ms Ward explained that Shell could use a planned re-organisation of its in-house legal team in order to terminate Mr Curless' employment. Ms Ward had added that this approach was worth considering so as to avoid the risk of "impasse and proceedings with ongoing employment with no obvious resolution". Mr Curless alleged that the emails showed that Shell's redundancy process was a sham used to terminate his employment, and that he was made redundant because he had raised his grievances internally about his disability discrimination and because he had brought a claim in the Employment Tribunal.

Mr Curless also relied on a conversation he overheard in a London pub in or around May 2016 between two people, who he believed to be lawyers from Lewis Silkin (a firm advising Shell). The two individuals were discussing how a senior lawyer's days at Shell were numbered because the lawyer’s employment tribunal claim was to be handled firmly, and that Shell planned to use the context of a redundancy exercise to terminate his employment purportedly by reason of redundancy.

Employment Tribunal and Employment Appeal Tribunal decisions

The Employment Tribunal had denied Mr Curless the ability to rely on the email or the conversation on the basis that both were legally privileged. The Employment Appeal Tribunal had reversed this decision, finding that the email showed that the redundancy exercise was used as a "cloak" to dismiss Mr Curless and that the legal advice had fallen foul of the "iniquity principle" by being provided or received to commit an iniquity.

Findings

The Court of Appeal found:

1. The email remains legally privileged and cannot be relied upon by Mr Curless. The advice contained within the email was not to act in an underhand or iniquitous manner, rather, it was the "sort of advice which employment lawyers give "day in, day out"" when an employer wishes to consider making redundant an employee who is regarded as underperforming.

2. The overheard conversation could not be used as an aid to interpret the email from Ms Ward. The email predated the conversation by two weeks and there was no evidence that the individuals whose conversation was overheard, had seen Ms Ward's email. Therefore, gossip from third parties could not taint the advice in the email.

3. The anonymity order from the Employment Tribunal (where the case was referred to as X v Y Limited) was not binding on the Court of Appeal. The Court of Appeal rejected Shell's application for a similar order on the basis that there is a high bar to meet in order to displace the general position that a hearing should be held in public. The mere fact that a judge conducting a future substantive hearing may have to exclude from their consideration evidence was found to be inadmissible is an insufficient reason, as it is standard practice for judges to decide on the admissibility of evidence before or during a trial.

Comment

The Court of Appeal's judgment will reassure employers that legal advice obtained will remain privileged where it is advice which is of a nature typically given in the circumstances. However, the fact that the Court of Appeal considered the text of the email to determine this issue demonstrates that it remains open to parties to argue that legal advice is not privileged because it has fallen foul of the "iniquity principle".

The question of whether one can rely on overheard conversations again will be one that is heavily fact dependent. The fact that there was no evidence in this case that the overheard conversation was directly related to Ms Ward's email meant the Court did not need to consider whether the conversation had led to privilege being waived over that email.

Contribution to legal costs: natural love and affection or calculated self-interest?

Wed, 20 Nov 2019 15:32:00 Z

The facts

The claimants were awarded judgment in a very substantial fraud claim (US$287,834,593) against the second defendant, Mr Arip, and the third defendant Ms Dikhanbayeva. The defendants were ordered to pay the claimants £8,000,000 on account of costs. The judgment remained unsatisfied as both Mr Arip and Ms Dikhanbayeva claimed to be unable to pay the sums ordered against them.

The claimants attempted to enforce the judgment and in the process, discovered that Mr Arip's wife, Mrs Arip, and her mother, Ms Asilbekova, had jointly funded over 50% of Mr Arip and Ms Dikhanbayeva's defence costs, despite neither being party to those proceedings.

Accordingly, the claimants applied under section 51 of the Senior Courts Act 1981 for an order that Mrs Arip and Ms Asilbekova should pay the claimants' legal costs of the proceedings.

Legal principles

The costs of and incidental to all proceedings in the High Court "shall be in the discretion of the court"[2]; this discretion includes the power to determine "by whom and to what extent the costs are to bepaid"[3].

Ultimately, whether a costs order is made against a non-party will depend upon whether the court considers it just. While this is a highly fact specific exercise, the courts have provided some guidance; for example, the discretion will not normally be exercised against 'pure funders' (for example litigation funders) who have no personal interest in the litigation, do not stand to benefit from it and in no way seek to control its course. In general, those with an indirect interest, particularly if it is linked to emotional or family involvement with the party being supported, are not normally regarded as interested parties.

This means that where a non-party not merely funds the proceedings but substantially controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he/she will pay the successful party's costs.

The decision

The court considered the circumstances surrounding the funding by Mrs Arip and Ms Asilbekova of Mr Arip and Ms Dikhanbayeva's defence.

Just before the proceedings had started, Mr Arip arranged for a very large sum to be paid into a trust (the WS Settlement) of which he and his wife were beneficiaries. The bulk of this sum was then distributed to Mrs Arip in three tranches between 2010 and December 2013, substantially depleting the trust.

The last and largest tranche was distributed to Mrs Arip after proceedings had been commenced. Shortly thereafter, Mrs Arip began funding the defence of her husband and Ms Dikhanbayeva, and continued to do so until after judgment.

Mrs Arip stated that the reason for her generous funding was that her husband had run out of money and that, out of love and affection, she wished to help him. (This did not explain her funding of Ms Dikhanbayeva's defence).

In addition to funding the defence, Mrs Arip transferred significant sums of money to her brother and her mother, such that at the time of the hearing, over £100 million of the monies transferred to her out of the WS Settlement was either missing or unexplained.

The court found that the distribution of monies out of the WS Settlement to Mrs Arip, and her subsequent transfer of a significant proportion of that money to family members, whilst still retaining control of those funds, was nothing more than an attempt to dissipate her husband's assets, to put them out of reach of enforcement by the claimants. This suggested that the funding of the defence by Mrs Arip, and the complicated movement of funds out of the WS Settlement, was a joint enterprise between Mr and Mrs Arip calculated to frustrate enforcement by the claimants. In this sense, Mrs Arip had a real interest in the outcome of the proceedings, both on the basis that her lavish lifestyle could not be maintained if judgment was enforced against her husband's assets, and that the distributions paid out to her in order to circumvent enforcement were themselves at risk of being attached in enforcement proceedings, as monies which derived from Mr Arip.

Accordingly, the court held that Mrs Arip's funding of the defence was not motivated by natural love and affection for her husband, but was calculated self-interest and part of a joint plan with her husband to dissipate assets and to frustrate enforcement. The court accordingly made a costs order against Mrs Arip, and her mother, Ms Asilbekova, on the basis that the latter had been content for funds to be parked in her account, at the control of Mrs Arip (and her husband).

Comment

Whilst the courts have provided guidance on the factors to be taken into consideration when determining whether or not to grant a non-party costs order, these are not pre-conditions or hard and fast rules as to how the discretion is to be exercised. In all cases, the immutable principle is that the discretion must be exercised justly.

In this case, the court saw through the artifice employed by Mr Arip, his wife and their complicit family members, and recognised the acute injustice and unfairness to the claimants that would result from this scheme to keep monies out of reach of the claimants. In the circumstances, it was just to make a costs order against Mrs Arip and her mother.

[1] Kazakhstan Kagazy Plc, Kazakhstan Kagazy JSC (and others) v Baglan Zhunus, Maksat Arip, Shynar Dikhanbayeva, Sholpan Arip, Larissa Asilbekova [2019] EWHC 2630 (Comm)
[2] Section 51(1) Senior Courts Act 1981
[3] Section 51(3) Senior Courts Act 1981

Risky business: the perils of taking over someone else's contract

Thu, 07 Nov 2019 14:37:27 Z

Background

M&M Contractors hired Flexidig as a sub-contractor to carry out certain civil engineering works. The contract provided that:

The sub-contractor shall maintain and protect the sub-contract Works and shall make good at the sub-contractor's own expense and at such times to be decided by the Contractor, any defects in or damage to the sub-contract Works… Where the sub-contractor does not make good any sub-contract Works to the satisfaction of the Contractor and Client, the Contractor may engage another contractor.

Within six weeks of Flexidig starting work, M&M Contractors became aware of problems with the standard of work and issued a stop notice. Flexidig assured M&M Contractors that it would satisfactorily remedy the defects and was given a second chance. However, it quickly became clear that Flexidig's work was still unacceptable and M&M Contractors issued a further stop notice.

M&M Contractors engaged Coupland to complete the works as a sub-contractor in Flexidig's place. Flexidig subsequently issued proceedings against Coupland. Flexidig alleged (among other things) that M&M Contractors had been required under their contract to give Flexidig the chance to perform any remedial works and that Coupland, by carrying out the works in Flexidig's place after having been notified of that requirement, had caused M&M Contractors to be in breach, thereby committing the tort of inducing breach of contract.

Elements of inducing breach of contract

The tort requires the following(2):

Inducing breach – the tortfeasor must act in such a way that it induces a contract party (the so-called 'influenced party') to breach its pre-existing contract with a third party.
Knowledge – the tortfeasor must know that (or be recklessly indifferent as to whether) the act it is inducing the influenced party to do constitutes a breach of the contract between the influenced party and the third party.
Intent – the tortfeasor must intend to induce the influenced party to breach its contract with the third party. Such intent need not be malicious; simply intending to persuade the other party to breach its contract, or intending the consequences of that breach, is enough.

"Intentional causative participation" in a breach of contract is key.

Was Coupland liable?

The court held that the contract did not require M&M Contractors to give Flexidig the opportunity to complete the works, so there was no breach of contract and consequently no inducing breach of contract.

As to knowledge and intent, at the time of informing M&M Contractors of its rates and entering into the contract, Coupland had been unaware of the pre-existing contract between M&M Contractors and Flexidig. However, by the time that Coupland started work, Flexidig had told Coupland that M&M Contractors was contractually required to engage Flexidig to make good on the defects. M&M Contractors had assured Coupland that it was not. In these particular circumstances, the court held that Coupland had not acted with "reckless indifference" as to whether M&M Contractors would be in breach. Coupland had not been required to ascertain which contention was correct and therefore had no knowledge or intent to induce M&M Contractors to breach its contract.

Is facilitating alone enough to constitute inducing?

The court separately considered whether Coupland had actually done anything which could have constituted inducement to M&M Contractors to breach its contract with Flexidig.

All Coupland had done to participate in a theoretical breach was to comply with M&M Contractors' instructions to carry out the works. Any other competent sub-contractor could have completed the work instead of Flexidig or Coupland. Coupland had not encouraged, induced or persuaded M&M Contractors to commit a breach; as such, there was no causative participation. At worst, Coupland might have facilitated a breach by M&M Contractors through completing the works and thereby depriving Flexidig of the opportunity. However, the court emphasised that facilitating alone, where there is no knowledge, intent or actual inducement to breach the contract, cannot constitute inducing.

Comment

This decision clarifies that merely contracting with another party and thereby giving it the opportunity or means to breach another pre-existing contract is not itself sufficient to constitute inducing. For inducing breach of contract, the party in breach must have actually been induced, influenced or encouraged to commit the breach; facilitating alone is not enough.

More practically, the case is also a reminder of the perils of becoming involved as a third party in others' disputes. Although it is unclear from the judgment who was paying Coupland's costs, it can be assumed that Coupland did not contract with M&M Contractors expecting that it would ever be sued by Flexidig. Service providers taking over from other service providers that have failed to deliver would be well-advised to make provision for reimbursement by the employer if they become embroiled in any disputes between the employer and the original service provider.

(1) [2019] EWHC 2578 (TCC)
(2) OBG v Allan [2008] 1 AC 1

Anchor Defendants: Court of Appeal confirms no 'sole object' test applies

Thu, 07 Nov 2019 14:21:48 Z

Where claimants have a sustainable claim against an 'anchor defendant' that they intend to pursue to judgment, they may rely on article 6(1) to bring a foreign co-defendant within the jurisdiction. This will be the case even if the claimant's sole object in suing the anchor defendant is to sue the foreign co-defendant in the same proceedings.

Background

The claimant, Privatbank, commenced proceedings in England against two Swiss-domiciled individuals, Igor Kolomoisky and Gennadiy Bogolyubov, as well as companies domiciled in England and the British Virgin Islands. Privatbank alleged that the defendants were involved in fraudulently misappropriating over US$1.9 billion from the bank.

Privatbank relied on article 6(1) of the Lugano Convention to sue each of the defendants in England and obtained a worldwide freezing order against all the defendants. Under article 6(1), defendants domiciled in a Convention state may be sued, where there are multiple defendants, in the jurisdiction where any of the defendants are domiciled, 'provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments'.

On application by the defendants, the High Court discharged the freezing order. The court found that as Privatbank commenced proceedings against the English defendants with the 'sole object' of bringing Mr Kolomoisky and Mr Bogolyubov within the jurisdiction, it was not entitled to rely on article 6(1). On that basis, the court did not have jurisdiction over these defendants. The High Court also stayed the proceedings against the English defendants and found that it did not have jurisdiction over the claim against the BVI defendants on the grounds of forum non conveniens.

Privatbank appealed.

A key issue for the Court of Appeal was whether article 6(1) of the Lugano Convention is subject to a 'sole object' test that precludes claimants from relying on it for the sole object of subjecting a foreign defendant to another jurisdiction.

Other issues on appeal included whether the court had jurisdiction to stay the proceedings against Mr Kolomoisky, Mr Bogolyubov and the English defendants and, if so, whether the High Court correctly exercised its discretion in deciding to grant a stay.

The 'sole object' test

The Court of Appeal held that article 6(1) is not subject to a sole object test. The court considered that the terms and drafting history of article 6(1) favour this view. As article 6(2) expressly includes a sole object condition, it is fair to ask why one is not also included in article 6(1) if it was intended to apply.

Further, adding a test to article 6(1) based on a claimant's intentions would add uncertainty to a question that requires certainty and predictability: the allocation of jurisdiction among member states.

Applying relevant authorities, the court found that article 6(1) is subject to the principle of abuse of law, which applies generally to rights under EU law, rather than a sole object test: claimants cannot rely on article 6(1) where they artificially fulfil or prolong the 'close connection' condition. The court gave examples of this, such as using a fictitious anchor defendant.

The court also accepted that relevant decisions of the Court of Justice of the European Union support the proposition that the 'vice' in using article 6(1) solely to remove a foreign defendant from the state of their domicile was met by the 'close connection' condition.

Privatbank was therefore entitled to rely on article 6(1) even if its sole object in commencing proceedings against the English defendants was to bring Mr Kolomoisky and Mr Bogolyubov within the jurisdiction of the English courts.

The court went on to find that even if article 6(1) was subject to a sole object test, it was not met here. A claimant's object must be determined objectively. Aside from suing foreign defendants in England, Privatbank had another reason to sue the anchor defendants: obtaining relevant documents through disclosure. The sole object test was not therefore passed.

Stay of proceedings

Did the court have jurisdiction to stay the proceedings against Mr Kolomoisky and Mr Bogolyubov?

The High Court held that even if it had jurisdiction over these individuals, it would have granted a stay of the English proceedings against them because a related action was pending in Ukraine. Mr Kolomoisky had brought a defamation claim against Privatbank and a journalist in Ukraine, in respect of an article alleging that he had fraudulently siphoned substantial funds from the bank. The other defendants to the English proceedings were joined as third parties to the Ukrainian defamation action.

The High Court applied article 28 of the Lugano Convention, which provides that where related actions are pending in different Convention states, any court other than the court first seised may stay its proceedings. Actions will be ‘related’ if they are ‘so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments'.

Article 28 did not apply directly here, as Ukraine is not an EU or Lugano Convention state. However, the High Court applied it 'reflexively', or by analogy.

The Court of Appeal held that it was correct to do so. Recognising that the same principles underlying the Convention should apply in cases involving pending proceedings in a third state, the court found that this approach did not impermissibly extend the scope of the Convention or undermine it. Rather, a reflexive application was in line with the Convention's purpose: achieving certainty in relation to jurisdiction and avoiding the risk of inconsistent judgments.

The Court of Appeal also approved the High Court's finding that the proceedings were 'related' for the purpose of article 28. The court's decision on this point is discussed further below.

Accordingly, the High Court did have jurisdiction to stay the proceedings against Mr Kolomoisky and Mr Bogolyubov.

Did the court have jurisdiction to stay the proceedings against the anchor defendants?

The High Court also stayed the proceedings against the English defendants, pursuant to article 34(1) of the Recast Brussels Regulation[3], on the basis that related proceedings were pending in Ukraine. For a stay to be granted under article 34(1), it must be 'expedient to hear and determine the related actions together to avoid the risk of irreconcilable judgments'.

The Court of Appeal agreed that Mr Kolomoisky's Ukrainian defamation claim and Privatbank's English fraud claim were 'related' for the purpose of both article 34(1) of the Recast Brussels Regulation and article 28 of the Lugano Convention. As a result, the High Court had jurisdiction to grant a stay.

The court rejected Privatbank's submission that as the claims could not be consolidated, they were not related. The word 'expedient', as used in article 28 and article 34(1), was more akin to 'desirable' and did not require that consolidation be possible or practicable. If it was intended that proceedings had to be capable of consolidation in order to be 'related', the articles would expressly refer to consolidation, as other provisions of the Recast Brussels Regulation do.

Did the High Court correctly exercise its discretion in staying the proceedings?

While the High Court's decision that it had jurisdiction to stay the proceedings was correct, its exercise of that jurisdiction was not.

The Court of Appeal set aside the decision to stay the proceedings against Mr Kolomoisky, Mr Bogolyubov and the English defendants and held that these claims could proceed in England. The fact that proceedings cannot be consolidated is a compelling reason to refuse a stay without a strong countervailing factor and here, there was no countervailing factor. It would be ‘entirely inappropriate’ to stay an English fraud claim in favour of Ukrainian defamation claims where the fraud claim involved ‘fraud and money laundering on an “epic scale”’ and the bank had a good arguable case to recover US$1.9 billion.

Further, the High Court had erroneously proceeded on the basis that the Ukrainian court had not considered the merits of Mr Kolomoisky's defamation claim, when in fact the Ukrainian court had assessed the claim to be 'frivolous and fabricated'. In those circumstances, the correct exercise of the High Court's discretion would have been to refuse a stay.

The Court of Appeal also set aside the High Court's decision to stay the proceedings against the BVI defendants on the ground of forum non conveniens. The BVI defendants were necessary or proper parties to Privatbank's English claim.

Comment

By confirming that claimants are entitled to use article 6(1) of the Lugano Convention as a vehicle to submit foreign co-defendants to a chosen venue, this decision will be of significant assistance to claimants where one or more co-defendants are domiciled in their preferred jurisdiction.

The decision confirms that not only is it legitimate to have regard to the various advantages that certain jurisdictions offer, it is also perfectly acceptable to commence proceedings against an anchor defendant with the sole object of securing those advantages. While claimants that use article 6(1) in this way must have a sustainable claim against an anchor defendant which they intend to pursue to judgment, and must not artificially fulfil or prolong the close connection condition, these qualifications are not unduly onerous.

This case also provides helpful clarity as to the reach of the Lugano Convention and confirms that courts may apply article 28 reflexively where related proceedings are pending in a third state.

[1] Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters [2007] OJ L339/3.
[2] JSC Commercial Bank Privatbank v Kolomoisky & Ors [2019] EWCA Civ 1708.
[3] Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L 351/1.

When is opinion evidence admissible?

Thu, 31 Oct 2019 15:07:34 Z

The facts

In February 2008, Mr Barry Pring was killed when a vehicle struck him while he stood on the hard shoulder of a motorway in Ukraine. The vehicle failed to stop, and the driver's identity has never been determined. Mr Pring died intestate and had no children.

The circumstances of Mr Pring's death were highly controversial. His mother and brother tried to establish that Mr Pring's widow, Ms Moore, organised Mr Pring's death and so under English law she should not benefit from it.

The family's case was entirely based on inference. They relied on three documents:

a witness statement of a Mr Salenko (a Ukrainian investigator) that included reference to what Mr Salenko had been told by another investigator about Ms Moore's movements on the night of Mr Pring's death;
'maps' produced by Mr Salaneko (in reality photos of locations near to the crime scene, marked up by reference to mobile phone data to show the apparent location of Ms Moore in the aftermath of Mr Pring's death) – based on information given to him by the same investigator; and
a summary (or 'protocol') of mobile phone data obtained from Ms Moore's records and covering the relevant period, prepared by a Ukrainian Internal Affairs Captain and signed by two witnesses. This was the subject of a Hearsay Notice served pursuant to Civil Procedure Rule 33.2.

Ms Moore applied to have the documents, including the 'maps', excluded from evidence on the basis that they constituted expert evidence which is not admissible without the permission of the court.

The law

The relevant law is found in Section 3(1) of the Civil Evidence Act 1972, CPR 35 and
Section 1(1) of the Civil Evidence Act 1995.

Generally speaking, opinion evidence (even hearsay) is admissible without permission, only if it is relevant and prepared by someone who is qualified to give expert evidence. If the evidence is prepared for the purposes of the proceedings, (in other words, the expert responsible was instructed by one of the parties), CPR 35 will apply and permission to adduce it will be required. So, evidence by an expert who is not instructed by one of the parties, or evidence which is not produced for the purpose of those proceedings, cannot fall within CPR 35 and permission to adduce it is not required.

The judgment

The court summarised the case law in this area, including Hoyle v Rogers[2] and Illumina v TDL Genetics Ltd[3]. In its assessment of the facts, it focused on whether or not the witness statement, maps and protocol had been prepared by someone who was qualified to give evidence as an expert. The judge concluded that CPR 35 did not apply because the documents were not produced for the purposes of these proceedings.

The court noted that it had wide powers to exclude evidence that is otherwise admissible, but should be cautious in excluding before trial potentially admissible evidence since it is the trial judge who will be best placed to determine its relevance. In relation to the specific documents, the court found as follows:

The witness statement: this contained hearsay evidence that was admissible in that it recorded what Mr Salenko was told by another investigator. If the information that had led to the annotation of the maps did not require an expert to opine, then the evidence was admissible as hearsay fact. If it did, it was admissible as expert evidence.
The 'maps': the court could not determine whether or not the annotations on the 'maps' could only derive from an analysis by a person qualified to give expert evidence. In other words, it was possible that a lay person could have drawn the same conclusions if faced with the same underlying information.
The protocol: the court could not determine whether an expert would have been required to produce the protocol. The fact that the source of the evidence could not be identified was not an objection. The protocol was accordingly admissible either as hearsay evidence of fact, or of both fact and opinion.

Comment

The case clearly sets out the difference between evidence which will be subject to CPR 35's restrictions and that which will not be. Where relevant opinion evidence (even hearsay) is prepared by someone qualified to give expert evidence, it will generally be prima facie admissible. Where the evidence is produced by an expert instructed by the parties for the purposes of the proceedings, however, it will be subject to CPR 35 and permission to adduce it will be required.

It is notable that the applicant in this case did not advance a comprehensive argument as to why certain evidence could only have been undertaken by an expert – if she had, the outcome may have been different and arguably the outcome on the facts would have been more helpful for practitioners. The court made clear that it was operating without any information as to Ukrainian law – it said that it would have been beneficial for the parties to produce information as to the Ukrainian approach to mobile phone data analysis (and whether an expert is needed to undertake it). Parties should take care to provide the court with all possible information it might need to analyse the evidence before it.

[1] [2019] EWHC 2430 (Ch)
[2] [2014] EWCA Civ 257
[3] [2019] EWHC 1159

World freezing orders: recent dissipations and reasonable delays

Thu, 24 Oct 2019 17:05:00 +0100

Overview

The High Court has held that an alleged 20-month delay in applying for a world freezing order was not fatal to its continuation at the return date in circumstances where:

the nature, value and conduct of the underlying transactions provided solid evidence of a risk of dissipation; and
the delay in seeking relief from the English courts was not material and did not evidence the absence of a genuine belief in that risk.

While the court may be reluctant to freeze assets on the basis of historic transactions, the ultimate question is whether solid evidence exists of a risk of dissipation "even if the trail goes somewhat cold thereafter".

Timeline of events

The claimant Russian banks held outstanding loans granted to a corporate group allegedly owned by Mr Boris Mints, the O1 Group. The banks claimed that the O1 Group had – with the assistance of various bank officials and a third-party entity – defrauded them to the value of $572 million by taking the following steps:

August 2017: shortly before the first bank was placed into temporary administration by the Central Bank of Russia and at a time when the second bank was expected to follow suit, the O1 Group:
- terminated its existing secured (and largely performing) loan arrangements with the banks;
- replaced the banks' security with "illiquid and unmarketable" bonds issued by an O1 Group entity; and
- used the purchase monies to repay the group's debts.
October 2017 to December 2017: the O1 Group divested assets returned to it and the third-party entity as a result of the repayment of its existing loans.
December 2017 to June 2018: the O1 Group reduced the share capital of a group entity by approximately $202 million, with the monies to be paid back to the O1 Group.

The second bank had met with and written to Mr Mints in September 2017 to demand that the O1 Group reverse the transaction which replaced its security. It subsequently issued proceedings against O1 Group entities in Russia in October 2017 and in Cyprus in January 2018. In response, the entities involved in the alleged fraud issued arbitration proceedings in London in January and February 2018 to establish the propriety of the underlying transactions.

In June 2019, the banks applied for and were granted a world freezing order against Mr Mints and his sons in the English courts. The order was granted on the basis that the banks had:

established that they had a good arguable case against the Mints; and
provided solid evidence of a risk of an unjustified dissipation of assets.

The Mints accepted that the banks had a good arguable case against them but challenged the continuation of the world freezing order on two fronts:

the banks had not established a sufficient risk that assets would be dissipated; and
the banks had materially delayed in seeking relief from the English courts.

The court considered both grounds on the return date of 11 July 2019.

Risk of dissipation

On the basis that the material before the court was sufficient to establish a real risk of dissipation, the Mints bore the burden of providing:(2)

i) "satisfactory explanations of the transactions and facts upon which a case of dissipation is based"; or

ii) "positive evidence that, notwithstanding those matters, there is no real risk of dissipation".

The Mints served no evidence to challenge the continuance of the worldwide freezing order or to counter the banks' claim against them. Instead, the Mints relied on assertions made in their written and oral submissions in connected proceedings. The court gave those arguments short shrift.

In relation to the second point above, although the risk of dissipation had been established on the basis of transactions carried out between August 2017 and March 2018 (at the latest), the court's view was that:

If there are very large transactions carried out within a period of a year or two prior to the application for a [worldwide freezing order], this may well be (and is in this case) material evidence in support of a risk of dissipation, even if the trail goes somewhat cold thereafter".

The court may be reluctant to accept historic transactions as evidence of an existing risk of dissipation but an applicant need not identify recent transactions (which may be made more difficult due to a lack of dealings with the respondent or a lack of available information on recent activities). The evidence must be considered as a whole and the primary question to be considered is whether solid evidence of a risk of dissipation exists, not when it dates from.

Banks' delay

The court rejected the Mints' argument that there had been a 20-month material delay in the banks' application (i.e, the period between proceedings being issued in Russia in October 2017 and the application being issued in England in June 2019). The court held that the only relevant delay ran from the date on which the banks obtained "reasonably reliable evidence" that the Mints were in its jurisdiction and that proceedings could be commenced in England "with any degree of confidence".

It was submitted that the banks ought to have been aware of Mr Mints' move to England on the basis of an article published in the Daily Mail in May 2018, but the court held that there was no evidence that the banks were aware of the article or appreciated its accuracy. If they were, at a maximum, the article would have warranted further investigation.

On the banks' own evidence before the arbitral tribunal, they were aware that the Mints had relocated to England in September 2018 (and of further press reports to that effect). They subsequently took positive steps to progress matters, including establishing a team to review possible claims and a team to search for and retrieve emails. However, proceedings were delayed by the fact that the banks were investigating other transactions with a view to bringing all claims at one time and had been exploring the possibility of a commercial settlement. Their investigations had also been hindered by limited access to emails and cooperation from staff.

The court accepted that there had been some delay between the investigation of the banks' claims (beginning in September 2018) and the instruction of solicitors (in March 2019). That six-month period was held to be the only delay relevant for the purposes of continuing the freezing order but was not considered to be evidence that "there was no genuine belief in a risk of dissipation by these Defendants, in circumstances where there was evidence of such a belief in relation to companies which they controlled". During that period, the banks had:

taken steps to progress their claims in England; and
advanced proceedings and obtained freezing orders against the O1 Group in other jurisdictions.

The banks had also provided explanations in evidence as to why the delay had occurred.

The further delay between the banks instructing solicitors (in March 2019) and issuing the application (in June 2019) was deemed not to be material "in view of the complexity of the transactions and the evidence, and the need to ensure that all relevant facts were fairly disclosed to the court".

Comment

Each freezing order is fact specific and the court emphasised the limited value of comparing the details of specific cases. It remains the case that any application for a world freezing ought to be brought promptly in order to maximise its prospects of success and recovery.

However, on the court's ruling, an application does not require evidence of recent dissipations in order to succeed. The ultimate question is whether, taken in the round, solid evidence of a future risk of dissipation exists or has existed. Further, a reasonable delay in bringing an application for a world freezing order may be permitted if the applicant can provide detailed, evidenced reasons for that delay which show that it continued to hold a genuine belief in the risk of dissipation.

(1) PJSC National Bank Trust v Boris Mints [2019] EWHC 2061

(2) Holyoake v Candy [2017] EWCA Civ 92

Tortious claims against third party may trigger anti-suit injunction

Thu, 10 Oct 2019 14:59:06 +0100

Background

The claim centred on a series of contracts relating to the chartering of a vessel. The charter itself contained an exclusive jurisdiction clause in favour of the English courts.

A portion of the cargo (oil) carried by the vessel was detained by Chinese Customs on the grounds that (contrary to what was stated in the shipping documents) the cargo had not originated in the Philippines. The events unfolded as follows:

The purchaser of the oil, China-Base, brought proceedings against the vessel owner, Xiang Da, in Singapore, alleging misrepresentations in the shipping documents.
In turn, Xiang Da brought third-party claims in Singapore against:
The English court granted interim anti-suit injunctions restraining Xiang Da's third-party proceedings against Clearlake and Gunvor in Singapore.
Xiang Da applied to vary the injunctions on the basis that it wished to pursue only those claims in Singapore that were not subject to the exclusive jurisdiction clause in the charter – namely, a claim against Clearlake under the indemnity and tortious claims against Gunvor for fraudulent and negligent misrepresentation.

Law relating to anti-suit injunctions

The court summarised the law applicable to the grant of anti-suit injunctions. In broad terms, an anti-suit injunction is a discretionary remedy granted by the English courts on two main grounds:

where foreign proceedings constitute the breach of a contractual jurisdiction clause (the ‘contractual basis’). In such circumstances, an anti-suit injunction will be granted unless there are strong reasons not to do so; and
where the foreign proceedings are otherwise vexatious or oppressive. Under this ground, the court must also be satisfied that:

England is clearly the more appropriate forum for the trial (sometimes referred to as 'the natural forum'); and
it is necessary in the interests of justice to grant the injunction taking into account considerations of comity.

When does a tortious claim against a third party trigger an anti-suit?

The court set out the following three-step approach to determine whether a contracting party could enforce an exclusive jurisdiction clause, by an anti-suit injunction, so as to prevent tort proceedings by the other contracting party against a third party:

Does the jurisdiction clause extend to the tort proceedings against the third party, applying general principles of contractual interpretation?
If yes, the contractual basis will apply and the court will grant the injunction unless there are strong reasons not to do so.
Applying privity of contract, only a contracting party (B) and not a third party (C) can enforce a jurisdiction clause (against A) by an anti-suit injunction on the contractual basis. However, the jurisdiction clause may be a relevant factor in granting the contracting party (B) an anti-suit injunction against the other contracting party (A) on the basis that the foreign proceedings are vexatious or oppressive.

Given that there was no contractual basis on which to grant the anti-suit in the present case, were the tortious claims against Gunvor (a third party) vexatious and oppressive in relation to the exclusive jurisdiction clause in the charter? If so, was Clearlake entitled to an anti-suit injunction to prevent these claims from proceeding in Singapore?

On the facts, the court found that Xiang Da had manipulated its third-party claims to try to avoid being caught by the exclusive jurisdiction clause in the Clearlake charter. The alleged misrepresentation was in fact contained in an email from Clearlake, not Gunvor. The claim against Gunvor rested on the misrepresentation being passed via Clearlake. If Gunvor was found liable for misrepresentation, it was hard to see why Clearlake would not also be liable. In the circumstances, it would normally be expected for Clearlake to be sued for misrepresentation as well, and the appropriate forum to sue Clearlake would be England.

Given the above, the court found that the bringing of a tortious claim solely against Gunvor in Singapore and not against Clearlake was a procedural manoeuvre designed to evade the exclusive jurisdiction clause in favour of the English courts.

This precise type of procedural manoeuvre may not have previously triggered an anti-suit injunction. Nevertheless, the court was prepared to grant an injunction in this case. In doing so, it emphasised that the categories of conduct which may be deemed vexatious or oppressive should not be regarded as closed.

Comment

This case demonstrates the courts’ willingness to look into the substance of an impugned foreign claim in order to assess whether it is in fact a tactic designed to evade an exclusive jurisdiction clause. On that basis, claims which are ostensibly framed as falling outside the ambit of a jurisdiction clause may nevertheless be deemed vexatious or oppressive.

Further, the sort of conduct which may be regarded as vexatious or oppressive is not closed. To this end, parties must bear in mind that any litigation tactic in foreign proceedings which is designed to circumvent a jurisdiction clause may similarly give rise to an anti-suit injunction.

(1) Clearlake Shipping Pte Ltd v Xiang Da Marine Pte Ltd [2019] EWHC 2284 (Comm).

Subjective expectation versus objective intention; when will a term be implied into a contract?

Mon, 30 Sep 2019 11:28:00 +0100

The Facts

The claim relates to a dispute over the terms of sale of Peruvian GDNs by Lehman Brothers International (Europe) (Lehman) in early 2014, to the Defendant, Exotix Partners LLP (Exotix). Lehman requires little introduction; it was the primary trading company within the Lehman Group of companies in the UK and Europe. Exotix is a broker for fixed income and equity securities.

GDNs

A GDN is a debt instrument created by a depository bank, (in this instance, Citibank) that evidences ownership of a local currency denominated debt security. GDNs emulate the terms (interest rate, maturity date, credit quality etc.) of particular local currency-denominated bonds, in this case issued by the Republic of Peru. However, unlike the underlying bonds, they trade, settle and pay interest in US dollars.[1]

The Trade

The trade took place within the context of the administration of Lehman's estate. The GDNs were part of a package of miscellaneous assets which Lehman described as "scraps", which it wanted realise by sale to third parties.[2] The trade of the GDNs in this case, was made orally on a recorded telephone line. The parties agreed a transcript of what was said, which recorded that the trade was made on the basis it was:

"the 22 just on the shy of 22…23 thousand er sol at 91 and a half [meaning that the GDNs were currently trading at 91.5% of their par value] which is around 7,712…dollars"

The claim turns on what was meant by this because, although the agreed purchase price was only $7,712, Lehman went on to deliver to Exotix GDNs worth in excess of $7 million, around 1000 times more than was paid.

Exotix did not appreciate the true value of the GDNs it had acquired until it received, some three weeks later, a coupon payment on the GDNs of a sum much higher than anticipated. Despite an employee flagging that he considered that there had been an error on the payment, a Exotix kept the GDNs. A year later, Exotix sold the entirety of the GDNs for a total of US$8.5million and kept the windfall.

The Dispute

Lehman sought restitution on the basis that Exotix had been unjustly enriched. However, in order to achieve this, Lehman recognised that a term needed to be implied into the contract that would recognise fractional sales, so as make the trade workable. This is because if the trade proceeded on Lehman's pleaded interpretation (i.e. the transfer of 22,955 units of GDN) this would see their delivery commitment being for more or less than a whole number of GDNs and this is impossible, as GDNs can only be delivered in full integers. Lehman contended therefore, that a term needed to be implied that required it to:

(1) Deliver 22 GDNs to Exotix; and

(2) Pay Exotix the cash equivalent of 0.955 GDNs.

Exotix presented the problem of delivery for a fraction of a GDN as its trump card, stating that it was unclear as to how such a commitment could be effected where there were no express provisions for fractional entitlements. Exotix argued that an interpretation which would lead to the impossibility of performance, clearly required reconsideration as to whether it could be truly correct.[3]

Although accepting that Lehman was mistaken as to the value of the assets it wished and agreed to sell, Exotix said that this was as a result of "extraordinary lack of care". Exotix maintained that as a matter of strict law, both delivery and the price paid were in accordance with the trade on its objective interpretation and that it had paid what it had contracted to pay. Exotix therefore maintained that Lehman was not entitled to any remedy.

The principal issue for the court to decide was therefore the true meaning and effect of the bargain struck during the oral agreement between the traders. This boiled down to:

(1) what the parties agreed to trade (either:

(a) 22,955 GDNs or

(b) a number of GDNs having a face value of PEN 22,955); and

(2) at what price (US$7,707.93, or by implication, US$7,707,926.69).

In short, there were issues as to both subject matter and price.

Save for limited exceptions, subjective evidence of the parties' intentions must be ignored by the court. At the same time, the court has to resist temptation to mend a bad bargain.[4] In this case, there was no claim for rectification and so it was for the judge to determine the effect of the contract according to its true construction. If it was impossible of performance, or incapable of legal effect, the matter would be governed by the law of restitution.[5]

Decision

The judge found in favour of Lehman and implied a term for settlement of the trade of the fractional entitlement in cash. However, he noted that it was not an entirely straightforward decision , because had the parties realised that they were both under a shared misapprehension with regard to the true nature and value of the GDNs, they would probably have dissolved the agreement, since neither party was considering trading anything more than "scraps". However, taking into account the law's reluctance to negate a contract, the judge chose to give effect to what the parties had (in his finding) objectively agreed, as without it, the contract was unworkable.

It was common ground that if Lehman succeeded in its primary submission as to the interpretation of the trade and the implication of a term to give the contract business efficacy, then Lehman would be entitled to restitution on the ground that Exotix would (on that basis) have been unjustly enriched by the over-delivery of GDNs.

If he was wrong in allowing the implied term, the judge considered Lehman to be entitled to restitutionary relief on the basis that without the implied term, the trade could not be fulfilled in accordance with the terms and there would be a failure of consideration such as to make the contract void and unenforceable.

The appropriate remedy was monetary[6] and, whilst open to the parties agreeing some other measure, the appropriate measure would be for Exotix to reverse its own unjust enrichment by paying to Lehman the price it obtained when it on-sold the GDNs to Deutsche Bank, as attributable to the over-delivered whole number of GDNs, plus interest.

Finally, the judge noted that based on the facts, his finding accorded with both overall commercial good sense and commercial morality.

Comment

This decision is of interest because it considers how the courts should address a situation where the subjective expectation of the parties at the time is clear, but the objective intention apparent from their bargain is more difficult to determine, particularly where the objective interpretation may lead to a contract being incapable of being performed. It also demonstrates the importance of clarity in the subject matter and price in a contract and shows how in the commercial world, the two are often closely connected.

[1] https://depositaryreceipts.citi.com/adr/common/linkpageUL.aspx?pageId=3&subpageid=179

[2] Lehman Brothers International (Europe) (In administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch), paragraph 21

[3] Lehman Brothers International (Europe) (In administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch), paragraph 149

[4] Lord Bingham MR, Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472 at 482

[5] Lehman Brothers International (Europe) (In administration) v Exotix Partners LLP [2019] EWHC 2380 (Ch), paragraph 8
[6] Lord Neuberger of Abbotsbury, Menelaou v Bank of Cyrpus UK Ltd [2016] AC 176 (SC) at [81].

Court orders mediation

Thu, 19 Sep 2019 09:51:43 +0100

Background

Invesco, an investment manager, engaged Ohpen to develop and implement a digital online platform through which Invesco's retail customers could buy and sell investments in funds offered by Invesco.

The framework agreement (Agreement) governing the relationship imposed a range of obligations on the parties in the period between its effective date of 1 July 2016 and the launch of the platform (the Development and Implementation Phase). It included a tired dispute resolution clause (clause 11) that provided for the following staged process:

Internal Escalation: where the parties agreed first to use their respective reasonable efforts to resolve any dispute amicably through ordinary negotiations.
Escalation of the dispute to the respective executive committees of the parties.
CEDR mediation.
English court proceedings.

Delays occurred and the original platform launch date was not met. A revised date was agreed by the parties but there was a dispute as to where the responsibility for the delays lay.

Invesco purported to terminate the Agreement on the grounds of (incurable) material breach and/or repudiatory breach. Ohpen disputed any material and/or repudiatory breach on its part, disputed the validity of Invesco's purported termination and purported to accept Invesco's repudiatory breach.

Whilst the parties agreed that their primary obligations under the Agreement were terminated, there was a dispute as to which party was in material and/or repudiatory breach of contract. At the end of January 2019 the parties held a without prejudice meeting to attempt to resolve the dispute, but no agreement was reached.

The court proceedings

In April 2019, Ohpen issued proceedings, claiming damages of £4.7 million arising from what it said was Invesco's wrongful termination. Invesco counterclaimed for the sum of approximately £5.7 million.

In May 2019 Invesco applied for a declaration that the court would not hear Ohpen's claim pending compliance with the contractually agreed dispute resolution procedure. Invesco submitted that clause 11 of the Agreement was a valid, binding and applicable alternative dispute resolution clause, which prescribed a tiered process of mandatory escalation and mediation procedure prior to the commencement of proceedings.

Ohpen submitted that, as a matter of construction of the Agreement, the relevant dispute resolution provisions were not applicable outside the Development and Implementation Phase or following termination of the Agreement.

High Court analysis

The court found that the dispute resolution provision created an enforceable obligation requiring the parties to engage in mediation. Furthermore, the clear purpose of the English court proceedings provision was to create a mandatory requirement to pay heed to the dispute resolution procedure before a party could institute proceedings. As such, although the term "condition precedent" was not used, the words used made it clear that the right to commence proceedings could only arise if the dispute resolution procedure (including mediation) failed. The court referred to the public interest arguments in favour of enforcing agreed ADR provisions considered in Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd

The commercial purpose of the dispute resolution procedure was for the parties to achieve swift resolution to any disputes and avoid litigation. Specifically, the purpose served by the clause in question was to avoid disruption to the development and implementation of the online platform. No commercial purpose would be served by curtailing the parties' right to use the dispute resolution process in respect of a dispute that had already arisen, or by halting an ongoing process, at the end of the relevant phase. This could lead to a situation where certain disputes in relation to the development of the platform were caught by the dispute resolution procedure and others not, even where such disputes were closely connected and arose at the same time. It is very unlikely that the parties would have intended an incomplete mechanism for resolving their disputes.

The court noted in this context that it was common ground that, as a matter of principle, dispute resolution obligations ordinarily survive the discharge of the parties' primary obligations under a contract: Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Australia) Pty.

Clause 11 was intended to apply to all disputes, and was indistinguishable from an arbitration clause which, on the authorities, would survive termination. In any event, on a plain and natural reading of clause 11.2, it encompassed disputes arising both prior to and after termination.

The court ordered a stay of the proceedings to enable a mediation to take place and, with a view to maximising the prospects of a settlement, that pleadings should be served and therefore substantive issues clarified before that mediation.

Comment

This decision continues the post-Sureterm union between commercial common sense and the plain and ordinary meaning of words, which happily coincided in this decision. The court's decision to stay these proceedings, whilst ordering pleadings to be filed, is a good example of the courts taking both a common sense and pragmatic view to dispute resolution clauses that the parties intended to be bound by when the original contract was signed.

High Court waits for no lawyer

Wed, 11 Sep 2019 14:45:09 +0100

Two days too late

The claimant, Ms Rafaela Evans, applied for permission to appeal a decision of a costs judge dismissing her application for an assessment of the defendant's costs. The application to appeal was considered on the papers and a copy of the order dismissing the application was received by the claimant's solicitors on 21 May 2019. The claimant then had seven days to apply for a hearing to renew the application for permission to appeal. The events unfolded as follows:

30 May 2019 (nine calendar days later) – the claimant's solicitors wrote to the court stating that "we understand that today is the final day to request for an oral hearing taking into account the Bank Holiday dated 27 May" and requesting that the decision be re-considered. The letter was not sent to the defendant's solicitors.
3 June 2019 – the claimant's solicitors received the notice that the renewed application had been listed and sent a copy (along with the 30 May letter) to the defendant's solicitors.
4 June 2019 – the defendant's solicitors wrote to the court asserting that the claimant's application to renew her application for permission on 30 May had been made late and was therefore invalid. Civil Procedure Rule 2.8(4) provides that a bank holiday is excluded from the computation of time where the specified period is five days or less, which did not apply in this instance given that the relevant time period was seven days.

Claimant's application for relief from sanction and two-day extension

On 6 June 2019 the claimant applied for relief from sanction and a retrospective extension of two days to apply for an oral hearing for permission to appeal. The application was supported by a witness statement from the claimant's solicitor, who stated that as soon as the delay or breach was brought to his attention, his firm had written to the court to request an oral hearing (which was the 30 May letter).

On 11 June 2019 the court granted relief on the basis that the extension had been short and the default not serious or significant.

Appeal of grant of relief and extension

The defendant appealed the 11 June 2019 decision and drew the court's attention to the inconsistencies between the 30 May letter and the 6 June witness statement. The witness statement stated that it had been the realisation that the application was two days late which had prompted the 30 May letter, whereas the 30 May letter asserted that the final day for the application had been 30 May.

The claimant then served a further witness statement from her solicitors. This explained that:

the wording of the first 6 June witness statement was 'terrible';
there had been no intention to mislead the court in the 6 June witness statement; and
at the time that the 30 May letter was prepared, the claimant's solicitors had believed that the application was still on time.

What did the High Court say?

The High Court was dissatisfied with the claimant's further evidence. It found in favour of the defendant and refused the claimant's application for relief from sanction. As a result, the claimant will not be able to pursue her appeal.

The court took the view that the court had been seriously misled by the 6 June witness statement, for which it considered that there was no adequate explanation. The court was even more concerned with the possibility that the claimant's solicitors had known that the application was two days late on 30 May but hoped to pull the wool over the court's eyes by asserting that the application was on time. Matters were made even worse by the claimant's failure to serve the 30 May letter on the defendant so as to provide it with the opportunity to make representations to the court and the claimant that the application was out of time.

How does this decision affect you?

The calculation of time periods under the English Civil Procedural Rules can be complicated but is essential to get right. This decision is a reminder that an entire case may stand or fall on the correct calculation – as well as a reminder of the importance of accuracy and clarity in court correspondence and evidence.

(1) Evans v Pinsent Mason LLP [2019] EWHC 2150 (QB)

Notice givers take care – ignore the contract at your peril

Thu, 29 Aug 2019 14:22:00 +0100

Background

This dispute arose in the context of a 2008 share purchase agreement (the SPA) under which Stobart Group Ltd (SGL) acquired Stobart Rail Limited (SRL) from sellers, William Stobart and Andrew Tinkler.

As is common in such transactions, the SPA provided for the sellers to pay any tax liability incurred by SRL prior to the sale but which had not been recognised until after the sale.

The dispute centred on two notice provisions relating to the tax covenants in the SPA:

Paragraph 6.3: related to a claim by SGL against the sellers and set out the requirement for SGL to send the sellers an advance notice if it intended to make a claim against the sellers for a tax liability. The sellers would not incur any such tax liability unless a paragraph 6 notice was served within seven years of the completion of the acquisition.
Paragraph 7.1: related to a claim by HMRC against SRL and set out the requirement for SGL to send the sellers a notice providing details of any such HMRC claim.

As to how these provisions were intended to operate in practice, following receipt of a tax demand by HMRC, SGL was required to send the sellers a paragraph 7 notice informing them of a claim by HMRC. SGL could also send the sellers a paragraph 6 notice informing them that SGL required them to pay this tax liability pursuant to the tax covenants in the SPA.

SRL subsequently incurred a tax liability and SGL served a notice of claim against the sellers for this liability. The sellers argued that the notice was invalid and that they were therefore not required to pay.

The key question was whether a notice sent by SGL to the sellers on 24 March 2015, very shortly before the end of the seven year limitation period, was a valid paragraph 6 notice. If the letter did constitute a paragraph 6 notice then the sellers would be liable for the HMRC tax demand. Conversely, if the letter did not constitute a paragraph 6 notice the seven year limitation period having subsequently expired SGL/SRL would be required to cover this liability themselves.

Objective test

The dispute came before the Court of Appeal which found that the letter of 24 March 2015 was not a valid paragraph 6 notice and dismissed the appeal.

In reaching this conclusion, the Court of Appeal affirmed the House of Lords' decision in Mannai Investment Co Ltd v Eagle Star Life Assurance[2] which stated that contractual notices must be construed objectively, noting that "The question is not how the [recipient] understood the notices. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene ".

Exploring this test, the Court of Appeal noted in particular that:

The letter contained no reference to a Tax Claim, or to a claim under paragraph 6.3 or to any claim being made against the sellers.
Instead, the letter referred only to a "potential Liability to Taxation" and a "potential" claim rather than an actual claim.
The letter referred to paragraph 7 of the SPA and, in accordance with the terms of the SPA, sought the sellers' confirmation as to whether they wanted to have conduct of any further discussions with HMRC in relation to SRL's tax liability.

How important was context?

SGL argued that, notwithstanding the terms of the 24 March 2015 letter, the sellers would have understood that it was a paragraph 6, and not a paragraph 7 notice. It had sent the sellers a letter a month earlier that referred to SGL's ability to send a paragraph 6 notice and requesting an extension to the seven year limitation period while discussions with HMRC continued. This letter would have put the sellers on notice that they might expect to receive a paragraph 6 notice before the end of the seven year limitation period and was a key piece in the contextual jigsaw. The Court of Appeal rejected this argument on the basis that, even after the 24 March 2015 letter, there was still time for SGL to send a valid paragraph 6 notice and so it would not be clear to the sellers that no further notice would be received.

In the light of the finding that the relevant notice had to be construed objectively it was irrelevant that SGL may have subjectively intended the letter of 24 March 2015 to represent a paragraph 6 notice. Instead, following its review of the terms of the letter, the Court of Appeal concluded that a reasonable recipient with knowledge of the terms of the SPA would have understood it to be a paragraph 7 notice, and not a paragraph 6 notice.

Comment

This decision serves as a helpful reminder to notice givers that the courts will apply an objective test when construing unilateral notice clauses and, in the absence of a common understanding between the parties, the sender's subjective intention will not be relevant to questions of construction.

In addition, this decision represents yet another example of the courts emphasising the role contractual notices play in providing certainty and, consequently, the importance of complying strictly with notice provisions. Finer details of contractual notice provisions are not mere technicalities; parties must remain alive to the fact that failure to comply with the mechanics of the notice provisions set out in the contract may have serious consequences.

[1] [2019] EWCA Civ 1376

[2] [1997] AC 749

Clarity, clarity, clarity; more contract drafting lessons from the court

Thu, 15 Aug 2019 15:27:48 +0100

Background to the Dispute

Macquarie Capital (Europe) Ltd (Macquarie) had been engaged by Nordsee Offshore MEG I GmbH (NOMEG), a subsidiary of the Windreich Group, to raise equity and debt finance for the installation and operation of a proposed windfarm in the German Exclusive Economic Zone in the North Sea.

The 2013 Engagement Agreement made reference to the "Project" (the windfarm development) and termed the raising of the finance for the Project as the "Transaction". Under the terms of the Engagement Agreement, NOMEG had to pay completion and debt advisory fees to Macquarie if the Transaction was completed, irrespective of whether Macquarie had been responsible for raising the financing, provided that the Engagement Agreement had not been terminated more than
12 months before completion of the Transaction.

A number of difficulties occurred and various aspects of the windfarm development changed, including the timing and structure of the finance, and details of the windfarm development itself, such as the turbines to be used and the identity of the plant supplier. However, the Engagement Agreement was never terminated. The finance raising process was completed in 2016 and although it had contributed little to the final form of the development and finance raising process, Macquarie sought payment of fees under the Engagement Agreement. NOMEG denied any liability.

The Dispute

The key point of dispute between the parties was whether the windfarm development and associated financing which had ultimately been concluded fell within the definition of "Transaction" as defined in the Engagement Agreement.

NOMEG argued that the definitions of "Project" and "Transaction" in the Engagement Agreement should be construed narrowly, such that the financial close in August 2016 did not fall within the scope of the "Transaction". This was on the basis that there had been such substantial changes to both the windfarm development and the finance structure that it no longer fell within the definition of "Project". The judge disagreed and found that, although there were "numerous aspects of the potential windfarm project under consideration" at the time the Engagement Agreement was entered into, the Engagement Agreement did not specify any particular aspects as being necessary constituents of the windfarm development for the purpose of the Agreement.

On the opposite side of the fence, Macquarie argued that the changes to the windfarm development did not take it beyond the contemplation of the parties upon entering into the Engagement Agreement and thus the development and associated financing as completed did still fall within the scope of the "Transaction", as defined.

The High Court Decision

The High Court found that, at the time of the Engagement Agreement, there had been flexibility in relation to the raising of finance (including the timing and structure of that finance), the capital structure and corporate structure, and the windfarm development itself. This corresponded with Macquarie's position that various aspects of the intended development had not been "set in stone" at the time of the contract and "were capable of significant change".

The court criticised the definitions for "Project" and "Transaction" as being "unclear" and "unhelpful". Adopting a textual approach to the language used to define the terms, and considering the Engagement Agreement as a whole, the term "Project" meant the windfarm project in which NOMEG was involved at the time of entry into the Engagement Agreement. The term "Transaction" was intended to refer to an equity and debt raising process in relation to the "Project" in broad terms.

In reaching its decision, the High Court set out the well-known principles of contractual interpretation under English law as summarised in Lukoil Asia Pacific PTE Ltd v Ocean Tankers (PTE) Ltd. (2)

the court must ascertain the "objective meaning" of the language used in the agreement;
the court must consider the contract as a whole, as well as the wider context; and
If there are two possible constructions, the court should adopt the construction consistent with business common sense.

In this case, commercial common sense favoured an interpretation of the Engagement Agreement which entitled Macquarie to its fees, notwithstanding the significant changes to the way in which the proposed windfarm development had been brought about. The court held that, without such an interpretation, Macquarie might be incentivised to advise in a way that would ensure it would be entitled to its fees.

For these reasons, the High Court held that Macquarie's wider interpretation of the defined terms in the Engagement Agreement was the correct approach. As a result, the High Court held that NOMEG was liable for Macquarie's fees (amounting to
EUR 16 million plus interest).

Comment

Had NOMEG terminated the Engagement Agreement earlier, it might have avoided payment to Macquarie. It goes without saying that clearer drafting could also have helped.

The application of the now well-established principles of contractual interpretation in any given case remains tricky, particularly in cases where defined terms provide for flexibility. As a result, while parties should of course strive for clarity in drafting, they should also give particular consideration to possible options for terminating contracts when they are no longer needed.

(1) [2019] EWHC 1655 (Comm)

(2) [2018] EWHC 163 (Comm)

An innocent party is entitled to damages, even though performance of the contract is impossible

Thu, 01 Aug 2019 10:45:51 +0100

Quick facts and decision at first instance

A shipowner and a charterer entered into a long-term contract for the shipment of iron ore pellets from Brazil to Malaysia. The charterer failed to make five cargoes available for shipment and claimed to be excused from its obligation to do so by the bursting of a dam in Brazil; this event fell under the "exceptions" clause in the contract. The trial judge found that:

the burst dam made it impossible for the charterer to perform the contract; but
even if the dam had not burst, the charterer would have defaulted anyway (primarily due to a collapse in demand in the Malaysian markets).

The judge held that, in order to rely on the exceptions clause, the charterer was required to prove that "but for" the dam burst, it could and would have performed the contract in accordance with its terms. In the light of the judge's finding that the charterer would have defaulted regardless of the burst dam, the charterer was unable to rely on the clause to excuse its failure to supply the cargoes.

The judge accepted that the applicable principle for assessing damages was the compensatory principle. However, instead of a straightforward comparison between the position the shipowner was in as a result of the breach and the position it would have been in if the charterer had supplied the cargoes, the judge considered it relevant to take account of the reasons why the charterer was in breach of its obligations. The judge therefore assessed damages by comparing the shipowner's position as a result of the breach with the position it would have been in had the charterer been able and willing, but for the dam burst, to supply the cargoes. Since the charterer would not have been able and willing to supply the cargoes (regardless of the dam burst) the judge found that the shipowner was only entitled to nominal damages of US$1 per shipment.

This shipowner appealed the damages award and the charterer cross-appealed on liability.

The Court of Appeal decision

Interpretation of the exceptions clause

The Court of Appeal upheld the trial judge's interpretation of the exceptions clause and the judge's finding on liability. In exploring the exceptions clause, the court found that if the parties had wished to agree a clause that excluded the "but for" test they could have done so. Given that they did not, the clause in question did require such proof and the charterer was unable to provide it.

Compensatory principle of damages

The court found that the trial judge had misapplied the compensatory principle of damages. The correct approach required a comparison in financial terms between
(i) the innocent party's actual position as a result of the breach and (ii) the position it would have been in if the contract had been performed. The court held that its task was "simply to ascertain the value to the claimant of the performance which the defendant should have rendered”, regardless of the reason(s) why the defendant did not perform the contract.

This assessment of damages avoided the paradoxical conclusion reached by the trial judge that, even though the exemptions clause did not provide the charterer with a defence to liability, the charterer was not obliged to pay substantial damages for failing to perform its obligations under the contract. The court found that the shipowner was in fact entitled to damages of almost US$20 million.

What does this mean for the drafting of exceptions or force majeure clauses?

This case provides yet another warning about the need for clarity in drafting contractual clauses and the implications of getting it wrong.

A clause may be drafted so as to relieve a party from liability in circumstances where it can prove that it would have been willing and able to perform the contract if a specified event had not occurred (as was the case here), or to relieve a party of obligations to perform in the future, regardless of its willingness and ability to perform the contract (which is more akin to a typical force majeure or frustration clause). Either way, parties should consider what it is they wish such a clause to achieve, and draft the clause so as to make that intention explicit. Relying on the clause heading to confer meaning to the clause will not suffice.

On the subject of clause headings, the court found that attempting to distinguish clauses on the basis of their labels (such as "exceptions", "contractual frustration" or "force majeure") was not particularly helpful. What matters is the language of the clause: its meaning should simply be construed from that language.

This decision is subject to appeal and we will report on the outcome of that application.

(1) Classic Maritime Inc v Limbungan Makmur SDN BHD & Anor [2019] EWCA Civ 1102

The Art of the (Settlement) Deal

Fri, 26 Jul 2019 14:57:00 +0100

The facts

Mr Dan Simantob (based in Los Angeles) and Mr Yacob Shavleyan (based in London) were both dealers in Islamic antiquities. In 2008, Mr Simantob acquired various textiles that ended up being auctioned at Sotheby's by Mr Shavleyan for £1.2 million. Mr Simantob claimed that, prior to the auction, he had consigned the textiles to Mr Shavleyan to sell in return for a cut of the sale proceeds but Mr Shavleyan claims that he purchased them outright from Mr Simantob. The parties had a long history of working together and decided to enter into a settlement agreement.

Under the terms of that agreement, Mr Shavleyan was to pay Mr Simantob US$1.5 million by 21 May 2010 in full and final settlement of all claims between the parties. In the event that payment was not made by the deadline, a penalty payment of US$1,000 per day would become payable, no matter the amount then outstanding. No payment was made by the deadline and "interest" began accruing.

End of 2011 - US$1 million paid.

21 May 2012 - US$731,000 in "interest" owed (in addition to US$500,000 of the outstanding principal).

August 2013 – US$100,000 paid.

April/May 2014 - Mr Shavleyan presented Mr Simantob with eight post-dated cheques (from June 2014 to January 2015) each for US$100,000. Mr Shavleyan's position was that the cheques represented a varied agreement whereby Mr Simantob accepted US$800,000 in full and final settlement of all claims under the settlement agreement. Mr Simantob's position was that the cheques were payments under the settlement agreement towards the outstanding sums due. The eight cheques were never presented for payment but were replaced with other post-dated cheques (in increased sums) at various points.

February 2016 - Mr Shavleyan transferred a further US$200,000 to Mr Simantob.

April 2016 - Mr Simantob issued proceedings for US$2,378,000 (US$2,178,000 of which was "interest") and applied for summary judgment. In response, Mr Shavleyan contested the original settlement agreement, having received advice from his lawyers that the US$1,000 per day penalty payment clause might be an unlawful penalty.

US$1000 per day not a penalty - outcome of the summary judgment application

The master (judge) hearing the application awarded summary judgment on the principal amount owed of US$600,000 (being the US$800,000 Mr Shavleyan had acknowledged he owed at the meeting in April/May 2014 less the US$200,000 payment made in February 2016). The master found that the US$1,000 a day penalty payment clause was not an unlawful penalty (even though it was referred to as a penalty and it would result in an interest rate of 1000% per day if there was only US$1 of debt outstanding). The remaining issues of whether (i) the parties had agreed to vary the 2010 settlement agreement in 2014; and (ii) good consideration had been given for the variation, were to be decided at trial.

The judgment at trial

At trial, the judge found that there had been a binding oral agreement in spring 2014 to vary the settlement agreement and that the parties had therefore agreed to cap Mr Shavleyan's liability at US$800,000, with no further "interest" falling due.

The judge found that he was bound by authority to find that a party is not able to pay a lesser sum to fulfil a debt without giving some consideration.[2] For the variation to be binding, therefore, it was necessary to identify some consideration passing from Mr Shavleyan (as debtor) to Mr Simantob (as creditor). It was held that the additional consideration provided to Mr Simantob was Mr Shavleyan relinquishing his claims that the US$1,000 a day penalty payment was an unlawful penalty and that the settlement agreement was invalid. The judge also commented on the commercial advantages that the variation offered Mr Simantob, including the approval of his colleagues and continued access to Mr Shavleyan's expertise in Islamic art and the London market. However, he did not consider these commercial advantages to amount to good consideration.

Mr Simantob appealed the court's decision on the grounds that there had been no good consideration for the variation of the settlement agreement because the master at the summary judgment hearing had found that the US$ 1,000 a day rate of "interest" was not an unlawful penalty.[3]

Click here for our post on the High Court decision.

Judgment of the Court of Appeal

The Court of Appeal upheld the first instance decision, finding that there is a difference between a defence (or claim) which a party knows to be invalid or believes not to be valid, and one which may be doubtful but it believes in and pursues. The court found that the latter applied in Mr Shavleyan's case and that there had therefore been good consideration. The fact that the penalty payment clause had been found by the master at first instance to be lawful was immaterial to whether there was genuine doubt on behalf of Mr Shavleyan as to the merits of his defence when the variation was agreed (i.e. in 2014). The court noted that Mr Shavleyan's defence in the summary judgment hearing had been based around the penalty payment clause and that he plainly intended to raise it in any proceedings brought by Mr Simantob. The court was also mindful of public policy considerations around encouraging parties to settle disputes amongst themselves and "holding people to their commercial bargains".

Comments

It is trite law, familiar to every student of English law, that for a contract to be binding under English law, each party must receive "good" consideration. Yet what can be "good" consideration has been the focus of fluctuating case law. In 1884, the House of Lords held that the practical benefit of receiving part payment of a debt more quickly than receiving the full amount was not good consideration.[4] In 1991, the Court of Appeal held that practical benefits could be sufficient consideration where performance of an existing obligation was offered in return for additional
payment.[5] In 1993, the Court of Appeal held that that did not apply to part payment of debts.[6] In this case, the Court of Appeal seems to be straining again to find good consideration for part payment of a debt.

The court's finding that the consideration provided by Mr Shavleyan was his relinquishing his right to bring a claim that the penalty payment clause was void is particularly interesting given that Mr Shavleyan appears to not have even been aware of that right until 2015, after the alleged variation agreement, and had no hesitation in asserting that claim when Mr Simantob started proceedings. It may well be that the court was looking to achieve a fair result in terms of the penalty payment clause but was bound by the findings of the master at the summary judgment hearing (which had not been appealed by Mr Shavleyan).

In practical terms, until the issue is determined by the Supreme Court, the case acts as a reminder to parties to document any agreement (or variation to an agreement) to avoid the validity of the agreement being challenged down the line. Parties should also carefully consider whether good consideration has been provided and, if there is any doubt, make a payment to the contractual counterparty of a nominal amount (e.g. £1).[7]

[1] Simantob v Shavleyan [2019] EWCA Civ 1105

[2] Foakes v Beer (1884) 9 App Cas 605; Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) 1 QB 1 (CA)

[3] Cook v Wright (1861) 1 B & S 559

[4] Foakes v Beer (1884) 9 App Cas 605

[5] Williams v Roffey Bros & Nicholls (Contractors) Ltd (1991) 1 QB 1 (CA)

[6] Re Selectmove [1995] 1 WLR 473

[7] Or a non-monetary item in the case of releasing a debt.

Make the most of a mediation - 10 Top Tips

Thu, 25 Jul 2019 12:26:40 +0100

1. Crunch the numbers. Work out the costs to you and your opponent of your best case scenario (you recover everything claimed + your costs of the litigation) and your worst case scenario (you get nothing + pay your opponent's costs of the litigation).

2. Get Real. Take a step back, assess the merits of your case and work out the most likely outcome, which will probably fall somewhere in between the best and worst case scenarios. Use this to identify the range in which you would be happy to settle. If you want to get technical on settlement strategy- and see a graphical illustration of the optimal settlement zone-check out our series of blogs on the art of settlement and game theory here .

3. Think outside the box. What are you really hoping to achieve from the mediation? Whilst damages are often sought in court proceedings, parties to mediation have the flexibility to agree to a wider range of solutions to the dispute which simply could not be ordered by a court. For example, they could enter into a new agreement to regulate their relationship going forward.

4. Give and take. Work out if there are any easy gives which will encourage the other party to settle without breaking the bank. Sorry can be the hardest word but it can also be the cheapest! It is always worth having bargaining chips ready to throw in to get the negotiations moving. Equally, are there things you need from the other party which are non-negotiable? Know where your red lines are.

5. Help is at hand. Remember, the mediator is a neutral facilitator- they are there to help make the deal happen. Build a relationship with the mediator before the mediation and maintain good communication with them throughout the day.

6. Set the tone. Consider carefully if you wish to make an opening statement. It can be an opportunity to get your side of the story across - particularly if the dispute has affected you personally. It can also give you the chance to knock your opponent's confidence in their case and address any obvious weaknesses in your own-before your opponent does. However, be mindful that opening statements can backfire by leading parties to become entrenched in their own position before the day has even started or they may be ill advised if relations have broken down so much that putting parties together would torpedo any deal.

7. Patience is a virtue. Expect and be ready for a long day- it may take hours for the parties to consider each other's offers. However, setting a deadline for a final agreement to be reached can help focus minds when the finer points of detail are being thrashed out.

8. Be prepared. Have a template settlement agreement ready which can be adapted depending on what is agreed during the day. This should help keep the momentum going once the headline terms have been agreed. Make sure that the representatives for both parties are authorised to agree a settlement. Deals can fall apart if a binding agreement is not signed on the day.

9. Pick your team. You reach a log jam- what do you do? Mix it up and try lawyer or principal only meetings to break the deadlock.

10. Flex it. Start with a plan but be ready to go with flow to achieve the deal you want. Don't be afraid to be creative!

Serving up the truth, the whole truth and nothing but the truth?

Fri, 05 Jul 2019 10:25:05 +0100

The background facts

The Libyan Investment Authority (LIA) brought claims against JP Morgan Markets Limited (JPM), Mr Walid Mohamed Ali Al-Giahmi (a Libyan individual) and Lands Company Limited (his vehicle) in relation to an allegedly corrupt US$200 million derivative transaction concluded between the LIA and Bear Stearns International Limited (which had subsequently been bought by JPM) in November 2007.

The LIA inferred Mr Al-Giahmi's corrupt involvement in the Bear Stearns trade from certain specific acts of bribery and intimidation, which it says it became aware of during previous proceedings brought by the LIA against Société Générale SA in 2014. In the SocGen proceedings, the LIA alleged fraud in relation to US$2.1 billion of different transactions entered into between 2007 and 2010.

The duty of full and frank disclosure in the context of limitation

Full and frank disclosure must be given when applying for injunctive relief, but it applies equally to any without notice application. In this claim, the LIA successfully applied without notice for an order allowing it to serve the claim on Mr Al-Giahmi and Lands out of the jurisdiction. The LIA was subject to the 'golden rule': an applicant for relief without notice must disclose to the Court all matters relevant to the exercise of the Court's discretion. Failure to observe this rule entitles the Court to discharge the order obtained even if the circumstances would otherwise justify the grant of such relief.(2)

The LIA issued the claim in April 2018. The transaction complained of dated from 2007. Consequently, a limitation defence under English law was open to the defendants, since more than 6 years had elapsed since the relevant events. The LIA was aware of this issue and the witness evidence in support of the application did acknowledge that the trade in dispute had been executed in 2007, giving rise to possible limitation defences. However, it dealt exclusively with the Libyan law position, without detailing the position under English law, under which the claim was time barred, subject to the operation of s.32 of the Limitation Act 1980, which extends the limitation period in cases of fraud to six years from the date on which the claimant discovered the fraud or could with reasonable diligence have discovered it.

Mr Al-Giahmi and Lands each challenged jurisdiction, applying to set aside service of the proceedings against them on the basis that the claims of the LIA against each of them stood no real prospect of success as they were time-barred under English law, and on the basis that service should in any event be set aside for a failure on the part of the LIA to comply with its obligation of full and frank disclosure on the without notice paper application for permission to serve out.

The decision

Service on Mr Al-Giahmi (in Libya) and Lands (in the Cayman Islands) was set aside and it was found that the claim had no reasonable prospect of success given the time-bar. The judge found that:

Limitation is not merely a point taken by way of defence: when applying for permission to serve out of the jurisdiction, the LIA knew that limitation was an issue because it had litigated against the same defendant in the SocGen claim, when the defendant had raised a limitation defence. The present claim was brought even later than the SocGen proceedings and so it was obvious that limitation was an issue. The LIA nevertheless did not bring it to the Court's attention and address the likely points of defence.
However, even had the limitation issue not been as clear-cut, it was undoubtedly a matter which might weigh against the making of the order for permission to serve out of the jurisdiction, as it went to the question of a real prospect of success of the LIA's claims. Thus, had the LIA brought the issue to the Court's attention, it would have weighed heavily on the Court in considering whether to exercise its discretion. The fact it did not amounted to a clear breach of the duty of full and frank disclosure, and of the Commercial Court Guide, and was "a serious failing to provide satisfactory disclosure”.
The LIA's own assertion as to when it alleged it acquired sufficient knowledge to bring a claim (answering the Libyan law test) was not the benchmark against which limitation was to be judged; and the LIA had not addressed what could have been discovered with the exercise of reasonable diligence. It is not up to a claimant to determine which defences are credible and to put only those before the Court. The purpose of full and frank disclosure is to ensure that the claimant will put before the Court all facts and arguments material to the Court's decision.
There was accordingly a failure to comply with the Commercial Court Guide, and in light of the previous litigation, it must have been a "conscious decision" not to address the limitation position under English law, and the need for the LIA to rely upon s. 32, and to draw such matters to the attention of the judge. That was held to be a significant aggravating factor.
The Court also found that whereas interim injunction applications are often made to very tight timescales, the same was not the case in the present claim, which was prepared over some months, and that was a relevant factor to be taken into account in weighing up the adequacy of the full and frank disclosure given.

For the reasons summarised above, the Court set aside service and found that the claims against Lands and Mr Al-Giahmi stood no real prospect of success. Accordingly, the claims against them failed.

Comment

The case raises a number of issues for claimants. Applicants must give full and frank disclosure when applying for without notice relief to avoid the wasted costs of fully-contested proceedings after the event. Public policy dictates that defendants, and the courts, should not be burdened with weak cases wrongly brought into the jurisdiction.

Applicants must not 'pick and choose' the issues to highlight to the Court nor rely on defendants to raise matters in their defence when such defences are obvious. This is particularly important in a situation that raises the possibility of a conflict of laws and alternative possibly limitation defences. There was no suggestion in the present case that the applicant's legal representatives set out to, or did, mislead the Court by failing to deal with matters of English law limitation (instead focusing on the Libyan position) but nevertheless the Court set aside service.

(1) Libyan Investment Authority v JP Morgan Markets Ltd, Walid Mohamed Ali Al-Giahmi, Lands Company Limited [2019] EWHC 1452 (Comm)

(2) Knauf UK GmbH v British Gypsum Ltd [2001] 1 WLR 1269

Court of Appeal makes rare order for rectification, with interesting consequences…

Fri, 28 Jun 2019 10:13:54 +0100

Facts

Persimmon, the Buyer, is a house building company. It entered into discussions with the Sellers, Mr Creed and Mr Hillier, who were business partners operating a house building business through a number of companies with the name "Hillreed". Those companies held interests in various plots of land that together comprised a single development site.

The Buyer entered into two share purchase agreements (SPA) to purchase all of the shares in two of the Sellers' companies which purportedly held the interests in the six plots of land that made up the development site and agreed to purchase from a third company a freehold office building which was Hillreed's group head office. Despite the parties' intentions the Buyer only acquired four plots of land, not that six that were required to make up the development site.

What is rectification?

Rectification is a remedy where there has been a common or unilateral mistake. For common mistake a party must show that the agreement as drafted does not reflect the common intentions of the parties at the time the contract was made and the agreement as rectified will reflect their intentions.

The claim for rectification

The Buyer brought proceedings to rectify the SPA so as to include within the scope of the warranties provided by the Sellers in the SPA that one of the Sellers' companies did own the two relevant plots of land (that meant that the Sellers were in breach of warranty as the company did not in fact own the two plots of land, it was owned by a third company of the Sellers) and also to rectify the disclosure letter to omit those two plots from the disclosures concerning the ownership. This meant that the Sellers' liability for breach of warranty was not disclaimed by the disclosure letter.

The claim was successful and the Buyer was therefore entitled to damages representing the difference at the date of the SPA between the value of the acquired company as warranted (i.e. the whole development site) and its actual value.

The Sellers appealed on two grounds:

the first instance judge was wrong, on the evidence before him, to order rectification of the SPA and disclosure letter; and
in any event, the disclosure letter was incapable of rectification as a matter of law.

Decision of the Court of Appeal

The Court of Appeal looked at the evidence before the first instance judge and found that, objectively construed, the evidence suggested that the Sellers had held out that the entire development site was to be included in the purchase and that both parties had proceeded with the SPA on the common understanding that it included all six plots of land. In particular, the Sellers had sent the Buyer a data package which often referred to the whole site as belonging to "Hillreed", without referring to any particular company and it clearly suggested that if the Buyer was to purchase the relevant entities it would acquire the entire site regardless of which "Hillreed" entity owned it. There was also nothing in the correspondence between the parties that suggested that the Sellers had intended to remove the two plots from the deal and both the Seller and the Buyer proceeded on the basis that they were included.

Further, the Court of Appeal found that the common intention of the parties had been that one of the entities would be the corporate vehicle for the sale of the "strategic landholdings" (i.e. the two plots) and the Sellers could have ensured that ownership issues would have been resolved by completion without difficulty. The Court of Appeal therefore upheld rectification of the SPA as it did not accurately record the terms agreed between the parties and the requirements for rectification had therefore been met.

The Court of Appeal also upheld the rectification of the disclosure letter. The Sellers argued that it was incapable of rectification as it was a unilateral notification of particular facts that existed at the time and the court could not re-write history and delete a correct statement of fact. The Court of Appeal found that the same mistake informed both the SPA and the disclosure letter and found there was no difficulty in principle about rectifying both contractual documents to give effect to the common intention. Nothing turned on the fact that the document was unilateral; unilateral documents may be rectified if they do not give effect to the intention of the maker. The rectification of the disclosure letter did not "re-write history" but instead gave effect to the parties' common intention that there should be warranties in the SPA that the Seller entities owned the two plots of land.

Comment

It is rare for the court to order rectification as it is often difficult to satisfy the test to do so. This case serves as a welcome reminder that the Court is willing to order rectification to prevent one party from seeking to take advantage of a situation when a mistake is discovered. It is also a cautionary tale to practitioners to look closely at the relevant contractual documentation to make sure that it accurately reflects the parties' agreement. Often the devil is in the detail which can be overlooked in complex negotiations.

(1) [2019] EWCA Civ 800.

What expenditure falls within ‘ordinary and proper course of business’ exception in freezing orders?

Fri, 28 Jun 2019 09:56:57 +0100

Underlying facts

The parties are in dispute over the control of the first claimant Koza Ltd. In 2015 the directors of various related companies within the Koza group, including Kozin Altin (the first defendant and Koza Ltd's parent), were replaced by trustees appointed by the Turkish state. Koza Ltd and Mr Ipek (one of Koza Ltd's directors) applied for declarations that the notices served by Koza Altin under the Companies Act 2006 to convene a meeting of Koza Ltd to pass resolutions replacing the directors were ineffective. They also applied for an injunction to restrain the defendants from holding any meetings of Koza Ltd, pursuant to the notices. The injunction was granted subject to Koza Ltd providing an undertaking to the court not to "dispose of, deal with or diminish the value of any funds belonging to [it] or held to [its] order other than in the ordinary and proper course of its business".

Koza Ltd intended the following expenditure:

funding Ipek Investment Ltd (IIL) to bring arbitration proceedings against Turkey before the International Centre for the Settlement of Investment Disputes (ICSID), which was aimed at establishing that IIL became the ultimate holding company of the Koza group in 2015, pursuant to a share purchase agreement; and
funding Mr Ipek in resisting extradition from the United Kingdom to Turkey on various charges relating to subverting the Turkish government.

Koza Ltd argued that the expenditure would be in the ordinary and proper course of its business and therefore permitted by the undertaking because:

the arbitration proceedings would assist it in regaining control of its sources of funds from the Koza group and preventing the seizure of assets by Turkey; and
Mr Ipek was vital to the ongoing operation of Koza Ltd and, as such, it was important to the company that he was not extradited to Turkey.

At first instance, the court held that the proposed expenditure was not permitted and made negative declarations to that effect, primarily on the basis that:

it was unclear whether ICSID had jurisdiction to hear the proposed arbitration claim (the court also found that there were serious doubts about the authenticity of the share purchase agreement underlying the proposed claim); and
Mr Ipek could fund the extradition expenditure from his own resources, which meant that the expenditure could not be 'proper' (even if it was 'ordinary').

Court of Appeal explores 'ordinary' and 'proper'

The Court of Appeal summarised the authorities relating to the meaning of an 'ordinary' and 'proper' course of business (mostly in the context of freezing injunctions). The relevant guidance is:

whether a transaction is in the ordinary and proper course of business is a mixed question of fact and law;
'ordinary' and 'proper' are separate, cumulative requirements;
the test is objective and must be considered against accepted commercial standards and practices;
the question is not whether a transaction is ordinary and proper, but whether it is carried out in the ordinary and proper course of a company's business; and
the questions must be answered in the specific factual context in which they arise.

Arbitration expenditure

The Court of Appeal discharged the negative declaration but declined to make the positive declaration sought by Koza Ltd. It held that:

while there was a seriously arguable case that the share purchase agreement had been a forgery, it was impossible for the court to declare in advance that the expenditure would be in the ordinary and proper course of Koza Ltd's business;
it was not the court's role to determine whether ICSID had jurisdiction to hear the claim. Unless the proposed arbitration's prospects were "so manifestly poor that they throw doubt on the board's motive in pursuing it" – they had no relevance as to whether funding the claim would be in the ordinary and proper course of Koza Ltd's business;
Koza Ltd would be "funding the litigation because it considers that doing so will facilitate the continuation of the ordinary and proper course of its mining business"; and
the absence of evidence as to whether IIL had access to alternative sources of funding was not relevant (although the Court of Appeal declined to lay down a rigid rule that it could never be relevant in this sort of case).

If Koza Ltd incurred the expenditure it would therefore do so at its own risk (ie, it would ultimately be shown to be in breach of its undertaking).

Extradition expenditure

The Court of Appeal granted a declaration that the extradition expenditure would be in the ordinary and proper course of Koza Ltd's business:

The question as to whether Mr Ipek could fund this himself was not relevant. Mr Ipek was a vital asset of Koza Ltd; the fact that he might pay himself did not make payment by Koza Ltd outside the proper course of its business (even if it might make it uncommercial or imprudent).
The expenditure did not amount to litigation funding. Its purpose was to protect Koza Ltd's mining interests and therefore was not a departure from the ordinary course of its business. The fact that the benefit to Koza Ltd would be indirect was irrelevant.

Comment

Many practitioners will be familiar with the 'ordinary and proper course of business' exception from the standard form freezing order. This guidance provides a further, useful example of the application of that difficult test. Its application by the Court of Appeal to the extradition expenditure is perhaps more permissive than might be expected, given the court's recognition that this expenditure was potentially uncommercial. This demonstrates that, consistent with the fact that the purpose of a freezing order should not be to stifle the respondent's business, the court will be slow to substitute its decision making about transactions for that of the respondent.

In terms of the arbitration expenditure, the decision illustrates that where the proposed expenditure or transaction is complex the court may not be in a position to make the factual findings necessary for it to authorise the expenditure in advance, meaning that if the respondent wishes to proceed it must do so at a risk of breaching the order (and, typically, in contempt of court as a result). While the outcome in the present case seems fair (given that Koza Ltd or the Ipek family would presumably know whether the share purchase agreement had been a forgery), in other cases respondents (and their advisers) will inevitably be left in a difficult position.

(1) [2019] EWCA Civ 891.

Court of Appeal upholds decision on importance of industry standard documents in conflicting jurisdiction clauses

Thu, 13 Jun 2019 14:43:37 +0100

Background

In October 2008, Trattamento Rifuiti Metropoliani SpA (TRM) entered into a Financing Agreement with a syndicate of banks led by BNP Paribas SA (BNPP) in order to design, build and operate a facility in Torino to convert waste into energy.

In March 2010, in accordance with the Financing Agreement, TRM and BNPP entered into an interest rate hedging transaction governed by a 1992 edition ISDA Multi-Currency Cross Border Master Agreement which was expressly governed by English law and provided that:

"In the case of conflict between the provisions of this Agreement and the [Financing Agreement] … the provision of the [Financing Agreement] … shall prevail".

Later that month, the parties agreed an interest rate swap under the Master Agreement.

The dispute

In September 2016, BNPP commenced proceedings against TRM in the English Commercial Court. BNPP sought various declarations in relation to TRM's obligations under the interest rate swap conducted under the ISDA Master Agreement.

In April 2017, TRM commenced proceedings against BNPP in Italy in respect of whether the hedging strategy was properly implemented.

The High Court decision

The High Court began its analysis of jurisdiction by referring to Article 25(1) of the Brussels Regulation (Recast) which provides that if parties have agreed that the courts of a Member State have jurisdiction to settle any disputes that arise, that court has jurisdiction to do so, irrespective of where the parties are domiciled.

TRM objected to BNPP commencing proceedings in England on the grounds that there was no serious issue to be tried because there was no dispute regarding the ISDA Master Agreement. The High Court disagreed: while there was no dispute over the validity of the ISDA Master Agreement, there was a dispute as to the rights BNPP had under the interest rate swap conducted under the ISDA Master Agreement.

TRM also unsuccessfully argued that the English court had no jurisdiction to hear the claim because:

the ISDA Master Agreement provided that in cases of conflict, the Financing Agreement would prevail over the ISDA Master Agreement; and
the factual context surrounding the agreements should be considered in interpreting the jurisdiction clauses, and the context supported TRM's position.

The High Court held that there was no conflict as the parties had different relationships, with the Financing Agreement and the ISDA Master Agreement governing different legal relationships. Therefore, the respective jurisdiction clause in each of the agreements was concerned with separate matters. Applying a broad and purposive construction of the contracts (as per Sebastian Holdings Inc v Deutsche Bank [2011] 1 Lloyd’s Rep 106), the Court found that the jurisdiction clauses could fit together and alas, there was no basis for rewriting the contracts.

The High Court disagreed that the factual context supported TRM's position. The Court found the use of ISDA documentation – an industry standard document – was the most important point of factual context; it signalled the parties' interests in achieving consistency and certainty in this area of financial transacting. The Court added that where parties use industry standard documentation, they are even less likely to intend that provisions in that documentation may have different meanings depending on the context.

The grounds of appeal

TRM appealed the High Court's decision on the basis that:

The judge failed to construe, correctly or at all, the Financing Agreement jurisdiction clause;
The judge did not correctly conduct the analysis required by Article 25 of the Brussels Regulation (Recast);
The judge was wrong to find that the conflicts provision in the ISDA Master Agreement was not engaged; and
The judge was wrong to find that, with one exception, all of the declarations sought either derive directly from the contractually agreed language of the interest rate swap, and in particular the ISDA Master Agreement or are consequent on those declarations.

The Court of Appeal decision

The appeal was dismissed on all four grounds.

Considering the first three grounds together, the Court of Appeal found that the High Court's interpretation of the jurisdiction clauses was correct; where a court is "faced with multiple jurisdiction clauses, it must construe them all and do so in a careful and commercially-minded way", as was confirmed in the recent Court of Appeal decision in Deutsche Bank AG v Savona [2018] EWCA Civ 1740. In this case, the Court of Appeal found that the clauses concerned different matters: the ISDA Master Agreement jurisdiction clause was to govern any disputes relating to the interest rate swap conducted under the Master Agreement (although pursuant to the Financing Agreement), whilst the Financing Agreement jurisdiction clause was to govern disputes relating to the Financing Agreement. The Court of Appeal held that the parties had two distinct legal relationships in relation to one another and that the two jurisdiction clauses should be understood as being complementary rather than competing; therefore, the conflicts provision in the ISDA Master Agreement was not engaged and disputes concerning the swap fall exclusively within the jurisdiction clause of the ISDA Master Agreement.

The fourth ground of appeal was dismissed on the grounds that all of the declarations sought, with only minor amendments, were governed by the ISDA Master Agreement (and therefore, the English jurisdiction clause) because the declarations were related to the interest rate swap rather than the underlying relationship governed by the Financing Agreement.

Comment

The Court of Appeal decision reinforces the High Court's findings that it is i) important that jurisdiction clauses provide parties with certainty as to where their disputes will be resolved and ii) parties' use of industry standard documentation is an indicator that they are even less likely to intend that provisions in that documentation may have different meanings depending on the context.

Additionally, this decision clarifies that before it can be said that jurisdiction clauses are in conflict, the Court must be satisfied that a dispute cannot be said to be more clearly governed by a jurisdiction clause in one agreement rather a conflicting jurisdiction clause in another agreement.

[1] Please see the authors' article on the High Court judgment here: https://www.internationallawoffice.com/Newsletters/Litigation/United-Kingdom/RPC/Importance-of-industry-standard-documentation-when-considering-competing-jurisdiction-clauses

[2] BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA [2019] EWCA Civ 768

Economic duress: when is a threat not an (illegitimate) threat?

Fri, 31 May 2019 11:08:41 +0100

The facts

The Claimant, Times Travel (TT), is a travel agency whose business was almost exclusively the sale of flight tickets to the Pakistani community in and around Birmingham for travel to and from Pakistan. In 2009, TT was appointed as agent for Pakistan International Airlines Corporation (PIAC) by which TT was authorised to sell PIAC flight tickets to the public. At the time, PIAC was the only airline operating direct flights between the United Kingdom and Pakistan.

The three relevant provisions in TT's 2009 contract with PIAC were:

the payment of commission to TT
the right for PIAC to modify the fortnightly ticket allocation
termination by notice.

In September 2012, PIAC gave notice of termination to TT and PIAC reduced TT's fortnightly ticket allocation from 300 to 60. This had a significant impact on TT's business. A new contract was offered by PIAC but only on terms that TT waived its existing claims to unpaid commission under the earlier arrangements. It was understood that TT's fortnightly ticket allocation would be restored if it entered into the new contract. As TT depended on PIAC for so much of its business, TT had no practical alternative to entering into the new contract if it wished to remain in business. Accordingly, TT accepted the terms offered by PIAC.

In 2014, TT brought proceedings to recover commission and other payments which it said were due under the 2009 contract. The issue before the court was whether or not the waiver contained in the 2012 new contract had resulted from economic duress on the part of PIAC. The case reached the Court of Appeal.

Test for economic duress

The three necessary ingredients for a successful claim of economic duress are that:

There must be illegitimate pressure applied to the claimant;
The pressure must be a significant cause inducing the claimant to enter into the contract; and
The effect of the pressure is that there is a lack of practical choice for the claimant.

The second and third ingredients had been satisfied. Was the significant economic pressure that was applied to TT by PIAC illegitimate?

The pressure applied by PIAC was in all respects lawful; it was neither a breach of contract nor a tort or other actionable wrong for PIAC to reduce TT's ticket allocation or to give notice of termination of the 2009 contract or to insist on the inclusion of the waiver of past claims in the new contract. That being the case, was the significant economic pressure applied by PIAC illegitimate?

When is lawful conduct illegitimate pressure?

The Court of Appeal explored its decision in CTN Cash and Carry Limited v Gallagher Limited[2] in which a consignment of cigarettes was stolen on its journey between a supplier and CTN Cash and Carry. The supplier terminated its credit facilities and refused to reinstate them unless its invoice for the stolen cigarettes was paid. CTN Cash and Carry paid the invoice and brought a claim to recover that payment on the grounds that it had been procured by means of economic duress.

In rejecting the claim of economic duress, the court in CTN stressed three points:

There was no protected or consumer relationship between the parties
The defendant was lawfully entitled to refuse to enter into further supply contracts with the claimant and to withdraw credit facilities and
The defendant bona fide thought that the claimant owed it the sum in question.

It also observed that, in a purely commercial context, lawful act duress would be difficult to establish, and it might be particularly difficult to show duress if the defendant acts in good faith.

Decision of the Court of Appeal

In judging the use of lawful acts as commercial pressure, there is a sharp distinction between such use to pursue demands made in good faith and those made in bad faith. Relying on CTN, the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result to which the coercer believes in good faith it is entitled. That is so whether or not, objectively speaking, it has reasonable grounds for that belief.

The threat made by PIAC in this case was not to enter into the 2012 new contract, and the demand was to accept the non-negotiable terms of the 2012 new contract (including the waiver of past claims for commission)[3]. The claimant had failed to establish that PIAC's demand had been made in bad faith. The suggestion by the judge at first instance that it was for PIAC to establish good faith was rejected by the Court of Appeal.

The economic pressure that PIAC was able to apply in this case resulted from its position at that time as a monopoly supplier of tickets for direct flights between the UK and Pakistan. The use, or abuse, of a monopoly position as a ground for setting aside a contract is not one that has been recognised by the common law. It was not considered appropriate to develop the law of economic duress in a way which would fetter the lawful use of a monopoly position. The control of monopolies is a matter for Parliament.

Comment

The main thread running through the Court of Appeal's decision is the need for clarity and certainty in the law of contract, particularly in commercial dealings. Introducing a concept of fair, honest or conscionable dealing to the question of whether lawful pressure was illegitimate was not considered to be appropriate, particularly where the party exercising lawful pressure was doing so in the genuine belief that it was entitled to the demand it was making.

The Court of Appeal also resisted the temptation to interfere in the lawful use of a monopoly position on the ground of economic duress, even if the result was an objectively unreasonable use of that position. The control of monopolies was a matter for Parliament.

[1] [2019] EWCA Civ 828

[2] [1994] 4 All ER 714

[3] Future commission was covered by a new commission scheme introduced by the 2012 new contract

Novel approach to measuring damages resulting from a breach of warranty

Wed, 15 May 2019 12:46:50 +0100

Facts

Oversea-Chinese Banking Corporation Limited purchased the shares in ING Asia Private Banking Limited from ING Bank NV for $1.466 billion in 2010. It later emerged that ING Asia PB had an exposure to Lehman Brothers Finances S.A.. When Lehman Brothers filed for bankruptcy in September 2008, the exposure crystallised at $14.5m. The purchaser sued the seller for damages in that sum alleging that ING NV's failure to provide for the Lehman exposure in the accounts amounted to a breach of warranty.

The purchaser claimant accepted that that the breach had not affected the value of the company, so the question for the court was whether it was entitled to recover the $14.5m as damages. It argued that diminution in value of the shares was only a "prima facie" measure of loss and that other measures could be applied in specific circumstances. The purchaser submitted that breach of a "true and fair" accounts’ warranty should be the amount recoverable under a hypothetical indemnity/specific warranty which would, it was said, have been negotiated in the share purchase agreement had the Lehman exposure been disclosed. The claimant said that it had lost the chance to negotiate a specific warranty or indemnity due to the non-disclosure.

Decision

The accepted measure of damages for a breach of warranty in a share purchase agreement is the diminution in value of the shares as a measure of loss. The judge held that there was no support in case law or academic texts for the claimant's alternative, novel argument based on a failure to give a "true and fair" view of the company's affairs. As a result, the purchaser could not claim for damages on the basis of the amount which could have been claimed under a hypothetical indemnity.

A claimant is entitled to be put in the position it would have been in had there been no breach of warranty, or to recover damages for its “loss of bargain” as a result of the breach. Since the breach had no impact on the value of ING Asia, something which the claimant itself acknowledged, no loss of bargain was suffered.

The claimant was not entitled to any recovery in respect of the $14.5m loss.

Comment

The accepted diminution in value argument puts the claimant back in the position that it would have been in had the breach not occurred; but to prove its claim, a purchaser can be faced with the unenviable task of demonstrating a diminution in value in shares in a private company. In addition, even where the claimant has spent more funds rectifying issues arising from a breach it will, it seems, be limited to the lesser, and what is often the less certain, diminution in value measure.

The court here was also clear that damages which could have been recovered under a hypothetical indemnity, which would have been negotiated had the 2008 accounts included provision for the potential liability to Lehman Brothers, is not recoverable as damages for breach of a warranty.

Ang(er) over jurisdiction challenge: High Court seeks to clarify whether speculative investment by a private individual is a business or consumer activity

Fri, 10 May 2019 16:56:00 +0100

The Facts

The defendant, Reliantco, was a Cypriot company offering financial products and services through its online trading platform, UFX. The claimant, Ms Ang, was a person of substantial wealth who invested in Bitcoin futures on a leveraged basis through the UFX platform.

Ms Ang was not, at the relevant time, employed or earning in any self-employed trade or profession (save that there was an issue between the parties whether her activity as a customer of Reliantco via the UFX platform was to be classified as such). She had no education or training in cryptocurrency investment or trading. However, Ms Ang's husband, Mr Wright, had amassed a large cache of Bitcoin through his early investment in Bitcoin mining and identifies himself publicly as the inventor/co-inventor of Bitcoin. (The judge was not required to consider whether this claim was true.)

Ms Ang opened her account with Reliantco in January 2017 in order to invest c. US$200,000 from her personal funds, being the proceeds of the sale of a former home and her interest in an Australian next generation banking business. At the time of opening the account, Ms Ang was required to click a button to indicate that she accepted Reliantco's terms and conditions. These included an exclusive jurisdiction clause in favour of the courts of Cyprus.

The underlying claim arose from the alleged blocking of access to Ms Ang's account by Reliantco in August 2017 and its subsequent refusal to allow her to withdraw funds from the UFX platform. Ms Ang alleged that Reliantco should compensate her for the loss of her open Bitcoin positions, which she claimed at August 2017 equated to c. US$1.1million and at the time of commencing the legal proceedings would have been in excess of US$3million.

Ms Ang issued proceedings in England, her country of domicile. Reliantco challenged the jurisdiction of the English court on the basis of the exclusive jurisdiction clause and Article 25 of the Recast Brussels Regulation. Ms Ang claimed that the exclusive jurisdiction clause was ineffective and did not require her to bring the claim in Cyprus, either because she was a "consumer" within the meaning of section 4 (Articles 17 to 19) of the Recast Brussels Regulation, or because the jurisdiction clause was not incorporated into her contract with Reliantco in such a way as to satisfy the requirements of Article 25. Ms Ang claimed that she received hyperlinks to Reliantco's terms and conditions (that included the exclusive jurisdiction clause) but that they did not work, such that they took her to an error page.

Ms Ang also claimed under the Data Protection Act 1998 and the GDPR, seeking an order for the rectification, destruction, erasure or blocking of her personal data held by Reliantco.

The Recast Brussels Regulation

The Recast Brussels Regulation on jurisdiction and enforcement of judgments in civil and commercial matters applies to all proceedings commenced in EU/EFTA countries on or after 10 January 2015.

Under Article 25 of the Regulation, where the parties have agreed that a court of a member state shall have jurisdiction in relation to any disputes that occur between the parties, that court shall have jurisdiction.

Articles 17 to 19 of the Regulation relate to jurisdiction over consumer contracts. A consumer contract is expressed as a contract concluded by a person (the consumer) for a purpose which can be regarded as being outside his or her trade or profession. Three types of contract are covered, as set out in Article 17(1)(a)-(c)).

Article 18(1) provides that "a consumer may bring proceedings against the other party to a contract either in the courts of the Member State in which that party is domiciled, or regardless of the domicile of the other party, in the courts for the place where the consumer is domiciled".

The jurisdiction provisions are designed to protect the consumer, who is viewed in these situations as the weaker party. A jurisdiction clause that is inconsistent with these provisions is generally rendered ineffective.

Decision

Jurisdiction

The judge rejected the jurisdiction challenge by Reliantco.

In considering the purpose of the investments, the judge held that the contract fell within Article 17 of the Recast Brussels Regulation. The purpose of the investments was not a business activity but a private consumption need. The fact that Ms Ang was wealthy and had some knowledge of the investment did not preclude her from being a consumer. Ms Ang was therefore entitled to commence proceedings in her country of domicile, despite the exclusive jurisdiction clause.

The case law on the definition of a consumer is extensive and in determining whether Ms Ang was a consumer, the judge cited the cases of Shearson[1], Benincasa Srl[2] and Apostolakis[3 ]. The judge spent time analysing the decision in Apostolakis, a case where the defendants were wealthy private individuals who entered into forward foreign exchange transactions with the claimant bank. The contracts were entered into outside of their professions and it was therefore held that they were consumers. However, when the same litigation came before the Greek Courts[4] it was held that the individuals were not consumers.

The judge in this case suggested that the Greek court in Apostolakis had erred in introducing the concept of a quasi-professional, where someone could not be a consumer due to their knowledge, experience of skill in the investment sector (although there is clearly a line to be drawn here). The main disagreement between the English and Greek decisions was whether investing for private wealth, in the form of trade on the international currency exchange market, was by its nature a business activity. At the time of opening her account, Ms Ang in no way represented that she was opening the account for business purposes. The judge in this case therefore agreed with the decision in the English Apostolakis case, namely that wealth and having some knowledge does not preclude an individual from being a consumer.

The judge noted, with particular reference to Apostolakis, that there was conflicting case law in this area. Further, he explained that there was currently no ECJ/CJEU judgment on whether contracts entered into by wealthy private individuals for the purpose of investing their wealth are consumer contracts within section 4 of the Recast Brussels Regulation. The CJEU heard a reference from the Czech Republic[5] earlier this year in relation to whether Article 17(1) of the Recast Brussels Regulation applies to an individual who engages in trade on the international currency exchange market through a third party professionally engaged in that trade. Judgment is awaited.

Effective Jurisdiction Clause

The judge (obiter) considered that had the jurisdiction challenge been well founded, the exclusive jurisdiction clause would have been effective under Article 25 of the Recast Brussels Regulation. There was evidence that the terms and conditions were available during the relevant period, that Ms Ang had been referred to them on occasion and had had the opportunity to request them.

Data Protection Claims

In obiter the judge also considered that since the jurisdiction challenge had failed, so did the challenge by Reliantco to the jurisdiction of the data protection claims under the Data Protection Act 1998. These claims fell within the scope of the Recast Brussels Regulation as they were civil/commercial matters not excluded by Article 1(2) and arose out of Ms Ang's contract with Reliantco, meaning that they fell within the wider decision on jurisdiction explained above. However, the judge concluded (again, obiter) that had Reliantco's challenge to jurisdiction been well founded (ie it had established jurisdiction in Cyprus), the English Court would have had jurisdiction to consider the claim under the GDPR for an order for rectification, destruction, erasure or blocking of her personal data pursuant to Articles 16 – 17 of the GDPR. Under Article 79 of the GDPR Ms Ang would be entitled to bring proceedings in England against Reliantco as data controller or processor because she is habitually resided in the country (notwithstanding Article 25 due to Article 67 of the Recast Brussels Regulation).

Comment

This judgment demonstrates that the question of whether a private investor is a consumer for the purposes of the Recast Brussels Regulation remains unclear and will often turn on the facts. With a lack of clarity in the case law, it demonstrates the need for the issue to be considered at a higher level.

This judgment also provides some interesting obiter commentary on the jurisdiction over data protection claims.

[1] Shearson Lehman hutton Inc v TVB [1993] (Case C-89/91) EU:C:1993:15

[2] Benincasa Srl v Dentalkit [1997] (Case C-269/95) EU:C:1997:377

[3] Standard Bank London Ltd v Apostolakis [2002] CLC 933

[4] Standard Bank London Ltd v Apostolakis [2003] ILPr 29

[5] Petruchova v Fibo Group Holdings Ltd (Case C-208/18)

No exceptions to exclusionary rule: Court of Appeal confirms established principle

Fri, 10 May 2019 16:12:49 +0100

Facts

The appellant company, Merthyr (South Wales) Ltd, operated open cast coal mining in South Wales. The respondent was the local planning authority, Merthyr Tydfil County Borough Council. In 2005 the council granted planning permission for mining operations on the condition that the land would be restored following the conclusion of those operations.

On 21 December 2015 the mining company, the council and HSBC Bank Plc entered into an escrow account agreement to create an escrow fund to secure £15 million for land restoration.

Clause 4.2(a) of the agreement provided that:

subject to clause 4.2(b) and (c), on each [quarterly funding date] the Company [the mining company] shall deposit an amount equal to £625,000 (as adjusted pursuant to clause 4.2(b) and (c)) into the account.

Clauses 4.2(b) and (c) provided that if a deposit or consecutive deposits were missed, the amount due on the following funding date would increase by the amount outstanding.

Clause 4.2(d) provided that if a deposit was not made on the final funding date, the company must pay the council the full £15 million by 30 June 2022 (which was the contractual longstop date).

The mining company made no deposits into the escrow account. The council applied for specific performance to compel the company to make the deposits.

High Court decision

The council was granted summary judgment for the accrued amounts due under the agreement and the mining company was ordered to pay the outstanding quarterly payments of £6.25 million into the escrow account.

The mining company appealed on the ground that Clause 4.2 of the escrow agreement did not create an enforceable obligation to pay any money into the escrow account until the contractual longstop date.

Court of Appeal decision

In support of its interpretation of Clause 4.2, the company sought to rely on a passage which appeared in certain pre-contractual documents. The gist of the passage was that if the company was unable to meet a quarterly payment, outstanding payments would be rolled forward, with the full £15 million being deposited into the escrow account by the longstop date.

The Court of Appeal analysed the applicable legal principles on the admissibility of evidence of pre-contractual negotiations. It concluded that pre-contractual documents may explain the commercial or business object of a contract, but that a party may not use pre-contractual communications as evidence of what the contract should be understood to mean, nor can that evidence be used to try to demonstrate that the parties reached a consensus on a particular point or used words in an agreed sense.

The Court of Appeal accepted that these pre-contractual documents could be adduced as evidence of the escrow agreement's commercial purpose. However, the court found that the passage cited by the company shed no light on that matter and that it had instead been introduced only to support the company's interpretation of Clause 4.2.

Accordingly, the Court of Appeal held that the passage was inadmissible by virtue of the exclusionary rule and, even if it were admissible, it would provide no guidance as to Clause 4.2's meaning, since the passage contemplated a scenario where the company was unable (rather than unwilling) to pay.

Without reference to the pre-contractual documents, the Court of Appeal held that the appellant mining company was obliged to pay the outstanding sums immediately, because:

(a) The interpretation of the contractual provision put forward by the company was inconsistent with the language of clause 4.2, where the use of terms such as 'shall', 'fails to pay', 'payable' and 'outstanding' signified that payment of sums into the escrow account on a funding date was intended to be a legal obligation, and not a matter of choice;

(b) the company's interpretation would defeat the commercial purpose of the escrow account, which was to build up a fund of money for land restoration while coal mining activity was being carried on; and

(c) it was contrary to business common sense that a sum due from a contracting party would cease to be due because the paying party chose not to pay on the agreed date.

Comment

If such a confirmation is necessary, this case confirms that the English courts continue to take a doctrinal approach to contractual interpretation. In particular, this decision confirms and reiterates the robustness of the exclusionary rule and provides a helpful illustration of the almost imperceptible distinction between using evidence of pre-contractual communication to shed light on the business aim of a contract (on the one hand) and to interpret the meaning of a contractual provision (on the other).

Endnotes

(1) [2019] EWCA Civ 526.

The High Court removes its cap for litigation funders

Fri, 03 May 2019 15:21:01 +0100

Background

The defendants in Davey v Money were successful in defending various claims brought against them by the claimant, Ms Davey. In order to fund her claims, Ms Davey had entered into a funding agreement with commercial funder ChapelGate Credit Opportunity Master Fund (ChapelGate) on 23 December 2015, originally in the amount of £2.5m in return for the greater of: (i) 2.5 times the committed funding; or (ii) 25% of net recovery.

Chapelgate required Ms Davey to obtain ATE insurance to cover an adverse costs order. Ms Davey did not obtain ATE cover and as a result the total funding commitment was halved to £1.25m. However, the return was still calculated on the basis of the original £2.5m. ChapelGate also protected itself with ATE cover in the sum of £650,000.

In the event, Ms Davey was ordered to pay the defendants' costs, roughly £7.5m, on an indemnity basis.

As a result of Ms Davey's failure to pay, the defendants sought a non-party costs order under s51 of the Senior Courts Act 1981 against ChapelGate. ChapelGate accepted that the order should be made, but argued that its liability should be limited to the extent of the funding it provided, in this case £1.3m, due to the Arkin cap.

What is the Arkin Cap?

The Arkin cap limits a commercial litigation funder's liability for costs to the amount of their investment. It was established in the case of Arkin v Bouchard Lines and was responsible in part for allowing the embryonic litigation funding industry to develop. It has been the subject of criticism, specifically because it could be seen as allowing a funder to reap the rewards of success while benefiting from a cushion in defeat.

The High Court's decision

The Court held that ChapelGate's liability should not be limited to £1.3m by reference to the Arkin cap. Snowden J explored the decision in Arkin, as well as its precipitator the Privy Council decision in Dymocks Franchise Systems (NSW) Pty v Todd, and subsequent decisions and legal commentary, including Sir Rupert Jackson's Final Report of the Review of Civil Litigation Funding in December 2009 which recommended that a funder's liability to adverse costs should be a matter for the discretion of the judiciary in each case.

Snowden J found that he was free to exercise his general discretion as to costs under s51 Supreme Court Act 1981, and could therefore find that ChapelGate should be liable for the full amount of the costs awarded against Ms Davey from the date of the Agreement, irrespective of the Arkin cap. He took into account the following factors:

ChapelGate had approached its involvement as a commercial investment throughout the litigation;
The conduct of Ms Davey throughout the litigation had warranted an order for indemnity costs, and ChapelGate had had numerous opportunities to distance itself and chosen not to;
ChapelGate had been aware that Ms Davey would be unable to meet any potential substantial costs order, which was likely to be far in excess of the sum ChapelGate proposed to invest;
ChapelGate halved its commitment while retaining the same share of the recovery demonstrating further self-interest in the commercial venture;
By taking priority in any recovery, ChapelGate was, in the wording of Dymocks, a "real party" with the primary interest in the claim. Access to justice clearly came second to it receiving of a significant return on its investment; and
There was no evidence supporting the submission that commercial funders would be discouraged from providing funding in the future.

RPC thoughts

The finding that the Arkin cap is an approach rather than a rule to be applied automatically may leave funders open to liability for the full amount of a successful party's legal costs. From the defendant perspective, that may be welcome news, increasing the prospect of a greater costs recovery, even if the claimant is impecunious.

However, from the claimant and funder perspective, the increased risk of bearing adverse costs is likely to impact the litigation funding market. ATE insurance is frequently part of the funding package; while it may take some time for the full effects to be seen, this decision may result in funders requiring its inclusion more frequently. It may also cause funders to undertake further diligence at the pre-action stage, together with a closer watching brief during the course of the proceedings so that they stay tuned to any twists and turns in the case that may increase their exposure.

On the face of it, this development could suggest that funding will get more expensive as funders need to absorb the cost of higher risk. However, we have witnessed a number of new entrants to the funding market in recent times. So, competitive pressures resulting from an increase in the size of the funder stable, with a larger number chasing a limited pool of cases to fund, may minimise any impact as the funders try to differentiate themselves from one another on a number of factors including review time and, more crucially, price.

Duty of care can exist between parent company and third parties affected by subsidiaries' actions

Tue, 30 Apr 2019 09:48:00 +0100

Vedanta is the first of the three to reach the Supreme Court(3) and the only one in which, at present, the court has found that the claimants have an arguable case against the English 'anchor' defendant.

Although the Supreme Court found that England was not the proper place in which to bring the claim, it decided that the English courts would nonetheless exercise jurisdiction over the claim as the parties were unable to secure substantial justice in Zambia.

Facts of claim

The claim concerned 1,800 Zambian citizens who brought a claim in the English High Court in negligence against a copper mine operator, Konkola, and its English parent, Vedanta. The claim related to personal injury, property damage and loss of income arising from pollution allegedly caused by the activities at the copper mine in Zambia.

Supreme Court decision

The Supreme Court considered the defendants' appeal on the following issues.

Abuse of EU law
The defendants argued that there was no triable issue against Vedanta (see below). However, even if there was, it should be stayed as it was an abuse of EU law to use Article 4 of the recast EU Brussels Regulation (1215/2012) (the general rule that defendants should be sued in the courts of their domicile) to bring a claim against Vedanta in England purely for the collateral purpose of attracting English jurisdiction against Konkola, the real target of their claim.

In Owusu v Jackson the European Court of Justice (ECJ) decided that a claimant has the right to sue an English domiciled defendant in England free from the challenge that the court of another state was a more appropriate forum, even if that state was a non-EU state. The ECJ decision causes difficulties in considering the appropriate forum in such cases. In practice, the English proceedings inevitably continue and the need to avoid irreconcilable judgments has, thus far, effectively disabled the English courts from concluding that any other jurisdiction is the forum conveniens (see below).

However, leaving aside circumstances where a claimant has no genuine intention to seek a remedy against the 'anchor' defendant,(4) the fact that Article 4 "fetters and paralyses" English forum conveniens in this way in a "necessary and proper party" case cannot be said to be an abuse of EU law:

to allow those concerns to serve as the basis for an assertion of abuse of EU law would be to erect a forum conveniens argument as the basis for a derogation from article 4, which is the very thing the court of Justice held in Owusu to be impermissible.(5)

Accordingly, the Supreme Court held that there was no abuse of EU law and the claimants were entitled to rely on Article 4.

Real issue against Vedanta
The critical question was whether Vedanta sufficiently intervened in the management of the mine by its own subsidiary to have incurred itself (rather than by vicarious liability) a common law duty of care to the claimants and a separate liability under Zambian law.

The defendants argued that this would involve a novel and controversial extension of the boundaries of the tort of negligence beyond any established category, which would require detailed investigation of the claimants' case, something which neither the High Court nor the Court of Appeal had carried out. The Supreme Court did not accept that argument. It commented that the liability of parent companies in relation to the activities of their subsidiaries is not, of itself, a distinct category of liability in common law negligence. Rather, everything will depend on the extent to which, and the way in which, a parent company avails itself of the opportunity to take over, intervene, control supervision or advise the management of the relevant operations. All that the corporate relationship demonstrates is that the parent company had such an opportunity.

In Unilever, the Court of Appeal identified the following basic types of case where a parent company might incur a duty of care:

where the parent has in substance taken over the management of the relevant activity of the subsidiary in place or jointly with the subsidiary's own management; or
where the parent has given relevant advice to the subsidiary about managing a particular risk.

The Supreme Court was reluctant to confine possible cases into these two categories. It also suggested that the factors in Chandler(6) were no more than particular examples of how a parent company might incur a duty of care and did not establish a separate test distinct from the general principles. In doing so, the Supreme Court acknowledged that there is no limit to the models of management and control which may be put in place in multinational groups of companies, from a parent being no more than a passive investor to a group of companies being vertically reorganised so its business is, in management terms, carried on as if it was one single undertaking.

The Supreme Court was also reluctant to extract from Unilever and Dutch Shell(7) a limiting principle that a parent company could never incur a duty of care simply by laying down group-wide policies and guidelines and expecting the management of each subsidiary to comply with them. However, it did find that group-wide policies may give rise to a duty of care to third parties where the parent does not merely proclaim them, but takes active steps by training, supervision and enforcement, to see that they are implemented by subsidiaries. Similarly, a parent may incur liability if, in published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not do so. The Supreme Court went on to comment that, in those circumstances, its omission may constitute the abdication of a responsibility which it has publicly undertaken.

The Supreme Court considered that in the published material that the claimants relied on, Vedanta could fairly be said to:

have asserted its own assumption of responsibility for the maintenance of proper standards or environmental controls, particularly the operations at the mine; and
not merely have laid down but also implemented those standards by training, monitoring and enforcement.

This was sufficient to show that it is well arguable that a sufficient degree of intervention by Vedanta could be demonstrable at trial, after full disclosure of Vedanta and Konkola's internal materials, and those passing between them.

Proper place
Vedanta had, by the time of the jurisdiction hearing, offered to submit to the jurisdiction of the Zambian courts, so that the whole case could proceed in Zambia. That being the case, any risk of parallel proceedings and irreconcilable judgments would arise from the claimants' choice, rather than Zambia not being an available forum for the claims against both defendants.

In OJSC VTB(8) the court concluded that there was no reason why the claimant should be expected or required to give up its right to sue the anchor defendant in England in order to avoid duplication of proceedings. However, the Supreme Court found there was a good reason why the claimants should have to make that choice. If this case only concerned member states, the claimant would have the choice to pursue separate proceedings or bring one set of proceedings in one defendant's domiciled member state. The Supreme Court asked why the right to sue in England under Article 4 should not give rise to the same choice where an alternative jurisdiction is available by reason of the defendants all agreeing to submit to it; if the Article 4 right is not a trump card within the confines of the member states, it should not be so outside.

The High Court had found that, setting aside the risk of irreconcilable judgments, Zambia was overwhelmingly the proper place for the claim to be tried.(9) Accordingly, the Supreme Court concluded that if substantial justice was available to the parties in Zambia as it was in England:

it would offend the common sense of all reasonable observers to think that the proper place for this litigation to be conducted was England, if the risk of irreconcilable judgments arose purely from the claimants' choice to proceed against one of the defendants in England rather than, as is available to them, against both of them in Zambia.(10)

On that basis, the Supreme Court concluded that, subject to the issue of substantive justice, England was not the proper place for the claim to proceed.

Substantial justice
Even if the court concludes that England is not the proper place for the claim to be tried, it can still permit service of English proceedings on a foreign defendant if satisfied by cogent evidence that there is a "real risk that substantial justice will not be obtainable in that foreign jurisdiction".(11)

The High Court had found that substantial justice would not be available for the following reasons:

a practical impossibility of funding such group claims where claimants are in extreme poverty; and
the absence within Zambia of sufficiently substantial and suitably experienced legal teams to enable litigation of this size and complexity to be prosecuted effectively.

The Supreme Court approved the High Court's approach to this issue and its analysis of the position. This was a decisive factor and so the Supreme Court found that the claim should be permitted to proceed in England.

Comment

While this decision confirmed that a duty of care can exist between a parent company and third parties affected by the actions of its subsidiaries, the Supreme Court was reluctant to place limits on the types of case where a parent company might incur a duty of care. While this creates some uncertainty, it also allows flexibility and demonstrates that the existence of any duty of care is likely to be a question of fact in each case. In some circumstances, it might be possible to determine the existence of such a duty on a summary basis, although this will again depend on the facts of the case.

Where defendants agree to submit to a more appropriate forum, claimants are now likely to find it more difficult to establish England as the proper place to proceed, absent being able to demonstrate that the other jurisdiction in question cannot provide substantial justice.

It is also striking that the Supreme Court's judgment opens with a discussion on maintaining proportionality in jurisdiction disputes. While many decisions comment on proportionality it is noteworthy that the Supreme Court has taken this opportunity to draw parties' attention to the issue. It suggests costs consequences may await litigants and legal professionals who ignore the warning.

(1) Vedanta Resources PLC v Lungowe [2019] UKSC 20.

(2) AAA v Unilever PLC, Unilever Tea Kenya Limited [2018] BCC 959 and Okpabi v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd [2018] EWCA Civ 191.

(3) The Supreme Court has specifically directed that any decision for permission to appeal the Court of Appeal decision in Okpabi be taken after judgment has been handed down in Vedanta.

(4) The High Court had found that the Vedanta claimants had a genuine intention to seek a remedy from Vedanta and the Supreme Court's practice was not to revisit such factual findings absent an error of law.

(5) [40].

(6) Chandler v Cape plc [2012] EWCA Civ 525.

(7) Okpabi.

(8) OJSC VTB Bank v Parline Ltd [2013] EWHC 3538 (Comm).

(9) See [85] for a summary of those connecting factors.

(10) [87].

(11) [88].

What if third parties helped to hide the golden egg?

Thu, 25 Apr 2019 12:32:46 +0100

If payments have been made out of the victim's bank account in the course of the fraudulent scheme, the victim's bank may be the place to (re)start the hunt. The bank may owe the victim, as its customer, the so-called Quincecare duty of care[1]. This means that the bank should refrain from executing its customer's order for payment if it has reasonable grounds for believing that it is an attempt to defraud the customer. If a Quincecare duty is breached, a customer may be able to recover the sums paid out of that account from the bank – a potentially eggs-cellent result. RPC is acting on just such a claim against JP Morgan for the Nigerian state.

As we explored in our blog on Wednesday [2], if a victim of fraud has a proprietary interest in the golden egg they may be able to trace its value into assets held by third parties and recover these assets directly. This is of limited use if the egg has been dissipated (or devoured over the Easter weekend). However, a third party may also be liable to compensate the victim for the value of the golden egg or hand over the profits which they have earned from it. For example, third parties can be liable if they:

Dishonestly assist the fraudster. It has recently been confirmed that the third party's dishonesty is to be judged objectively, according to the standards of ordinary decent people.[3]
Receive assets knowing that they were obtained as a result of a fraudulent scheme. The key question is whether, given the third party's knowledge, it would be unconscionable for them to retain the benefit of the asset.

It is no good if egg-hunters seek these equitable remedies from the court after they have been making chocolate nests for Easter (or acquiescing in the third party's conduct, for example) – in these circumstances they are unlikely to have "clean hands".

And after all those eggs-traordinary Easter-themed jokes, we come to the end of the greatest Easter egg hunt…that's all, yolks!

[1] Barclays Bank plc v Quincecare Ltd [1992] 4 All ER 363

[2] What to do if the golden egg hatches (or you need to trace into the fraudster's other assets)

[3] Group Seven Ltd v Notable Services LLP [2019] EWCA Civ 614, following the test for dishonesty established in Ivey v Genting Casinos [2017] UKSC 67

The fraudster is insolvent – can you add more eggs to the basket?

Wed, 24 Apr 2019 15:37:32 +0100

This is because an office-holder such as a liquidator has wide powers to require information from the directors and from third parties about the affairs of an insolvent company under s236, Insolvency Act 1986, which may shed further light on any wrong-doing and where the eggs have been hidden.

An office-holder can also bring proceedings against the individual directors in the name of the insolvent company, where the directors have acted in breach of their duties.

And last, but not least, the office-holder has significant powers to line up their egg soldiers and attack the disposition of assets, in order to increase the assets available for distribution to creditors. He or she can apply to court for orders that relevant transactions be set aside and assets transferred pursuant to those transactions be returned where, for example:

Assets were sold for no consideration or at an undervalue, unless they were sold in good faith with reasonable grounds to believe they would benefit the now insolvent company.
Some creditors were given preferential treatment, with the intention of improving the creditors' position on insolvency.
Transactions were entered into whose purpose was either to put assets beyond the reach of creditors or prejudice their interests.

Whilst such orders have the potential to increase the pool of assets, there are limits on their utility. In respect of the first two scenarios above, the relevant transaction must have taken place when the company was unable to pay its debts, during the period either six months or two years before the company went into liquidation (depending on whether the other party is connected to the company). Moreover, where assets have been transferred to a third party for value who has no notice of the relevant circumstances, the liquidator must tread on egg shells and the court will not order those assets to be restored to the company.

[1] What to do if the golden egg hatches (or you need to trace into the fraudster's other assets)

What to do if the golden egg hatches (or you need to trace into the fraudster's other assets)

Wed, 24 Apr 2019 10:17:18 +0100

Just like the most tempting Easter eggs, a fraudster is unlikely to hold on to a golden egg for very long. It may be easy to follow the golden egg, so if the fraudster gave it to his friend at Easter, the egg-hunter could claim it straight back from the friend.

The hunt gets harder if the golden egg hatches or its value is transferred to another asset, and the egg-hunter must try to show that they have a proprietary interest in that asset. For example, if the fraudster sold the golden egg to one of his cronies and they cannot be found, the egg-hunter may try to trace the sale proceeds into the fraudster's bank account.

The rules of tracing are extremely complicated, but in essence, the egg-hunter's ability to claim the funds in the bank account, or the assets purchased with these funds, depends on the basket into which the proceeds of sale were placed. If the basket (bank account) contains the fraudster's eggs, then it is presumed that any asset was purchased using the egg-hunter's funds, unless the fraudster can prove the contrary. If the basket contains the eggs of an innocent party, the egg-hunter and innocent party will be treated equally and there are various methods to courts use to achieve a fair outcome.

The trail runs cold if a fraudster eats the egg (dissipates the asset), or sells it to a third party who has no notice of the egg-hunter's interest. An egg-hunter's attempt to show a proprietary interest in the fraudster's assets will be eggs-hausted.

How can I find the golden egg? Part 2: ask the Easter bunny (or third parties)

Tue, 23 Apr 2019 10:57:56 +0100

As well as getting information from the suspected fraudster, and checking up on his affairs through an enquiry agent, the unsatisfied egg-hunter can ask the court to make two orders which can be an enticing prospect, even for those who have over-indulged during the bank holiday weekend:

• Norwich Pharmacal disclosure orders. These orders oblige a third party who has been mixed up in the wrongdoing (whether knowingly or innocently) to provide specific information for a range of purposes, most typically to allow the victim to work out whom to pursue. In recent cases, they have been used to find out from a bank the identity of a potential rogue trader[1], to obtain from a potential wrongdoer documents showing the nature and extent of the wrongdoing[2] and to confirm the identity of someone who gave instructions to delete a social media account.

• Bankers Trust orders[3] . These orders oblige a bank to disclose information, such as the flow of funds through a suspected fraudster's bank account, to help a victim of fraud find assets in which they claim a proprietary interest. But they are by no means limited to banks: in recent cases, a Greek businessman sought such an order to find out from an auction house, a jeweller and a safety deposit company about jewellery potentially discussed or left with them by his estranged wife, which the businessman said she had misappropriated from his family home.[4]

An egg-hunter will need to work hard to convince the court to make either of these orders. Requests should be targeted and strong evidence is needed that a fraud has taken place. The egg-hunter will also need to give the Easter bunny – or the third party – a carrot, by paying their costs of complying with the disclosure order and compensating them for any losses suffered.

If the suspected fraudster has hopped overseas it is still possible to obtain information about them from third parties in England, though getting information from third parties abroad may be a much harder eggs-ercise.

[1] Domestic and General Group Ltd v Bank of Scotland Plc [2018] EWHC 3604 (QB)
[2] Benhurst Finance Ltd v Colliac [2018] 6 WLUK 641
[3] Named after the Court of Appeal decision in Bankers Trust Co v Shapira [1980] 1 W.L.R. 1274
[4] Kyriakou v Christie Manson and Woods Ltd [2017] EWHC 487 (QB

Egg supplier ends up with egg on its face

Thu, 18 Apr 2019 14:14:41 +0100

Laying the egg: the underlying facts

Back in May 2015, Rembrandt entered into a contract with NIVE under which NIVE was to supply egg products to Rembrandt. Shortly after that contract, NIVE indicated that there would be an unanticipated extra regulatory cost which would require a price increase. Rembrandt agreed to the increase and the parties entered into a new contract in June 2015.

When shipments begun a few months later, NIVE informed Rembrandt that some of the egg products would be supplied by Henningsen van den Burg (its sister company).

Not long afterwards, Rembrandt suspended its performance of the contract alleging that NIVE failed to comply with US inspection requirements.

Incubation: the arguments before the High Court

NIVE sued Rembrandt for loss of profit on the sales that would have taken place but for that suspension of performance. Rembrandt claimed that it was entitled to rescind the second contract because (i) the increased sale price in the second contract was not all that it was cracked up to be and in fact, the increased price included an element of profit, not only regulatory costs (which amounted to fraudulent misrepresentation); and (ii) the products did not comply with US regulations (which amounted to a breach of warranty).

Hatched in the High Court

The High Court found that NIVE had made fraudulent misrepresentations to Rembrandt and could not prove that Rembrandt would have entered into the second contract regardless. Rembrandt was therefore able to rescind the second contract. However, that resurrected the first contract (which would otherwise have been terminated by the second). As the High Court egged to differ on any breach of warranty, Rembrandt was still liable to NIVE for damages for breach of the first contract. However, the High Court held that Rembrandt was liable only for NIVE's losses and not for its affiliate's losses.

NIVE appealed on the grounds that (a) it was for Rembrandt to prove that it would not have entered into the contract but for the fraudulent misrepresentation; and (b) it could recover its affiliate's losses as well as its own.

Cracked in the Court of Appeal (to mix a metaphor)

Who has the onus of proof on reliance when it comes to fraudulent misrepresentation?

The representor.

The Court held that there is a factual presumption that the representee entered into the contract in reliance upon the fraudulent misrepresentation (even if it is one of several reasons for doing so), which can be rebutted by the representor.

NIVE could not prove that even if it had not made the false representations regarding the price increase, Rembrandt would still have entered into the second contract. Rembrandt was therefore entitled to rescind the second contract, and as a consequence, NIVE could only claim for loss of profit based on the sales prices in the first contract.

Can a contracting party recover both its own losses and those of a non-contracting party?

Only if the contract is for the known benefit of that non-contracting party. Otherwise, a transferred loss claim must fail.

Rembrandt, in this instance, was not even aware of the existence of Henningsen at the time that the contract was made, let alone the possibility that Henningsen might supply the egg products. As such, NIVE was unable to show that there was a common intention to benefit the third party, which was crucial to establishing a transferred loss claim. Consequently, NIVE could claim only for its own loss, and not the loss suffered by Henningsen.

Counting your chickens before they are hatched

While it is rare for a fraudulent misrepresentation to be established, this decision reaffirms the difficulties faced by the representor once a fraudulent misrepresentation has been found. More broadly, however, the case is a reminder that post-contractual events will rarely alter the contractual position. If third parties become involved, or the parties' performance starts to change from that set out in the contract, it is always preferable for those changes to be reflected in a variation to the contract. Otherwise, if things go wrong, the less advantageous contractual position may well prevail.

Happy Easter!

[1] BV Nederlands Industrie Van Eiprodukten v Rembrandt Enterprises Inc [2019] EWCA Civ 596

Should fraud unravel all? The Supreme Court thinks so

Thu, 18 Apr 2019 11:47:45 +0100

Background to the claim

The Claimant, Mrs Takhar, transferred a number of deteriorating properties to Gracefield Developments Limited, a company in which she and the two Respondents (her cousin, Mrs Krishan and her cousin's husband, Dr Krishan) were shareholders. At the time, Mrs Takhar was experiencing significant financial difficulties.

A dispute arose over ownership of the properties; a significant piece of evidence was a profit share agreement apparently signed by Mrs Takhar which outlined the division of profit on the sale of the properties.

During the hearing, Mrs Takhar stated not only had she not signed the agreement but that the first time she had seen it was after the dispute arose. She was, however, unable to explain how her signature had come to be on the document and she could not say that the signature on the document was not hers. She applied for permission from the trial judge to obtain evidence from a handwriting expert to examine the signature on the agreement, but the application was refused because the trial was imminent.

Ultimately, the trial judge held that the properties had been transferred to Gracefield Developments Limited both legally and beneficially, on terms reflected in the profit share agreement.

The unravelling begins

A handwriting expert engaged post-trial concluded that Mrs Takhar's signature was forged; on that basis, Mrs Takhar issued proceedings to have the judgment set aside.

The Krishans contended that this was an abuse of process because the agreement had been available to the Claimant prior to the earlier trial. The application reached the Supreme Court. The Court found that where it can be shown that a judgment has been obtained by fraud, and where no allegation of fraud had been raised at the trial which led to that judgment, a requirement of reasonable diligence should not be imposed on the party applying to set aside a judgment.

The existence of fraud was a new issue to be decided and not a matter that had been raised in the earlier proceedings. This was demonstrated by the differences in relief sought; in the earlier proceedings, Mrs Takhar had sought to avoid the effect of the agreement because of undue influence and unconscionability, whereas in the current proceedings, she claimed that the agreement itself was fraudulent.

The Supreme Court also acknowledged that Mrs Takhar had attempted to bring the matter before the Court in the earlier proceedings, but the Court had refused to grant permission to do so. Therefore, there had not been a deliberate decision on her part not to investigate the fraud.

As the High Court had done, the Supreme Court found the position of Australian and Canadian courts on the matter to be very compelling, both of which have rejected the notion that due diligence is required in order to have a judgment set aside for fraud.

Ultimately, the Supreme Court regarded the idea of a fraudulent party profiting from their opponent's passivity or lack of reasonable diligence to be antithetical to any notion of justice.

When might fraud not unravel all?

While making it very clear that this was not the Court's final view on the matter, the Supreme Court did indicate that there may be instances where fraud doesn't in fact unravel all, and a court could exercise discretion as to whether to entertain a challenge to set aside judgment, for example:

• where a deliberate decision is taken not to investigate the possibility of fraud in advance of the first trial even if it has been suspected; or

• where fraud was raised at the first trial, but new evidence as to the existence of the fraud is advanced in support of an application to set aside the judgment.

Why does this matter?

The case indicates that fraud should unravel judgments in order to safeguard against injustices, and the Court has made clear that innocent parties should not be burdened with an obligation to keep their eyes peeled constantly for acts of forgery. That being said, a prudent litigator should investigate suspicions of fraud as soon as it first comes to their attention, so as to avoid the time and costs involved in challenging a judgment that has been obtained by fraud.

How can I find the golden egg? Part 1: ask the fraudster and accept no eggs-cuses

Wed, 17 Apr 2019 16:52:20 +0100

When courts grant freezing orders, they can also require suspected fraudsters to provide an affidavit disclosing the value, location and details of their assets across the globe, including assets they previously owned. Disclosure orders can provide egg-hunters with useful clues at an early stage in proceedings so that they can track down the golden egg and ensure that it is not moved from its hiding place. Indeed, courts usually view such a disclosure order as being necessary to enable an egg-hunter to check the freezing order is being complied with.

If you are on the receiving end of a disclosure order, it's no spring picnic. Identifying all of the assets of a very wealthy person, usually in a very short time period, is an onerous obligation. And if there are no good eggs-cuses for non-compliance with a disclosure order, the consequences can be severe. In 2018, a defendant in a US$4.6 billion fraud failed to give certain disclosure and was untruthful in the disclosure he had given. He was ordered to attend court in England for cross examination, rather than videolink from Switzerland, even though this would place him at an increased risk of extradition to Russia, Kazakhstan or Ukraine.

Egg-hiding is not a game for the faint-hearted; failure to comply with a disclosure order can be considered contempt of court and result in a prison sentence for individuals (the court has recently sentenced an individual to two years in prison for contempt of court).

How do you stop the treasure map leading to the golden egg being destroyed?

Wed, 17 Apr 2019 09:57:53 +0100

In these circumstances, the egg-hunter may obtain a search order (historically, an Anton Piller order) on an urgent basis enabling her to enter the suspected fraudster's (or a third party's) premises and search for, copy, remove or detain documents - a result potentially tastier than a slice of simnel cake. In the context of asset recovery, the primary purpose of the order is to prevent the suspected fraudster from destroying evidence which may support the egg-hunter's claim.

Such an intrusive power is akin to a search warrant executed by the police and is not available in many other jurisdictions. The egg-hunter will have to be speedy but thorough: the English court will grant a search order only in eggs-ceptional circumstances and in reliance on a number of safeguards. In particular:

   •   an egg-hunter must have a hard-boiled case that the respondent has caused her very serious damage and demonstrate a real possibility that the respondent will fry up the material in his possession;
   •   as with freezing orders, an egg-hunter is required to take eggs-tra care to tell the court the full circumstances in which the order is being sought, including any points against the egg-hunter; and
   •   the court will appoint an independent supervising solicitor, who will be responsible for serving the order, explaining it to the respondent, ensuring that the search is conducted within the terms of the order and any items removed are listed, and reporting back to the court on the conduct of the search.

If a respondent refuses to allow the egg-hunter access to his premises or his paper or electronic records (or tells someone other than his lawyer about the search order, if it includes a "gagging" order), he may be guilty of contempt of court and fined or imprisoned. But if it turns out that the search order should not have been granted, the egg-hunter may have to reimburse the respondent for any losses suffered as a result of the order - which may leave her feeling a little beaten.

How do you stop the golden egg rolling away?

Mon, 15 Apr 2019 15:04:09 +0100

Without knowing exactly where the golden egg is, the egg-hunter can obtain a freezing order to dampen any fraudster's enthusiasm more quickly than the April showers. A freezing order usually prevents the suspected fraudster from having "free-range" to deal with their assets up to the value of the claim, whether just in England or worldwide. As they may have tried to obfuscate the true ownership of their assets, the assets of third parties can also be frozen if there is reason to suppose these in fact belong to the respondent.

Those who breach a freezing order and individuals who assist them could be very un-clucky. They could be liable for contempt of court and sent to prison.

Whilst a freezing order can effectively secure assets, obtaining one is a lot trickier than choosing from a box of chocolates. An egg-hunter needs to act quickly to avoid delay scrambling her plan to secure the assets, but must still be able to show the court both a good arguable case against the suspected fraudster in England and that there is a risk they will dissipate their assets. As an injunction is usually obtained without telling the other side first, an egg-hunter can't present their case sunny-side up and must disclose to the court the runnier aspects of their position.

A hard toffee may be left in the bottom of the box if it later turns out that the order should not have been given and has caused the respondent loss. Before a freezing order is made an egg-hunter usually has to agree to compensate the respondent (and third parties) for any unnecessary losses suffered.

The greatest Easter egg hunt: asset recovery in the English courts

Mon, 15 Apr 2019 12:04:27 +0100

It is not unusual for fraudsters to hide their assets to defeat attempts to enforce orders against them, often through a series of convoluted transactions, using a web of offshore entities. Before court proceedings start, it can pay to identify and preserve the "golden egg" (or eggs) - the assets which could be available to satisfy any judgment.

Fortunately, the English court recognises the scale and ubiquity of fraudulent schemes and the challenges faced by those seeking to bring fraudsters to justice. In 2018 the court issued a worldwide freezing order of US$540 million, showing its willingness to go wide and big. It also announced a new court to deal specifically with fraud and cybercrime. It has a number of tools to assist in the hunt for the golden egg, both in this jurisdiction and worldwide.

In the run up to Easter, we'll provide a (large-scale) treasure map to asset recovery in the English courts, to help the hungry egg-hunter in their search for and capture of the golden egg - a healthy distraction for anyone abstaining in the difficult final days of Lent.

If you can't resist the temptation to find out more about asset tracing right now, take a look at Terralex's Guide to Tracing Assets Around the World. The guide contains contributions from lawyers in over 25 jurisdictions in the Americas, Europe and Asia, including RPC.

English Court trumps the FBI

Fri, 05 Apr 2019 10:04:32 +0100

Background

In October 2011 Autonomy Corporation Limited (Autonomy) was acquired by Hewlett-Packard Vision BV (HP Vision), a wholly owned subsidiary of Hewlett Packard Enterprise (HPE).

The acquisition, and subsequent integration, of Autonomy into the HP group was not a smooth process, and on 20 November 2012 HPE announced that it would write down the value of Autonomy by US$8.8 billion. Autonomy and HP Vision then commenced proceedings in the UK alleging that Mr Lynch, Autonomy's founder and former CEO, and Mr Hussain, Autonomy's former CFO, were the "architects of fraudulent manipulation of Autonomy's accounting information on a massive scale". The claimants claim that the alleged manipulation caused HP Vision to pay US$5 billion more for Autonomy than they would have, had they known the true position. The trial in these proceedings, one of the most eagerly anticipated of 2019, has recently begun.

Separately from the civil proceedings, a criminal investigation into the acquisition of Autonomy by the HP group was launched in the US in late 2012. As part of this investigation, a subpoena was issued and served on HPE at the request of the US Attorney's Office, on 30 October 2018. The subpoena demanded the production of "all documents produced by any party" to the English proceedings which were in HPE's possession, custody or control.

The subsidiaries of HPE believed they could face criminal sanctions in the US if they did not comply with the terms of the subpoena. They applied to the English court for permission to produce to the FBI documents disclosed by Mr Lynch and Mr Hussain during the English proceedings, as well as witness statements served by the parties.

The English High Court's Decision

Summary

The claimants' application was refused. In rejecting the application, the court re-emphasised that the prohibition against collateral use of disclosed documents and witness statements set out in CPR 31.22 and CPR 32.12 gave effect to important public policy considerations which required careful control to be exercised over the use of any documentation exchanged during proceedings. Utmost consideration should be given to the need to preserve, as far as possible, a litigant's right to privacy and confidentiality, and sufficiently cogent and persuasive reasons in favour of the collateral use had not been established to outweigh this interest.

The legal test

Crest Homes Plc v Marks established that the court will release or modify the restrictions on collateral use only (a) where there are special circumstances which constitute "cogent and persuasive reasons" for permitting collateral use, and (b) where the release or modification will not occasion injustice to the person giving disclosure.

On the first limb, the burden of showing sufficiently cogent and persuasive reasons for permitting collateral use was such that it would "usually be difficult, if not impossible", except where the court was persuaded of some public interest in favour of collateral use which was stronger than the public interest and policy underlying the restrictions that the rules reflected. Tchenguiz v Grant Thornton UK LLP , and subsequent obiter comments in The Libyan Investment Authority v Société Générale SA , further developed guidance on what may constitute a special circumstance for these purposes.

HP's reasons for disclosure

In the present case, the court held that the existence of the US subpoena, in and of itself, did not establish a cogent and persuasive reason for giving permission for the collateral use. The argument that there was both "compulsion and necessity" for the documents to be divulged was not sufficiently established for a number of reasons:

1. The Applicants had not established that there was any real need for the documents to assist in the investigation and prosecution of fraud.

Significant progress in the American investigations had been made without reference to the subpoenaed documents: Mr Lynch had been indicted in the US in November 2018, and Mr Hussain had been tried and convicted in April 2018.

2. The Applicants were not under the legal obligation that they claimed.

None of the parties to the litigation were addressees of the subpoena. HPE was the only entity named as the "Subpoena Recipient" within the body of the document, and the judge accepted that only HPE was subject to the legal obligation under the subpoena.

3. Control of documents

Upon review of the evidence provided regarding US law, the court noted that HPE should not be considered to have the relevant documents in its control given the requirement for the court to give its permission for any collateral use.

4. The terms in which the subpoena was drafted gave the firm impression of a trawl, rather than an investigative need which may have amounted to a cogent and persuasive reason in favour of the collateral use.

The document request in the subpoena was enormously broad, seeking "all documents produced by either party". Whilst this language was entirely regular for the purposes of a US subpoena, the request was not sufficiently tied to any issues or areas of investigation which might have enabled the court to strike a balance between competing public interests.

Injustice

While the application was found to fail on the first limb of the test, the court considered (obiter) whether granting permission would also give rise to injustice against the defendants. The court considered that it might, suggesting that there was the potential for prejudice in making available documents and statements to a claimant in the US that would not be available "but for the happenstance of parallel process in the UK". The judgment notes that this prejudice is particularly visible in the context of witness statements, citing the real possibility that witnesses might be moved to withdraw their evidence in the event that their statements were made public in advance of the trial.

Comment

This is another judgment in a spate of recent decisions which illustrate the high threshold which needs to be met to obtain the court's permission to make collateral use of documents disclosed in English proceedings. Perhaps most interestingly, the court's comments show clearly the level of scrutiny which will be given to requests or demands made by third parties for the disclosure of documents obtained through ongoing proceedings, no matter the standing of the person or authority which makes it.

Game theory and the art of litigation strategy - Article 4

Tue, 02 Apr 2019 22:28:00 +0100

Introduction

This article that will - with the help of game theory and a little computational modelling – consider what a litigant's optimal settlement negotiation strategy should be, specifically how aggressively they should bargain with an opponent. It will build upon the framework established in the previous trilogy of articles on this topic published last year (which can be found here, here and here) which visualised how litigation settlement works and illustrated how it can become harder to settle a case the further towards trial it progresses.

So is it better to be uncompromising and bargain aggressively or be less aggressive and pragmatic? Read on to find out more.

The Hobbesian Trap

The most well-known scenario in game theory is the Prisoner's Dilemma, where two suspects in police custody are offered the opportunity to betray the other by testifying that the other committed the crime. The irony in the scenario is that if both decide to betray the other they are both worse off than if they both stayed silent.

Less well known is the Hobbesian Trap. Imagine two nations A and B, which must both decide whether to mobilise for war. Mobilising is costly (both in resources and the heightened prospect of war) but potentially advantageous if the other nation does not mobilise (because of the resulting power differential). However, if both nations mobilise neither is happy, as both will have incurred costs and heightened the risk of war without achieving any relative advantage.

We can represent this situation using the table below (which is known as a payoff matrix) where the numbers represent the relative payoff to each nation for each possible outcome. (Nation A's payoff is shown on the left of each cell and nation B's on the right of the same cell.)

		Nation B
		Mobilise	Not Mobilise
Nation A	Mobilise	-2 , -2	+1, -1
Nation A	Not Mobilise	-1 , +1	0 , 0

For the purposes of this example we assume that the costs of mobilisation (-2) are greater than the disadvantage of not being mobilised when the other nation is (-1). The corresponding advantage to being a mobilised nation dealing with a nation that is not mobilised is assumed to be (+1).

If we start from a state of affairs where neither nation is mobilised, both nations have a pay-off of zero (bottom right of the matrix). However, this state is unstable as each nation has an incentive to change its position and mobilise which – assuming the other nation does not also mobilise –takes its payoff to +1 (the bottom left and top right of the matrix). Unfortunately this 'greed' incentive can result in both nations mobilising, which results in a mutual mobilisation scenario (top left). This is the worst of all positions i.e. a Hobbesian Trap.

However, if we were to start from a position of mutual mobilisation the position resembles the game of chicken – another game theory staple. In a game of chicken two cars accelerate towards each other hoping that the other will swerve away before the cars crash; if your opponent swerves and you do not then the pay-off is high whereas if neither you nor your opponent swerves the pay-off is rather less good. In the mutual mobilisation scenario, we can think of a swerve as demobilising.

Sidebar – How is a Hobbesian Trap different to Prisoner's Dilemma?

For those who are interested, the payoff matrix for the Hobbesian Trap is different to the Prisoner's Dilemma payoff matrix, a variant of which is shown below.

		Prisoner B
		Betray	Stay silent
Prisoner A	Betray	-2 , -2	0, -3
Prisoner A	Stay silent	-3 , 0	-1 , -1

The critical difference is that in a Hobbesian Trap situation, mutual mobilisation is the worst possible outcome whereas in Prisoner's Dilemma a mutual betray situation is actually a better outcome than staying silent while the other prisoner betrays you.

As this article progresses we will consider how these scenarios could inform our understanding of litigation settlement negotiations – but first a quick recap of the framework built up in previous articles.

Litigation settlement – a recap

In summary, the key principle underpinning settlement analysis is that by settling a case (rather than taking it to trial) collectively both the claimant and defendant save the costs that would otherwise have been incurred in bringing a matter to trial; that cost saving can potentially bridge the distance between the two parties' views of what the case is worth (i.e. the claim value x probability of success, adjusting for potential costs awards).

Previous articles introduced certain terminology which will be used again in this article but which is quickly summarised below:

An "indifference line" represents a settlement outcome that a particular party would consider financially equivalent to their expected outcome at trial; for example if a claimant's expected award at trial was £500k they would theoretically be as happy with an award of £200k at an earlier point in the litigation if they avoided incurring £300k in legal fees to take the matter to trial unnecessarily.
The "settlement acceptance zone" is the area below the defendant's indifference line and above the claimant's indifference line – a space where both parties can settle and achieve a better outcome than they expect at trial.
The "rational expected settlement line" is the midpoint between the claimant and defendant indifference lines.It is the point we might expect the parties to settle at assuming equal bargaining positions.

A graphical representation of these concepts is show below:

Figure 1 – Graph illustrating the claimant/defendant indifference lines, the settlement acceptance zone and the rational expected settlement line for a £1m case with a 50% chance of claimant success with both parties likely to spend £300k to take the case to trial

Litigation settlement strategy and bargaining aggression

We now have all the tools we need to start to consider what the optimal litigation settlement strategy for a lawyer to adopt might be. In this context 'settlement strategy' means the level of damages the claimant/defendant will accept/pay out and how aggressive that level is relative to the settlement acceptance zone. To do this we will consider 5 different settlement strategies below ranked on an aggression scale of 1 to 5.

Settlement aggression level	Description
1	Willing to settle at own indifference line
2	Willing to settle midway between own indifference line and rational expected settlement line
3	Willing to settle at the rational expected settlement line
4	Willing to settle midway between rational expected settlement line and opponent's indifferent line
5	Willing to settle at opponent's indifferent line

Taking the claimant as an example, the graph below shows the point above which it would be willing to settle at different settlement aggression thresholds (please note: if the defendant's perspective were being considered Level 1 would start at the top).

Figure 2 – The same graph as Figure 1 but with the settlement aggression levels from the Claimant's perspective shown

The caveat to the above is that one does not know what one's opponent's indifference line is as it is based on their subjective view of the prospects of success of the case. Given this limitation we will assume for the purposes of this article that a party will assess that an opponent has the same view of the prospects for the case as they do.

Measuring the outcome of a given litigation settlement strategy

To measure the effectiveness of a given strategy it is necessary to model and simulate a large number^[1]of cases pitting each aggression strategy against one another.

To approximate the fact that in litigation one's knowledge and ability to accurately assess the likely outcome of the case increases over time we will split the cases into four stages where each parties level of knowledge increases at the end of each stage:

Litigation stage	% Total case costs incurred by end of stage	Accuracy of case merits estimate at end of stage^[2]
1 (Pleadings)	25%	25%
2 (Own disclosure)	50%	50%
3 (Witness statements / opponent disclosure)	75%	75%
4 (End of trial)	100%	n/a as the court decides

Each simulated case will randomly generate a claimant probability of success in the range 30%-70% (which over the spread of simulated cases means the average chance of a claimant winning a case will be 50%). We will also assume that that the claim value in all cases is £1m and each side's legal fees to trial would be £300k.

At each litigation stage the model will check whether settlement is possible – i.e. whether a settlement value exists between claimant's and defendant's bottom lines. If settlement is possible then the model will assume the parties will settle midway between their bottom lines (reflecting where we might imagine they would negotiate to)^[3]. If settlement is not possible both parties progress to the next litigation stage (incurring costs as they do so). If the parties reach Stage 4 then the case is decided by the court.

Outcome of simulation

Running the numbers, the average net recovery from the claimant's perspective is as follows:

Figure 3 – Claimant average net recovery at different claimant/defendant settlement aggression levels

As one would expect, in general, the more aggressive the defendant is the lower the claimant's expected recovery for a given aggression level. This is partly due to the fact that the defendant is driving a harder bargain but also by the fact that at higher aggression levels the case is less likely to settle or if it does will settle at a later stage. This is illustrated below where the average stage the case reaches at different aggression levels is shown as a range from stage 1 (being pleadings, represented as 1.0) through to stage 4 (being trial, represented as 4.0). It can be observed that cases where one party adopts an aggression level of 5 and the other an aggression level of 4 or more do not settle.

Figure 4 – Average litigation stage at which settlement is reached at different claimant/defendant settlement aggression levels

If we take Figure 3 and check what the claimant's best (vertical) response to each level of defendant aggression (along the horizontal), we get the following (with the optimal result boxed/ in bold in each case):

Figure 5 - Claimant average net recovery at different claimant/defendant settlement aggression levels with optimal recoveries for each defendant aggression level shown.

The same trend is reflected in the defendant's recovery graph (this time you have to consider the defendant's best horizontal response to each vertical claimant aggression level).

Figure 6 – Defendant average net loss at different claimant/defendant settlement aggression levels with optimal recoveries for each claimant aggression level shown.

This trend can be summarised in the table below (the result is the same regardless of whether one is claimant or defendant).

Opponent aggression level	Optimal aggression level response
1	4
2	3
3	2
4	2
5	2

Here we see that one's optimal aggression level depends on the aggression level of one's opponent. It is generally better to be more aggressive to a less-aggressive opponent and vice versa.

Further refinement

We can take the analysis above one step further and consider how rational adversaries will engage with this settlement landscape.

Knowing that the optimal level of aggression response to any aggression level from your opponent is in the range 2-4 there is no reason why rationally either the claimant or the defendant would adopt an aggression level of 1 or 5 so we can discount them and the table reduces to the following:

Opponent aggression level	Optimal aggression level response
2	3
3	2
4	2

In the reduced form we can see that the range of optimal aggression has now shrunk to 2-3. This is because level 4 is only optimal if one's opponent has aggression level 1, which we have seen they are unlikely to adopt. Eliminating level 4 from the table as well reduces the table to the following:

Opponent aggression level	Optimal aggression level response
2	3
3	2

Putting in the Claimant's expected recovery values at these levels of aggression produces the following:

Figure 7 – Claimant average net recovery (top) and defendant average loss (bottom) at different claimant/defendant at settlement aggression levels 2 and 3 (figures rounded to nearest thousand).

By way of explanation for the table above – taking the 2/2 example – the claimant's average outcome is a recovery is £424k which reflects the fact that in those conditions it generally is able to settle at the end of litigation stage 1 (after which c. £75k costs have been incurred) for an average settlement of £500k. Similarly the defendant's average outcome is loss of -£576k (i.e. the £500k average settlement plus c. £75k of costs).

Here we come full circle if we return to our Hobbesian Trap example and think of aggression level 3 as being the equivalent of mobilising and aggression level 2 as being not mobilising. As can be seen from Figure 7, a level 2 / level 2 (demobilised) scenario is much better for both claimant and defendant than a level 3 / level 3 (mobilised) scenario. Here the desire to be more aggressive and hold out for a better deal conspires to produce a worse result (for both sides) than if both sides were less aggressive. In fact, the negative of this is more acute than in the original Hobbesian Trap scenario as the potential gain from being aggressive is small (c. £15k – £30k) relative to the cost of a level 3 / level 3 scenario (c. £90k).

Assuming a case starts from a level 3 / level 3 starting position – we are in a 'chicken like' scenario. The level 3 / level 3 starting scenario is unstable^[4] because if either party lowers their aggression level to 2 (or 'swerves') the position is improved for both parties. However the hope that one's opponent will swerve first can keep both parties in the level 3 / level 3 state in which both parties – relatively speaking – lose.

Concluding thoughts

The analysis illustrates the potential dangers of adopting an overzealous approach to get the best deal for one's client. The best litigators will be able to weigh up the value of any additional concession that might be achieved against the time cost of achieving it and be mindful that too aggressive an approach could end up costing the client (much) more.

Ultimately any analysis is only as good as the underlying model which is necessarily based on a number of assumptions. However, it is hoped this article provides an alternative perspective on settlement strategy and an illustration of how to address a problem by thinking about it in a strategic context.

^{[1] The results that follow are based on the average value of approximately 4 million simulated cases in a computer model created by RPC}

^{[2] This is calculated by taking the composite of the actual merits of the case and random elements. For example at Stage 2 the estimate would be calculated as follows: 25% x Actual case merits + 25% random element 1 + 25% random element 2 + 25% random element 3. At Stage 3 the estimate would be 75% x Actual case merits + 25% random element 3.}

^{[3] For example, if the claimant's bottom line is £300k and the defendant's bottom line is £400k then it is assumed a settlement value of £350k is negotiated.}

^{[4] In the parlance of game theory – the level 2 / level 3 and level 3 / level 2 points are Nash Equilibria – were as level 3 / level 3 is not.}

What are the circumstances in which acting in breach of EU sanctions will kill a claim?

Thu, 21 Mar 2019 11:14:51 Z

The transaction

The claimant, Iranian Offshore Engineering and Construction Company or IOEC, was a contractor in the offshore oil and gas sector. In 2012, to purchase an oil rig it paid US$87 million to a company established in the BVI and controlled by one of the defendants ("Dean"). Arrangements had been made for Dean to acquire the relevant oil rig from a Maltese subsidiary of the Romanian company Grup Servicii Petroliere SA ("GSP"). Ultimately Dean failed to acquire the relevant oil rig from GSP and IOEC's payment was misappropriated by several of the defendants including IOEC's managing Director at the time, Dr Taheri. As a result, IOEC brought proceedings for breach of fiduciary duty, knowing receipt, dishonest assistance, conspiracy and deceit.

The judge found in favour or IOEC in almost all respects. Dr Taheri had been central to the fraud and the other defendants in the proceedings had provided wide-ranging assistance.

Role of sanctions in the defence

As a final line of defence, some of the defendants argued that IOEC should not succeed due to the sanctions on trading with Iran in place at the time. They ran the argument that IOEC's claim arose from a contract which was prohibited by the regulation imposing the EU Iran sanctions regime (Regulation EU/267/2012, "the Regulation") in which IOEC was specifically identified (although it ceased to be a sanctioned entity by the time it issued proceedings). The effect of that regulation was for it to be prohibited for any person subject to it to sell, supply, transfer or export drilling equipment to IOEC. The defendants contended that the entire set of arrangements taken together was entered into for the purpose of circumventing the sanctions regime.

The judge found that the use of BVI-based Dean as an intermediary was an attempt to circumvent the sanctions regime so as to allow an EU company (GSP) to sell to a sanctioned Iranian entity. This brought into play considerations of illegality and of public policy, and required the court to ask itself whether such considerations defeated the otherwise good claims brought by IOEC.

To determine this, the court applied the test in the Supreme Court case of Patel v Mirza. That test requires the court to consider whether it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system. In assessing if the public interest would be harmed, the must court consider;

    • the underlying purpose of the prohibition that has been breached,
• the relevant public policy on which the denial of the claim may have an impact and
• whether denial of an otherwise valid claim would be a proportionate response to the illegality.

On the basis of the points above and applying the criteria set out in Patel v Mirza, the judge considered that it would not be contrary to the public interest to enforce IOEC's relevant claims. The denial of those claims:

   • would not enhance the purpose of the sanctions, given that enforcement of the claims would not provide IOEC with a rig, and the purpose of the prohibition was never to prevent the recovery of money obtained by fraud
    • would adversely impact the public policy of preventing and deterring fraud and that of the victims of fraud being able to take steps to recover money and property of which they have been defrauded; and
   • would be a disproportionate response to any illegality involved.

The following factors were at the heart of the judge's assessment:

   a) IOEC's claims were not to enforce the sale agreement with Dean and IOEC did not and would not actually obtain the GSP Fortuna
    b) IOEC was not, by the date of issue of proceedings, a sanctioned entity and had the transaction taken place at the date it would not have involved a breach of the sanctions regime
c)  IOEC's complaints related to serious wrongs, which were independent of the intended breach of the sanctions regime, which only provided the opportunity for them to take place.

Accordingly, IOEC's otherwise successful claims succeeded.

Comment

This case provides an interesting example of the extent to which entities complicit in the breach of EU sanctions are still able to bring legal proceedings relating to matters arising out of those breaches. However, it is difficult to draw any broad principles from this case given the specific factual circumstances.

Of particular interest is the judge's analysis that it was considered material that the relevant activity breaching sanctions at the time was no longer prohibited. This reasoning might be criticised in so far as it seems odd to evaluate the severity of illegality in retrospect rather than at the time it was committed. It is also curious that the judge omits explicit consideration in the judgment of the public interest in ensuring that EU sanctions are enforced.

"Agency" is not always enough to engage the law of bribery and secret commissions

Wed, 13 Mar 2019 16:33:26 Z

Prince Arthur Ikpechukwu Eze v Conway and another [2019] EWCA Civ 88

The dispute related to the failure to complete the purchase of a house in North London (the "Property") in August 2015. The Appellant, Prince Eze, was the buyer, and Mr and Mrs Conway (the Respondents) were the sellers.

Prince Eze had been assisted in the transaction by a property developer and acquisition agent - Mr Obahor. Mr Obahor visited the Property in April 2015. The Property was then on the market for £5.495 million. He informed the sellers that he was acting on behalf of an individual who would be interested in acquiring the Property (in fact at that time he had no interested client and was proceeding speculatively). Mr Obahor agreed a price of £5 million with the sellers. Mr Obahor said at that first visit (and subsequently repeated and recorded in a written agreement) that he wished to receive a "finder's fee" of 1.5% (£75,000) from the sellers (the "Finder's Fee").

Mr Obahor then approached Prince Eze, with whom he had had no prior dealings, in relation to the Property. He stated that he had negotiated a price of £5 million and expressed the view that this constituted a "good deal". Prince Eze made it clear that he wanted to proceed with the transaction and agreed to pay Mr Obahor a fee of 3% of the purchase price (£150,000). Prince Eze instructed Mr Obahor to liaise with his private wealth adviser, Mr Richard Howarth, whom Prince Eze already knew well and trusted to monitor what was happening and "tell him the truth".

The negotiations for the acquisition were complex and drawn out. Mr Obahor acted as a go-between in passing information between the sellers and Prince Eze (or Mr Howarth on his behalf). Mr Obahor was also authorised to act on behalf of Prince Eze in relation to the transaction in the dealings with the sellers' solicitors.

The parties eventually exchanged contracts in August 2015 and completion was fixed for 30 November 2015. Shortly after exchange, however, Prince Eze's attitude towards the Property cooled. The sellers served notices to complete on Prince Eze, but the sale never completed.

The sellers commenced proceedings against Prince Eze for damages for breach of contract.

The finder's fee (payable by the sellers to one of Mr Obahor's companies) was not disclosed to Prince Eze until after initiation of these proceedings. Prince Eze defended the claim on the principal basis that the contract had been concluded following the sellers' promise to pay a bribe or secret commission to Prince Eze's agent, Mr Obahor, which Prince Eze contended rendered the contract void or at least voidable and unenforceable by them.

The Decision at First Instance

The judge found that the relationship between Mr Obahor and Prince Eze was not such as to engage the law on bribes. He concluded that the "starting point [was] initially that Mr Obahor was nobody's agent". Mr Obahor had contacted Prince Eze with a pre-packaged deal in relation to the Property which, if taken up, would require a 3% commission. He was not acting as agent but was in substance a sales person acting on his own behalf and for his own commercial interest. The Judge referred to Mr Obahor as providing a "ministerial" service in progressing matters relating to the transaction, rather than a trusted adviser to Prince Eze. Mr Obahor had been told by Prince Eze to contact Mr Howarth in order to progress matters; he was therefore not found to be an agent himself in any significant sense of the word.

The Decision on Appeal

Prince Eze appealed the decision on the basis that (i) the judge was wrong to decide that the promise of a secret payment to a person acting in a "ministerial role" does not engage the law of bribery and secret commissions, and (ii) in anyevent the judge was wrong to find that Mr Obahor's role was purely "ministerial".

The appeal was unanimously dismissed. In her decision, Lady Justice Arden cited the judgment of Christopher Clarke J (as he was then) in Novoship (UK) Limited v Mikhaylyuk, which considered the nature of a bribe and the circumstances in which the law on bribes and secret commissions is engaged (which in turn cites earlier authorities on the issue). The authorities explain the importance of an agency relationship between the recipient of the bribe and his principal in order to engage these principles, i.e. the payment or inducement must give rise to a real prospect of a conflict between the agent's personal interest and that of his principal. Christopher Clarke J concluded his exposition of law in this area by noting that "the underlying rationale for the strict approach taken by the cases is that a principal is entitled to be confident that an agent will act wholly in his interests."

Lady Justice Asplin concluded that for the law of bribery and secret commissions to be engaged there must be a "relationship of trust and confidence" between the recipient of the benefit or promise and his principal, which puts the recipient in a real position of conflict between his interests and his duties. Although the relationship of agent and principal is a fiduciary one, (i) not every person described as an "agent" is the subject of fiduciary duties and a person described as an agent might owe fiduciary duties in relation to some of his activities but not others, and (ii) a relationship of trust and confidence may arise where there is no agency at all. It will therefore turn on the facts, and depend on the nature of the individual's duties.

As to the application of that principle in this case, the Court of Appeal also concluded that it could see no error in the way in which the judge had carried out his analysis of the facts, rather it seemed that he had legitimate and proper grounds for concluding that Prince Eze did not regard Mr Obahor as a trusted adviser, and he was not an agent "in any significant sense of the word", nor had the relationship matured in that way.

Commentary

This judgment sets the bar high for parties to prove that a sufficient relationship of trust and confidence exists so as to engage the law on bribery and secret commissions. An "agency" relationship, including where the principal has issued a letter granting the agent with authority to act on the former's behalf, will not necessarily be enough to evidence the requisite degree of fiduciary duty.

Enforceable oral contracts – Supreme Court looks to conduct and context

Thu, 07 Mar 2019 15:41:42 Z

Wells v Devani 2019, UKSC 4

Facts

Mr Wells developed a block of flats, which he initially struggled to sell. He mentioned this to a neighbour, who put him in contact with Mr Devani. Wells and Devani spoke on the phone; Devani explained that he was an estate agent and that his commission would be 2% plus value added tax. There was no discussion of the circumstances in which that commission would fall due. Devani subsequently introduced a purchaser to Wells who bought the flats; however, Wells refused to pay Devani any commission. As a result, Devani issued court proceedings.

At first instance, the judge found for Devani by implying a term on payment.

The Court of Appeal, finding for Wells, found that there was an "incomplete bargain" and that, therefore, there was no binding contract into which the term could be implied.

The case reached the Supreme Court.

Supreme Court explores circumstances of contract

Was there a binding contract?

The Supreme Court emphasised that:

"The courts are reluctant to find an agreement is too vague or uncertain to be enforced where it is found that the parties had the intention of being contractually bound and have acted on their agreement".

Wells and Devani's words and conduct were clear enough to show intention; there had been no need to imply a term into the agreement (as the judge at first instance had done). Further, while the parties had not discussed the precise event that would trigger the payment of commission, it would have been naturally understood that the payment would be due on completion.

Implied terms

If it had been necessary to imply a term, the Supreme Court would not have hesitated to do so. Applying its own decision in Marks & Spencer v BNP Paribas – that a term will be implied only where it is necessary to give a contract business efficacy or would be so obvious that it 'goes without saying' – the court held that the obligation to pay the commission on completion was all that was required to give the agreement between Devani and Wells business efficacy. It would not go beyond what was necessary for that purpose.

There was no general rule that it was not possible to imply a term into an agreement to render it sufficiently certain or complete to constitute a binding contract. It was possible to "imply something that is so obvious that it goes without saying into anything, including something the law regards as no more than an offer".

Context is key

In simple, frequently used contracts, such as some contracts of sale (the Supreme Court used the purchase of a broom from a door-to-door seller as an example), the context in which words are used and the conduct of the parties when the contract is made often tell as much, or even more, about the essential terms of the bargain than the words themselves. The agreement between Wells and Devani was such a contract.

Expressly agree essential terms

The differing conclusions drawn by the three courts in these proceedings highlight the difficulties inherent in assessing contract formation and implied terms, especially where there is no written agreement. Contracting parties should ensure that all essential terms are expressly agreed within a legally binding contract. Nevertheless, where some essential terms are missing, but the parties clearly intend to be bound by and act on their agreement, this decision will provide some reassurance that the courts will be keen to find an enforceable agreement.

Click here for a copy of the Supreme Court judgment.

Is a good arguable case good enough? The Court of Appeal considers the test for establishing jurisdiction

Tue, 19 Feb 2019 09:54:58 Z

It is appropriate for a court to take into account the relative merits of the parties' arguments in deciding whether a claimant has a "good arguable case" that a jurisdictional gateway applies, following the Court of Appeal's decision in Kaefar Aislamientos SA de CV v AMS Drilling Mexico SA de CV and others [2019] EWCA Civ 10 . Where the court does not have the evidence to decide which party has the better argument a more flexible approach should be adopted.

What happened?

The claimant carried out work to an oil drilling rig in the Gulf of Mexico and sought permission to serve four companies out of the jurisdiction for sums due under the relevant contract. The claimant argued that the jurisdictional gateway in Article 25 of the Recast Brussels Regulation applied, because the parties were bound by an exclusive jurisdiction clause in favour of the English courts.

However, only two of the defendants (AMS and AMS Mexico) were parties to the contract containing the exclusive jurisdiction clause and they were in financial difficulties. In order to establish that the jurisdictional gateway applied in respect of the other two defendants (AT1 and Ezion), the claimant had to show a good arguable case that they were acting as AMS and AMS Mexico's undisclosed principals in relation to the contract and so were bound by the exclusive jurisdiction clause.

What did the Court of Appeal decide?

The Court of Appeal decided that it did not have jurisdiction over AT1 and Ezion because on the facts the claimant did not have a good arguable case that they acted as AMS and AMS Mexico's undisclosed principals and were therefore bound by the exclusive jurisdiction clause.

How do you show a good arguable case?

The Court confirmed that the test to be applied when determining whether the claimant has established a good arguable case that a jurisdictional gateway exists is as follows:

• The claimant must have a plausible evidential basis that the relevant jurisdictional gateway applies. The court should consider whether the claimant has a better argument that the evidential basis exists, though a "much" better argument is not required. The test is therefore relative and a claimant's success will depend on the strength of its arguments as against the defendant's arguments.

• If there is an issue of fact or some other reason for doubting whether the jurisdictional gateway applies, the court must take a view on the material available if it can reliably do so. This acknowledges that an element of pragmatism is required where the decision on jurisdiction is taking place at an interim stage without all the evidence that would be available at a trial.

• If no reliable assessment can be made of the evidential basis for the gateway then there will be a good arguable case if there is a plausible (albeit contested) evidential basis for it. In these circumstances, the court does not need consider which party has the better argument.

Is it all relative?

It is now clear that a claimant usually needs to show that it has the better argument that a jurisdictional gateway has been established before it obtains permission to serve out of the jurisdiction. In circumstances where the evidence is thin, it is not all relative and a claimant is just required to demonstrate a plausible evidential basis that the gateway exists. A word of warning though - the Court warned that claimants should not try to engineer a lack of evidence by making extensive document requests from defendants.

Time waits for know-ledge: but what does that mean for limitation?

Tue, 12 Feb 2019 14:09:26 Z

However, working out what limitation period applies to a particular set of facts and circumstances is not always straightforward, especially in circumstances where negligence has allegedly caused latent damage. Under English law, Section 14A of the Limitation Act 1980 sets out the position on latent damage in negligence claims and this article explores the circumstances in which the section applies and the latest decision on when the clock starts to count down (excluding personal injury claims).

The law

Negligence claims must usually be brought within six years from when the cause of action accrued (ie, when the damage was caused). However, when the six-year axe has fallen, and a potential claimant was unaware of any damage until after that period, Section 14A can step in by starting the clock when the claimant knew that it might have a potential claim and should investigate further. From that point, a claimant has three years to bring the claim. Claims must be brought within 15 years from the date of the defendant's breach of duty (Section 14B) so as to provide a fair cut-off point for potential defendants.

What is meant by 'knowledge'?

Section 14A states that a claimant must have knowledge of:

the material facts relating to the damage – facts that: would lead a reasonable person who has suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment (Section 14A(7)); and
other facts relevant to the current action – which include the identity of the defendant and knowledge that the damage was attributable in whole or in part to the act or omission which is alleged to be negligent (Section 14A(8)). Section 14A also states that knowledge can be actual or constructive/implied and that the court will consider what knowledge the claimant might reasonably have been expected to acquire from observable or ascertainable facts. Facts will be considered to be ascertainable if it was reasonable for the claimant to seek expert advice and that advice would have provided the claimant with the requisite knowledge. Therefore, the threshold for whether a claimant has knowledge is relatively low.

Knowledge pitfall

Litigation around the application of Section 14A has predominantly centred on when the claimant has the requisite knowledge to bring a claim and if a claim could, and should, have been brought earlier. This has been brought into sharp focus again recently in a case relating to a claim brought against the Bank of Scotland.

The claimants had purchased three interest rate swaps from the Bank of Scotland on three separate dates in 2008. When interest rates fell in 2009, the claimants had to pay substantial sums to the bank. They allegedly discovered in November 2015 that the bank had carried out some worst case scenario contingent liability forecasts of the claimants' potential exposure before the purchase had been made. The bank had not shared these forecasts with the claimants.

The claimants alleged that by failing to share the forecasts at all, the bank had provided misleading descriptions of the risks associated with the swaps and had therefore been negligent. The claimants argued that the limitation clock should start ticking from November 2015 when the forecasts had been discovered (ie, they did not have the requisite 'knowledge' required to bring an action until they knew the nature of the bank's failure).

The court found that the bank was responsible for informing the claimants of their potential liability when the swaps had been sold and that one way (but not the only way) of doing that would have been to share the forecasts. However, the court found that when the swaps had made losses in 2009, resulting in the claimants having to pay substantial sums to the bank, they knew at that point that they might not have been advised properly by the bank. It did not matter that the claimants were unaware of the forecasts at this time. The three-year period therefore started in 2009 and had elapsed by the time the claim was issued. The claim was time-barred.

Keep limitation under review

In short, Section 14A does not extend the limitation period until each and every breach is identified and a claimant cannot postpone the date of 'knowledge' under Section 14A of the Limitation Act by choosing which breach of duty it relies on.

In order to avoid claims being time-barred, limitation should be considered from the outset and continually reassessed to ensure that a claim is made at the right time. Where a limitation period is approaching expiry, consider stopping the clock by entering into a standstill agreement with the potential defendant.

Drafting a contract? Beware the well-intentioned but unenforceable agreement to agree

Tue, 05 Feb 2019 10:20:04 Z

Facts of the dispute

The case concerned a company called Glenpath Holdings Limited which provided residential care for autistic men and women. The shares in the company were sold by the claimant, Mr Morris, and his business partner to the defendant, Swanton. The dispute concerned Mr Morris' entitlements under an earn-out provision in the Share Purchase Agreement (SPA). The relevant clause read:

“Mr Morris shall have the option for a period of 4 years from Completion and following such period such further period as shall reasonably be agreed between Mr Morris and the Buyer to provide the following services… [the Consultancy Services]” (emphasis added).

Mr Morris provided the Consultancy Services during the initial 4 years and was paid £4,146,371 under the earn-out provisions.

Towards the end of the four year period following the SPA, Mr Morris wrote to Swanton seeking a "reasonable extension" of the period in which he could provide the Consultancy Services. Swanton refused the extension. Mr Morris brought proceedings claiming that, after the expiry of the initial four years, he was entitled to a further period of time to be agreed between the parties under the earn-out provision in which he would provide the Consultancy Services and earn further consideration.

Swanton defended the proceedings on the basis that:

(i) the reference to a further period to be agreed was no more than an agreement to agree and applicable only if both parties agreed;

(ii) the wording was not mandatory on its true meaning; and

(iii) it was reasonable for the defendant not to agree an extension.

The judge at first instance agreed with Swanton and found that whilst Mr Morris had enforceable right to provide Consultancy Services for the initial four year period, he did not have an enforceable right to provide the Consultancy Services during any further period to be reasonably agreed between the parties. There was an obligation on the parties under the SPA to agree on the length of the second period in a reasonable way but there was no mechanism in the SPA to enable the court to determine the length of the second period and as such it was no more than an “agreement to agree” and was therefore unenforceable under established case law.

Court of Appeal Decision

The Court of Appeal found that the words "as shall reasonably be agreed between Mr Morris and the Buyer", when construed in the context of the entire agreement, made it plain that for there to be any further period there had to be a further agreement between the parties. At the time of entering into the SPA the parties did not specify a further period but, instead, agreed that there would have to be a further agreement in the future, which is the "very paradigm of an agreement to agree". At that future point, either party was therefore free to agree or disagree. “Reasonably” in this context applied only to the manner of agreement and not to the period.

The provision was therefore void for uncertainty but the SPA otherwise remained binding. The Court of Appeal commented that whilst the relevant provision required the parties "reasonably" to agree, it did not turn an unenforceable provision into an enforceable agreement; there is a long line of case law which suggests that there is no obligation on parties to negotiate in good faith about matters which remain to be agreed and Swanton was therefore free to negotiate in accordance with its own commercial interests.

Certainty is key

It is a truism to say that there is no place for ambiguity in a contract. Flexibility between the parties can be well intentioned but may ultimately be the source of uncertainty; the very opposite of what was intended by the drafters, and often a path to unwanted litigation.

Can expert evidence be used to determine dishonesty?

Thu, 31 Jan 2019 11:21:37 Z

Dishonesty – the facts of the claim

In the early 2000s, the claimant professional footballers made a number of investments based on the advice of financial advisers Formation Asset Management. Unknown to the claimants at the time of investment, the claimants' agents would receive a share of the commission to be paid to Formation Asset Management.

The claimants brought proceedings against Formation Asset Management, its parent company and several independent agents on the basis that they had not been made aware of the commission arrangements and that those parties' involvement amounted to unlawful conduct. Their claims included alleged breaches of fiduciary duties, dishonest assistance to commit these breaches, liability for the tort of deceit and unlawful means conspiracy.

In response to the claimants' dishonesty plea, at a case management conference three of the defendants applied for permission to adduce expert evidence:

of the historic regulatory position (to support their argument that commission sharing agreements were an accepted practice within the financial advisory industry prior to 2007);
to determine whether they had acted with dishonesty when compared against the market standard at the time; and
to defend the allegation of conspiracy to injure by lawful means and deliberate concealment under the Limitation Act 1980.

Can expert evidence be adduced to determine the standard of honesty?

The historic regulatory position – No. The judge held that it was unnecessary to adduce expert evidence of the alleged market practice; this evidence would be available from the relevant contemporaneous documents.
The standard of honesty – No. This would be judged against an objective standard, in other words, did the defendant's conduct fall below the standards of honest and reasonable people? (The subjective element of determining whether the defendant considered their actions dishonest was removed in Ivey v Genting Casinos (UK) Ltd)
Limitation – Yes. The judge did permit expert evidence as to market practice to be adduced to defend the allegation of conspiracy to injure by unlawful means and deliberate concealment under the Limitation Act 1980. These allegations would turn on evidence as to the defendants' state of mind, specifically, whether the defendants had deliberately committed the wrongdoing alleged, knowing that it was unlawful.

Comment

This case reinforces the courts' desire after Ivey to remain the guardians of honest behaviour in relation to financial market practices; the objective standards of dishonesty are to be set by the courts rather than the market. The parties must therefore rely on contemporaneous documents when trying to prove claims for dishonest assistance as the court will not permit them to adduce expert evidence of wider market practice.

A look back at the Year of the Dog

Thu, 31 Jan 2019 09:53:33 Z

We summarise below some of the cases and legal developments from 2018 which are particularly noteworthy, as guidance on the Hong Kong courts’ current approach to various legal issues.

We have identified five broad themes:

Early dismissal of claims
Regulatory Disputes
Interplay between Hong Kong and Foreign or Mainland jurisdictions
Shareholder Activism
Costs

Early dismissal of claims

In 2018 the Hong Kong courts displayed a noticeable trend of taking a more pro-active role in dismissing defective claims at an early stage. Some of the claims which were struck-out alleged negligence by professional advisors.

1. Company barred from recovering same loss as subsidiaries

In a cautionary tale, a group company and its current liquidators had their claim against the group company's former liquidators struck out under the 'no reflective loss' principle. The strike-out was granted on the basis that the group company's subsidiaries had a closer nexus to the relevant loss than the group company. The group company appealed, arguing that it would be unjust to prevent it from making its own claim in the event that its subsidiaries' claim failed. This was rejected.

As a mere shareholder of the wronged company, the group company was not entitled to bring proceedings in its own name against the alleged wrongdoer. The appeal judgment follows other recent case law (see 4. below) which demonstrates that the courts are prepared to dismiss defective claims against professional advisers without trial.

(Re Wah Nam Group Ltd, HCA 960/2015; Re Wah Nam Group Ltd [2018] HKCA 687)

2. Mis-selling claim dismissed

The Court of First Instance in Shine Grace Investment Limited v Citibank NA confirmed the conventional thinking that a relationship between a bank and a customer does not of itself give rise to a duty of care to advise on the bank's part.

The court dismissed the claimant investor's mis-selling claim against the bank on the basis that neither the terms of the relevant contracts entered into with the bank, nor the circumstances of the case, suggested that there had been any assumption of a duty to advise by the bank. The court also observed that even if the bank had (contrary to the court's finding) assumed a duty to advise and been in breach, the claim would have failed because the sole controlling director of the investor company was a strong-minded individual who would have proceeded with her investment decisions regardless of the bank's advice.

(Shine Grace Investment Limited v Citibank NA [2018] HKCFI 1737)

3. More dismissal of 'dormant' claims

Defendants should welcome the judgment in Fiscalink International Ltd v Yiu Yu Sum Alex, in which the court struck out the plaintiffs' claims against a majority of the defendants on the basis that the lack of progress over many years was an abuse of process warranting the entire action against those defendants to be dismissed. The court's judgment is another first instance example of the court pragmatically applying the relevant principles concerning dismissal for abuse of process – those principles are set out in Court of Final Appeal judgment (Wing Fai Construction Co Ltd v Yip Kwong Robert (2011) 14 HKCFAR 935) and their application (in practice) leaves much to the discretion of the case-managing courts.

(Fiscalink International Ltd v Yiu Yu Sum Alex [2018] HKCFI 1293, HCA 5913/1997)

4. Flawed claim against solicitors struck out

In defending themselves against a claim for professional negligence brought by a former client, two law firms and the individual solicitor successfully applied to strike out the entire claim against them, with costs awarded on a more generous ('indemnity') basis.

The two related judgments are a salutary reminder of the need for plaintiffs to plead all material particulars, failing which there is a real prospect that their claim could be struck out as plainly defective. A plaintiff in these circumstances (as happened in this case) should not expect a court to allow amendments to cure an inherent defect in a claim. The two judgments, while both first instance, caught the attention of the legal profession in Hong Kong and sent a clear message that flawed claims against professional advisers are liable to early challenge and dismissal without trial.

(Jim Chiu Yuen v CL Chow & Mackison Chan (a firm) [2018] HKCFI 154, and Jim Chiu Yuen v CL Chow & Mackison Chan (a firm) [2018] HKCFI 215)

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Regulatory Disputes

The Securities and Futures Commission (SFC) has been particularly aggressive over the past 12 months in prosecuting potential wrongdoers. The first case discussed below also shows that the SFC will actively pursue investigations into alleged transgressions even if they only have a limited connection to Hong Kong.

1. Lead regulator wins landmark civil lawsuit

The SFC has been using section 213 of the Securities and Futures Ordinance (Cap 571) for some time to secure (among other things) compensation on behalf of counterparty investors to impugned transactions. In a landmark judgment, the Court of Final Appeal confirmed that the SFC's remit under section 213 extends not only to insider dealing involving locally listed securities and regulated trades, but also to contraventions of section 300 – namely, transactions involving shares listed overseas carried out through means of fraud or deception.

(Securities and Futures Commission v Lee & Ors [2018] HKCFA 45)

2. Moody's appeal against SFC

In October, the Court of Final Appeal dismissed the credit agency Moody's appeal against the SFC's decision to sanction it for its 'Red Flags' report.

The SFC had launched disciplinary action against Moody's in relation to a special comment report which Moody's had published in 2011, entitled "Red Flags for Emerging-Market Companies: A Focus on China". Apparently, more than half of the Mainland companies targeted by Moody's report experienced substantial falls in their share price the day after its publication. In its original decision the SFC concluded that the report contained a number of misleading statements. It fined Moody's HK$23 million and issued a public reprimand. Moody's appealed this decision, arguing that the publication of market reports did not fall within the performance its regulated activity, namely the provision of credit rating services. However, the SFC successfully argued that the publication of market reports did relate to its regulated activity for the purposes of section 193(1)(d) of the Securities and Futures Ordinance (Cap. 571).

Parties should be aware of how broadly the courts will interpret an act as 'relating to' a regulated activity. Credit rating agencies should also recognise the high standards of accuracy expected from them before publishing reports to the market.

(Securities and Futures Commission v Moody's Investors Service Hong Kong Ltd [2018] HKCFA 42, FACV 6/2018)

3. SFC collective redress: reliance on misstatement in a real but not ideal world

As highlighted in 1. above, the SFC in Hong Kong has been active in using civil proceedings under section 213 of the Securities and Futures Ordinance to seek redress for investors. The recent judgment in Securities and Futures Commission v Qunxing Paper Holdings Co Ltd confirmed that the SFC can seek restorative orders not only against parties to impugned transactions, but also against individuals who aid or abet or who are otherwise involved. The High Court judgment is pragmatic and reasoned, and considers a novel issue affecting section 213 restorative orders – common law 'reliance' on misstatement and the proportionality of relief for individual investors. This should encourage investors that the SFC will take steps to recover any assets misappropriated through improper transactions.

(Securities and Futures Commission v Qunxing Paper Holdings Co Ltd [2018] HKCFI 271)

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Interplay between Hong Kong and Foreign or Mainland jurisdictions

Hong Kong is a dispute resolution hub of global significance. As such, the approach its courts take to judgments and orders made in other jurisdictions are of keen interest to international observers.

1. Reciprocal enforcement of Mainland and Hong Kong civil judgments

In 2018, the Hong Kong government issued a consultation paper, seeking views from members of the public and interested stakeholders, on a proposed arrangement between Hong Kong and Mainland China for the reciprocal recognition and enforcement of judgments in civil and commercial matters (the proposed arrangement). The proposed arrangement seeks to widen the existing limited scope for the enforcement of Hong Kong court civil judgments in Mainland China and vice versa. The proposals have broad support in principle and reflect the realities of increased commercial interaction between the two jurisdictions within 'One Country, Two Systems'.

Postscript: On 18 January 2019 the "Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region" was signed between the Supreme People’s Court and the HKSAR government.

For the Arrangement to come into force in Hong Kong, local legislation will need to be enacted and (at the time of writing) this is expected to be passed in 2019.

(Consultation Paper on the "Proposed Arrangement between Hong Kong and the Mainland on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters")

2. Cross-border insolvency regime – past and future

In the absence of a statutory corporate rescue procedure, the Hong Kong courts have continued to refine their use of inherent powers to assist cross-border insolvencies.

The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-border Insolvency is not formally recognised in Hong Kong (unlike in Singapore, which adopted it in 2017). There are similarly no statutory provisions empowering the Hong Kong courts to provide assistance and recognition to foreign insolvency office holders.

The courts, therefore, rely on their inherent power (where appropriate) under the common law principle of 'modified universalism' to provide such assistance. Although the application of this principle is not without problems, in recent years the courts have shown some willingness to assist the effective implementation of cross-border insolvency and restructuring regimes. This has given rise to the development of common law recognition and assistance in Hong Kong for cross-border insolvencies.

Some difficulties were illustrated in Re CW Advanced Technologies Limited – a case in which the companies judge, for the first time, considered the possibility of recognising and giving assistance in support of the new Singapore insolvency regime in Hong Kong proceedings.

The Proposed Arrangement for reciprocal enforcement between Hong Kong and the Mainland (see 1. above) does not cover corporate insolvency and restructuring or bankruptcy. Therefore, there is no statutory regime for the courts of either jurisdiction to recognise the other's insolvency or bankruptcy proceedings. This is a major hurdle to the recovery of assets across the border between the two jurisdictions.

While the government is planning to introduce legislation to provide for a corporate rescue procedure for Hong Kong, the legislative timetable is uncertain. It is understood that the government is considering conducting a standalone consultation on reciprocal enforcement for cross-border insolvency matters between Hong Kong and the Mainland.

(Re CW Advanced Technologies Limited [2018] HKCFI 1705; also see, more recently, Re China Fishery Group Ltd [2018] HKCFI 2622)

3. Court allows extra time to resist enforcement of foreign arbitral award

In the long-running Astro v Lippo saga, the Court of Final Appeal granted an application for time to resist the enforcement in Hong Kong of a "New York Convention" arbitral award made in Singapore. This was despite the appellant appearing to have consciously chosen not to resist enforcement of the award in Hong Kong initially, and when the appellant did so, it was over a year late.

This case does not diminish Hong Kong's pro-arbitration credentials. The CFA held that something fundamentally wrong had happened during the arbitration proceedings in Singapore, which meant that it would have been plainly wrong to refuse the appellant more time to apply to set aside the arbitral award. It was also reasonable for the appellant to have chosen to resist enforcement in Hong Kong, rather than to actively try to set aside the award at the seat in Singapore. This indicates that Hong Kong courts will take a holistic approach to requests for extra time, rather than a mechanistic one.

(Astro Nusantara International B V v PT Ayunda Prima Mitra [2018] HKCFA 12)

4. Court clarifies admissibility of Mainland court judgment

In Capital Century Textile Co Ltd v Li Dianxiao, in determining the admissibility of parts of an earlier judgment of a court in Beijing arising out of criminal proceedings, the High Court analysed the rationale behind the common law principle in Hollington v F Hewthorn & Co Ltd. The court clarified that, under Hong Kong common law, the Hollington principle did not prevent the courts from admitting factual evidence (as opposed to judicial findings) referred to in an earlier judgment of another court or tribunal, provided that it is relevant to the civil proceedings in Hong Kong.

(Capital Century Textile Co Ltd v Li Dianxiao [2018] HKCFI 729)

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Shareholder Activism

Two 2018 court decisions in particular have served to clarify and extend shareholders' rights in disputes. Both should cause investors to take some heart.

1. Qualifying shareholders' access to company records

The decision of the High Court in Ninotre Investment Ltd v L & A International Holdings Ltd is an example of the court agreeing to grant a qualifying shareholder access to and inspection of company records using its statutory powers.

Section 740 of the Companies Ordinance (Cap 622) has become an established mechanism for aggrieved shareholders, with legitimate complaints in their capacity as shareholders, to obtain access to and inspection of company records. The outcome in the case is encouraging in respect of the likely consequences for minority shareholder protection and corporate governance generally.

(Ninotre Investment Ltd v L & A International Holdings Ltd [2018] HKCFI 2555)

2. Shareholders of a party granted access to pleadings

In Elliott International LP v Bank of East Asia (No. 2), the High Court granted access to pleadings in the case to shareholders of the respondent public company .

The court held that the principle of open justice allowed it to diverge from the default position that third parties should not normally have access to pleadings. Although this was a private dispute, the 1st respondent was a public company and the dispute was of interest to its shareholders generally. Publishing the pleadings would allow the shareholders to better comprehend the details of the dispute without any significant negative effect. Hedge funds (as the plaintiffs were in this case) and other investment funds, particularly activist shareholders, should take note of this decision.

(Elliott International LP v Bank of East Asia (No 2) [2018] 4 HKLRD 427)

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Costs

Costs remain an important strategic consideration for any party to a civil claim. In 2018, the Hong Kong courts have clarified their interpretation of some of the existing rules on costs. One of the most significant developments was the introduction of third-party funding for arbitrations (2. below).

1. Top court rules on protective costs orders

The Court of Final Appeal in Designing Hong Kong Ltd v Town Planning Board confirms that, in deciding whether it is fair and just to grant a protective costs order in public interest litigation, the courts should be apprised of an applicant's financial position.

In the case of a corporate applicant, it is proper to inquire not only into the assets belonging to the company, but also other sources of funding to which it has access. Depending on the circumstances, these could include the financial resources of the directors, shareholders or other supporters of the company. In this case, the Court of Final Appeal dismissed the applicant's appeal of the lower courts' refusal to grant a protective costs order in its favour. Although perhaps of limited comfort to the applicant, the case is the first in Hong Kong in which the courts have extensively set out the relevant legal principles in this regard.

(Designing Hong Kong Ltd v Town Planning Board [2018] HKCFA 16)

2. Code for third party funding of arbitrations

The Hong Kong Government issued its Code of Practice for Third party Funding of Arbitration in Hong Kong, in December 2018. This follows on from the relevant legislation which was enacted in June 2017. As a result, from 1 February 2019 arbitrations in Hong Kong can be funded by qualifying third party funders.

3. Court of Appeal clarifies reviews of taxed costs

In Lam and Lai (Solicitors) v Ho Chun Yan Albert the Court of Appeal clarified the lower courts' role when reviewing disputes over taxed costs. In doing so, the Court of Appeal appears to have come to a sensible compromise in allowing some costs that had been approved by the taxing master but disallowed by the judge on review.

(Lam and Lai (Solicitors) v Ho Chun Yan Albert [2018] HKCA 83, CACV 172/2017)

4. New rates for recoverable costs

The long-awaited increase in the guideline solicitors' hourly rates adopted for party and party taxation in civil proceedings was announced towards the end of 2017. The new rates came into effect on January 1 2018 with the goal of narrowing the gap between the costs incurred by successful litigants and recoverable costs.

Some of the content for this briefing was first edited and published on www.internationallawoffice.com.

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Funding for disputes – “one step forward”

Fri, 04 Jan 2019 09:28:24 Z

The government has announced that the key provisions of the Ordinance not yet in force will take effect on 1 February 2019. The “Code of Practice for Third Party Funding of Arbitration” has also been published. Third party funders are expected to comply with its provisions.

Background

The development of third party funding in Hong Kong has to a large extent been dependent on case law, which has resulted in a miscellany of exceptions to the general prohibition against third party funding of civil disputes.

While third party funding of civil litigation is generally caught by the common law torts and crimes of maintenance and champerty in Hong Kong, arbitration is thought to be different in that it is conducted in private, by agreement and underpinned by party autonomy. This was the impetus for a Law Reform Commission sub-committee consultation and report in 2015-16, as a result of which third party funding of arbitration in Hong Kong was put on a statutory footing. Without legislation there were doubts in some quarters whether third party funding of arbitration in Hong Kong was lawful.

Given the importance that Hong Kong attaches to being an international disputes resolution centre which, in particular, embraces arbitration, the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance was passed in relatively quick time. Many Law Reform Commission recommendations are not acted upon or, if they are, not as quickly as was the case here.

Recent developments

Although the Ordinance was enacted in June 2017, the key provision formally disapplying maintenance and champerty with respect to third party funding of arbitration did not come into effect until a further notice was published by the government. By a commencement notice published on 3 December 2018, this key provision comes into effect on 1 February 2019 ¹. As from then, as a matter of legislation, maintenance and champerty will no longer apply to third party funding of arbitration in Hong Kong.

Another reason for the delay in implementing this key provision was to allow time for consultation on the Code of Practice for third party funding of arbitration. The Code of Practice was formally published on 7 December 2018 ².

Comment

These developments mean that third party funding of arbitration in Hong Kong formally comes into force as from 1 February 2019. This will be welcomed by the arbitration community and commercial funders. It is also in keeping with the government’s wish to promote Hong Kong as an international and regional disputes resolution hub.

Interestingly, the Ordinance (but not the Code of Practice) also applies to third party funding of mediation and has done since June 2017. It is not entirely clear why mediation was included in the Ordinance given that mediation (in this context) is generally thought of as a non-contentious process to which the prohibition against maintenance and champerty does not apply. Before the passage of the Ordinance, prospective claimants were generally entitled to seek third party funding for mediation of their disputes – albeit, there is no institutional commercial market for mediation funding in Hong Kong given that most mediations are conducted with respect to relatively lower value and noncommercial claims.

Including mediation within the framework of the Ordinance may have attracted certain headlines for Hong Kong’s promotion of its disputes offering. However, prior to the passage of the Ordinance, there were already concerns that unscrupulous claims agents and touts were taking advantage of some claimants – particularly, those claimants not able to obtain legal representation. This concern is heightened where mediation is conducted after the commencement of court proceedings. Hong Kong has a high incidence of litigants in person, particularly in the first tier courts. By including mediation in the Ordinance, there is a danger that certain unscrupulous practices may become more prevalent without proper regulation, particularly with respect to personal injury claims and the like ³. It remains to be seen how the department of justice proposes to deal with this concern – for example, by regulation or a further code of practice ⁴.

An excessive demand is still a demand - Barclays Bank plc v Price

Wed, 02 Jan 2019 15:08:00 Z

Brief facts

Mr. Cohen was a director of a law firm, Jeffrey Green Russell Limited, JGR. When JGR went into liquidation it owed money to Barclays Bank plc. Barclays enforced various guarantees given by the law firm's directors.

Barclays had provided two loan facilities to JGR in 2012. One was an Overdraft Facility and the other was a Term Loan. Under these arrangements, guarantees were provided by way of security. One of the guarantees was described as: "A guarantee from Philip Graham Cohen on the Bank's standard form limited to £55,500.00" (the Guarantee). The Guarantee was signed by Mr. Cohen on 20 August 2012.

The Guarantee contained both an unconditional guarantee clause and a separate principal debtor clause; the latter rendered Mr. Cohen liable to Barclays for any customer liabilities that could not be recovered from him as guarantor. Any sums demanded under this clause would be payable immediately but would be no more than the defined "specified amount" of the aggregate of: (i) one ninth of the balance of outstanding on the 2012 Term Loan (ii) a maximum of £55,000 of the balance outstanding on the 2012 Overdraft Facility or any other account which may be substituted for it.

The 2012 Term Loan was repaid and in 2013 the Overdraft Facility was refinanced by JGR entering into a new Facility Agreement in 2013 for £600,000. No new security was required but the 2013 Facility Agreement expressly referred to the existing security. This reference to existing security directly referred to the Guarantee.

Demands & notices

Barclays sent two demands to Mr. Cohen for sums owed.

First demand – October 2015

Barclays demanded payment pursuant to the Guarantee for the sum of £55,500 (£500 more than the "specified amount" but the same amount as specified by the 2012 and 2013 agreements with Barclays).

Second demand – March 2016

The following year, Barclays sent its second demand to Mr. Cohen for £55,000 under cover of a letter before action dated 17 March 2016. Although the correct address was included on the second demand itself, the letter before action contained an error in Mr. Cohen's address. Mr. Cohen stated that as a result of that mistake he did not receive the letter before action (and therefore the second demand enclosed with it) on time and that he had only discovered the existence of the letter before action from his co-defendants.
Mr Cohen applied for strike out or summary judgment against Barclays . The three issues at stake were:

Was Barclays required to issue a demand in order to claim under the Guarantee or could it rely on the principal debtor clause?

If Barclays was required to issue a demand under the Guarantee,
- was the first demand invalid because Barclays had demanded an excessive amount?
- was it able to rely on the second demand even though it was sent under cover of the letter before action which contained an error in Mr. Cohen's address?

Requirement of a demand – the first demand

The court followed a line of authorities which established that a principal debtor obligation has the effect of creating a primary liability which is not contingent on a demand (even in instances where the words "repayable on demand" are used). A demand was referred to both in the principal debtor and the surety/guarantee clauses without any identifiable distinction. As such, the judge concluded that in both such instances the reference to a demand was to be construed in the same way, i.e. a demand is required to trigger an obligation to pay.

Was the first demand invalid because the amount demanded was excessive?

The judge stated that a guarantee should always be looked at on its own terms and in the proper context. Although there are authorities stating that a demand for an excessive amount may be valid, the conclusion will turn on the specific facts in question. The judge noted that the test established by Mannai Investment Co. Ltd v Eagle Star Life Assurance Co Ltd which was that even if notices contain some errors, they should be "sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate must be applied in an "objective way" as regards the "reasonable recipient" of a demand.

On this basis, the judge concluded that he was in no doubt that the first demand was not invalid by reason of demanding an additional £500. The reasonable recipient would have been in no doubt that the reserved right was being exercised by Barclays. Furthermore, no form of demand had been specified by the Guarantee.

Second demand

The judge concluded that the question as to whether or not Barclays could rely on the second demand was not a matter which could be decided on the present application as it raises triable issues of fact and would need to be determined at trial. The judge did not therefore strike out this claim nor give summary judgment on it.

Conclusion

This case extends the established test that a demand made under a guarantee for an excessive amount may nevertheless be effective as a demand for what is due in circumstances where the amount that has been demanded in fact exceeds an express liability cap.

Guarantors should be alive to the extension of this authority in circumstances where they may consider they have reason to reject a demand on such basis. Meanwhile, this judgment will surely be a welcome extension of the authorities relating to the operation of guarantees (and the demands made under them) for the creditors who benefit from such arrangements.

Watch out! Internal settlement negotiations may not always remain "internal"

Wed, 19 Dec 2018 12:24:55 Z

The dispute and litigation privilege

West Ham and E20 were in dispute over the number of seats in the London Olympic stadium that West Ham were entitled to use. E20 board members exchanged emails about settling the matter on 30 January 2017. During a pre-trial application, E20 claimed litigation privilege in respect of those emails on the basis that they were created "with the dominant purpose of discussing a commercial settlement of the dispute" at a time when litigation was in contemplation.

The judge at first instance found that the emails had the protection of litigation privilege on the basis that discussions with the dominant purpose of formulating and proposing the settlement of litigation that is in reasonable contemplation or in existence are protected by litigation privilege.^[1]

The application found its way to the Court of Appeal.^[2]

The Court of Appeal's decision

The Court of Appeal's starting point was the House of Lords decision in Three Rivers DC v Governor and Company of the Bank of England (No 6)^[3]. For litigation privilege to apply to communications they must pass between the parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with existing or contemplated litigation.

The emails discussing the proposed commercial settlement were not created for the dominant purpose of obtaining information or advice, in the sense that information was not being solicited for the purposes of the litigation and no legal advice was being sought. As such, the claim for litigation privilege failed at the first hurdle. Crucially, the court dismissed an argument by E20 that there was privilege for internal communications within a corporate body; there is no separate head of privilege for those communications.

So where are we today?

Litigation privilege is engaged when litigation is in reasonable contemplation.
Litigation privilege covers communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with the conduct of the litigation, provided it is for the sole or dominant purpose of the conduct of the litigation.
Conducting the litigation includes deciding whether to litigate and also includes whether to settle the dispute giving rise to the litigation.
Documents in which such information or advice cannot be disentangled or which would otherwise reveal such information or advice are covered by the privilege.

What does this mean for clients?

The court was at pains to emphasise that privilege is an inroad into the principle that a court should be able to decide disputes with the aid of all relevant material. As such, it did not consider it justified to extend (as it saw it) the scope of litigation privilege to purely commercial discussions which did not fall into the recognised categories of advice or information going to the merits of the contemplated litigation.

However, it is difficult to follow the court's analysis and its (over)emphasis on Three Rivers requirement for the communication to be seeking or giving information or advice. Although we do not know what the documents said, it seems likely that they were sent to elicit, expressly or implicitly, the views of E20's board members on the settlement proposals. Why those views were not – or could not be – information sought for the dominant purpose of settling the litigation is unclear.

The decision is not being appealed to the Supreme Court so, for now, those engaged in litigation should take care (i) not to commit to writing their commercial discussions on settlement; and (ii) to frame their settlement discussions in terms of the legal advice they have received on the litigation risks.

^References

^{[1] SFO v Eurasian Natural Resources Corporation Limited [2018] EWCA Civ 2006}

^{[2] [2018] EWCA Civ 2652}

^{[3] [2004] UKHL 48}

On the twelfth day of Christmas, the High Court gave to me…twelve judges judging

Tue, 18 Dec 2018 14:08:00 Z

It attracted nothing like the controversy of the US Senate's confirmation of US Supreme Court Justice Kavanaugh. However, the decision^[1] of the two selection commissions to recommend, and of the Lord Chancellor to recommend to the Prime Minister, the appointment of Lady Hale to the Presidency of the UK Supreme Court and of Ladies Black and Arden to the Court marked historic firsts in 2018. It was the first time that a woman had held the post of President of the UK Supreme Court and the first time that the Court has been composed of 25% women (three out of 12). It also led, in short order, to the first case where the panel was majority female.^[2] (For non-UK lawyers: unlike some other jurisdictions, the whole of the UK Supreme Court does not sit on every case. Typically, there is a panel of five. Particularly important cases may be heard by larger panels.)

Happily, the appointments came in the year of the centenary of (some) women being permitted to vote; and 99 years after the first female magistrate, 98 years after the first female solicitor, 96 years after the first female barrister, 70 years after the first woman to take silk, 53 years after the first female High Court judge, 30 years after the first female judge in the Court of Appeal, 28 years after the first female general counsel of a FTSE 100 business and 14 years after the first female Supreme Court judge (all in the UK as currently constituted).^[3]

While the Court's composition has not reached gender parity and other forms of diversity are even further off, it does better reflect the pool from which judges are most typically drawn – QCs (of which women make up some 15%^[4]) and law firm partners (of which women make up around 33% in England & Wales, and less in the biggest firms^[5]). Here's hoping to more progress all round in 2019.

But for now, as St Nicholas put it,^[6] a happy Christmas to all and to all a good night!

The Twelve Judgments of Christmas (2018)

On the first day of Christmas, the High Court gave to me…a privilege in E-N-RC.

On the second day of Christmas, the High Court gave to me…two LIBOR reps.

On the third day of Christmas, the High Court gave to me…three corporate crimes.

On the fourth day of Christmas, the High Court gave to me…four contracts.

On the fifth day of Christmas, the High Court gave to me…five time bars!

On the sixth day of Christmas, the High Court gave to me…six exclusion clauses.

On the seventh day of Christmas, the High Court gave to me…seven fraudsters fleeing.

On the eighth day of Christmas, the High Court gave to me…eight duties owing.

On the ninth day of Christmas, the High Court gave to me…nine losses counting.

On the tenth day of Christmas, the High Court gave to me…ten claims a-noticed.

On the eleventh day of Christmas, the High Court gave to me…eleven groups a-growing.

On the twelfth day of Christmas, the High Court gave to me…twelve judges judging.

^References

^{[1] Adopting a loose definition of 'judgment'.}

^{[2] Re D (A Child) UKSC 2018/0064 on appeal from [2017] EWCA Civ 1695, heard in October 2018.}

^{[3] I am indebted to the fascinating timeline put together by the history project, the First Hundred Years.}

^{[4] 14.8%, according to the Bar Standards Board's Report on Diversity at the Bar 2017 published in January 2018.}

^{[5] As of August 2017, according to the Solicitors Regulation Authority.}

^{[6] As faithfully reported by Clement Clarke Moore in 'Twas the night before Christmas.}

On the eleventh day of Christmas, the High Court gave to me…eleven groups a-growing

Mon, 17 Dec 2018 13:41:12 Z

Unlike Scrooge, litigation will not wake transformed on Christmas Day into a gentler, kinder activity. But it is undergoing a slower transformation with the growth of various forms of group litigation in England.

The Ghost of Group Litigation Past

Historically, similar claims could be brought in one claim form (writ), or, if brought in separate proceedings, case managed together. Representative claims could also be brought in some circumstances, where one person had the same interest as a specific group of people (eg all the beneficiaries of a trust).

In 2000, in response to perceived difficulties with these mechanisms, Group Litigation Orders were created, which the court might grant where a large number of claims raised common or related issues of fact or law. So far, however, only some 107 have been made since autumn 2000,^[1] ie an average of about six a year.

Since 2015, collective redress in private damages actions in competition claims can be brought on an "opt in" or "opt out" basis, as determined by the court, where there are the same, similar or related issues of fact or law. There have been four applications to date although none has been certified as yet.

The Ghost of Group Litigation Present

2018 has tested the limits of these different mechanisms (or should that be rattled the chains of?).

In Lloyd v Google LLC,^[2] a representative claim for alleged breach of the Data Protection Act 1998 (the DPA), the court found that the representative claimant and the class did not have the "same interest" and it was too difficult to determine who was a member of the class. It was therefore not willing to allow the claim to continue. However, in Various Claimants v Wm Morrison Supermarkets plc,^[3] claims relating to wilful breach of the DPA by a disgruntled employee of the company conducted under a group litigation order, the court held that the company was vicariously liable for the employee's breach.

The courts were also prepared to be lenient to claimants in terms of evidence. In Bates v The Post Office No 2,^[4] claims by sub-postmasters in relation to alleged failures of the Royal Mail's accounting system conducted under a group litigation order, the court declined to strike out extensive parts of the lead claimants' evidence, taking the view that it should be harder to strike out evidence in group litigation rather than easier.

But there was a sting in the tail, in the way of costs. In Atlasjet Havacilik Anonim Sirketi v Kupeli and others,^[5] the claimants, whose claims for failed flights were being managed together, were not able to recover their costs, even though the airline was held liable to some of them. And in Crossley v Volkswagen Aktiengesellschaft,^[6] the group litigation relating to the Volkswagen emissions scandal, a premature application for a group litigation order resulted in an indemnity costs order against the claimants.

The Ghost of Group Litigation Yet to Come

Further limits will be tested, or more chains rattled, in 2019. We await the results of the appeal in Merricks v Mastercard Inc, an opt-out claim in the Competition Appeal Tribunal (the CAT) purportedly on behalf of UK consumers. The claim had been dismissed by the CAT as unsuitable for collective proceedings, but the Court of Appeal will have a chance to reconsider it.^[7] The CAT will also be considering two collective actions arising out of the trucks cartel – one brought on an opt-in basis and the other on an opt-out basis. It remains to be seen if either or both of these will be certified.

Looking further afield, the European Commission has now published proposals for a European directive which would effectively introduce a European procedure for collective redress where qualified entities would be able to bring representative actions on behalf of consumers - whether Member States will endorse the Commission's proposals (and how it will fit with the post-Brexit regime) remains to be seen.

With the growth of litigation funding, the increasing familiarity with contingency fee agreements among lawyers and the proliferation of options, it seems likely that group litigation in its various forms will continue to grow. But, particularly with the costs shifting principle firmly in place, it seems unlikely that it will evolve into US-style class actions any time soon.

The Twelve Judgments of Christmas (2018)

On the first day of Christmas, the High Court gave to me…a privilege in E-N-RC.

On the second day of Christmas, the High Court gave to me…two LIBOR reps.

On the third day of Christmas, the High Court gave to me…three corporate crimes.

On the fourth day of Christmas, the High Court gave to me…four contracts.

On the fifth day of Christmas, the High Court gave to me…five time bars!

On the sixth day of Christmas, the High Court gave to me…six exclusion clauses.

On the seventh day of Christmas, the High Court gave to me…seven fraudsters fleeing.

On the eighth day of Christmas, the High Court gave to me… eight duties owing.

On the ninth day of Christmas, the High Court gave to me… nine losses mounting.

On the tenth day of Christmas, the High Court gave to me…ten claims a-noticed.

On the eleventh day of Christmas, the High Court gave to me…eleven groups a-growing.

On the twelfth day of Christmas, the High Court gave to me…[to be continued]

^References

^{[1] According to the HM Courts and Tribunals Service: see here.}

^{[2] [2018] EWHC 2599 (QB)}

^{[3] [2018] EWCA Civ 2339}

^{[4] [2018] EWHC 2698}

^{[5] [2018] EWCA Civ 1264}

^{[6] [2018] EWHC 2308 (QB)}

^{[7] Having decided in R (Merricks) v CAT [2018] EWCA Civ 2527 that it had jurisdiction to do so.}

On the tenth day of Christmas, the High Court gave to me…ten claims a-noticed

Fri, 14 Dec 2018 09:15:06 Z

Christmas may come but once a year, but 2018 was book-ended by two cases in the Court of Appeal on claim notices in the context of share sale purchases. These can be a trap for the unwary buyer as they form an additional hurdle to making a claim, often within a short contractually agreed limitation period (see verse 5 for 2018's cases on statutory limitation).

In the bleak mid-winter not so long ago (that is, January), the Court of Appeal considered whether the requirement to give a notice "setting out reasonable details of the claim (including the grounds on which it is based and the Purchaser's good faith estimate of the amount of the claim ...)" had been satisfied in order to allow the purchaser to claim for breach of tax warranties.^[1] The purchaser had given two notices about four months apart. Both at first instance and in the Court of Appeal, the court held that the notice requirement had not been met because the specific warranties upon which the purchaser relied had not been identified and could not be inferred from the facts given in the notices. The purchaser's understandable desire to keep its options open at an early stage backfired and its claims for around £4m melted away. See here for more detail.

Fast forward 12 months to St Nicholas' Day (6 December), and the Court of Appeal again looked at the requirement to give "a notice of the relevant matter or thing (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims)".^[2] The seller argued that the notice given was inadequate because it did not provide details of the claims (which arose from actual and potential liabilities to customers from mis-selling by the business while owned by the seller) or an estimate of their value. This time, the Court of Appeal held that the claim had been made under an indemnity which was not a "Claim". As a result, while notice had to be given, the words in brackets did not apply. Accordingly, the purchaser did not have to specify the details or estimate the claim value.

Lest you fear an ever-circling Court of Appeal, on both occasions it helpfully reminded us that "every notification clause turns on its own individual wording".
Cold – not to say frosty – comfort for purchasers and their advisers.