Litigation and Arbitration: the top things you need to know July 2015

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Contract

1. Supreme Court on contractual construction and the principle of "commercial common sense"

In Arnold v Britton [2015] UKSC 36, Lord Neuberger provided guidance on how a court, when construing a contract, should apply the principle of "commercial common sense" espoused in cases such as Rainy Sky SA and others v Kookmin Bank [2011] UKSC 50:

• The importance of the language of the provision should not be undermined by reliance on commercial common sense and the surrounding circumstances;
• The less clear the central words to be interpreted (or the worse the drafting), the more ready the court can be to depart from their natural meaning;
• Commercial common sense is not to be invoked retrospectively. The fact that a contractual arrangement has worked out badly (or even disastrously) for one of the parties is not a reason for departing from the natural meaning of the language used;
• The court should be very slow to reject the natural meaning of a provision simply because it appears to be a very imprudent term for one of the parties to have agreed. It is not the court's function, when interpreting an agreement, to relieve a party from the consequences of its imprudence or poor advice;
• The court can only take into account facts or circumstances which existed when the contract was made, and which were known or reasonably available to both parties. It cannot take into account a fact or circumstance known only to one of the parties; and
• If an event occurs which was plainly not intended or contemplated by the parties, and it is clear what they would have intended, the court will give effect to that intention.

The guidance makes clear that the court should only turn to commercial common sense as an interpretative tool where the meaning of a contractual provision is ambiguous. It should not be a consideration where the natural meaning of the language used is clear, even if the provision is obviously detrimental to one of the parties. It is not the court's function to save a party from a bad bargain. The judgment is here.

2. Measure of damages where claimant receives financial benefits on mitigating its loss

The High Court's decision in Thai Airways International Public Company Ltd v KI Holdings Co Ltd [2015] EWHC 1250 (Comm) provides useful clarification on the measure of damages in a scenario where a claimant takes steps to mitigate its loss and achieves financial benefits as a result. It confirms that:

• any monetary benefits received by the claimant (whether chosen by the claimant or not) resulting from reasonable mitigating steps must be set off against the defendant's liability; and
• the defendant bears the burden of proving that the claimant has derived any benefit from those mitigating actions.

The case also highlights the difficulty of accurately assessing quantum in a loss of profits claim in a complex commercial contract - and the advantage, at least in this case, for a claimant in bringing a claim based on mitigation loss instead.

Dominic Dryden has written an article on the case: see here. The judgment is here.

3. Court of Appeal applies flexible approach to penalties in consumer context

The traditional approach to determining whether a provision is a penalty is to distinguish between a liquidated damages clause, which is enforceable if it is a genuine pre-estimate of loss, and a penalty, which is not (Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1915] AC 79). More recently, the courts have applied a more flexible approach of asking whether there was a commercial justification for the provision in question.

In ParkingEye Ltd v Beavis [2015] EWCA Civ 402, the Court of Appeal applied the more flexible approach in a consumer context, holding that a parking fine did not amount to a penalty, even though the claimant had not suffered any direct loss as a result of the defendant's breach of its parking terms. It gave two reasons:

• Although the primary function of the fine was deterrence (to stop motorists overstaying the period in which they could park for free), there was a commercial justification for it, because if the claimant did not manage the car park properly, it was at risk of losing its own contract with the third party who owned it. Interestingly, Moore-Bick LJ commented that other (non-commercial) factors could also, in principle, justify the enforcement of a clause which might otherwise be judged a penalty. Here, although the justification had been presented as commercial, it was in fact a combination of commercial and social (the latter being the benefit to consumers and local retailers of free parking); and
• In order to find that a term is a penalty, it is not enough that its purpose is to deter breach; the sum payable also has to be extravagant and unconscionable. The fine here (£85) was not. The court acknowledged that "in the commercial context, a 'dominant purpose of deterrence' has been equated to extravagance and unconscionability, but in another context that need not be the case".

The law on penalties will be considered again in the summer, with the Supreme Court due to hear El Makdessi v Cavendish Square Holdings BV on 21 - 23 July. Hopefully it will clarify the extent to which commercial considerations can justify enforcing a term which would have been considered a penalty under the Dunlop test. The judgment is here.

4. "Illegality defence" not available on claim by company against directors for breach of duty

The Supreme Court has confirmed in Jetivia SA and another v Bilta (UK) Ltd (in liquidation) and others [2015] UKSC 23 that the "illegality" defence (ex turpi causa - the public policy principle that a party cannot bring a claim which relies on its own illegal act) is not available where a claim is brought by a company against its directors for breach of duty. In this context, the wrongdoing of the directors could not be attributed to the company, and therefore could not be relied on by the directors as a defence to a claim brought by the company's liquidator for loss suffered by the company as a result of that wrongdoing. This was the case even though the directors were the only directors of and shareholders in the company. It was also irrelevant that in other contexts (e.g. a claim by a third party for loss suffered because of the company's role in the wrongdoing), the state of mind of the company's directors would be attributable to the company.

Although the Justices were unanimous on the attribution point, they disagreed on the wider issue of the proper approach to be taken to the defence of illegality. As the issue was not determinative in this case, they did not decide it, but this demonstrates the need for the Supreme Court to conduct a full review of the law of illegality in an appropriate case. Louise Bell of Olswang acted for the liquidators of Bilta. The judgment is here.

5. Setting aside settlement agreements for fraud

In Hayward v Zurich Insurance Company plc [2015] EWCA Civ 327, the Court of Appeal refused to set aside a settlement agreement even though there was new evidence that the claimant had fraudulently exaggerated his claim. The courts have generally taken the view that settlement of an ill-founded claim is binding (because the defendant, when settling, takes the risk that the representations on which the claim was based were false), but the situation may be different where the representation was not merely false, but can later be shown to have been fraudulently made. There, the court may apply the maxim that "fraud unravels all" and rescind the settlement agreement.

Here, the Court of Appeal held that fraud did not unravel all because the defendant had been alleging dishonesty on the part of the claimant from the beginning. The defendant's decision to settle the claim despite the fact it was aware of the possibility of fraud meant it had entered into the settlement "with its eyes wide open". It is clear from this that any attempt to set aside a settlement agreement for fraud is going to turn on the evidence of the innocent party's knowledge at the time of the settlement. The decision also emphasises the court's unwillingness to undermine the principle of the finality of settlements: as Underhill LJ observed, "parties who settle claims with their eyes wide open should not be entitled to revive them only because better evidence comes along later". The judgment is here.

Freedom of speech

6. Supreme Court decision in Rhodes v OPO: inflicting mental suffering, freedom of expression and interim injunctions

In Rhodes (formerly MLA) v OPO [2015] UKSC 32, the Supreme Court clarified the tort of intentionally inflicting mental suffering (established in Wilkinson v Downton [1897] QB 57), gave a powerful reminder of the importance of freedom of expression and abolished imputations of an intention by operation of a rule of law. The Court of Appeal had granted an injunction to prevent the publication of a book solely on the ground that it might cause psychological harm to the author's son. The Supreme Court reversed that decision and discharged the injunction. Olswang acted for the interveners (English PEN, Article 19 and Index on Censorship) at the Supreme Court. For a detailed discussion of the decision, see the blog posts by Tamsin Blow and Dan Tench here and here.

The court also provided important guidance on how interim injunctions should be expressed. The injunction granted by the Court of Appeal had included a prohibition on the publication of "graphic" material - a qualitative concept which was inherently a matter of value-judgment. The Supreme Court recognised this was problematic and emphasised that any injunction must be in terms sufficiently specific to "leave no uncertainty" about what the target is or is not permitted to do. For more details, see Anna Caddick's post on the Injunctions Blog here. The judgment is here.

Privilege

7. Limited waiver of privilege and without prejudice in communications with regulators

In Property Alliance Group Ltd v Royal Bank of Scotland plc [2015] EWHC 1557 (Ch), the High Court considered the application of legal professional privilege ("LPP") and without prejudice privilege to communications between the defendant bank and various regulators in the context of a claim that the defendant had made misrepresentations in relation to the use of LIBOR on interest rate swaps. It confirmed the following points (on which there was no previous English authority):

• The principle of limited waiver (under which privileged material can be provided to a third party on the basis that privilege is not waived and confidentiality will be preserved) does apply to the disclosure of privileged documents to a regulator. This is the case notwithstanding the existence of "carve outs" permitting the regulator to share the documents with other third parties (such as other governmental or regulatory agencies) and/or to make them public; and
• A principle analogous to without prejudice privilege applies to settlement negotiations with the Financial Conduct Authority ("FCA"): "the public policy on which the without prejudice rule is based is capable of applying in order to promote settlement of FCA investigations".

In this case, however, the court held that the defendant had waived LPP over a number of documents which had either been given to or shown to regulators, because it had relied on the regulators' findings (specifically, the lack of criticism within them) as part of its defence to the claim. On a similar basis, by relying in its defence on the lack of any regulatory finding of misconduct in relation to LIBOR manipulation, the defendant had waived without prejudice privilege in settlement negotiations with the FCA leading up to the issue of a final notice which imposed a penalty on the bank in connection with LIBOR. As Birss J commented: "[the defendant] really cannot have it both ways. It cannot on the one hand rely on absences from the regulators' findings as indicating the limits of its misconduct and yet on the other hand seek to maintain as privileged what it put to them". The judgment is here.

Injunctions

8. The Injunctions Blog

Olswang have launched a blog to report on the important and developing area of injunctions: http://theinjunctionsblog.com. Recent posts include:

• High Court dismisses newspaper editor's appeal against conviction and fine for publication of a story in breach of an anonymity order (see here);
• Anti-suit injunctions and foreign insolvency proceedings (see here); and
• Bespoke interim injunction to protect confidential information and IP (see here).

Readers who are interested can sign up for email alerts at http://theinjunctionsblog.com.

Cross-border

9. Conflicting dispute resolution clauses: when the "one stop shop" presumption does not apply

In Trust Risk Group SpA v Amtrust Europe Ltd [2015] EWCA Civ 437, the Court of Appeal considered the scope of the "one stop shop" presumption set out in Fiona Trust and Holding Corp v Privalov [2007] UKHL 40 (i.e. that when construing a dispute resolution clause, the court should begin from the assumption that the parties, as rational business people, are likely to have intended any dispute arising out of their relationship to be decided by the same tribunal) in the context of two agreements entered into between the parties at different times and which contained conflicting dispute resolution clauses.

The court held that where a contractual relationship contained a number of differently expressed choices of law and/or jurisdiction in respect of different agreements, the correct approach was not to start with the "one stop shop" presumption, but to apply a "careful and commercially-minded construction" of the agreements. That could be achieved by giving the agreements a broad and purposive construction and taking into account the overall contractual scheme between the parties.

Where (as in this case) there was a single contract creating a relationship, followed by a subsequent contract embodying a later agreement about the relationship, and the contracts did not form "part of one package", it might be easier to conclude the parties chose that different aspects of the relationship would be dealt with in different jurisdictions - even if that meant a degree of fragmentation in the process of resolving disputes between them. On the facts, the claimant had a good arguable case that the dispute resolution clause in the later agreement did not supersede that in the earlier agreement, and the parties had intended for different disputes to be heard in different places.

For more details, see Sarah Speller's article here. The judgment is here.

10. CJEU finds anti-suit injunctions in arbitral awards compatible with the Brussels Regulation

The Court of Justice of the European Union ("CJEU") has published its much-anticipated judgment in the Gazprom case (Case C‑536/13: "Gazprom" OAO). It confirmed that, under the arbitration exclusion in the original Brussels Regulation, that Regulation does not compel the courts of an EU Member State to refuse to enforce an arbitral award which contains an anti-suit injunction.

Although the ruling reaches the same conclusion as the Advocate General's earlier Opinion in the case, it is much narrower in scope and in particular does not consider the text of the Recast Brussels Regulation or revisit the decision in Allianz SpA v West Tankers Inc (Case C-185/07) (which established that it was incompatible with the Brussels Regulation for a Member State court to grant an anti-suit injunction to restrain a party from commencing or pursuing proceedings in the courts of another Member State in breach of an arbitration agreement).

The Gazprom decision also opens up the prospect of one Member State court ordering enforcement of an anti-suit injunction issued by an arbitral tribunal, while at the same time another Member State court conducts proceedings brought in breach of the arbitration agreement. It will probably only be a matter of time before the CJEU is called upon again, to rule on how far the effect of the decision extends.

For more details, see Sarah Speller and Jeremy Mash's article here. The judgment is here.

Funding and civil justice

11. Assignment of claim to SPV not champertous

Champerty is the support of litigation by a third party for a financial interest in the outcome (usually a share in the proceeds). The bare assignment of a cause of action will usually be found to be champertous and therefore void as a matter of public policy if the assignee cannot show he has a genuine interest pursuing the litigation for his own benefit (Trendtex Trading v Credit Suisse [1982] AC 679).

JEB Recoveries LLP v Binstock [2015] EWHC 1063 (Ch) is an unusual example of the court holding that the assignment of a claim to a special purpose vehicle ("SPV") was not champertous, where the assignor had a one-third interest in the SPV and it had been formed solely for the purpose of pursuing the claim (and other associated claims). The court found that this did not amount to a bare assignment and distinguished it from previous authorities on the basis that: (1) the rights assigned were not confined to a cause of action, but included debts; (2) the assignor remained entitled to one third of the "fruits" of the claim, because of his interest in the SPV; (3) the SPV had no separate purpose unconnected with the assigned claims; (4) all the assignors of claims to the SPV were connected with it and had a direct or indirect interest in the assigned rights; and (5) the assignor was not "costs-proofing" himself in relation to the litigation, because it was open to the defendant to apply for security for costs against the SPV.

In deciding that the assignment was not contrary to public policy, the court also seems to have been influenced by the changing attitudes to litigation funding in recent years, and in particular the advent of damages-based agreements (DBAs) and the need to give impecunious litigants access to the courts.

This decision suggests there may be a softening in the courts' approach to the assignment of causes of action to third parties such as SPVs (as there has been in the context of third party funding), although it is worth remembering that every assignment will be judged on its facts. Given the importance of the decision to the law of champerty, the court gave permission to appeal. It will be interesting to see what the Court of Appeal makes of it. The judgment is here.

12. Consultation on shorter and earlier trial procedures

A Working Group of judges from the QBD, Chancery Division, Commercial Court and TCC are consulting on shorter and earlier trial procedures. The group has recommended piloting the following procedures for business and commercial cases in the Rolls Building courts:

• a shorter trial procedure, which would involve streamlining court procedure so that judgments can be made within a year of proceedings being issued. Cases would be managed by a designated judge, with the aim of reaching trial within 10 months and judgment being handed down within the following six weeks. The maximum length of trial would be four days; and
• a flexible trial procedure, which would allow parties to adapt certain court procedures (such as pre-trial disclosure or witness evidence) to suit their case and encourage the use of a more simplified and expedited procedure.

The consultation paper is here and a draft practice direction setting out the proposed pilot schemes is here.

13. Consultation on proposals for Financial List in the Rolls Building

The Chancery Bar Association have published a consultation proposing the creation of a specialist Financial List in the Rolls Building of the High Court, the adoption of appropriate procedures for the case management and trial of cases on the Financial List and test case procedures for cases involving issues of market importance.

The purpose of the proposals is to provide parties to particularly complex or high value financial disputes, or those that involve issues of general importance to financial markets, with added procedural flexibility and access to experienced business judges. For more details, see here and here.