Litigation and Arbitration: the top things you need to know - September/October 2014

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

Substantive law

1. Effect on liquidated damages clause of amendment to contract

A liquidated damages clause in a contract is generally regarded as an unenforceable penalty if it is not a genuine pre-estimate of loss. Whether the liquidated damages amount to a genuine pre-estimate of loss is judged at the time the contract was entered into, not at the date of breach (Dunlop Pneumatic Tyre Co v New Garage and Motor Co [1915] AC 79). What happens though, if the contract is amended before the breach occurs? According to the Commercial Court in Unaoil Ltd v Leighton Offshore Pte Ltd [2014] EWHC 2965 (Comm), the assessment should then be made as at the date the contract was amended, rather than when it was entered into. Eder J acknowledged that there was no reported authority to this effect, but considered it to be consistent with principle.

The contract in Unaoil was amended to substantially reduce the price payable, but no corresponding reduction was made to the liquidated damages payable on breach. The court held that, although the liquidated damages might have amounted to a genuine pre-estimate of loss when the contract was entered into, the failure to revise them when the contract price was reduced meant that they amounted to a penalty at the date of amendment. The decision highlights the importance of reviewing a liquidated damages clause where the contract is amended. The judgment is here.

Civil procedure

2. Inadvertent disclosure of privileged documents: meaning of "obvious mistake"

Where a party to litigation inadvertently allows a privileged document to be inspected, CPR Rule 31.20 provides that the inspecting party can only use the document if the court gives permission. The starting point the court will take on such an application is to assume that the disclosing party has waived privilege voluntarily, and it will only refuse permission if it is satisfied that there has been a fraud or it is obvious that the document was disclosed by mistake (Al-Fayed v Commissioner of Police for the Metropolis [2002] EWCA Civ 780).

In Rawlinson and Hunter Trustees SA and another v Director of the Serious Fraud Office [2014] EWCA Civ 1129, the Court of Appeal emphasised that, in order to resist an application under Rule 31.20, it was not enough for the disclosing party to show that a document was obviously privileged - it also had shown it was obvious the document had been disclosed by mistake. The fact that a party could choose to waive privilege and allow inspection of a document meant it did not automatically follow that disclosure of a privileged document must have been inadvertent. To suggest (as the first instance judge had done) that because a document was obviously privileged, it was obvious it must have been disclosed by mistake was to confuse two separate issues. In some cases, the sensitive nature of a document would be enough to make it obvious that it had been disclosed by mistake, but often that would not be the case. Where a qualified lawyer had inspected a document and not realised it had been disclosed by mistake, it would be "a strong thing" for the court to then find that the mistake was obvious.

The court also found that, given the scale of the disclosure exercise in this case, general assertions by the disclosing party in correspondence that it did not intend to waive privilege were not sufficient to make it obvious that any arguably privileged document had been disclosed by mistake. The judgment is here.

3. Injunctions: test for ordering fortification of cross-undertaking in damages

Where a court grants an interim injunction, it normally requires the applicant to give an undertaking to pay any damages sustained by the respondent if it is subsequently decided that the injunction was wrongly granted. This is known as the as "cross-undertaking in damages". In Energy Venture Partners Ltd v Malabu Oil And Gas Ltd [2014] EWCA Civ 1295 the Court of Appeal considered for the first time the test for ordering the fortification of a cross-undertaking in damages. "Fortification" means providing security for the cross-undertaking, usually by way of a bank guarantee or a payment into court. The court confirmed that, in order to obtain an order that the applicant provide fortification, the respondent to an injunction had to satisfy the three requirements set out in Harley Street Capital v Tchigirinski [2005] EWHC 2471 (Ch), i.e. that:

• the court had made an intelligent estimate of the likely amount of loss which might result from the injunction;
• there was a sufficient risk of loss to require fortification; and
• the grant of the injunction had caused or was likely to cause such loss.

The Court of Appeal accepted that in some cases it might be difficult to assess loss at the interim stage. In such cases the court would need to make an intelligent estimate: one which was "informed and realistic, although it may not be entirely scientific". As the applicant had to demonstrate a good arguable case in order to obtain the injunction, it was appropriate to require a respondent seeking fortification to show a good arguable case that it would suffer loss in consequence of the injunction. In terms of causation, it was sufficient to satisfy the court that the grant of the injunction "was a cause without which the relevant loss would not be or would not have been suffered", effectively a "but for" test. The judgment is here.

4. Without prejudice privilege cannot be applied retrospectively

A document or communication is only protected by without prejudice privilege if it is part of a genuine attempt to settle an existing dispute; merely labelling it "without prejudice" is not sufficient. In Avonwick Holdings Ltd v Webinvest Ltd and another [2014] EWHC 3322 (Ch), the High Court confirmed that communications made at a time when there is no dispute cannot retrospectively be protected by without prejudice privilege if a dispute later arises. Even the use of the expression "without prejudice" by an experienced litigator will not be conclusive if, on analysis of the evidence, the court is satisfied there was no genuine dispute at the time the communication was created. In that situation, the court would conclude that solicitor had made a mistake in applying the without prejudice label. The judgment is here.

The Court of Appeal upheld the decision on this point on 17 October 2014. A summary of that ruling is available on Westlaw.

5. Calculation of "additional amount" where claimant beats own Part 36 offer

Where the claimant beats at trial a Part 36 offer it made on or after 1 April 2013, unless it is unjust to do so, the court will order that the claimant is entitled to payment of an "additional amount" as a sanction on the defendant. If the claim "is or includes a money claim", the additional amount is calculated as percentage of the damages awarded to the claimant (Rule 36.14(3)(d)(i)). The High Court has now clarified in Watchorn v Jupiter Industries Ltd [2014] EWHC 3003 (Ch) that this calculation should just be made on the basic monetary award, and should not be applied to any award of interest. The judgment is here.

6. Third party funders liable for indemnity costs awarded against funded party

In Excalibur Ventures LLC v Texas Keystone Inc and others [2014] EWHC 3436 (Comm), the High Court has held a claimant's third party funders jointly and severally liable for indemnity costs awarded against the claimant. The claim failed on every point at trial, and the court awarded indemnity costs on the basis that the claim was "well outside the norm": it was "speculative and opportunistic" with "no sound foundation in fact or law". The defendants sought a non-party costs order against the funders in respect of a £4.8 million shortfall between the amount of security provided by the claimant and the award of indemnity costs. In holding the funders liable, the court made the following points:

• Where a claim failed, not just on the facts, but because it was bad in law, a professional funder should (subject to the Arkin cap explained below) bear the costs ordered to be paid by the party they had unsuccessfully supported. Those costs would be assessed on the basis which the court considered it just for the funded party to pay in light of the circumstances, including the behaviour of the funded party and its advisers.
• The order for indemnity costs was not to penalise the claimant or its funders, but to recompense the defendants.
• The court was not precluded from making the order by the fact that the funders had not been personally responsible for the conduct which led to the award of indemnity costs. It was sufficient that the claim was speculative and opportunistic and could not have been brought without the assistance of the funders, who stood to make a significant return if it was successful.
• The court doubted that the ruling would send an "unacceptable chill" through the litigation funding industry. If it caused funders to be more rigorous in their analysis before taking on case, that was in the public interest.
• It was appropriate in this case to cap the funders' liability for the defendants' costs at the amount of funding each had provided (known as the Arkin cap following Arkin v Borchard Lines Ltd [2005] EWCA Civ 655). The amount of that cap should take into account any sums paid by the funders as security for costs as well as towards the claimant's costs. In providing security, the funders were still funding the claim in exchange for a return on their contribution, and the claim could not have continued without it.
• Each funder would only be liable for costs incurred by the defendants after the date of that funder's contribution.
• In considering what order for costs was appropriate, the court would look at the economic reality, i.e. who was ultimately obliged to provide the money and would share in the proceeds if the claim was successful. Where this was a third party (e.g. the funder's parent company), the court could make a non-party costs order against them as well as the funder named in the funding agreement.

This is clearly a significant decision for the litigation funding market. Although it was an extreme example - a $1.6 billion claim which had "no sound foundation in fact or law" - it suggests that professional funders of unsuccessful claims may be exposed to a liability for indemnity costs, even where they were not responsible for the conduct which led to such costs being awarded. The judgment is here and an article considering the practical implications for funders is here.

Current awareness

7. Recoverability of success fees and ATE insurance premiums in "excepted cases"

The ability of a successful party to recover a success fees and/or an after the event (ATE) insurance premium from the losing party was abolished for the majority of cases on 1 April 2013. There were a number of exceptions to this, where recoverability has so far been retained, including insolvency proceedings and publication and privacy proceedings. The Government has now confirmed that the exemption for insolvency proceedings will end in April 2015. The Bar Council is urging the Government to reconsider on the basis that the move would put the public finances at risk (see here).

The abolition of recoverability in publication and privacy proceedings will be tied to the introduction of costs protection through a new regime of qualified one-way costs shifting ("QOCS"), so that success fees and ATE premiums will no longer be recoverable in proceedings issued after the introduction of the new regime. The Government had proposed introducing the QOCS regime in October 2014, but things appear to have gone quiet and no new implementation date has been given.

8. Article for PLC: "Managing a corporate reputation in the 21stCentury"

PLC have published an article by Dan Tench and Jack Gilbert on managing a corporate reputation in the 21st Century. The article provides a practical guide to preventing damage to a company's reputation, formulating strategies to deal with traditional and online media, and managing political engagement.

The article is available on the Olswang website here, or please ask your Olswang contact for a copy in PDF format.