Litigation & Arbitration: top things you need to know - July 2016

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

Contract

1. How effective is a clause requiring amendments to a contract to be in writing?

Two recent decisions of the Court of Appeal have made it clear that a clause providing that any amendment to a contract must be in writing and signed by both parties (an "anti-oral variation clause") may not prevent subsequent variation of the contract orally or by conduct. Previously, there was conflicting Court of Appeal authority on the point.

In Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] EWCA Civ 396, Beatson LJ rejected the defendant's argument that there were reasons of principle and policy for upholding the effectiveness of anti-oral variation clauses (that they promoted certainty and avoided false or frivolous claims of an oral agreement). He noted that the general principle under English was that parties had "freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct". This meant that, in principle, an anti-oral variation clause would not prevent them from later making a new contract orally or by conduct which had the effect of varying the original contract.

The court’s comments in Globe Motors were obiter. They were, however, subsequently endorsed by a differently constituted Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553), which held that the presence of such a clause did not prevent a variation by oral agreement from being valid. The court agreed with Beatson LJ's assessment that the parties' freedom of contract was to be preferred over policy arguments. As Kitchen LJ commented, "to my mind, the most powerful consideration is that of party autonomy".

Although parties can no longer rely on the enforceability of anti-oral variation clauses, they still retain an evidentiary value, in that parties who have incorporated such a clause are likely to face "significantly greater" difficulty in showing that both sides intended to vary a formal written contract by informal means. As Moore-Bick LJ put it in Globe Motors, such a clause may still have "considerable practical utility, if only because it is likely to raise in an acute form the question whether parties who are said to have varied the contract otherwise than in the prescribed manner really intended to do so".

The judgment in Globe Motors is here and the judgment in MWB is here.

2. Exclusion clauses: UCTA reasonableness test may apply where contract only partly on one party's standard terms

Under section 3 of the Unfair Contract Terms Act 1977, if a party is dealing on its “written standard terms of business”, a clause excluding or limiting liability will be subject to the UCTA reasonableness test. In Commercial Management (Investments) Ltd v Mitchell Design and Construct Ltd and another [2016] EWHC 76 (TCC), Edwards-Stuart J considered whether parties can be deemed to be dealing on one party's written standard terms even where such terms are only incorporated into a contract in part and the rest of the terms have been negotiated. He held, obiter, that they could. This meant that the UCTA reasonableness test would apply. In reaching his conclusion, the judge approved the obiter comment in Pegler Ltd v Wang (UK) Ltd [2000] EWHC (TCC) 137 that "for the Act to apply, it is not necessary for the whole of the contract to be 'on the other's written standard terms of business'". This lends further weight to the theory that the real issue is not whether the contract as a whole was negotiated, but whether the exemption clause, and terms agreed in conjunction with or in consideration of it, was the subject of negotiation.

The judgment is here.

3. Exclusion clauses: mutual clauses between parties of equal bargaining power

In Transocean Drilling UK Ltd v Providence Resources plc [2016] EWCA Civ 372, the Court of Appeal declined to apply restrictive principles of interpretation to a "knock-for-knock" indemnity clause (one where the parties agree that loss or damage stays where it falls, regardless of blame) which was fully mutual and negotiated by parties of equal bargaining power. The decision makes a number of interesting points:

• The starting point must always be the language of the clause itself, and that language is of paramount importance (per Arnold v Britton [2015] UKSC 36).
• The courts will uphold clearly drafted exclusion clauses or mutual indemnities negotiated by parties of equal bargaining power. Here, Moore-Bick LJ observed that, although the clause was an exclusion clause, it was not a typical exclusion clause, by which a commercially stronger party sought to exclude or limit liability for its own breaches of contract. The parties were of equal bargaining power and had entered into mutual undertakings to accept the risk of consequential loss flowing from each other's breaches of contract. The clause, therefore, had to be seen as an integral part of a broader scheme for allocating losses between the parties: "It is not … a simple exclusion clause of a kind which at one time the courts were willing to construe restrictively in order to avoid commercial oppression".
• The principle of freedom of contract required the court to respect and give effect to the parties' agreement. If, as here, they had agreed to accept responsibility for losses that might otherwise have been recoverable as damages for breach of contract "it is difficult to see why the court should not give effect to their agreement".
• The contra proferentem rule is distinct from the principle justifying the restrictive construction of exclusion clauses (that clear words are needed to cut down the available remedies for breach of contract). The contra proferentem rule can only be used where the language is "one-sided and genuinely ambiguous" and has been inserted or is being relied on by one party for its own benefit. It cannot apply to a clause which favours both parties equally, especially where they are of equal bargaining power. With a clause such as the one in this case, it was "impossible to say who is the proferens and who the proferee".
• Where there is doubt as to the meaning of a clause, the restrictive approach to construction of exclusion clauses may be used to determine the parties' common objective. However, that approach cannot be used to justify overriding the parties' intention where that intention has been clearly expressed.

The judgment is here.

4. Penalties: contract-breaker's ability to pay is irrelevant

Snowden J observed, obiter, in Hayfin Opal Luxco 3 SARL & another v Windermere VII CMBS plc and others [2016] EWHC 782 (Ch), that whether a contractual provision amounts to a penalty cannot depend on the contract-breaker's ability to pay the specified amount, or source from which he is to pay.

As Lords Neuberger and Sumption indicated in Cavendish Square Holdings v Makdessi [2015] UKSC 67, the penalty doctrine does not depend on whether a provision is subjectively intended to (or does) provide a deterrent to the contract-breaker. It focuses on the lack of proportionality between the amount of the secondary liability imposed and the innocent party's legitimate interest in performance of the primary obligation.

Consequently, an innocent party cannot save a clause from being a penalty by claiming that, even though it provides for payment of an amount which is wholly disproportionate to his legitimate interest in performance of the contract, the contract-breaker is so rich that he will not notice the difference. Nor can he do so by limiting his claim to specified funds in the hands of the contract-breaker if this would still give him a wholly disproportionate amount, and might deprive the contract-breaker of the ability to pay debts due to other creditors with lower priority.

The judgment is here.

5. Meaning of "the purpose" in a contract

In Starbev GP Ltd v Interbrew Central European Holdings BV [2016] EWCA Civ 449, the Court of Appeal upheld a High Court ruling of the meaning of "the purpose" in a sale and purchase agreement ("SPA"). The SPA provided that part of the consideration for the transaction would be deferred until the re-sale of the business and would be calculated as a percentage of the re-sale price. The SPA also contained an anti-avoidance provision to the effect that if the business was re-sold for consideration other than cash and that was done "with the purpose of reducing the payments due" to the seller, this would still be treated as cash for the purposes of calculating the deferred consideration. The question for the court was whether "the purpose" meant: (1) the sole purpose; (2) one purpose, even if it was one of many; or (3) the dominant purpose.

The Court of Appeal agreed with the High Court that the correct interpretation was "the dominant purpose". The High Court had been entitled to rely on Lord Sumption's statement in Hayes v Willoughby [2013] UKSC 17 (which concerned the Protection from Harassment Act 1997) that: "A person's purposes are almost always to some extent mixed, and the ordinary principle is that the relevant purpose is the dominant one". The court rejected the claimant's argument that it should interpret the expression as meaning "the sole purpose"; to do so would make it "all too easy for the anti-avoidance provision to be itself avoided". Such an interpretation was "not at all plausible as the objective meaning of the clause in this contractual context". As a result, it was enough for the clause to be triggered that the claimant’s dominant purpose in structuring the re-sale transaction was to reduce the payments due to the seller.

The judgment is here.

6. Notifying warranty claims: importance of complying with contractual requirements

Teoco UK Ltd v Aircom Jersey 4 Ltd and another [2016] EWHC 1074 (Ch) helpfully summarises the case law on the importance of complying with contractual requirements for the notification of claims for breach of warranty, in particular those relating to the form and content of the notice of claim. A failure to meet the strict requirements as to form may lead to the warranty claim being struck out.

Here, the sale and purchase agreement ("SPA") provided that the seller would not be liable for any claim on a warranty unless the buyer had given notice setting out reasonable details of the claim and a good faith estimate of the amount of the claim, as soon as reasonably practicable after it became aware of the claim, and in any event by 31 July 2015. The buyer then had to commence and serve proceedings in respect of the claim within six months of the notification. The buyer wrote two letters to the seller, purporting to notify claims under the SPA, and issued proceedings. The seller applied to strike out two heads of claim on the basis that the buyer had not complied with the notification requirements in the SPA.

The judge began by summarising the legal principles on the construction of warranty claim notices:

• Every notification clause turns on its own wording (Forrest v Glasser [2006] 2 Lloyd's Rep 392). The court should focus on the meaning of the words used in their documentary, factual and commercial context (Arnold v Britton [2015] UKSC 36).
• A notification clause which imposes a contractual time limit on the bringing of claims is a species of exclusion clause, and should be construed narrowly, if necessary, to resolve ambiguity (Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128).
• The commercial purpose of a notification clause includes ensuring that sellers know in sufficiently formal terms that a claim for breach of warranty is to be made, so that financial provision can be made for it (Ipsos SA v Dentsu Aegis Network Ltd [2015] EWHC 1171 (Comm)).
• In construing a notice of claim, the question is how it would be understood by a reasonable recipient with knowledge of the context in which it was sent (Laminates Acquisition v BTR Australia Ltd [2003] EWHC 2540 (Comm).
• The notice must specify that a claim is actually being made, rather than indicating the possibility that a claim may yet be made (Laminates).
• Where the notice is required to specify "reasonable detail", what this means will depend on the nature of the claim, but as a general rule the minimum requirement is that it should identify the warranty or warranties said to be breached (RWE Nukem Limited v AEA Technology plc [2005] EWHC 78).

The judge held that neither letter amounted to notification for the purposes of the SPA, and struck out the heads of claim. The letters did not state that they were claims notices or refer to the provisions in the SPA governing claims notices, and did not identify the particular warranties that had been breached. The letters were not sufficiently precise that it would be clear to the reasonable recipient that a claim was actually being made; they merely flagged up to the seller that the buyer had claims, or might have claims. The letters were written in "highly tentative" language: "what is being notified is a possible claim, or at best a 'likely' claim".

The judgment in this case is available on LexisNexis.

Injunctions

7. Court's jurisdiction to grant a free-standing notification order

Nugee J held in Holyoake v Candy and others [2016] EWHC 970 (Ch) that the court has jurisdiction under s. 37 of the Senior Courts Act 1981 to grant an injunction requiring the respondents to give written notice of disposals of or dealings with their assets (a "notification order"), even where no freezing order is sought. The purpose of notification is to give the claimant the opportunity to apply to freeze the assets before the disposal or dealing takes place. Although notification orders are commonly made in practice in response to applications for freezing orders (where, for example, the respondent agrees to give a notification undertaking instead of the freezing order being made), this is thought to be the first time the court has considered in detail its jurisdiction to grant a free-standing order.

To obtain a notification order, the claimant must assert either a substantive right to prevent the defendant disposing of an asset (for example, a proprietary right such as a tracing claim, or a contractual right) or credible evidence of a threatened dissipation such as would justify a freezing order. The threshold test is the same as for a freezing order, i.e. a good arguable case. Where the requirements for a freezing order and a notification order appear to diverge is in relation to the risk of dissipation: because a notification order is less intrusive, the court may be persuaded to intervene where the evidence of dissipation risk would not be sufficient to obtain a freezing order.

Why might a claimant seek a notification order rather than a freezing order? Clearly, one factor is the lower standard of dissipation risk that needs to be shown. The other is that, given the notification requirement may be less likely to cause significant damage than freezing the respondent's assets, the level of the cross-undertaking in damages is likely to be lower. This is particularly important where the respondent is seeking fortification of the cross-undertaking, for example by way of a payment into court or bank guarantee.

A more detailed review of the decision can be found on Olswang's Injunctions Blog here. The judgment is here.

Costs and funding

8. Application of post-Jackson proportionality test: courts taking a tough line

An important recent decision by the Senior Costs Judge has made it clear that the courts are going to take a tough line in applying the post-Jackson test of proportionality in relation to costs: BNM v MGN Ltd [2016] EWHC B13 (Costs).

The primary principle remains that costs which are assessed on the standard basis will not be recoverable unless they are both reasonable and proportionate, but the test for proportionality has now changed. Prior to the Jackson Reforms, costs were effectively deemed to be proportionate if they were reasonably or necessarily incurred (Lownds v Home Office [202] EWCA Civ 365). The Jackson Reforms introduced a new test for cases commenced on or after 1 April 2013, which provides that costs incurred are proportionate if they bear a reasonable relationship to: (1) the sums in issue in the proceedings; (2) the value of any non-monetary relief; (3) the complexity of the litigation; (4) any additional work generated by the paying party's conduct; and (5) any wider factors involved in the proceedings, such as reputation or public importance. The rules explicitly state that costs which are disproportionate may be disallowed or reduced even if they were reasonably or necessarily incurred.

In this particular case, the claimant sought an injunction restraining the defendant from using or publishing confidential information taken from her phone. She entered into conditional fee agreements ("CFAs") with her solicitors and counsel with success fees of 60% and 75% respectively, and an after the event ("ATE") insurance policy. As the case fell within the exception to the Jackson Reforms which applies for privacy and publication cases, the success fees and insurance premium were potentially recoverable from the defendant.

The claim was settled for damages of £20,000, and the defendant agreed to pay the claimant's costs. The claimant then sought costs of £241,817, including the success fees and an ATE premium of £61,480. On detailed assessment, the Senior Costs Judge held that reasonable costs amounted to £167,000, including success fees on both CFAs of 33%. However, he found those costs to be disproportionate, and held that recoverable costs were to be limited to £84,000, reducing each item by about half (except for the court fee).

It is clear from the Senior Costs Judge's conclusion that costs which have been allowed as reasonable on a line-by-line assessment may still be reduced significantly if they are found to be disproportionate. He also made a number of specific points:

• Costs will not necessarily be disproportionate just because they exceed the sums in issue. That was the case here because privacy claims were more complex than most and required specialist "Londoncentric" work, the allegations against the defendant were serious, and it was reasonable for the claimant to issue proceedings without prior warning and to apply for an anonymity order.
• The new test of proportionality extends to additional liabilities, i.e. success fees and insurance premiums. Although cases where additional liabilities remain recoverable from the other side fall within an exception to the Jackson Reforms, this does not mean that the old test of proportionality is preserved in respect of such liabilities.
• When applying the new test, the court is entitled to take into account the total amount of costs - both base costs and any additional liabilities. It does not necessarily have to consider the additional liabilities separately.

This is perhaps the most prominent and significant of a number of recent decisions in which the courts have significantly curtailed costs recovery on the grounds of proportionality. It is now clear that a successful party whose costs are found to be disproportionate may see a large reduction in the costs it can recover, even if those costs were reasonably incurred. The days of expecting to recover 60-70% of costs from the other side are, in those circumstances, over.

The judgment is here.