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

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

Contract

1. Court of Appeal clarifies test for Wrotham Park damages

In Morris-Garner and another v One Step (Support) Ltd [2016] EWCA Civ 180, the Court of Appeal clarified the test for Wrotham Park damages (after Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798). Such damages seek to quantify the amount the claimant might reasonably have demanded if the defendant, before breaching its contractual obligations, had instead sought a release from them.

The case involved the sale of a business from the defendants to the claimant, following which the defendants launched a competing business, in breach of confidentiality, non-compete and non-solicitation covenants. The claimant sought Wrotham Park damages on the basis that it would be very difficult to establish its financial loss resulting from the breaches.

The Court of Appeal expressly approved the three features identified in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 as justifying the award of Wrotham Park damages, i.e. (1) the defendant's deliberate breach of its contractual obligations for its own reward; (2) the claimant's difficulty in establishing financial loss resulting from the breach; and (3) the claimant's legitimate interest in preventing the defendant's profit-making activity in breach of contract.

Longmore LJ added a fourth factor which would apply in business sale cases: that as a result of the defendant's breach, it was doubtful that interim relief could be obtained. He commented that this was not a necessary feature but one which, if present, could be taken into account.

The court also provided the following additional guidance:

• Wrotham Park damages were not restricted to cases where the claimant had suffered no identifiable loss and could be awarded where it would be very difficult for the claimant to establish “ordinary” compensatory damages.
• There was no requirement that the case had to be "exceptional". Although there was some force in the argument that Wrotham Park damages should not become "the norm" in business sale and employment cases involving restrictive covenants, the test was not whether the case was exceptional, but what justice required.
• The court rejected the defendants' argument that Wrotham Park damages should only be awarded where they were necessary to avoid manifest injustice. The correct test was whether they were "the just response" and that was "quintessentially, a matter for the judge to decide".

The judgment is here.

2. Term sheets / heads of terms may be legally binding

A recent decision of the High Court (New Media Holdings v Kuznetsov [2016] EWHC 360 (QB)) demonstrates that merely describing a document as a "term sheet" does not preclude it from being a legally binding and enforceable agreement.

Simler J rejected the argument that a document described as a "term sheet" was never intended to be legally binding. In reaching that conclusion she considered various factors:

• While "term sheet" was often used in a commercial context to describe a framework agreement which would be used to develop a more detailed legal document, there was no absolute rule that term sheets were framework documents and could not be contractual.
• Although there were factors pointing against an intention to create legal relations, the terms of the document itself, and the conduct of the parties, viewed objectively, led to the conclusion that the term sheet was intended to be binding. The language used here was consistent with a legally binding agreement and not merely a document that was aspirational. The rights and obligations set out in the term sheet were expressed in unqualified terms.
• The fact that the preamble referred to the term sheet as "describing principal terms and conditions", suggesting that further agreement on other matters might be required, did not mean that the term sheet itself was not contractual.
• The judge was also persuaded by the fact that the parties were experienced businessmen and had placed the drafting of the term sheet into the hands of their lawyers very quickly after their discussions.
• The court also rejected the argument that because the term sheet made no reference to consideration, it could not have been intended to be binding. The fact that consideration was not mentioned was not decisive and it was clear on the facts that consideration had been given.

The judgment is here.

3. Is notice required for termination at common law?

Vinergy International (PVT) Ltd v Richmond Mercantile Limited FZC [2016] EWHC 525 (Comm) raised the question whether a contractual termination provision (which required the terminating party to give notice and an opportunity to cure the breach) applied to a party’s exercise of its common law right to terminate the agreement by accepting the other party’s repudiatory breach. Teare J held that it did not.

Clause 17.1.1 of the agreement contained a typical provision enabling the innocent party to terminate on the failure of the other party to remedy a breach, following a notice requiring that the breach be remedied.

The defendant terminated the agreement, not by relying on clause 17.1.1, but at common law by accepting the claimant’s repudiatory breach. An arbitral tribunal found that the defendant had validly accepted the breach, but the claimant appealed, arguing that it should have first been given an opportunity to remedy the alleged breach in accordance with clause 17.1.1. The claimant accepted that clause 17.1.1 did not exclude the common law right to terminate, but argued that such a right had to be exercised as prescribed by the clause.

Teare J held that there was no general rule that a contractual notice requirement would always also apply where a party sought to terminate at common law. Whether notice was required in a given situation was a matter of construction of the relevant contract. Clause 17.1.1 did not expressly state that it applied where a party wanted to terminate for repudiatory breach and so it would only apply if the court implied a term to that effect.

Construing the contract at hand, Teare J held there was no justification for implying such a term, for two reasons:

• Firstly, the right to terminate under clause 17.1.1 arose on the failure to observe "any of the terms" in the agreement and dealt with both major and minor breaches in the same way. It made no reference to the common law right to terminate for repudiatory breach.
• Secondly, clause 17 of the agreement also granted the parties an express right to terminate in five other situations, without having to give notice and provide an opportunity to remedy the breach. From this, the court inferred that the requirements to give notice and an opportunity to remedy only applied to the specific right to terminate set out in clause 17.1.1 and were not intended to apply to any of the other express rights or to the right to terminate at common law.

The judgment is here.

4. When deleted words may be used as an aid to construction

In Narandas-Girdhar and another v Bradstock [2016] EWCA Civ 88, the Court of Appeal considered when words deleted from a contract may be used as an aid in construing that contract. It approved the position adopted by Clarke J in Mopani Copper Mines plc v Millennium Underwriting Ltd [2008] EWHC 1331 that "the deletion of words in a contractual document may be taken into account … if the fact of deletion shows what it is that the parties agreed that they did not agree and there is ambiguity in the words that remain".

The court emphasised, however, that where recourse is had to deleted words, care is required as to what inferences, if any, can be drawn from them. The parties might have deleted the words because they considered they added nothing to, or were inconsistent with, the other provisions of the contract, or by mistake. They may have had different ideas as to what the words meant and whether the words that remained achieved their respective purposes.

The judgment is here.

5. "All reasonable endeavours" and "good faith" clauses do not override specific provisions in contract

Bristol Rovers (1883) Ltd v Sainsbury's Supermarkets Ltd [2016] EWCA Civ 160 confirms that "endeavours" clauses and "good faith" clauses cannot be used to override specific provisions in a contract which set out the steps parties need to take to comply with their obligations.

Here, the clauses did not require the defendant to go beyond its obligations to obtain a planning consent contained elsewhere in the contract. In particular, the defendant was not in breach of the "all reasonable endeavours" clause in withdrawing a planning appeal where counsel had estimated the likelihood of success at 55%, and the contract only required it to pursue an appeal where there was a 60% likelihood of success. It was also not in breach of an obligation on each party to "act in good faith in relation to its respective obligations under the agreement" in failing to consent to the claimant bringing a further appeal. It could not have been the parties' intention that the defendant should have to consent to the claimant pursuing an appeal in circumstances where the defendant itself was no longer obliged to appeal. The specific contractual provisions had curtailed the scope of the all reasonable endeavours and good faith clauses.

The judgment is here.

6. Exclusion clauses: "written standard terms of business"

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. Where parties contract on industry standard terms, the question of whether these will be deemed to be a party's written standard terms depends on how consistently they are used and the degree to which they are altered. Modern case law suggests that, to be regarded as a party's standard terms, industry terms should be used in virtually all transactions without any material alteration (see, for example, Hadley Design Associates v City of Westminster [2003] EWHC 1717 (TCC) and Yuanda (UK) Co Lt v WW Gear Construction Ltd [2010] EWHC 720 (TCC)).

In African Export-Import Bank and others v Shebah Exploration & Production and others [2016] EWHC 311 (Comm), Phillips J considered whether the use of a Loan Market Association ("LMA") standard form agreement meant that the parties were contracting on the claimants' written standard terms. He held that they were not, for two reasons:

• There was no basis for inferring that the claimants habitually put forward the LMA standard form (or a tailored version of it). It appeared that they selected the most appropriate terms for each transaction, depending on the lawyers used and the banks involved. Even if the claimants normally put forward the LMA form, there was no basis for inferring that they refused to negotiate the terms.
• There was no evidence to show that the claimants had refused to negotiate the terms in this case, or that the LMA form had remained "effectively untouched". In fact, three significant changes had been made to the form, including revision of the material adverse change clause and the insertion of a new section on project accounts.

Phillips J concluded:

"In circumstances where commercial parties, represented by solicitors, have utilised a 'neutral' industry model form as the basis for a complex and detailed financial contract, executed after the usual process of negotiation, including revising a travelling draft, it will require cogent evidence to raise even an arguable case that the resulting contract is made on the written standard terms of one of those parties".

The judgment is here.

7. Exclusion clauses: narrow construction to resolve ambiguities

In Nobahar-Cookson and others v The Hut Group Ltd [2016] EWCA Civ 128, the Court of Appeal confirmed that ambiguities in an exclusion clause should be resolved by adopting the narrowest possible construction, if a linguistic, contextual and purposive analysis of the clause did not provide a sufficiently clear answer. This was because parties could not lightly be taken to have intended to cut down the available remedies for the breach of important contractual obligations without using clear wording to that effect.

The parties had entered into a share purchase agreement which contained a clause exempting the sellers from liability for any claim for breach of warranty “…unless the buyer serves notice of the claim on the sellers … as soon as reasonably practicable and in any event within 20 business days of becoming aware of the matter”. The court was asked to decide between three possible meanings of the phrase “aware of the matter”: i.e. awareness (a) of facts giving rise to a claim; (b) that there might be a claim under the warranties; or (c) of the claim, in the sense of an awareness that there was a proper basis for the claim.

Briggs LJ adopted a purposive approach. He held the purpose of the clause was to prevent the buyer from pursuing claims previously “kept up its sleeve”, and that was better served by an interpretation which focused on awareness of the claim rather than the underlying facts, i.e. interpretation (c). This approach was not beyond doubt, however, and so Briggs LJ fell back on the principle of narrow construction, which “significantly reinforced” the choice of interpretation (c). Although the other two judges (Hallett LJ and Moylan J) agreed with the outcome of the appeal, they both indicated that they would have placed greater weight on commercial common sense as opposed to narrow construction.

It is also worth noting comments from Briggs LJ on the contra proferentem rule. He noted that the rule could not now be regarded as a presumption or a special rule justifying giving a strained meaning to a provision just because it was an exclusion clause, nor could it be applied mechanistically whenever there was an ambiguity. The court still had to use “all its tools of linguistic, contextual, purposive and common-sense analysis” to discern what the clause really meant.

The judgment is here.

Arbitration

8. Meaning of “any party may submit the dispute to binding arbitration”

In Anzen Ltd and others v Hermes One Limited (British Virgin Islands) [2016] UKPC 1, the Privy Council considered the meaning of a dispute resolution clause which provided that “any party may submit the dispute to binding arbitration”.

The parties were shareholders in a BVI company. The shareholders' agreement contained a dispute resolution clause providing for ICC arbitration, with its seat in London. The respondent commenced proceedings in the BVI, alleging unfair prejudice by the appellants in their management of the company. The appellants applied for a stay of the proceedings under the BVI Arbitration Ordinance, on the basis that the shareholders' agreement contained a valid and binding arbitration agreement. The BVI courts refused a stay, but the Privy Council overturned their decision and ordered a stay.

The Privy Council drew a clear distinction between the use of "should" or shall" and "may" in an arbitration clause. Where "should" or "shall" were used, it would be a breach of contract to litigate. By contrast, the use of "may" did not amount to an exclusive agreement that all disputes had to be referred to arbitration. The words were merely permissive: they left it open to one party to commence litigation, unless and until the other party elected to arbitrate. However, that left over the question of whether a party had to commence an arbitration in order to make the election.

The Privy Council gave "submit" a broad meaning: it was not necessary for a party actually to commence arbitration to achieve a stay of court proceedings; it was sufficient for it to make an unequivocal request for arbitration. Requiring a party to commence arbitration did not "make much commercial sense", in particular because it might have no real basis for commencing arbitration other than to seek a declaration of no liability in respect of any claim made in the litigation.

This conclusion was also supported by general principle, in that "the hallmark of arbitration is consent", and the commencement of an arbitration was not necessary for that consent. The parties to an arbitration agreement were under mutual obligations to cooperate in the pursuit of an arbitration (Bremer Vulkan Schiffbau und Maschinenefabrik v South India Shipping Corp Ltd [1981] AC 909). This duty was now enshrined in section 40(1) of the Arbitration Act 1996 ("The parties shall do all things necessary for the proper and expeditious conduct of the arbitral proceedings"). Against this consensual background, the better interpretation was that notice would trigger the mutual agreement to arbitrate.

It remains important, where parties intend all disputes arising under an agreement to be referred to arbitration, to have a clear, unequivocal arbitration agreement - using the words "should" or "shall". While a stay was ordered in the end in this case, that might not have been the outcome on the facts and in any event the ambiguity resulting from use of the word "may" led to delay and expense for the parties. In addition, not every jurisdiction is as pro-arbitration as the English courts and the Privy Council and so parties cannot guarantee that a similarly worded clause would be construed in the same way elsewhere.

The judgment is here.

Privilege

9. "Without prejudice" communications cannot be relied on as evidence of repudiatory breach of contract

The High Court has held that a party cannot rely in court, as evidence of repudiatory breach, on emails which form part of a chain of "without prejudice" communications (Alan Ramsay Sales and Marketing Ltd v Typhoo Tea Limited [2016] EWHC 486 (Comm)). This is because it is "doubtful" that the public policy in favour of protecting without prejudice privilege can be overridden by a public policy consideration requiring repudiatory conduct to be made available as evidence. In addition, if the emails are part of a continuum of without prejudice discussions, it is not possible to construe them as sufficiently unequivocal to constitute renunciation or repudiation of the agreement.

The judgment is here.

Injunctions

10. The Injunctions Blog

Recent posts on Olswang's Injunctions Blog include:

• Court of Appeal considers extent of judicial discretion when awarding damages in lieu of an injunction: see here.
• PJS v News Group Newspapers: Supreme Court considering whether to lift celebrity privacy injunction: see here.
• Court of Appeal considers the role of comity and delay in the context of anti-enforcement injunctions: see here.

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

Costs and funding

11. CA upholds non-party costs order against director who controlled and funded company's litigation

The Court of Appeal has upheld a non-party costs order against the sole director and shareholder of the defendant company, which required him to pay £36 million on account of the claimant's costs (Deutsche Bank AG v Sebastian Holdings Inc and another [2016] EWCA Civ 23). In so doing, it noted that, when it comes to granting non-party costs orders, the court has a broad discretion and "the only immutable principle is that the discretion must be exercised justly". As the Privy Council observed in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] UKPC 39, an order of this kind is "exceptional" only in the sense that it is outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.

The director argued that he was not bound by any findings of fact made by the trial judge, because the application for a costs order against him was separate from the main proceedings. The Court of Appeal did not agree. The procedure for deciding whether to make a costs order against a non-party was a summary one, in the sense that the order would be based on the judge's findings at trial. Whether it was fair for the non-party to be bound by such findings depended on the nature and degree of his connection with the proceedings. The critical factor was whether there was a sufficiently close connection between the non-party and the proceedings to justify the court treating him as if he were a "real" party.

The judgment is here.

Civil procedure

12. First reported transfer of case into the Shorter Trials Scheme

Family Mosaic Home Ownership Ltd v Peer Real Estate Ltd [2016] EWHC 257 (Ch) is the first reported instance of a case being transferred into the new Shorter Trials Scheme. A two-year pilot for the scheme began in the Rolls Building Courts on 1 October 2015. Although the application was made on paper and by consent, Birss J handed down a reasoned judgment to provide guidance for future applications.

Although the rules governing the scheme (contained in Practice Direction 51N) do not expressly provide for the transfer in of existing cases, Birss J confirmed that the court has power to transfer cases into and out of the scheme. This was implicit in PD 51N, but the court also had express power under Rule 3.1(2)(m) (which entitles it to take any step or make any order for the purpose of managing the case and furthering the overriding objective).

PD 51N describes the scheme as being suitable for "business cases" in the Chancery Division. Birss J confirmed that the term was not intended to reduce the ambit of the scheme in the Chancery Division: it had a broad meaning and was intended to draw a distinction between business cases in the widest sense and purely private, non-commercial matters such as family property and family trusts. Here, the case fell within the ambit of the scheme even though the claimant was a registered provider of social housing, because it was clearly a commercial property dispute.

The judgment is here.

13. High Court approves use of predictive coding in e-disclosure

The High Court has, for the first time, approved the use of predictive coding (a form of technology assisted review) in a large disclosure exercise: Pyrrho Investments Limited and another v MWB Property Limited and others [2016] EWHC 256 (Ch).

Predictive coding can be used to identify documents in a large disclosure exercise which are most likely to be relevant to the case, in order to narrow down those which require human review. Lawyers review a sample data set, which is then coded and the software applies that coding across the remaining documents to predict their degree of relevance. Predictive coding is still used relatively infrequently in English litigation, although use is common in the US, where it was expressly approved in 2012. It was also approved by the Irish High Court in 2015.

In approving the use of predictive coding in this case, Master Matthews took into account a number of factors, including:

• The size and value of the claim: the cost of using predictive coding was proportionate on a multi-million pound claim where there were 3.1 million documents to review.
• Both parties had agreed to its use, and there were still 15 months until trial, which meant there was time to consider alternative options if the system was not satisfactory.
• The successful use of predictive coding in other jurisdictions.
• References in Practice Direction 31B (on electronic disclosure) to "other automated searches" and specific reference to predictive coding in the Technology and Construction Court e-disclosure protocol.

This decision is likely to be a decisive moment in the use of predictive coding in England and Wales. In the US, it took three years from the first judicial approval "to the point that it is now black letter law that where the producing party wants to utilise [technology assisted review] for document review, courts will permit it" (Rio Tinto Plc v. Vale S.A. (S.D.N.Y, 2015)).

The judgment is available on Westlaw.

14. Part 36 offer does not need to reflect possible outcome at trial; court gives effect to 95% offer

One of the changes made to Part 36 in April 2015 was the introduction of a new factor which the court had to take into account in deciding whether it was unjust to order the Part 36 costs consequences: "whether the offer was a genuine attempt to settle the proceedings". The question for the court in Jockey Club Racecourse Ltd v Willmott Dixon Construction Ltd [2016] EWHC 167 (TCC) was whether a Part 36 offer could be "genuine" where: (1) it did not reflect a possible outcome at trial; or (2) it came close to requiring total capitulation on the part of the offeree. The claimant had offered to settle on the basis that the defendant accepted liability for 95% of damages to be assessed.

On the first point, the court confirmed that an offer does not have to reflect a possible outcome at trial in order to be genuine. The claimant's offer was valid despite the fact that 95% liability was not an available outcome (because the defendant was either liable in full or not at all). The court accepted that the offer was "purely commercial" and parties often settled on a commercial basis "to achieve a certain and early outcome". The fact that an offer was commercial did not prevent it from being a valid one.

On the second point, it was clear that an offer could not amount to "a request to a defendant to submit to judgment for the entirety of the relief sought". There had to be "some genuine element of concession … to which a significant value can be attached in the context of the litigation". It could not be "all take and no give" (per AB v CD [2011] EWHC 602 (Ch)). Here, although the 5% discount offered by the claimant was "very modest", it was not "derisory". Adopting the test used in AB v CD, although the offer was "hardly generous", it could not be described as "all take and no give".

The judgment is here.