Litigation and Arbitration: the top things you need to know - January 2016

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

Contract

1. The Supreme Court on the penalties doctrine: recast and restricted but not rejected in full

The Supreme Court has handed down its highly anticipated decision in the joined cases of Cavendish Square Holding BV v Makdessi and ParkingEye v Beavis [2015] UKSC 67. The judgment restates the law on penalties and creates a new leading authority in this area. The long-cited test in Dunlop Pneumatic Tyre Company v New Garage and Motor Company [1915] AC 79 of whether a liquidated damages clause is a “genuine pre-estimate of loss” designed to compensate the innocent party rather than deter the defaulting party from committing the breach is no longer conclusive (although it may still be useful in the simplest of cases).

The new test is whether a stated remedy in a contract is proportionate to the legitimate interests of the innocent party. In addition, the Supreme Court held that the penalties regime only applies to secondary obligations (broadly, those obligations that arise upon breach of a primary obligation, the paradigm example being a provision for payment of a sum of money upon a breach of contract).

While this is helpful clarification, the Supreme Court has still left open the questions of:

• what is a primary or secondary obligation (which may not be clear in certain cases);
• what constitutes a party’s legitimate interests;
• how to apply the test of whether a stated remedy is proportionate to a party’s legitimate interests; and
• whether the doctrine applies to “withholding clauses” (that is, those that permit the innocent party to withhold a sum which would otherwise be due under the contract, such as deferred consideration clauses).

For more details, see Cathryn Hopkins’ and Sarah Speller’s article here. The judgment is here.

2. Supreme Court confirms strict test for implying terms

The Supreme Court has clarified the strict test to be applied where one party to a dispute alleges that a new term should be implied into a contract. Such a step is a potentially major intrusion by the courts into the parties’ dealings; therefore, a term will only be implied where it is so obvious that it goes without saying, or if the contract would be unable to take effect without it (Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72).

Since the judgment of the Privy Council in Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988, lawyers and judges have debated the point at which the court has the power to imply a term into a contract. In Belize, Lord Hoffman stated, “There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?”. This has been interpreted by some as indicating that terms may be implied where it is reasonable to do so, a lower bar than was previously understood to apply. This interpretation was roundly rejected by the Supreme Court.

The Supreme Court confirmed that the test for implying a term is as follows:

• the term must be either so obvious that it goes without saying or necessary to give business efficacy to the contract (where, without the term, the contract would lack commercial or practical coherence);
• the term must not contradict any express term of the contract;
• it must be capable of clear expression; and
• it must not be unreasonable or inequitable (but the fact that it is reasonable and equitable will not, in itself, be sufficient to imply that term into the contract).

This ruling brings welcome certainty to the law in this area, as there had been a number of judgments which appeared to interpret Belize in different ways. Lawyers can now be confident that the correct test is as described above. The Supreme Court did not consider that their ruling was inconsistent with Belize, merely that the wording of the earlier judgment was open to interpretation. They recommended that Belizediscussion [of the rules for implication] rather than authoritative guidance be treated as a “”.

The judgment in Belizebeforehere also seemed to suggest that the process of implying a term is part of the exercise of construction. The Supreme Court clarified that, while construing a contract and implying a term into it both involve determining the scope and meaning of the contract, they are different processes governed by different rules. While this may seem a purely theoretical debate, it is likely to have a practical effect on how judgments will be reached: the exercise of construction must be completed any terms are implied. The judgment is .

3. Estoppel by convention can be based on forgetfulness as well as mistake

Estoppel by convention arises where parties act on an assumption of fact or law, where that assumption is either shared by them or assumed by one party and acquiesced in by the other. The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable to allow them (or one of them) to go back on it.

The Court of Appeal has recently confirmed that it makes no difference whether that incorrect assumption comes about by way of forgetfulness or a mistake (Dixon and another v Blindley Heath Investments Ltdhere [2015] EWCA Civ 1023). It held that shareholders in a private company were estopped by convention by relying on agreements which granted rights of pre-emption in respect of share transfers, because shares had previously been transferred without reference to the agreements, apparently because the parties had forgotten about them. The judgment is .

Privilege

4. Legal advice privilege can cover information communicated between lawyer and client

In Property Alliance Group Limited v The Royal Bank of Scotland plc [2015] EWHC 3187 (Ch), Mr Justice Snowden helpfully confirmed that legal advice privilege can extend beyond actual legal advice to information communicated between a lawyer and his client, provided it is communicated in confidence and for the purposes of giving and seeking legal advice. This can include factual information in lawyers’ communications to their clients which otherwise would not be privileged.

The judge acknowledged that not all communications between a solicitor and his client would be for the purpose of giving or obtaining legal advice, but this did not mean that they necessarily lacked privilege. He cited Balabel v Air Indiaa continuum of communication and meetings… Where information is passed by the solicitor or client to the other as part of the continuum aimed at keeping both informed so that advice may be sought and given as required, privilege will attach [1988] 1 Ch 3117, where Taylor LJ explained that most solicitor/client relationships involved “”.

Applying this test, Snowden J upheld the defendant’s claim to privilege in respect of:

• Tables produced by lawyers to inform and update the defendant’s Executive Steering Group (“ESG”) (a special committee which oversaw regulatory investigations) on the progress of and issues arising in certain investigations. These were largely factual accounts of events which were not, of themselves, privileged, such as meetings with regulators.
• Notes and summaries drafted by lawyers of discussions between the ESG and its legal advisers at meetings - effectively summary minutes of the meetings.

He was satisfied that the purpose of the tables was clearly to provide a comprehensive and up-to-date summary of developments in the investigations, as the basis for discussions at meetings between the ESG and its legal advisers. As for the summary minutes, the lawyers had supplemented these with their impressions, responses to questions and suggestions on what the defendant should do next in relation to the investigations.

Finally, Snowden J recognised that the policy justification for legal advice privilege goes beyond encouraging clients to be candid with their lawyers:

“Lawyers are often also given the task of investigating, or are in possession of, relevant information. The lawyer must be able freely to communicate that information to his client to enable the client to make a fully informed decision as to what further legal advice to obtain, and what to do. When legal advice is then given, the lawyer must also be able to provide the client with an accurate record of the discussions and the decisions taken as a consequence. If the lawyer was concerned that his communications might be disclosable to third parties without the client's consent, he would be most unlikely to commit such matters to paper, with the inevitable risk of misunderstandings…”.

The judgment is here.

Injunctions

5. Top 10 injunction cases of 2015

A year ago, Olswang’s Litigation and Intellectual Property teams started The Injunctions Bloghere to monitor every significant judgment relating to injunctions. This has been another full year of such judgments, emanating from all areas of litigation, including intellectual property, fraud, media, and arbitration, employment and harassment, all covered on our blog. We have prepared a note setting out what we consider to be the top ten injunction cases of 2015. To view the full briefing, click .

We will continue to follow closely cases and other developments relating to injunctions in 2016. If you wish to keep up in this area, please register for our email alerter service at The Injunctions Blog.

6. Meaning of “assets” covered by a freezing order

In JSC BTA Bank v Ablyazov [2015] UKSC 64, the Supreme Court confirmed that the proceeds of a loan agreement were within the extended definition of “assets” in the current Commercial Court standard form of freezing order.

The order contained the following wording: “For the purpose of this order, the respondents’ assets include any asset which they have power, directly or indirectly, to dispose of, or deal with as if it were their own”. The Supreme Court held that this caught assets which the respondent did not own, but had the power to dispose of or deal with as if he did. Here, the respondent had an express right to direct the lender to pay the proceeds of the loan to a third party, and this amounted to him dealing with that asset as if it was his own.

The right to draw down under a loan agreement would not, however, be caught by a freezing order which did not contain this expanded wording (for example, the pre-2002 version of the Commercial Court order).

The court also gave useful guidance on the construction of freezing orders:

• They are to be construed in a restrictive manner: the sole question is what the order means, and the court should resist the temptation to stretch legal analysis to capture the perceived merits of the case. This stems from the draconian consequences of breaching an order and the respondent’s need to know where he stands.
• The construction of an order must take into account the context in which it was made, including the continued development of the standard forms of freezing order.
• Although the “flexibility principle” suggested by the Court of Appeal (that the court’s jurisdiction should be exercised in a flexible way, so as to be able to deal with new situations) might guide the decision whether to grant a freezing order, it had no place in the construction of such an order. It could not justify an “expansive interpretation of an order which has already been made”.

Despite the rejection of the flexibility principle as an interpretative tool, this decision reflects the courts’ tough approach to respondents’ increasingly creative attempts to avoid the enforcement of freezing orders. That said, the restrictive approach to construction means that great care must continue to be taken in drafting orders to ensure they cover the types of asset respondents are believed to hold. The judgment is here.

Jurisdiction

7. The Hague Convention on Choice of Court Agreements: coming into force

The Hague Convention on Choice of Court Agreements (see here) came into force on 1 October 2015. It aims to provide a reciprocal regime in relation to exclusive jurisdiction clauses which will give parties greater certainty that their choice of court will be respected and that judgments will be easier to enforce in other countries. The key provisions are:

• a court chosen in an exclusive choice of court agreement must hear the case (subject to limited exceptions) (article 5);
• a court of a Convention State which is not named in an exclusive choice of court agreement must stay or dismiss proceedings brought before it (subject to limited exceptions) (article 6); and
• any judgment given by the chosen court must be recognised and enforced in the other Convention States (subject to limited grounds for refusal) (article 8).

At the moment, the Convention is only in force in EU Member States (except Denmark) and Mexico and will apply to choice of court agreements between Member States and Mexico entered into after 1 October 2015 (issues of jurisdiction within the EU will still be governed by the Recast Brussels Regulation). There are signs, however, that the Convention is gaining acceptance - it is likely to be ratified by Singapore in the near future, and has been signed by the USA (although it is unlikely to be ratified there for some time). It is also under consideration in Hong Kong and Australia. Commentators are suggesting that, in time, the Convention may provide a regime for the recognition and enforcement of judgments which is as effective as that for arbitral awards under the New York Convention.

Costs and funding

8. Recoverability of success fees and insurance premiums in insolvency cases to end in April 2016

The ability of a successful party to recover a success fee 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 was retained, including insolvency proceedings and publication and privacy proceedings. The Government has now confirmed (see here) that the exemption for insolvency proceedings (which covers claims brought by liquidators, administrators, trustees in bankruptcy and companies in liquidation or administration) will end in April 2016.

9. Court fees: Government decides not to double maximum issue fee

In July 2015, the Government consulted on proposals for a further increase to court fees, in particular to raise the maximum issue fee for money claims (including counterclaims) from £10,000 to “at least £20,000”. As the issue fee for money claims over £10,000 is calculated as 5% of the value of the claim, this would have affected claims valued at over £200,000. This followed closely on the heels of significant increases to court fees in March 2015.

The Government has now decided not to proceed with the proposed increase, so that issue fees will remain capped at £10,000 for the time being. This may not be the end to the matter, however, as the response to the consultation (see here) makes clear:

“In view of the financial position, and the need to ensure the proper funding of the courts, the Government does not rule out returning to this proposal in the future, once we have had more time to properly assess the impact of the introduction of enhanced fees with the £10,000 cap”.

The Government is proceeding with a number of other fee increases proposed in the consultation, in particular increasing fees “across the range of civil proceedings” by 10%. This will catch fees: (1) for proceedings for an injunction or declaration; (2) in judicial review proceedings; (3) for the assessment of costs; (4) in the Court of Appeal; and (5) for enforcement proceedings. There is no indication at the moment of when these increases will come into effect.

Civil procedure

10. Interim report published on the structure of the civil courts

On 12 January 2016, Lord Justice Briggs published his interim report in the Civil Courts Structure Review. The Review was commissioned by the Lord Chief Justice and the Master of the Rolls in July 2015, to coincide with a programme for reform of the courts by HM Courts and Tribunals Service.

Of particular interest is the “clear and pressing need” identified by Briggs LJ to create an Online Court for claims of up to £25,000. He proposes that such claims would be dealt with in three stages: (1) a largely automated, interactive online process to identify the issues and provide documentary evidence; (2) conciliation and case management by case officers; and (3) resolution by judges.

The interim report is herehere and a press summary is . The review is due to be completed by the end of July 2016.

The information contained in this update is intended as a general review of the subjects featured and detailed specialist advice should always be taken before taking or refraining from taking any action.