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Practical Law Dispute Resolution: Top ten tips from 2015
Practical Law UK Articles 4-619-9653 (Approx. 9 pages)
Practical Law Dispute Resolution: Top ten tips from 2015
Practical Law Dispute Resolution highlights practical tips for litigators from some of the significant 2015 cases.
Tip 1: A freezing order can extend to assets under the control of the respondent:
In JSC BTA Bank v Ablyazov [2015] UKSC 64, the Supreme Court gave a landmark judgment on the construction of a freezing injunction.
The terms of the order against the respondent included an extended definition of assets, based on the standard form in Appendix 5, Commercial Courts Guide. The respondent drew down funds under unsecured loan facility agreements, and then directed that the funds be paid to third parties to meet the respondent’s legal costs and living expenses.
The Supreme Court held that the proceeds of the loan agreements were "assets" within the meaning of the freezing order in this case. The injunction expressly applied to assets that were held or controlled by a third party in accordance with the respondent's direct or indirect instructions, even if the respondent did not own the assets, legally or beneficially. Therefore, the respondent's instruction to pay the lenders' money to third parties constituted dealing with the lenders’ assets as if they were the respondent's own.
Anyone seeking a freezing injunction should consider carefully the scope of the relief required and, if appropriate, seek an order that includes an extended definition of assets A respondent against whom a freezing order has been made must take care to ensure compliance with the order when dealing with assets that are held by or on behalf of other parties. This is particularly the case when exercising any contractual rights to direct the payment of funds under a loan agreement, or using an agreed overdraft facility or a credit card. The Supreme Court's decision may also have implications for the question of whether a freezing order made against a sole shareholder and director of a company extends, not only to the respondent's shares in the company, but also to that company's assets.
For a full analysis of the decision, see Legal update, Supreme Court guidance on borrowing and the scope of a freezing injunction.
Tip 2: When drafting liquidated damages provisions, make sure you identify and document the applicable legitimate business interest
The Supreme Court clarified the "true test" for determining whether a clause is a penalty and, therefore, unenforceable. If the clause is a secondary obligation which imposes a detriment on the party in breach, out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation, it will be an unenforceable penalty.
In Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67, the Supreme Court restated the penalty rule. The traditional test, which focused on whether a clause was a genuine pre-estimate of loss, continues to be relevant when construing typical liquidated damages clauses. However, with more complex clauses, it is now necessary to ask whether their inclusion can be justified and, if so, whether, in the particular circumstances, they are nevertheless unconscionable or extravagant. When carrying out this exercise, the court will take into account that, in a negotiated contract between parties of equal bargaining power, the parties themselves are the best judges of what is a legitimate consequence of breach.
In light of the judgment, parties drafting complex liquidated damages provisions should consider explaining, in the preamble to the agreement, what interest they are seeking to protect and why. They should also consider whether it is possible to protect the relevant interest by structuring a contractual provision to be a primary, rather than secondary, obligation and, therefore, avoid the penalty rule altogether.
Tip 3: There may be a risk of parallel proceedings if co-defendants are not bound by contractual choice of jurisdiction
The Court of Appeal held that an investor, whose contract with a Monaco domiciled bank contained an exclusive jurisdiction clause in favour of the Monaco courts, could not bring proceedings against the bank in England. The court came to this conclusion despite the fact that the investor was entitled to proceed against two English companies in the same group as the bank, and in respect of which the investor's claim was governed by English law.
In Jong v HSBC Private Bank (Monaco) SA [2015] EWCA Civ 1057, the court had to consider the competing merits of "two powerful factors" which pointed in different directions, namely the bank's right to be sued only in Monaco pursuant to the exclusive jurisdiction, and the investor's entitlement to bring proceedings against associated companies domiciled in England. The court observed that making a decision on jurisdiction should not be a "sequential exercise", for example, by using the exclusive jurisdiction clause, or a party's entitlement to sue a defendant in a particular jurisdiction, as a starting point. Instead, it was appropriate to take a holistic or iterative approach.
Here, the nature of both the defendants and the claims against them were proper factors for the court to take into account when exercising its discretion, in particular, the fact that the English companies were content to be sued in Monaco, and the claim against the Monaco bank raised issues which were, in one sense, independent of the claims against the English companies. The court concluded that the judge at first instance, who had given greater weight to the exclusive jurisdiction clause, had taken the relevant considerations into account and had reached a decision that was in the bounds of reasonableness.
The decision illustrates how the court may exercise its discretion on questions of jurisdiction and how it will weigh up all relevant considerations, including the existence of an exclusive jurisdiction clause. However, it does at the same time, reinforce the fact that such questions are often finely balanced and difficult to predict, especially where there are multiple parties and related claims. Although the English court did not have jurisdiction over the claim against the bank here, the English domiciled parties were content to be sued in Monaco so that the claimant's claims against all defendants could at least all be heard in that jurisdiction, thereby avoiding parallel proceedings. Potential claimants should be aware, however, both at the point of drafting exclusive jurisdiction agreements and when considering jurisdiction after a dispute has arisen, that fragmented proceedings may be inevitable if there are related claims against connected parties who are not willing to be sued in the courts nominated in the exclusive jurisdiction clause.
Tip 4: Failure to mediate may affect court's approach to interim applications
The High Court refused the defendant's application for security for costs, concluding that the defendant's misconduct in failing to attend an agreed mediation would, itself, have justified dismissing the application.
In Gresport Finance Limited v Battaglia [2015] EWHC 2709 (Ch), the court considered the effect of the defendant's failure to attend a mediation (which it had agreed to attend) on its application for security for costs. Although the application was refused on other grounds, Chief Master Marsh noted that the defendant's failure to attend the mediation amounted to serious misconduct and would, itself, have been sufficient to dismiss the application.
Whilst parties should already be well aware that failure to engage in mediation without good reason can lead to costs consequences, this case demonstrates that it may also affect the court's approach to interim applications, such as this application for security for costs.
Tip 5: Ensure that your clients understand your advice, and exercise caution if using standard form letters of advice
Several cases over the last year have highlighted the importance of providing sufficient explanation when advising clients.
A number of cases over the last year have considered the scope of a solicitor's duty when advising his client. Each highlights an important practice point for practitioners to keep in mind:
- In Procter v Raleys Solicitors (A Firm) [2015] EWCA Civ 400, the Court of Appeal dismissed an appeal against a finding that a solicitors' firm had failed to properly advise its client about his claim and confirmed the need for standard form letters of advice to be sufficiently clear to ensure that clients properly understand the nature of the advice. The case highlights the potential risks of relying on standard form letters. Where such letters are used, it is vital that they are sufficiently clear that a client who may be "unsophisticated in the relevant field" can understand them. Consider discussing matters with the client to ensure that the client understands the position properly.
- In Kandola v Mirza Solicitors LLP [2015] EWHC 460, the High Court dismissed a negligence claim brought by the claimant against his solicitors. The judge concluded that the risks had been adequately explained to a person of the claimant's experience. A solicitor's duty to explain matters to his client should take account of the client's own experience. A solicitor will have fulfilled his duty if "he gives an explanation in terms the client reasonably appears to him to be able to understand, and to have understood, even if the client later alleges that he did not in fact understand what was said."
- Fryatt v Preston Mellor Harrison (a firm) [2015] EWHC 1683 shows that the solicitor's level of expertise in the relevant area will also be a factor. Here, a legal executive with 40 years' experience of conveyancing, advised a client (an experienced property developer) on an option to buy the share capital in a company. The court held that the legal executive's conduct fell below the requisite objective standard of skill and care as he failed to appreciate the significance of taking an option over the shares as opposed to an option over the land itself. He also failed to appreciate that the transaction had become one in which he did not have the requisite experience to continue to act without being more explicit with the claimant about his lack of experience. Although the defendant solicitors escaped liability in this case, it illustrates the potential risks for practitioners where cases involve issues outside their particular expertise and experience. It also provides a reminder of the importance of keeping a record of advice given to clients (as, in this case, the legal executive said that he had referred the client to his lack of expertise in corporate mergers and acquisitions, but there was no record of this).
- Orientfield Holdings Ltd v Bird & Bird LLP [2015] EWHC 1963 (Ch), which arose in the context of a conveyancing transaction, considers the scope of the advice that must be given. One issue was whether a buyer's solicitor had a duty to inform the buyer of a nearby property development of which the solicitor had become aware. The court held that, where a solicitor has information that may affect a client's decision-making process, he has a duty to inform the client of that material. The solicitors had breached that duty in this case.
For more details, see Legal updates, Court of Appeal confirms standard form letters not sufficient to properly advise client, Court considers whether risks adequately explained to client in professional negligence action (High Court), Duty of conveyancing solicitor when advising on corporate transaction (High Court) and Solicitor should have warned client of planned development (High Court).
Tip 6: Make it clear in your claim form if your claim is worth £10m or more and you do not want costs management
The High Court has confirmed that, unless the sum claimed in the claim form is £10 million or more (or there is a statement in the claim form that the sum claimed is £10 million or more), the default position is that costs budgeting applies.
In Sharp (and the other claimants detailed in the GLO Register) v Blank and others [2015] EWHC 2685 (Ch), Nugee J granted the claimants' application for an order requiring costs budgets to be filed and served, in proceedings where the total claims by parties under a group litigation order amounted to more than £215 million.
The judgment identified an apparent lacuna in the wording of CPR 3.12(1) (which sets out the exceptions when costs budgeting does not apply to multi-track claims). Nugee J concluded that the "natural and ordinary meaning" of the rule is that, unless the sum claimed in the claim form is more than £10 million (or there is a statement in the claim form that the sum claimed is £10 million or more), the default position is that costs budgeting applies.
Here, the claim forms in question simply contained statements of value to the effect that the claimant expected to recover more than £25,000 (which was clearly to satisfy CPR 13.3(2)(b)(iii)) and, in some cases, the box allowing parties to state the sum claimed was left blank, or was marked "TBC" or "TBD". Therefore, although it was clear from schedules filed shortly after the claim forms that the claim was for significantly more than £10 million, the default position was that costs management applied.
Whatever the default position, any party will still be able to make an application for the court to exercise its "unfettered discretion" to order differently, under CPR 3.12(1)(a) and CPR 3.13, but the obligation will be on them to do so. Here, it was concluded that the case would benefit from costs management.
Tip 7: Legal advice privilege extends to communication of information between lawyer and client
The High Court has upheld a defendant's claim to legal advice privilege over "high level" documents prepared by external lawyers for the defendant's internal committee overseeing regulatory investigations. The documents formed part of "a continuum of communication and meetings" between the defendant and its lawyers, the object of which was the giving of legal advice as and when appropriate.
In Property Alliance Group Ltd v The Royal Bank of Scotland plc [2015] EWHC 3187 (Ch), the defendant asserted legal advice privilege over certain "high level" confidential documents. External lawyers had produced these documents for meetings with an executive committee of the defendant, which oversaw its response to the LIBOR regulatory investigations and related litigation. Some were memoranda, which served as "updates" for the meetings, and others were summary minutes of the committee’s discussions. In upholding the defendant's claim to legal advice privilege, Snowden J was "entirely satisfied" that the defendant had engaged its external lawyers in a "relevant legal context".
This decision confirms that the communication of information between lawyer and client can be privileged, provided that the information is communicated in confidence for the purposes of the client seeking, and the lawyer giving, legal advice. The test is one of relevance and purpose. The ruling also recognises the public interest in those under regulatory investigation being able to receive from their lawyers, on a privileged basis, "candid factual briefings" as well as legal advice.
Tip 8: In a negligent misrepresentation claim, a claimant who has lost the right to rescind should consider seeking damages under section 2(1) of the Misrepresentation Act 1967
The Court of Appeal has confirmed that a claimant who has lost the right to rescind for innocent or negligent misrepresentation will not be able to claim damages in lieu of rescission under section 2(2) of the Misrepresentation Act 1967 (1967 Act).
In Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745, the Court of Appeal made some noteworthy obiter remarks regarding whether a claimant who had lost the right to rescind (for innocent or negligent misrepresentation) could, nevertheless, claim damages in lieu of rescission under section 2(2) of the 1967 Act, a matter on which there had been conflicting lower court decisions.
The Court opined that the language of section 2(2) of the Act was clear and the words "in lieu of rescission" in that section had to carry with them the implication that rescission was, or had been, available at the material time.
Accordingly, where a negligent misrepresentation claimant has lost the right to rescind, consideration should be given to claiming damages under section 2(1) of the Act instead. (This section allows innocent parties to claim rescission and damages for fraudulent or negligent misrepresentation.) Note, however, the defence available under that section to the representor who can prove that he had reasonable grounds to believe, and did believe up to the time the contract was made, that the facts represented were true.
Tip 9: Don't withdraw your Part 36 offer (or use the sunset provision) if you want the potential benefit of the Part 36 costs consequences
The High Court refused to grant a claimant indemnity costs, where her Part 36 offer was withdrawn 21 days after it was made, even though she beat her own offer at trial.
In Gulati and others v MGN Ltd [2015] EWHC 1805 (Ch), the claimant made a Part 36 offer which was not accepted and which was withdrawn after 21 days. At trial, the claimant beat her own offer and sought indemnity costs on the basis of the defendant's unreasonable conduct, including the failure to accept or beat the Part 36 offer. The court held that there was not enough here to establish unreasonable conduct leading to an award of indemnity costs. While a one-time Part 36 offer could play a part in assessing the reasonableness of the defendant's conduct, it could not be elevated to a position comparable with a "living Part 36 offer" just because it had been beaten.
The case demonstrates that parties should consider carefully the consequences of withdrawal of a Part 36 offer. Had the offer not been withdrawn in this case, the usual costs consequences of a claimant beating its own offer, including indemnity costs, would have applied.
For more detail, see Legal updates, Withdrawn Part 36 offer cannot attract indemnity costs (High Court).
Tip 10: Beware assigning pre-April 2013 CFAs
The County Court held that the purported assignment of a conditional fee agreement (CFA) from one law firm to another breached the rule against the assignment of personal contracts.
In Jones v Spire Healthcare Limited Case No: A13YJ811, following the assignment of a CFA from one law firm to another, the court held that the CFA had not been validly assigned because the rule against the assignment of personal contracts applied. The purported assignment was in fact a novation. The "new" CFA was unenforceable because it did not comply with the Conditional Fee Agreements Order 2013, in that it did not include the 25% statutory cap required for personal injury matters.
In so finding, the County Court distinguished Jenkins v Young Bros Transport Ltd (2006) 1 WLR 3189, in which it was held that, as an exception to the rule against the assignment of personal contracts, the benefit and burden of a CFA could be assigned where the claimant was loyally following an individual solicitor, in whom the client had considerable trust and confidence, from one firm to another. Here, the purported assignment did not take place because the claimant was following a particular solicitor.
Following this decision, it is even less clear whether it is possible to validly assign a CFA, and practitioners cannot assume that an assignment will be lawful. This is particularly relevant in the context of pre-April 2013 CFAs ( where the success fee is potentially recoverable), which have been assigned after 1 April 2013. If the pre-April 2013 CFA continues, recoverability will be possible. But, if the purported assignment is in fact a novation, there will be a "new" CFA and recoverability will not be possible.
This decision is currently being appealed so we may have more clarity in 2016.
For more detail, see Legal update, Assignment of CFA: costs of new firm not recoverable (County Court). See also Article, Can CFAs be lawfully assigned?.
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