Contractual interpretation – end of an era?
The Briggs Report - the future structure of the civil courts?
Judgment from start to finish in 10 months: new High Court procedures, if...
Refuse to mediate at your own risk
Estoppel by convention: ‘Crossing the line’ of the common assumption
International arbitration: ICC focuses on increasing efficiency and transparency
Using international law and deal (re)structuring to protect foreign investments
Cyber|secur¦ity: the state of being protected against the criminal or unauthorised use of electronic data, and the measures taken to achieve this
Unfair credit relationships: one year on from the watershed
Update on privilege
Introduction Welcome to the third edition of Disputes Digest, featuring commentary and analysis on the latest developments in disputes across the UK and beyond. In addition to updates on essential topics such as privilege and mediation, this edition also includes commentary on the array of reforms underway or proposed to litigation in England & Wales. Pilot schemes providing shorter and more flexible litigation procedures have now started in the High Court. We examine their potential impact, drawing on own experience of them. We also assess the extensive proposals set out in the Briggs Report, which include the creation of an exclusively online court for small claims. However, some limited reform is also taking place in the world of arbitration; in January 2016 the ICC introduced measures aimed at enhancing the efficiency and transparency of arbitrator appointments in ICC arbitration proceedings. We consider whether this development really is a step forward for users of institutional arbitration. Cyber security will continue to be on the boardroom agenda in 2016. What can you do to prepare for and react to a cyber attack? English law continues to be one of the most popular choices for international commercial transactions. We reflect on the recent shift in the English courtâ€™s approach to determining the meaning of contracts (Contractual interpretation â€“ end of an era?). For international investors, we take an in-depth look at how appropriate structures can give you the best chance of protecting foreign investments when things go wrong. If you would like to discuss any of the issues in this edition, or wish to provide any feedback, please get in touch with me, the authors, or your usual contact at CMS. I hope you find this edition of the Disputes Digest interesting and informative.
Guy Pendell Partner, Solicitor Advocate, Disputes Head of Commercial, Regulatory and Disputes T +44 (0)20 7367 2404 E email@example.com
CONTRACTUAL INTERPERATION – END OF AN ERA?
Contractual interpretation – end of an era? The English judicial approach to contractual interpretation is one of the cornerstones of English law. English law is one of the most popular choices for international commercial transactions. Therefore, having certainty in relation to contractual interpretation assists parties allocate risk and price accordingly. A series of cases placed an emphasis on interpreting contracts against their background (‘factual matrix’) and in a manner that makes commercial sense. The most notable protagonist of this approach being Lord Hoffman, starting with Investors Compensation Scheme Ltd v West Bromwich Building Society.1 The approach propagated by Lord Hoffmann diminished the need for rectification of contracts and implying terms because these were then just considered to be aids to construction of a contract. However, in recent Supreme Court judgments, Lord Neuberger appears to be resisting the recent trend and reverting to a more traditional ‘black letter’ approach, favouring an iterative process to interpretation with the starting point being the natural and ordinary meaning of the words used by the parties, as opposed to a unitary process considering the words alongside all available information (including ‘factual matrix’ and commercial sense) in one single interpretation step. As a consequence, the express words of a contract have regained their primacy even in the face of potentially uncommercial results. Development of business common sense approach In Investors Compensation Scheme Lord Hoffmann set down the following general principles of contractual interpretation: 1. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
2. The background (‘matrix of fact’) includes anything which would have affected the way in which the language of the document would have been understood by a reasonable man. 3. The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. 4. The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. 5. The ‘rule’ that words should be given their ‘natural and ordinary meaning’ reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. This approach was and remained somewhat controversial, especially the fifth principle. However, Lord Hoffmann continued to develop this approach. In Chartbrook Ltd v Persimmon Homes Ltd 2 he expressed the view that where the background and commercial sense suggested something had gone wrong with the drafting:
Investors Compensation Scheme Ltd v West Bromwich Building Society  1 WLR 896 Chartbrook Ltd v Persimmon Homes Ltd  1 AC 1101 1 2
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CONTRACTUAL INTERPERATION – END OF AN ERA?
‘there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant’. In Attorney General of Belize v Belize Telecom Ltd,3 Lord Hoffmann went further by suggesting that the principles for identifying express and implied terms were identical, which effectively questioned the ‘officious bystander’ and other tests long held sacred in English law. Further, in Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas).4 Lord Hoffmann seemingly questioned the existence of the rules of remoteness suggesting that the ‘rule’ in Hadley v Baxendale5 be replaced by the principles set out in Investors Compensation Scheme. Initially it seemed that Lord Hoffmann’s legacy had survived his retirement from the Supreme Court. For example in Rainy Sky Lord Clarke decided that: ‘the exercise of construction is essentially one unitary exercise in which …the court must consider the language used and ascertain what a reasonable person… would have understood the parties to have meant. In doing so, the court must have regard to all the relevant surrounding circumstances. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other’. Since Rainy Sky SA and others v Kookmin Bank  UKSC 50,6 parties have routinely argued that, in carrying out the interpretation exercise, it is not permissible to consider the contract in isolation from the commercial background. Indeed, some lawyers adopted the practice of putting forward their client’s desired interpretation first as an appropriate commercial construction, only to look at the actual awards used as a secondary exercise. Early signs of change Lord Neuberger’s intention to change the trend was signposted in Marley v Rawlings7 a case relating to wills. The fundamental principles of interpretation of wills and contracts are identical. In Marley Lord Neuberger described Lord Hoffmann’s approach as ‘controversial’. Lord Neuberger got his opportunity to expand his approach in Marley to contracts in Arnold v Britton and others.8 In Arnold the Supreme Court restrained the approach of applying commercial common sense when interpreting contracts.
Rules of construction In Arnold Lord Neuberger, giving the leading judgment, stated that when interpreting a contract the court should identify the intention of the parties by reference to what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract. The court then set out the following aids to construction, which were largely repeated from Marley: 1. The clause in dispute should be given its natural and ordinary meaning. 2. Any other relevant provisions of the agreement should be taken into consideration. 3. The overall purpose of the clause in dispute and the agreement should be considered. 4. Facts and circumstances known or assumed by the parties at the time that the document was executed are admissible. 5. Commercial common sense can be applied. 6. The subjective evidence of any party’s intentions should be disregarded. Commercial common sense - restricted Whilst the court in Arnold accepted that commercial common sense was an aid to construction, Lord Neuberger (with whom the majority agreed) went on to restrict the extent to which the court can rely on commercial common sense as an aid to depart from the actual language used in a contract: 1. Commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed. 2. The clearer the natural meaning of the words in the contract the more difficult it is to depart from it. 3. Commercial common sense is not to be invoked retrospectively. The mere fact that the natural meaning of a contract leads to a disastrous result for one party is not a reason for departing from the natural language. 4. The purpose of interpretation is to identify what the parties have agreed not what they should have agreed. A court should be slow to depart from the natural meaning simply because it appears to be an imprudent term for one of the parties, even at the time that they entered into it. There must nevertheless be a basis in the words used and the factual matrix for identifying a rival meaning.
Attorney General of Belize v Belize Telecom Ltd  1 WLR 1988 Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas)  UKHL 48 5 Hadley v Baxendale  EWHC Exch J70 6 Rainy Sky SA and others v Kookmin Bank  UKSC 50 7 Marley v Rawlings  UKSC 2 8 Arnold v Britton and others  UKSC 36 3 4
CONTRACTUAL INTERPERATION – END OF AN ERA?
5. When interpreting a contract, only those facts or circumstances which existed at the time that the contract was made and which were known or reasonably available to both parties should be taken into account. It was not right to take into account a fact or circumstance known only to one of the parties. 6. When an event occurs which, judging from the language used, was plainly not intended or contemplated by the parties, the court will give effect to the intention of the parties, if it is clear what the parties would have intended in that situation. Implied terms Lord Neuberger’s next opportunity arose in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited,9 where the Supreme Court unanimously clarified the requirements that must be satisfied before a term can be implied into a contract. This decision is confirmation of the English courts’ traditional approach to implied terms and provides welcome guidance on this area following the confusion and academic debate that followed Lord Hoffman’s Privy Council decision in Attorney General of Belize. Whilst the decision in Marks and Spencer plc does not change the fundamental test for implying terms –(that a term can only be implied where it is necessary in order to give business efficacy to the contract or where it is so obvious as to go without saying) - the decision clarifies how that is to be assessed. In the leading judgment, Lord Neuberger reviewed the tests set out in the key authorities on implied terms, including the leading case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings10 which held: ‘[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract’. Lord Neuberger approved that summary and then provided the following guidance for applying the test:
1. The implication of a term was ‘not critically dependent on proof of an actual intention of the parties’ - the court is concerned with what notional reasonable people in the position of the parties at the time of contracting would have agreed. 2. Care must be taken when using the ‘officious bystander’ test. It is vital to formulate the question posed by the bystander with the ‘utmost care’. 3. Business necessity and obviousness are alternative requirements rather than cumulative. Only one of them needs to be satisfied, but it is likely that if one were satisfied the other would be too. 4. Necessity for business efficacy involves a value judgment; it is not ‘absolute necessity’. Rather, ‘a term can only be implied if, without the term, the contract would lack commercial or practical coherence’. 5. A term should not be implied into a detailed commercial contract merely because it appears fair or is what the court considers the parties would have agreed if it had been suggested to them. (Lord Neuberger noted Sir Thomas Bingham’s comments in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd,11 that the parties may have deliberately chosen not to make provision for a particular eventuality for any number of reasons; they may not have been able to agree on what should happen and so chose to leave the matter undealt with in the hope that it did not occur.) 6. The ‘reasonable and equitable’ requirement will not usually, if ever, add anything to the analysis. If a term satisfies the other implied term requirements, it will almost inevitably be reasonable and equitable. Reasonable to imply a term Lord Hoffmann stated in Belize Telecom that the only question to be asked in the process of a implying a term was: ‘is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean’? This has subsequently been interpreted by some commentators as meaning that a term may be implied if it is merely reasonable to do so, seemingly diluting the traditional test. In Marks and Spencer plc, Lord Neuberger stated that there has been no such dilution and that Lord Hoffmann’s statement should not be interpreted as suggesting that reasonableness is a sufficient ground for implying a term.
Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited  UKSC 72 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20 11 Philips Electronique Grand Public SA v British Sky Broadcasting Ltd  EMLR 472 9
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CONTRACTUAL INTERPERATION – END OF AN ERA?
The decision in Marks and Spencer plc confirms that the ambiguous notion of ‘reasonableness’ does not play a central role in the process of implying terms and that the courts will instead take a strict approach. This welcome clarification upholds the principle of contractual autonomy and provides commercial contracting parties with greater comfort that their contracts, particularly where carefully and professionally drafted, will be taken to reflect the entirety of their bargain. However, there inevitably remains some scope for uncertainty in light of the requirement for the court to exercise a value judgment in establishing whether the contract would lack commercial or practical coherence without the implication of the suggested term. Implication of terms as an aid to construction Lord Hoffmann had suggested in Belize Telecom that the process of implying terms into a contract was part of the exercise of the construction, or interpretation, of the contract. In Marks and Spencer plc, Lord Neuberger emphasised that although they both involve determining the scope and meaning of a contract, the interpretation of a contract and the implication of a term are governed by different rules (and occur at different times) and the two processes must not be conflated. Conclusion Lord Hoffmann’s approach was akin to interpreting the contract as a conversation between the parties. Understanding a conversation requires the words to be understood in the context in which they are spoken, and an acceptance that even when a person ‘misspeaks’ the meaning of what they are seeking to convey is readily understandable.
Phillip Ashley Partner, Energy T +44 (0)20 7367 3728 E firstname.lastname@example.org
Lord Neuberger’s approach on the other hand requires a commercial contract to be treated as a legal document that has been agreed between sophisticated parties that have specifically chosen the words used. It follows that one has to interpret the contract in stages with the natural and ordinary meaning of the words on the page being the starting point. Lord Neuberger’s approach in Marley, Arnold and Marks and Spencer plc emphasises the importance of the actual words used in a contract. Unlike commercial common sense, the parties have control over the words used in a contract and are focussed on the issue covered by a clause when agreeing the wording. This approach also reinforces that rectification of a contract and implication of terms are not aids to construction but different processes. It is conceivable that Lord Neuberger’s approach may result in additional claims for rectification of a contract in the alternative to a claim for interpretation of a contract. A key practical effect of this is that when seeking rectification, parties are entitled to rely on evidence of the parties’ negotiations at the time the contract was entered into, which would not be the case in a claim for contractual interpretation. However, the test for rectification remains strict and, arguably, more difficult to overcome than the ‘red ink’ approach to construction adopted by Lord Hoffmann in Chartbrook. The decisions discussed above mark a shift in the English court’s approach to determining the meaning of contracts. For the time being, parties should expect the Supreme Court to favour a more traditional iterative ‘black letter’ analysis of contracts that commences by focusing on the words used by the parties in the contract.
Kushal Gandhi Senior Associate, Solicitor Advocate, Disputes T +44 (0)20 7367 2664 E email@example.com
BRIGGS REPORT - THE FUTURE STRUCTURE OF THE CIVIL COURTS?
The Briggs Report - the future structure of the civil courts? In January 2016, Lord Justice Briggs published his interim report on the future structure of the civil courts in England and Wales, following initial consultation. The report is part of a review commissioned by the Lord Chief Justice and the Master of the Rolls. It raises a number of ground-breaking proposals for reform, including a new Online Court, greater use of Case Officers, the potential unification of various courts and amendments to the right and route of appeal to reduce the workload of the Court of Appeal. As this is only an interim report, Briggs LJ requested further feedback in writing by the end of February 2016, ahead of a further consultation prior to preparing his final report by the end of July 2016. Online Court The most important and radical change proposed by the interim report is the creation of a new Online Court (‘OC’), designed for civil disputes of modest value (less than £25,000) and complexity to be resolved without incurring the cost of using lawyers. The report envisages the OC existing as a separate court with dedicated software, staff, rules and a rule-making body. Although there would be a monetary ceiling for claims brought in the OC, there are some cases which Briggs LJ proposes should be excluded, including: claims for possession of houses; claims for injunctions or other non-monetary relief; class claims; and claims by or against minor children or other protected parties. The process of bringing a claim in the OC would consist of 3 stages: triage (a largely automated, interactive online process for the identification of issues and the provision of documentary evidence); conciliation and case management (by Case Officers, explained below); and determination (involving telephone, video or face to face meetings, as appropriate). Case Officers Case Officers (formerly known as DJOs, or Designated Judicial Officers) are civil servants employed by Her
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Majesty’s Courts and Tribunal Services (‘HMCTS’) to carry out responsible tasks within the civil justice system, rather than judges. Briggs LJ’s interim report proposes the transfer of some of judges’ more routine and non-contentious work to Case Officers supervised by judges. As a necessary safeguard, parties are to have the right to have a Case Officer’s decision reconsidered by a judge. Briggs LJ also considers the role of the Case Officers in stage 2 (conciliation and case management) of the OC and cites the Financial Ombudsman Service adjudicators as an example of non-legal qualified employees performing a quasi-legal role. Number of courts Following on from the work of the Reform Programme, which the HMCTS embarked upon earlier in 2015, Briggs LJ has considered the theoretical unification of the High Court and the County Court into a Unified Civil Court. The conclusion of this review is that a case has not been made out for unification but should still be kept in mind. The use of regional centres, amendment of the divisional structure and the deployment of judges are considered as alternative areas for consideration in addressing the stresses on the structure of the civil courts. Rights and routes of appeal Briggs LJ highlights that, in recent years, the incoming work of the Court of Appeal has increased such that judges and staff are no longer able to absorb the increase simply by working harder or longer. In his interim report Briggs LJ addresses this issue from various angles, including increasing resources, reducing the Court of Appeal’s workload and improving efficiency. Although various suggestions are made, including increasing the threshold for obtaining permission to appeal, increasing the use of deputy judges in the Court of Appeal or the use of two judge courts, and the
removal of the right to oral renewal of permission to appeal (when permission has been refused on the documents), no firm solutions or recommendations are made. Instead, Briggs LJ says that such issues raise questions of public importance which deserve further and urgent consultation during the next stage of his review. Enforcement Briggs LJ also uses his report to consider the opportunity to review fundamentally the structure for effective enforcement of judgments and orders. Given that the only real difference between one judgment for the payment of a sum of money and another is the amount, Briggs LJ proposes that current enforcement procedures could be merged into a unified service (applicable irrespective of which court gave the relevant judgment). Comment The Briggs Report offers a real opportunity for businesses and lawyers alike to shape the future structure of the civil courts. The lengthy report is the start of that process and delivers some genuinely innovative proposals. In particular, there is a clear case that the creation of a new OC may deliver access to justice, at proportionate cost, for certain types of claim. However, the effectiveness of an OC will depend on the IT investment made and the parties, and the court itself, making good use of it. If parties are to pursue OC claims without lawyers, there is also an argument for the recoverable costs incurred to be fixed, as is the case in the small claims court. In any event, it is sensible to exclude certain claims from the OC. Consideration will now need to be given to the extent to which additional categories of claim should be excluded. The case for the expanded (judicial) role of Case Officers is less clear. An alternative to the automatic right to dispute a Case Officerâ€™s decision should be considered, as the likelihood is that an unsuccessful party will request a review regardless of the minor consequences proposed (thereby eliminating any costs savings in using a Case Officer to make the original decision). Also, Case Officers should ideally be legally qualified, perhaps based on the example of Clerkships in the US. Rather than referring to the responsibilities that a Case Officer would have as procedural matters, it may be practicable to identify undisputed matters as being more suitable to be put before a Case Officer (such as the sealing of a
Guy Pendell Partner, Solicitor Advocate, Disputes T +44 (0)20 7367 2404 E firstname.lastname@example.org
BRIGGS REPORT - THE FUTURE STRUCTURE OF THE CIVIL COURTS?
Consent Order, for example), with disputed, procedural, matters being determined by a judge. In order to maintain the international reputation held by the High Court, any suggestion of merging the County Court and High Court should be reconsidered. The key is for disputes to be determined by specialist judges and, if further consolidation is necessary, this could be achieved potentially through the creation of divisional/ cross-divisional specialist lists as has been done recently with the new Financial List in London. Provided that there is serious investment in IT and infrastructure in the regional centres, there is no reason that these should not be competitive with London. At this stage it is too early to say whether there is a case to justify a change to the rights and routes of appeal. In particular, more information is needed to assess the burden on the Court of Appeal and whether this is in fact excessive. In that event, consideration could be given to oral applications for permission to appeal being heard in a more concentrated fashion on a Friday, for example, with strict enforcement on length. Raising the threshold for obtaining permission and thus reducing the number of appeals being brought, or the use of deputies or only two judge courts, are cost saving initiatives with far reaching public policy implications. The unification of enforcement is a very good suggestion that ought to lead to significant efficiencies and costs savings. Overall the Briggs Report should be welcomed. There are, however, a number of matters it misses the opportunity to address. For example, although the establishment of a new OC will require IT investment, there is a clear case for significant investment in the IT infrastructure of the existing courts for the benefit of judges and court users. In a digital age, the courts could also offer more telephone hearings. This should be of particular assistance to parties not based in the UK and is already common practice in international arbitration. If you wish to read the interim report it can be accessed here : https://www.judiciary.gov.uk/civil-courtsstructure-review/civil-courts-structure-review-ccsrinterim-report-published/. CMS will be preparing a response to the consultation and your comments may be sent to: email@example.com
David Bridge Senior Associate, Solicitor Advocate, Disputes T +44 (0)20 7367 3021 E firstname.lastname@example.org
JUDGMENT FROM START TO FINISH IN 10 MONTHS: NEW HIGH COURT PROCEDURES, IF...
Judgment from start to finish in 10 months: new High Court procedures, if.... Two new pilot schemes providing shorter and more flexible litigation procedures have been introduced for claims issued in the High Court in London, running from 1 October 2015 until 30 September 2017. The Schemes aim to reduce the time and costs incurred by parties to litigation and provide a mid-point between the ‘rough justice’ of adjudication and full blown litigation. The new Shorter and Flexible Trials Pilot Schemes are available under the new Civil Procedure Practice Direction 51N. They can be applied to any claim issued in the Rolls Building, London (i.e. the Commercial Court, Technology and Construction Court, London Mercantile Court and the Chancery Division) subject to the specific limitations on the Shorter Trials Scheme noted below. Background The Schemes are a result of an investigation by a committee of Rolls Building Courts’ judges and legal practitioners into procedures that could be adopted in order to achieve shorter and earlier trials. The draft Practice Direction was the subject of a public consultation in May 2015. The aim of both Schemes is to ‘achieve shorter and earlier trials for business related litigation, at a reasonable and proportionate cost’ with the recognition that comprehensive disclosure and a full, oral trial on all issues is often not necessary for justice to be achieved. Certainly both Schemes should allow disputes to be resolved within a more commercially attractive timetable than is normally available in the courts. The Shorter Trials Scheme (‘STS’) The STS offers judgment within a year of the issue of proceedings through a revised, streamlined procedure. Aimed at straightforward cases, it is not suitable for those involving allegations of fraud, extensive disclosure, extensive witness/expert evidence, or complex cases with multiple issues or parties.
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In summary: —— Parties can issue cases directly onto the STS, or transfer existing cases across (provided that they are issued on or after 1 October 2015). —— The STS is not mandatory and whether the case is suitable for the STS is at the court’s discretion. —— Scope for parties to extend the timetable is limited. —— A simplified pre-action procedure replaces any otherwise applicable pre-action protocols. —— The length of statements of case, witness statements and expert reports are restricted (for example, a maximum of 20 pages for the Particulars of Claim). —— All proceedings will be heard by the designated judge as far as possible to reduce reading in time. —— Applications will generally be dealt with on paper. —— Disclosure is limited to documents relied upon or specifically requested. —— Trial length is restricted to 4 days (including reading time) and cross-examination is restricted. —— Costs budgeting will not apply unless otherwise agreed. The Flexible Trials Scheme (‘FTS’) The FTS enables the parties to agree a flexible, simplified and expedited case management procedure, with the aim of reducing costs and obtaining an earlier trial date.
JUDGMENT FROM START TO FINISH IN 10 MONTHS: NEW HIGH COURT PROCEDURES, IF...
In summary: —— Claims are issued as normal and parties agree the use of the FTS prior to the first Case Management Conference (‘CMC’). —— Once the use of the FTS is agreed, certain streamlined directions apply (subject to any modifications agreed by the parties) unless the court considers there to be a good reason why they should not. —— Disclosure is restricted, although it is wider than in the STS. —— Oral evidence at trial is limited to identified issues or witnesses, as directed at the CMC or agreed between the parties. —— Submissions at trial are generally made in writing, with oral submissions and any cross-examination to be subject to time limits decided at the CMC or agreed between the parties. Impact and Implications The Schemes aim to provide a heavily streamlined court procedure applicable for certain types of cases. Parties will need to determine at an early stage whether their dispute is simple enough to be suitable, which may prove difficult in some circumstances. The Schemes are also reliant on the court having sufficient capacity to hear claims within the expedited time period.
Stephen Netherway Partner, IRG T +44 (0)20 7367 3015 E stephen.netherway @cms-cmck.com
The nature of the Schemes and the ability to abridge the pre-action protocol timetable is striking. Unsuspecting defendants will need to be aware of short turnaround times for protocol responses and defences and the need for an early raising of any objection to the applicability of the Schemes. Any such application will have to be made promptly and normally not later than in advance of the first CMC. The FTS provides a slightly lower level of streamlining applicable to all cases, focusing mainly on reductions in disclosure and the shortening of trial lengths by the reduction in oral evidence and submissions and no doubt will be looked on favourably by the managing judge(s). If there is a dispute between the parties about the need for more extensive evidence than the Schemes may envisage, applications to oust the use of the Schemes will inevitably result. For those cases that, by their nature, are apt for determination within the Schemes, the court driven target of hearing and written judgment within 10 months of issue is really attractive. The courts’ appetite for a speedier and more streamlined dispute process will be determinative of the use of the Schemes – watch this space.
Alaina Wadsworth Senior Associate, Solicitor Advocate, IRG T +44 (0)20 7367 2722 E email@example.com
Sophie Newman Lawyer, IRG T +44 (0)20 7367 3659 E firstname.lastname@example.org
REFUSING TO MEDIATE – A RISKY DECISION
Refuse to mediate at your own risk Mediation, once rare, is now a standard part of the dispute resolution tool kit. Courts encourage parties to try alternative dispute resolution and in some jurisdictions even require it. For a majority of parties the option of a cheaper and quicker dispute resolution procedure is, save in the most exceptional cases, very attractive. Notwithstanding the strong track record for mediation, cases where parties refuse to mediate continue to make the legal news. In recent years there have been repeated cases where parties have tried to argue that they are too far apart to make mediation worthwhile, that the other side would never accept the offer they intend to make and given the strength of their case mediation would be pointless. Examples include: —— Garritt-Critchley and others v Ronnan and another1 —— Northrop Grumman Mission Systems Europe Ltd v BAE Systems2 —— Laporte & Anor v The Commissioner of Police of the Metropolis3
—— Reid v Buckinghamshire Healthcare NHS Trust4 The English courts’ position has been firm – the fact that another party’s proposals or position appear unreasonable is not sufficient reason to refuse to mediate – your beliefs about the merits of your case and your opponent’s tactics should not prevent mediation. Refusal to mediate can be costly However unreasonable your opponent appears, refusing to talk is a risky strategy. Courts frequently penalise non-participation in mediation through costs awards. If you succeed in court but previously refused to mediate, your opponent may be able to limit the sum it is obliged
Garritt-Critchley and others v Ronnan and another  EWHC 1774 (Ch) Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd (No 2)  EWHC 3148 (TCC) 3 Laporte & Anor v The Commissioner of Police of the Metropolis  EWHC 371 (QB) 4 Reid v Buckinghamshire Healthcare NHS Trust  EWHC B21 (Costs) 1 2
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to pay in reimbursement of your legal costs. If you fail in court and previously refused to mediate your opponent may well be entitled to a greater payment from you in respect of its legal costs. Given the potentially high cost of litigation these penalties can be significant and easily outweigh the moderate time and cost of mediating. Refusal to mediate may also mean that you have to pay costs on an indemnity basis, meaning your opponent will be freed from having to demonstrate that its costs are proportionate to the sums in dispute. Mediation pre and post litigation Interestingly, the recent cases make it clear that it is not only during the main proceedings that parties must consider mediation. Mediation may be relevant to any part of the dispute process – pre litigation and post. In Bristow v The Princess Alexandra Hospital NHS Trust and others5 the claim had been decided and the parties were arguing about what legal costs should be payable to the successful claimant. The claimant sought payment of the sums which it incurred in having to run a detailed assessment of its costs. The defendant argued there should be no order in respect of the costs of the assessment and, having delayed for three months, then refused to mediate in respect of these costs, arguing that the matter had already been set down for detailed assessment. The Senior Costs Judge found this approach to be unreasonable – mediation should be considered
for all elements of litigation, including a dispute over costs. It’s never too late It is worth bearing in mind that should you initially have failed to mediate, you can still try again and offer to mediate at a later stage; whilst imperfect, this may protect your position. In Murray and another v Bernard,6 the court found a later agreement to mediate was sufficient, there was not just one opportunity to mediate. Save for cases where emergency remedies are required, there can now be very few occasions when refusal to mediate can seriously be justified in litigation proceedings. The lack of incentives to mediate in arbitration, on the other hand, is becoming a striking difference to what is often seen as an efficient and cheaper alternative to litigation.
The position in Scotland: a different approach The Scottish courts have a considerably less hands on approach to mediation than their counterparts in England and Wales. In general there is no mechanism for the court to order parties to engage in mediation, although there are qualifications to this; in the commercial courts, judges have wide ranging case management powers. However, even there, the court has generally operated with a light touch when it comes to encouraging parties to mediate. The commercial court guidance states that ‘parties may wish to consider whether some or all of the dispute may be amenable to some form of alternative dispute resolution’. In practice, if parties wish to mediate the court is usually amenable to factoring this into the court timetable. However, parties will not currently be penalised by the court for failure to do so.
Gemma Lampert Partner, Disputes T +44 (0)131 200 7548 E email@example.com
Esther Duncan Professional Support Lawyer, Disputes T +44 (0)131 200 7506 E firstname.lastname@example.org
Jane Fender-Allison Senior Associate, Construction T +44 (0)141 304 6162 E email@example.com
Bristow v The Princess Alexandra Hospital NHS Trust and others  EWHC B22 (Costs) Murray and another v Bernard  EWHC 2395 (Ch) 5 6
ESTOPPEL BY CONVENTION
Estoppel by convention: ‘crossing the line’ of the common assumption Estoppel is a rare creature, which seems to be making more regular, if fleeting, appearances in disputes. Principles of estoppel are invoked where a party is unable to advance its case on the basis of the terms of a contract alone. An equitable concept, it operates to prevent a party from relying on some right if specific circumstances exist to make it inequitable to do so. That may arise by some express representation (estoppel by representation) or promise (promissory estoppel). In both cases there will need to be clear and unambiguous evidence of the representation or promise and of reliance by the innocent party on that representation or promise to give rise to the estoppel. A third category of estoppel, estoppel by convention, will be cited if no clear representation or promise can be shown. That will usually arise where other evidence is lacking and a court or tribunal is asked to look carefully at the other circumstances to determine whether estoppel can still be made out. Two recent cases have considered the principles of estoppel by convention, reminding parties of the high threshold required to succeed. Christopher Charles Dixon and EFI (Loughton) Ltd v Blindley Heath Investments Ltd and others ‘Dixon’1 In Dixon, the Court of Appeal examined the scope and applicability of the doctrine of estoppel by convention to cases of mistaken assumption and forgetfulness, in a matter where both parties had ‘forgotten’ about the existence of pre-emption rights attached to shares in a company. It held that there was no relevant difference between a claim founded on a mistaken assumption and a claim based on forgetfulness. If the elements of the test for estoppel by convention could be met, the estoppel would still apply. Background EFI and Mr Dixon appealed against a High Court decision upholding a transfer of shares in EFI to Blindley
Heath, the respondent company. The transfer, initiated by the other respondents, was alleged to be in breach of certain pre-emption rights held by Mr Dixon and other shareholders. EFI was set-up in 2000 to acquire a lease of land and buildings to provide business accommodation and various services on licence to small and start-up businesses. During 2001, the founding shareholders (which included Mr Dixon) agreed and signed a number of documents in relation to the transfer of shares in the company. Those documents provided, amongst other things, that no shares were to be transferred unless they were first offered pro-rata to the existing shareholders. The company operated smoothly until early 2009, when one of the founding shareholders died. After his death, Mr Dixon and another shareholder planned to take control of the company and in pursuit of that plan they acquired some of the shares of the other members. The shares were then purchased, in breach of the preemption rights, by a new company which they had formed.
Christopher Charles Dixon and EFI (Loughton) Ltd v Blindley Heath Investments Ltd and others  EWCA Civ 1023 1
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ESTOPPEL BY CONVENTION
Sale of shares to Blindley Heath Two of the founding members, Mr Bass and Mr Mingay, did not sell their shares to Mr Dixon. However, relations gradually turned sour and in 2011 a separate investor, the ultimate controller of Blindley Heath, offered to purchase Mr Bass and Mr Mingay’s shares. They agreed, and purported to sell their shares to Blindley Heath pursuant to a sale and purchase agreement. The other shareholders were informed of this sale at a board meeting in October 2011, at which no objections were raised. However, shortly after the meeting, Mr Dixon ‘re-discovered’ (on his own evidence) the pre-emption documents when looking through the company’s records. On the basis of these documents, the company blocked the sale to Blindley Heath, which then sought damages for deceit and/or breach of warranty of the sale and purchase agreement against Mr Dixon, EFI and the other shareholders. High Court decision At first instance, the judge found that there were valid pre-emption rights in place, but Mr Dixon and EFI were estopped by convention from relying on those rights to prevent the transfer of the shares. That was because the relevant parties shared a common assumption that there were no valid rights of pre-emption and had conducted themselves on that basis. It would also have been unconscionable and inequitable for Mr Dixon to rely on the pre-emption rights as a ground for blocking the sale, having himself acquired shares via his new company in 2009 without reference to those preemption rights. It is noteworthy that the judge also considered Mr Dixon an unreliable witness in light of certain actions and false statements he had made during the relevant period of the events in question. Court of Appeal decision Undertaking a full examination of the doctrine of estoppel by convention, the Court of Appeal refused Mr Dixon’s and EFI’s appeal. The court held that there were obvious examples in both parties’ behaviour which supported the judge’s decision that the parties had proceeded on a common assumption that there were no pre-emption rights over the shares. It was also noted that an estoppel by convention could not arise on the basis of a unilateral representation; it had to be consensual. Mr Dixon and EFI argued that the doctrine of estoppel by convention could not apply when the parties had simply forgotten that rights existed, rather than operating on a mistaken belief that they did not exist. The Court of Appeal did not agree, stating that a mistaken recollection ‘is not, to our minds, legally
different from a state of forgetfulness’. Whether the truth had been misremembered or forgotten made no difference as to whether the parties had in any event adopted a common assumption. What was relevant was the manner in which the assumption had been induced. It is not sufficient for one or (even) both parties to have acted on the assumption if there is no communication of that assumption. Before anyone could be estopped, they must play such part in the assumption that it would be unjust to allow them to ignore it. Such conduct must ‘cross the line’ enough to show their acceptance of the assumption (a question of fact which the judge must decide). At first instance, the judge was convinced that the parties’ conduct crossed the line sufficiently to show assent to the assumption. The parties actively conducted themselves on the basis that no valid rights of pre-emption existed; this was not a case of mere silence, inactivity or failure to take the point. The Court of Appeal saw no reason to depart from that view. There was similarly no reason to disturb the judge’s conclusion that it was unconscionable and inequitable for Mr Dixon to rely on pre-emption rights as a ground for blocking the sale – it would be unfair to allow a party who had benefited from the assumption to then reject it to prevent the other party obtaining a like benefit. Bibby Factors Northwest Limited v HFD Ltd and Another ‘Bibby Factors’2 In October 2013, Bibby, a factoring company which had purchased the debts of a supplier that subsequently fell into administration, commenced proceedings against customers of the supplier for failing to pay the sum due in respect of supplies made. The customers served a defence and counterclaim, and one of the three matters they raised concerned their entitlement to a rebate of 10% from the supplier for every supply in a given calendar year. At first instance, summary judgment was granted in favour of the defendant customers of the supplier. Bibby appealed the decision. The Court of Appeal considered whether the customers were estopped from relying on the rebate they were entitled to, on the basis of unconscionability, since they had been in contact with the claimant for 13 years regarding the outstanding debt, but had not referred to the rebate.
Bibby Factors Northwest Limited v HFD Ltd and Another  EWCA Civ 1908
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In this case, the Court of Appeal held that: ‘In circumstances where the customers were under no obligation to volunteer information about their arrangements there is no room for implying into the communications some representation that the customers would not rely on any rebate by way of set off.’ The customers had not communicated to Bibby that there was no right to a rebate by way of set off, and therefore, Bibby was not entitled to assume that the customers would not rely on the ability to claim the rebate. On the facts, there was no such conduct which gave rise to a common assumption, and, therefore, the customers could not be estopped from relying on set off. Conclusion The Court of Appeal’s decision in Dixon, confirms the extremely high threshold required to make out a case in estoppel by convention. There must be mutual conduct by the parties, based on a common (mistaken)
Guy Pendell Partner, Solicitor Advocate, Disputes T +44 (0)20 7367 2404 E firstname.lastname@example.org
16 | Disputes Digest
assumption of law or fact, which operates to bind the parties to their shared (mistaken) understanding. But there is still a fact-specific assessment to be carried out by the judge. The Court of Appeal did not hesitate to confirm the need for there to be clear conduct by the parties which unambiguously demonstrated their common assumption and demonstrated that the party estopped propagated the common assumption. The later ruling in Bibby Factors, is consistent with Dixon. Not invoking or relying on a right will not necessarily give rise to an estoppel by convention. There is no free standing obligation to provide such information to the other party about the terms of the contract (the question of whether or not a party has waived its rights is a separate issue that would need to be considered in light of the provisions of any contract between them and their conduct). In Bibby Factors, the parties’ conduct ‘had not crossed the line’ of common assumption. However, as with all cases or estoppel, whether the parties’ conduct crosses that line will be a question of fact to be assessed on a case by case basis.
Catherine Devine Lawyer, IRG T +44 (0)20 7367 3287 E email@example.com
International arbitration: ICC focuses on increasing efficiency and transparency On 5 January 2016, the International Court of Arbitration (the ‘Court’) of the International Chamber of Commerce (‘ICC’) announced the introduction of two significant new measures aimed at enhancing the efficiency and transparency of ICC arbitration proceedings. The appointment of arbitrators As of 1 January 2016, the Court will publish the name and nationality of arbitrators appointed to ICC cases. The Court will also publish whether the arbitrator was appointed by the parties or by the Court, and will indicate if an arbitrator is chairing the arbitral tribunal. The published information will not include the case reference number, parties, counsel, or the reasons for any change in the composition of the tribunal. Parties also have the option to opt out of disclosing details of the arbitrators appointed to their proceedings altogether, as well as having the option of disclosing additional information.
Costs sanctions for delayed awards Parties’ frustrations at the length of time taken for tribunals to render their awards are being addressed via costs sanctions in the event of an unjustified delay in submitting awards to the Court. ICC tribunals will be expected to submit awards within three months following the final substantive hearing or, if later, three months following the final written submissions (excluding costs submissions). Sole arbitrators will have a reduced deadline of two months in which to produce their draft awards.
In the event of a delay beyond the three/two-month deadline for the submission of a draft award, which is not justified by factors beyond the arbitrators’ control or exceptional circumstances, the Court may lower the arbitrators’ fees as follows: —— by 5-10% where there is a delay of up to seven months after the final substantive hearing or written submissions; —— by 10-20% where there is a delay of up to ten months after the final substantive hearing or written submissions; or —— by 20% or more where there is a delay of more than ten months after the final substantive hearing or written submissions. The Court will also have the option to increase arbitrators’ fees in circumstances where the tribunal has conducted the arbitration expeditiously.
International Centre for Settlement of Investment Disputes (‘ICSID’) are already published. These details reveal that a small pool of arbitrators are appointed in such a high number of cases that the parties appear to be willing to compromise efficiency for what they consider to be the right appointment for the case. However, the ICC’s introduction of costs sanctions for the delayed submission of awards is a welcome measure that reflects the growing suggestion that some form of financial incentive (negative or otherwise) should be imposed on arbitrators. Concern that such measures will force tribunals to ‘rush out’ awards of a lower quality is valid, but such arbitrators will either rapidly lose favour with parties, counsel and the ICC, or thrive if parties show themselves to favour efficiency over perfection.
A step forward for users of the ICC Court? There’s is no doubt that greater transparency which is aimed at increasing the time and cost efficiency of arbitral proceedings is to be encouraged. However, whether or not the publication of arbitrators appointed to ICC tribunals will achieve that aim is not clear. For example, details of the arbitrators appointed to tribunals relating to arbitrations administrated by the
Tim Hardy Partner, Disputes T +44 (0)20 7367 2533 E firstname.lastname@example.org
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Aimee Cook Associate, Disputes T +44 (0) 20 7367 3628 E email@example.com
Using international law and deal (re)structuring to protect foreign investments Given the proliferation of bilateral and multilateral investment treaties (BITs and MITs) and the developing body of case law interpreting such treaties, prudent investors will want to take into account the availability and quality of investment treaty protection when making or restructuring their foreign investment in a host country. Typically, treaty texts broadly define â€˜investmentâ€™ as anything other than an ordinary sales transaction. Investment treaties safeguard foreign investments against adverse host State conduct through a series of substantive rights as well as procedural guarantees by providing access to investor-State dispute settlement (ISDS) in the event an investment dispute arises with the host State or one of its agencies or instrumentalities. These treaties require diversity of nationality and provide standing only to investors who are nationals of a contracting State other than the State hosting the investment. Whilst more than 3,000 existing BITs have many features in common, they offer varying degrees of investment protection to nationals at different levels of the corporate chain. The nationality of natural persons is normally difficult to purposefully plan for investment
protection, (the outer limit in the ICSID Convention on the Settlement of Investment Disputes between states and nationals of other states (the ICSID Convention) being the requirement that an investor having dual nationality (through birth and/or acquisition) cannot also have the nationality of the host State). Investors have more freedom when it comes to corporate nationality. Corporate investors are able to structure their foreign investments so as to benefit from an investment treaty that offers maximum protection, including access to ISDS. We will highlight below common scenarios in which tribunals have scrutinised treaty coverage based on the investorâ€™s corporate nationality. Past ISDS rulings have
USING INTERNATIONAL LAW AND DEAL (RE)STRUCTURING TO PROTECT FOREIGN INVESTMENTS
nationality planning and provide a broad guide to protecting foreign investments through deal structuring or restructuring. Due to the wide variety of corporate structures and investment treaty configurations and an ever-evolving body of ISDS case law, foreign investors wishing to take advantage of investment treaty protection should obtain specialist legal advice regarding such protection when making or restructuring a foreign investment. Corporate nationality and investment protection In order to be eligible for investment treaty benefits, including access to ISDS, investors must, amongst others, fulfil the relevant nationality criteria. Whilst investment treaty requirements may vary from one treaty to another, corporate nationality is commonly established through a formal incorporation/seat test or a substantive link/controlling nationality test. The place of incorporation or corporate seat test Most investment treaties define corporate nationality by reference to the place of incorporation. For example, the Turkey-Lebanon BIT covers, amongst others, ‘legal entities, including companies, corporations, business associations and other organizations, including holding or offshore companies registered in either of the Contracting Parties which are constituted or otherwise duly organized under the law of that Contracting Party and having their headquarters in the territory of that Party …who have made an investment in the territory of the other Contracting Party’.1 As noted by one ISDS tribunal: ‘[a]s a general rule, States apply either the head office or the place of incorporation criteria in order to determine nationality. By contrast, neither the nationality of the company’s shareholders nor foreign control, other than over capital, normally govern the nationality of a company, although a legislature may invoke these criteria in exceptional circumstances’.2 Such an exceptional circumstance was decisive in a recent International Centre for Settlement of Investment Disputes (ICSID) arbitration3 brought on the basis of Guinea’s investment code. The tribunal overturned a French law presumption in favour of corporate nationality on the basis that the entire commercial activity of the French claimant was based in Guinea.
An investor may also stipulate the applicable nationality test in an investment agreement with the host State. If the contractual test is within the confines of mandatory law, including, if applicable, the ICSID Convention, ISDS practice 4 shows that the tribunal will enforce the parties’ agreed test. The genuine link or controlling nationality test As the place of incorporation or corporate seat is not invariably the relevant criterion for determining investor eligibility for investment treaty protection, it may not be sufficient to ascertain that a BIT is available in fact. Specific legal advice should be sought regarding the extent of treaty coverage. A number of investment treaties limit the scope of qualifying investors by denying the benefit of protection to entities having no substantial business activities in the country of incorporation or to entities that are not controlled by nationals of the country of incorporation. For example, the China-Colombia BIT requires corporate investors to ‘have their seat, as well as their substantial business activities’5 in the country of incorporation. Similarly, the Energy Charter Treaty (ECT) contains the following denial of benefits clause: ‘Each Contracting Party reserves the right to deny the advantages of this Part [III] to: (1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized’.6 In the absence of an express treaty provision, it is unclear when the host State may exercise its right to deny treaty benefits: some tribunals7 have sanctioned the withdrawal of treaty benefits by the host State even after an investment dispute has arisen, whilst tribunals sitting in ECT cases8 have held that the host State may exercise its right to deny treaty benefits only before the investor has made the protected investment. Conversely, a number of investment treaties9 extend protection to legal persons that are not incorporated in either of the BIT States, but are controlled, directly or indirectly, by nationals of a BIT State.
Article 1 of the Agreement between the Lebanese Republic and the Republic of Turkey on the Promotion and Reciprocal Protection of Investments, signed on 1 2 May 2004. 2 Société Ouest Africaine des Bétons Industriels v Republic of Senegal, ICSID, Decision on Jurisdiction, 1 August 1984. 3 Société Civile Immobiliere de Gaëta v Republic Guinea, ICSID, Award, 21 December 2015. 4 Autopista Concesionada de Venezuela, C.A. v Bolivarian Republic of Venezuela, ICSID, Decision on Jurisdiction, 27 September 2001. 5 Article 2.1(b) of the Bilateral Agreement for the Promotion and Protection of Investments between the Government of the Republic of Colombia and the Government of the People’s Republic of China, signed on 22 November 2008. 6 Article 17(1) of the ECT. 7 Guaracachi America, Inc. and Rurelec PLC v The Plurinational State of Bolivia, UNCITRAL, Award, 31 January 2014; Pac Rim Cayman LLC c. El Salvador, ICSID, Decision on Jurisdiction, 1 June 2012. 8 For example, Plama Consortium Limited v. Republic of Bulgaria, ICSID, Award on Jurisdiction, 8 February 2005; Yukos Universal Limited v The Russian Federation, UNCITRAL, Award on Jurisdiction, 30 November 2009. 9 For example, the Netherlands-Cuba BIT, signed on 2 November 1999. 1
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The permissibility of corporate nationality planning It is well-settled in ISDS practice that purposeful corporate nationality planning is in principle acceptable. In the words of one tribunal,10 ‘it is not uncommon in practice, and – absent a particular limitation not illegal to locate one’s operations in a jurisdiction perceived to provide a beneficial regulatory environment in terms, for examples, of taxation or the substantive law of the jurisdiction, including the availability of a BIT’. BITs ‘serve in many cases…as portals through which investments are structured, organized and, most importantly, encouraged through the availability of a neutral forum. The language of the definition of national in many BITs evidences that such national routing of investment is entirely in keeping with the purpose of the instruments and the motivations of the State Parties’. However, as discussed below, the investment treaty system cannot be manipulated by an otherwise ineligible entity to gain access to investment treaty protection, including ISDS, once a dispute has arisen. Investment treaty remedies for direct and reflective losses Shareholders may suffer harm as a result of adverse State conduct either directly, for example through the expropriation of shares, or indirectly, through the diminution of value of the investment vehicle. ISDS tribunals have consistently found that shareholders can claim not only for direct injury to their rights, but also for reflective losses suffered through injury caused to the company in which they hold shares. The extended standing derives from the express inclusion of shares as protected investments in most investment treaties. Moreover, when shareholders have such a direct right of action, it is immaterial for purposes of the tribunal’s jurisdiction that it was the company that has entered into a direct relationship with the host State.11 Foreigncontrolled domestic companies can also claim in ISDS on their own behalf if there is an express agreement to that effect in an investment treaty or agreement. Protecting foreign investments through deal structuring The multiplicity and diversity of investment treaties offer an opportunity for investors to route their investment through a jurisdiction that has concluded an investment treaty with the host State that offers favourable terms to the investor, such as broad substantive rights and liberal access to ISDS. Varying degrees of investment treaty coverage may be available at different levels of the
corporate chain, depending also on the nature of the relationship between the investor and the protected investment. Investments by majority shareholders Investors holding shares in a subsidiary incorporated in the host State are commonly covered by investment treaties on the basis that their shares qualify as protected investment under those treaties. This is consistently confirmed in ISDS practice. ISDS claims brought by majority shareholders have triggered jurisdictional objections when the named claimants were owned or controlled by nationals of the host State or a third State. In Tokios Tokeles v Ukraine12 and Rompetrol v Romania,13 the named claimants were incorporated in Lithuania and The Netherlands, respectively, and were owned and controlled by Ukrainian and Romanian nationals, respectively. In Saluka v Czech Republic14 and ADC v Hungary,15 the named claimants were incorporated in The Netherlands and Cyprus, respectively, and were owned and controlled by Japanese and Canadian nationals, respectively. The host States objected to jurisdiction arguing that the invoked BITs did not extend protection to investors owned and controlled by nationals of the host State or a third State. The predominant position deriving from the rulings in these cases is that, in the absence of a treaty provision, such as a denial-ofbenefits clause, and failing conclusive proof of abuse of legal personality by the investor, the tribunal will not override the formal corporate nationality of the claimant and thus will not give weight to the corporate control or effective seat of the claimant or the origin of capital funding of the investment. Notably, these cases were brought by shareholder claimants incorporated abroad. As mentioned below, the position may differ in ISDS cases brought under the ICSID Convention by foreigncontrolled investment vehicles incorporated in the host State. Investments by minority shareholders Minority shareholders are commonly covered by investment treaties, as confirmed in ISDS practice.16 Nevertheless, the terms of the relevant treaty and any rulings interpreting them should be thoroughly examined for any possible exclusions or limitations. For example, the China-Mexico BIT provides that ‘minority non-controlling investors have standing to submit only a claim for direct loss or damage to their own legal interest as investors’.17
Aguas del Tunari S.A. v Republic of Bolivia, ICSID, Decision on Respondent’s Objections to Jurisdiction, 21 October 2005. For example, CMS Gas Transmission Company v Republic of Argentina, ICSID, Decision on Jurisdiction, 17 July 2003. 12 Tokios Tokelės v. Ukraine, ICSID, Decision on jurisdiction, 29 April 2004. 13 The Rompetrol Group N.V. v. Romania, ICSID, Decision on Jurisdiction and Admissibility, 18 April 2008. 14 Saluka Investment BV (The Netherlands) v The Czech Republic, UNCITRAL, Partial Award, 17 March 2006. 15 ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary, ICSID, Award, 2 October 2006. 16 For example, CMS (n 11 above), Asian Agricultural Products Limited v Sri Lanka, ICSID, Award, 27 June 1990. 17 Article 13(8) of the Agreement between the Government of the United Mexican States and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, signed on 11 July 2008. 10 11
USING INTERNATIONAL LAW AND DEAL (RE)STRUCTURING TO PROTECT FOREIGN INVESTMENTS
Investments through locally incorporated vehicles Foreign investors may opt, or sometimes may be required, to incorporate a project or investment vehicle in the host State. These locally incorporated, foreigncontrolled companies may also be protected by treaties and can claim in ISDS in certain cases. Under the ICSID Convention, the foreign investor and the host State may agree that the locally incorporated investment vehicle be deemed a foreign company because of its foreign control. Similar provisions may be contained in investment treaties.18 These cases thus test corporate nationality by reference to foreign control.
or indirectly by persons of the same nationality as the host State.
The notion of ‘foreign control’ has been examined in ISDS practice. In AdT v Bolivia,19 the claim was brought by the local company controlled by a Dutch company through an intermediary incorporated in Luxembourg. The host State argued that the claimant was not covered by the Netherlands-Bolivia BIT on the basis that it was not ‘controlled directly or indirectly’ by nationals of The Netherlands as the relevant intermediaries were corporate ‘shells’ controlled by a US company. The tribunal upheld jurisdiction by distinguishing between legal and factual control and it observed that ‘where an entity has both majority shareholdings and ownership of a majority of the voting rights, control as embodied in the operative phrase ‘controlled directly or indirectly’ exists’.
In Siemens v Argentina,22 the investment was made through an intermediary wholly-owned by the claimant and incorporated in the investor’s home State. The tribunal held that in the absence of an express treaty exclusion of indirect investments, the ArgentinaGermany BIT protected the ultimate owner of the company incorporated in the same jurisdiction.
Similarly, the tribunal in Autopista v Venezuela 20 held that ‘direct shareholding confers voting right, and, therefore, the possibility to participate in the decisionmaking of the company. Hence, even if it does not constitute the sole criterion to define ‘foreign control’, direct shareholding is certainly a reasonable test of control’. The tribunal dismissed the host State’s argument that the US claimant was a corporation of convenience and held that the claimant’s exercise of its voting rights in a manner consistent with the Mexican parent’s strategy ‘show[ed] the group’s coherence’ and was ‘not sufficient to conclude that [the claimant] [was] a corporation of convenience’. ISDS tribunals21 have declined jurisdiction in ICSID cases where the named claimant was a locally incorporated vehicle controlled by nationals of the host State. In testing ‘foreign control’ in these cases, the tribunals pierced the corporate veil and held that share ownership is not conclusive proof of control when the formal nationality covers a corporate entity controlled directly
Investments through holding companies incorporated abroad The corporate chain also may involve one or more intermediaries incorporated in the investor’s home State or in a third State. A multi-layered corporate structure involving more than one jurisdiction may offer a choice of BITs to the investor, potentially granting multiple protections at one or more holding company levels and at the level of the ultimate beneficiaries.
In Lauder v Czech Republic,23 the claimant was a US citizen, who controlled a Dutch company which in turn owned the investment in the Czech Republic. The tribunal upheld its jurisdiction on the basis of the US-Czech Republic BIT. Based on the same facts, the Dutch company had also brought claims against the Czech Republic and controversially the two parallel proceedings led to conflicting awards on damages. Absent a treaty provision, ISDS tribunals have upheld their jurisdiction over indirect claims. For example, the nationality of the intermediate holding companies was disregarded in favour of the corporate nationality of the ultimate beneficiary of the investment in Waste Management v Mexico.24 Nevertheless, indirect claims with tenuous links between the investor and the investment can run into difficulties. In Standard Chartered Bank v Tanzania,25 a UK company wholly-owned, respectively controlled, Hong Kong companies which acquired a loan to a State-owned company in Tanzania. The claim was brought on the basis of the UK-Tanzania BIT. The tribunal acknowledged that ‘no bright line exists to determine how remote or near a corporate relationship should be in order to be considered relevant’. The tribunal distinguished between an indirect holding which ‘describe[s] a form of ownership implicating a chain of intermediate entities separating an asset from its ultimate shareholder’ and
For example, Article 26(7) of the ECT requires that the local entity claiming against the host State be controlled by investors of another Contracting Party. Aguas del Tunari (n 10 above). 20 Autopista (n 4 above). 21 TSA Spectrum de Argentina S.A. v Argentine Republic, ICSID, Award, 19 December 2008; National Gas S.A.E. v Arab Republic of Egypt, ICSID, Award, 3 April 2014; Gaëta (n 3 above). 22 Siemens A.G. v Argentine Republic, ICSID, Decision on Jurisdiction, 3 August 2004. 23 Ronald S. Lauder v The Czech Republic, UNCITRAL, Award, 3 September 2001. 24 Waste Management Inc v United Mexican States, ICSID, Award, 30 April 2004. 25 Standard Chartered Bank v United Republic of Tanzania, ICSID, Award, 2 November 2012. 18 19
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an indirectly made investment that designates ‘a type of action taken to implement an investment, when one person acts to invest through the agency of another’. The tribunal held that indirectly-made investments ‘involve investing activity by a claimant, even if performed at the investor’s direction or through an entity subject to investor’s control’, interpreted the BIT as requiring an ‘active relationship between the investor and the investment’ and concluded that, based on the facts of the case, no such relationship existed. Whilst the outcome is supported by the facts of the case and the wording of the applicable BIT, this case shows that tribunals may require a link between the claimant and the protected investments in ISDS cases involving multiple layers of intermediaries in the corporate chain. Investments by beneficial owners or grouped investors Some ISDS tribunals 26 have declined jurisdiction over claims involving investments held on behalf of a third party or made by a third party. If ownership title over the investment is divided between a nominee and a beneficial owner, the protected investor having to satisfy the nationality requirement is the beneficial owner. Similarly, if an investment is made by a consortium, the consortium leader or the qualifying consortium member may have no standing to bring ISDS claims on behalf of the consortium or the other consortium partners.27 Investments by portfolio investors Some investment treaties expressly exclude portfolio investors from their scope of protection. For example, the Denmark-Mexico BIT requires that protected investments are ‘created for the purpose of establishing lasting economic relations with an undertaking such as investments which give the possibility of exercising an effective influence on the management thereof’.28 In the absence of an express provision, portfolio investors are not per se excluded from investment treaty protection.29 However, the lack of an active relationship between the portfolio investor and its investment may present a jurisdictional hurdle that should be assessed in each case by specialist legal counsel based on the provisions of the applicable treaty and the evolving body of ISDS case law. Timing of the restructuring In ISDS the investor must meet the relevant nationality criteria on the date of the submission of the dispute to arbitration. A foreign investor may lose an existing investment protection if it restructures its investment
prior to the submission of the dispute to arbitration. Equally, an investor may acquire investment protection through a corporate restructuring following the making of the initial investment. In this regard, a distinction is made in ISDS jurisprudence depending on whether the claimant acquired its corporate nationality before or after the investment dispute had arisen. In Mobil v Venezuela,30 the tribunal found that a corporate restructuring was permissible so long as ‘the aim of the restructuring…was to protect [the] investments against breaches of [the investor’s] rights by the Venezuela authorities by gaining access to ICSID arbitration through the [Dutch] BIT. The Tribunal consider[ed] that this was a perfectly legitimate goal as far as it concerned future disputes’. The tribunal held that the investment protection acquired through corporate restructuring could not extend to pre-existing disputes, as that would constitute ‘an abusive manipulation of the system of international protection under the ICSID Convention and the BITs’. It is not always easy to discern when an investment dispute arises. In the words of the tribunal in Pac Rim Cayman v Salvador,31 an abuse of process in restructuring occurs once the relevant party can ‘foresee a specific future dispute as a very high probability and not merely as a possible controversy’. In light of the potential difficulties in identifying the point up to which an investor can legitimately gain access to investment treaty protection, it is advisable that investors secure investment treaty protection when making the initial investment, but in any event before the acts damaging the investments had been committed. Conclusion Foreign corporate investors may be able to maximise the protection afforded by international law against adverse conduct by the host State by drawing on existing ISDS rulings and examining the availability, extent and quality of investment treaty protection at different levels of the corporate chain at the time of structuring or restructuring their deals. The growing pool of investment treaties and related ISDS rulings offer a broad guide to legitimate and effective corporate planning. However, the multiplicity and diversity of investment treaties and the ever-evolving body of ISDS case law warrant in each case an in-depth investigation of the investment law framework applicable to the
Occidental Petroleum Corporation, Occidental Exploration and Production Company v The Republic of Ecuador, ICSID, Decision on Annulment of the Award, 2 November 2015; Guardian Fiduciary Trust Ltd, f/k/a Capital Conservator Savings & Loan Ltd v Former Yugoslav Republic of Macedonia, ICSID, Award, 22 September 2015. 27 Impregilo S.p.A. v Islamic Republic of Pakistan, ICSID, Decision on Jurisdiction, 22 April 2005. 28 Article 1 of the Agreement between the Government of the United Mexican States and the Government of the Kingdom of Denmark concerning the Promotion and Reciprocal Protection of Investments, signed on 13 April 2000. 29 Abaclat and others v Argentine Republic, ICSID, Decision on Jurisdiction and Admissibility, 4 August 2011; Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID, Award, 31 October 2012 30 Venezuela Holdings B.V. and others v Bolivarian Republic of Venezuela, ICSID, Award, 9 October 2014. 26
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planned corporate investment structure. Particular care should be exercised at the time of restructuring an existing investment so as not to inadvertently lose available investment treaty protection. Foreign investors rely on a beneficial legal environment when assessing country risk. As an integral part of such environment, investment treaty protection can provide an important safety net to foreign investors dealing with
Prof. dr. Pieter Bekker Partner, Disputes T +1 917 510 3537 E firstname.lastname@example.org
the host State or its instrumentalities or generally to investors relying on the legal framework of the host State in making their investment decisions. Therefore, whilst it is recognised that tax and accounting considerations may be of primary importance to an investor, investment treaty protection through deal structuring or restructuring should be considered alongside the traditional investment planning tools.
Csaba Kovacs Senior Associate, Disputes T +44 (0)20 7367 3485 E email@example.com
Pac Rim Cayman LLC v Republic of El Salvador, ICSID, Decision on Jurisdiction, 1 June 2012. 31
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Cyber|securÂŚity: the state of being protected against the criminal or unauthorised use of electronic data, and the measures taken to achieve this Cyber security is an issue which will continue to demand a place high on the board room agenda in 2016. Cyber breach incident response planning, awareness of forthcoming breach notification requirements in terms of the new European General Data Protection Regulations and cyber liability insurance should all be all key concerns for directors and senior executives.
What is Cyber? A ‘cyber’ attack is one which compromises (or seeks to compromise) the integrity, confidentiality and availability of data, systems and related assets. It is typically defined by security standards such as ISO/IEC 27002, the information security standard published by the International Organisation of Standardisation (ISO) and the International Electrotechnical Commission (IEC). The two key aspects of cyber liability are set out below: Cyber liabilty
What does it involve?
What losses could you suffer?
Network security liabilty
Compromises the integrity of systems or of critical assets in network infrastructure.
First Party: Business interruption costs, loss of revenue, increased operational costs, IT repair, restoration of lost/corrupted data, subsequent audits and loss of IPR exclusivity/ monopoly or first mover advantage. Third Party: Claims for business interruption by customers, negligent transmission of virus, damage to customer’s computer systems/data, breach of contract, conversion and breach of confidence.
Compromises duty of security, privacy and fair processing of data by individuals.
A board-room issue ‘Cyber security is not just an IT issue, and should be on the board-room agenda’: you would be forgiven for thinking you have heard that message before, because you have. But ignore the (repeat) message at your peril, because if ranked by commercial risk then cyber security remains a key priority for organisations again this year for very good reasons. According to the Information Security Breaches Survey commissioned by the UK government, the average cost to a large organisation in 2014 in consequence of a cyber security incident was in the range of £600,000 to £1.15m. Statistics for 2015 showed that for large organisations the costs incurred in dealing with an incident have almost doubled, and were found last year to be in the range of £1.46m - £3.14m (the equivalent figure for small businesses in 2015 was £75k - £311k, a less significant but still noticeable increase on 2014 figures of £65k - £115k). What should organisations do to prepare? Planning for a cyber attack requires a combination of environmental/physical, technical and human workstreams. This covers a broad range of activity, from
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Enforcement action from the UK Information Commissioner’s Office (‘ICO’) and other international regulators. A serious breach of data protection legislation can result in fines of up to £500,000 under the current regime, and may be fined based on a percentage of turnover in future legislation.
access restrictions, firewalls and penetration testing, to staff training, and financial risk mitigation, such as insurance. In order to mitigate the risk of a cyber attack, companies should consider: —— analysing their existing security processes; —— training their staff to be aware of, and how to avoid, potential data breaches; —— implementing technical measures to strengthen their defences to cyber hacks; —— actively monitoring and managing their security systems to keep them up to date with recognised security standards; —— identifying a disaster recovery/cyber crash team (internal/external); and —— cyber insurance. Cyber insurance Perhaps rather oddly, statistics suggest that the uptake of cyber liability insurance has decreased in the last twelve months (although there are fluctuations between different sectors). For example, only 39% of large organisations and 27% of small businesses reported having insurance that would cover them in the event of
a cyber security breach according to figures for 2015, these representing a reduction on the insurance uptake shown in the 2014 figures. One explanation for this may be that businesses are now more confident in their ability to rely on standard business disruption insurance policies in the event of a cyber breach, or that they are paying more attention to cyber threat intelligence. However, there remains a concern that some businesses are still not taking pro-active steps which recognise the threat cyber incidents pose across all business sectors, regardless of size. Whilst appropriate insurance cover ought to be on the executive agenda, it is not the only matter for discussion and action. Besides the value of insurance, lessons continue to be learnt from high-profile cyber security incidents as well as from industry simulations. In October 2015 TalkTalk hit the press after hackers attacked its website, stealing the confidential data of around 157,000 customers, in a breach which was expected to cost the company up to £35m in costs. The same month the inadvertent sharing of the personal details of patients at a London HIV clinic also made the headlines. Few organisations would agree that ‘all publicity is good publicity’ where the publicity arises from a cyber security incident. Recent statistics commissioned by the ICO confirm that if an organisation makes headlines on account of a cyber security breach, the risk of receiving a regulatory fine of up to £500,000 may be the least of its concerns considering the damage it may suffer to its reputation and customer base: 20% of people polled said they would definitely stop using a company’s services after hearing news of a data breach, while 57% would consider stopping. Most significant was the finding that 80% of people surveyed said they would think twice about giving their custom to an online company that had made headlines for failing to stop a security breach. According to the Information Security Breaches Survey results for 2015, 90% of large companies and 74% of small businesses had experienced a security breach (an increase of around 10% for both compared to the previous year), and both large and small businesses expected an increased number of security incidents in the coming year. The average number of breaches suffered by an organisation in the past twelve months stands at around 14 for large organisations and four for small businesses. Whilst more than two thirds of large organisations suffered attacks from unauthorised external sources last year (that figure being just 38% for small businesses), inadvertent human error accounted for three quarters of large organisations’ breaches, and for a full half of the worst breaches suffered. What these figures surely demonstrate is that a cyber incident is a ‘when’ rather than an ‘if’ for all businesses regardless of size or sector.
Preparation is key So what are the lessons to be learned? Time is clearly of the essence. According to the Hedge Fund Standards Board (HFSB) the best way to ensure a swift and sensible response to an incident is to have a cyber breach incident response plan in place. In December 2015 the HFSB undertook a cyber breach simulation in London. The report which followed that exercise highlighted that confusion over responsibilities can prevent an effective response to a cyber-attack and that managers should not consider cyber security as just an ‘IT’ issue, given the legal, compliance, investor relations and reputational issues involved. The simulation highlighted the importance of preparing in advance with a cyber security incident response plan which establishes responsibilities, pre-identifies external resources (such as regulators to whom notification should be given, legal advisers, technical support, and PR consultants), and critically speeds decisions in the fraught period after a breach is detected. In other words, having a cyber breach incident response plan ought to be regarded not merely as best practice for the bigger organisations, but as standard practice for all organisations. Around one third of British businesses now use the ‘10 Steps to Cyber Security’ guidance published by the UK Government to help organisations of all sizes take steps to assess risk and plan for responding to and managing a cyber security breach incident, and around two thirds of those businesses are FTSE350 companies. The guidance includes details on preparing an incident response and management plan for use in an emergency, and now also includes a new paper, ‘Common Cyber Attacks: Reducing The Impact’, helping to educate businesses on what a common cyber-attack looks like and how attackers typically execute them. Another initiative offered by the UK Government is the Cyber Essentials accreditation and badge. UK businesses of all sizes and across all sectors (public and private) can apply for a Cyber Essentials or Cyber Essentials Plus badge, which allows companies attaining either of the badges to advertise that they adhere to a government endorsed information security standard. A key aspect of any cyber or data security breach response plan is knowing the applicable notification requirements. Failure to adhere to notification requirements can result in regulatory fines even before the cost of the damage is taken into account. At present no general obligation to notify is imposed on organisations by the Data Protection Act 1998 (‘DPA’) in the event of a breach occurring (although the ICO does recommend the voluntary reporting by organisations of serious breaches). There are, however, various sectorspecific notification requirements relating, in particular, to the telecoms, financial services and health care sectors.
Significantly greater fines for data protection breaches The patchwork of notification requirements that exist not only throughout the UK, but throughout Europe, is, however, to become a thing of the past. In December 2015 agreement was finally reached amongst the European Commission, the European Parliament and the European Council on the terms of the General Data Protection Regulations (‘GDPR’). Although not expected to take effect for another two years, the GDPR will bring an end to the differing domestic data protection rules that currently exist across Europe. It will introduce a general, non-sector-specific obligation to report data breaches to a national data protection authority, with fines of up to the greater of €20 million or 4% of an organisation’s global annual turnover. Surely that alone is enough to ensure the issue gets space on the executive agenda, as well as space in the cyber breach response plan!
What CMS can do to help The CMS Cyber team provides expert advice on all information security and privacy breach matters. We have counselled dozens of organisations in responding appropriately to all manner of cyber and extortion attacks. The team offers a round the clock 24/7 service, operating in more than 30 jurisdictions. We have assembled a cross-disciplinary team with expertise in insurance, data protection, regulatory, intellectual property, IT and general commercial law, all with a thorough grounding in the commercial and legal issues arising from cyber breach. Our experience and breadth of knowledge in this field can help you fully prepare and overcome any information security and privacy breach matters you have. We also have significant experience and expertise in advising on computer forensic investigations, including online infringement issues and criminal actions, as well as managing the PR and communications aspects of such disputes. Please contact us if you would like to know more about how the team can help.
Graeme MacLeod Partner, Disputes T +44 (0)131 200 7686 E firstname.lastname@example.org
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Tom Scourfield Partner, Technology T +44 (0)20 7367 2707 E email@example.com
UNFAIR CREDIT RELATIONSHIPS: ONE YEAR ON FROM THE WATERSHED
Unfair credit relationships: one year on from the watershed There have been significant developments for lenders and other financial institutions since the Supreme Court clarified the effect of sections 140A to 140C of the Consumer Credit Act 1974 in Plevin v Paragon Personal Finance Limited. Twelve months on, it is interesting to consider whether the sands have shifted in the post-Plevin world when a borrower alleges that its credit agreement was unfair. It is one year on from the ground-breaking decision of the Supreme Court in Plevin v Paragon Personal Finance Limited,1 which considered the circumstances in which the courts can reopen a credit agreement because it is unfair.
In considering whether to make an order, the court will have regard to all matters it thinks relevant (section 140A(2)). Section 140B(9) reverses the burden of proof in relation to unfairness onto lenders, so it will be for the creditor to prove that the agreement is not unfair.
There have been significant developments for lenders and other financial institutions since the court clarified the effect of sections 140A to 140C of the Consumer Credit Act 1974 in Plevin. So twelve months on, it is interesting to consider whether the sands have shifted in the post-Plevin world when a borrower alleges that its credit agreement is unfair.
The watershed moment Ms Plevin took out a personal loan, together with payment protection insurance (PPI). 71.8% of the insurance premium was a commission, payable to the lender and her credit broker, but the level of commission was not disclosed to Ms Plevin. She argued that the non-disclosure of the commission made the credit agreement unfair. The court concluded unanimously that the non-disclosure was sufficiently unfair to justify the reopening of the credit relationship, heralding a step-change in how potent the courts regard the powers available to them under sections 140A to 140C.
The legislation Sections 140A to 140C give the courts wide powers to look again at a credit agreement that the borrower alleges to be unfair. Section 140A provides that the court may make an order under section 140B if it determines that the relationship between the creditor and the debtor arising out of a credit agreement (or the agreement taken with any related agreement) is unfair to the debtor because of: —— Any of the terms of the agreement or of any related agreement. —— The way in which the creditor has exercised or enforced any of its rights under the agreement or any related agreement. —— Any other thing done (or not done) by, or on behalf of, the creditor, either before or after the making of the agreement or any related agreement.
In finding for Ms Plevin, the Supreme Court ruled that the previous leading authority of Harrison v Black Horse Ltd2 was wrong. Harrison had suggested that lenders’ compliance with relevant regulatory rules could be determinative in assessing whether there was any unfairness. The Supreme Court clarified that while compliance with underlying regulation goes some way to assisting a lender facing an unfairness claim, it is not conclusive. In short, the view of the courts is that regulatory compliance is not the end of the story.
Plevin v Paragon Personal Finance Limited  UKSC 61
Harrison v Black Horse Ltd  EWCA Civ 1128 2
UNFAIR CREDIT RELATIONSHIPS: ONE YEAR ON FROM THE WATERSHED
Ms Plevin’s case was sent back to the County Court earlier in 2015 to decide the appropriate remedy. Although Ms Plevin sought a refund of the premium plus interest, the County Court held that the appropriate relief was a refund of the commission element only, not the entire premium. However, this may be cold comfort for an industry which had previously operated under the impression that it was the regulator’s considered view that the disclosure of commissions would hinder, not improve, the customers’ purchasing experience (for example, see paragraph 10.8 of the Financial Services Authority (as it then was) consultation paper 160 at www.fsa.gov.uk/pubs/cp/cp160.pdf) and that it was therefore acting appropriately. Unanswered questions Plevin made a splash, but left a number of questions unanswered. The court did not set out a precise or universal test for unfairness under sections 140A to 140C, leaving it instead to the courts’ discretion in each individual case. That has created a rather troublesome and uncertain vacuum for lenders, which carry the potentially onerous burden to prove that a relationship is not unfair when that is alleged by the borrower. It has fallen therefore to the Financial Conduct Authority (FCA), rather than the courts, to give more guidance on what unfairness might actually mean. Striking a balance Following Plevin, the two questions facing the financial services industry at the start of 2015 were: 1. In an industry focused on facts and numbers, where the alleged unfairness relates to the non-disclosure of the level of commissions, where is the tipping point between fair and unfair? 2. What will actually be unfair in a credit relationship between a lender and a borrower? In January 2015, the FCA announced its intention to gather evidence on trends in complaints made in respect of PPI, arguably one of the biggest retail finance challenges of the 21st century so far, with over 14 million customer complaints and £17 billion paid out by way of redress. The resulting consultation has provided the FCA with an opportunity to determine the potential impact of Plevin on the industry’s PPI complaints-handling processes. Accordingly, the FCA is currently consulting on: —— Introducing a deadline for the making of a complaint about PPI. —— A proposed new consumer communications campaign. —— New rules and guidance on complaints handling for PPI to take account of Plevin (www.fca.org.uk/static/ fca/documents/consultation-papers/cp-15-39-ppicomplaints.pdf). 3
It is important to remember that lenders that missold PPI are already giving full premium refunds, together with interest. That will not change. The consultation proposes that, in order to take account of Plevin, the nondisclosure of a commission in excess of a tipping point of 50% of the total PPI premium should raise a presumption of unfairness and, unless rebutted, should lead to redress based on the difference between the level of the commission and the tipping point, plus interest. With one of the biggest ever consumer redress programmes already underway, which has been ongoing since 2011, the financial services industry sees the sands shifting from underneath its feet on PPI as a result of the impact of section 140A. The consultation and its proposals are therefore currently attracting much interest and attention; responses were due by 26 February 2016. Discharging the burden of fairness While the FCA has taken centre stage in the last twelve months since Plevin, the courts have also produced some notable decisions on the application of section 140A and potential strategies for lenders seeking to discharge the burden placed on them by section 140B(9). Borrower’s knowledge The High Court has held that a US-qualified attorney bringing the claim was neither naive nor vulnerable, and that he would have had as much knowledge as the bank when it came to the financial health of his firm, for which he sought a loan for capital contributions (Barclays Bank v McMillan).3 McMillan highlights a number of individual angles in the case’s facts, which meant that the bank had successfully discharged its duty. While the decision was fact-specific, the relevance of knowledge and sophistication of a borrower is likely to be of more universal application when it comes to assessing section 140A. Summary judgment The High Court has reminded lenders that despite their potentially onerous burden of proof under the terms of section 140A, making use of procedural steps such as summary judgment can be effective (Axton & Axton v GE Money Mortgages Limited and another).4
Barclays Bank v McMillan  EWHC 1596
Axton & Axton v GE Money Mortgages Limited and another  EWHC 1343 4
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UNFAIR CREDIT RELATIONSHIPS: ONE YEAR ON FROM THE WATERSHED
Rejecting the suggestion in Bevin v Datum Finance Limited5 that for a lender to make use of summary judgment in a section 140A case is a virtually impossible exercise, the High Court in Axton took a more open approach and underlined that a summary judgment application, in the right cases, can be an appropriate remedy. Debtors’ conduct A debtor claimed, in the County Court, unfairness under section 140A in the context of a fixed sum loan agreement, secured over his home (Swift Advances plc v Okokenu).6 The facts of this case included deception by the debtor regarding his employment status when entering into the loan. The court held that a relevant factor in its consideration of fairness could be the debtor’s conduct, as well as the lender’s. The mendacity of the debtor was accordingly held to be one of the relevant factors for the purposes of Plevin. The decision is a welcome reminder that where a debtor has been dishonest, their conduct can, in certain cases, go to the heart of the assessment of unfairness.
Further claims Until Plevin, sections 140A to 140C had been something of a sleeping lion. Twelve months on, the roar of Plevin is now very much being heard. Plevin will, in the short to medium term, bring about a fresh wave of claims by borrowers, particularly in advance of any deadline fixed by the FCA for PPI complaints. Yet, since Plevin, there is a tension developing between the courts’ preference for flexibility in approach to both what constitutes unfairness and appropriate remedies, versus the FCA’s and industry’s demands for clarity and certainty. Section 140A’s broad definition of unfairness, combined with the robust remedies available to successful claimants, mean that it is likely that we will hear the echo of its roar for years to come in both the courts and the regulatory arena.
This article first appeared in the January/February 2016 issue of PLC Magazine http://uk.practicallaw.com/resources/uk-publications/ plc-magazine.
While these decisions are no doubt all helpful in some measure for lenders, they are perhaps still of frustratingly limited application, given the emphasis on the individual facts and circumstances of each case when it comes to section 140A. The landscape remains uncertain for lenders.
Colin Hutton Partner, Disputes T +44 (0)131 200 7517 E firstname.lastname@example.org
Phil Woodfield Partner, Banking Litigation T +44 (0)20 7367 2157 E email@example.com
Bevin v Datum Finance Limited  EWHC 3542 (Ch)
Swift Advances plc v Okokenu  CTLC 302 6
Update on privilege Whether documents attract legal professional privilege, and are therefore exempt from disclosure to the other party in a dispute, is often a real concern for clients. We are frequently asked what makes a document privileged and in what circumstances that privilege may be lost or waived. As highlighted by recent case law, the answers are not always straightforward. The recent case of Property Alliance Group Limited (‘PAG’) v Royal Bank of Scotland Plc (the ‘Bank’)1 highlights the difficult decisions to be made when deciding whether to run a defence which relies on matters that would otherwise be privileged. In this case, Birss J in the High Court decided that the Bank, by relying in its defence on a regulatory decision, had waived its legal advice privilege and without prejudice protection privilege in what would otherwise be privileged communications with those regulators. That decision is subject to appeal due to be heard in April 2016. PAG claimed that interest rate swaps it had entered into with the Bank had been affected by GBP Libor manipulation. PAG sought to inspect documents that related to previous investigations by, and negotiations with, prosecutors and regulatory authorities concerning the manipulation of other LIBOR rates. The Bank claimed privilege over these documents.
Internal investigations PAG sought inspection of documents relating to the Executive Steering Group (‘ESG’), a special committee formed by the Bank in 2011 to lead the various internal investigations into LIBOR misconduct. The Bank claimed that these were protected by legal advice privilege because, amongst other things, their external counsel were instructed by and reported to the ESG and prepared many of the documents. The court held that mere attendance and involvement in the ESG meetings did not mean legal advice privilege would automatically apply. While the external legal advisers had provided legal advice, they also carried out more administrative secretarial functions for the ESG and assisted in conducting an internal investigation. In June 2015, Birss J noted that if a document contained legal advice, that would be privileged (and could be redacted), but any factual summary in the document of the investigation findings would not be privileged. It was decided that the court would review the documents to assess whether they should be disclosed.
Property Alliance Group Limited v Royal Bank of Scotland Plc  EWHC 1557 (Ch)
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UPDATE ON PRIVILEGE
Snowden J took the task of reviewing the ESG documents and concluded that the documents were in fact privileged.2 The regulatory investigations gave rise to a ‘relevant legal context’ for the purpose of legal advice privilege. The documents formed part of the continuum of communications between the Bank and its legal advisers, the object of which was to give legal advice as and when appropriate. While the documents did contain factual and/or commercial advice, for example, tables prepared by external lawyers providing updates on the status of various investigations sometimes on the basis of public information or meeting minutes, they formed the basis of discussions between the Bank and its lawyers and were often used to input advice from the Bank’s legal advisers from other jurisdictions. Accordingly, the judge was unwilling to find that just because these documents contained some public information or commercial rather than legal advice, they were not protected by privilege. Snowden J suggested parts of minutes of meetings prepared by the external lawyers would not have been privileged had they been prepared by a bank employee, but because they formed an integral part of the provision of legal advice, they were privileged in this case. Ultimately, Snowden J relied on reasons of public policy to justify his decision: ‘[a] lawyer must be able freely to communicate…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…he would be most unlikely to commit such matters to paper, with the inevitable risk of misunderstandings as to the facts, the legal advice given, and the decisions taken’.3 Communications between the Bank and the FSA PAG sought to obtain copies of without prejudice communications between the Bank and the FSA (as it was then) in connection with the FSA’s investigation and Final Notice. The court held that communications between a firm and the FSA as part of genuine settlement discussions could, in principle, be withheld from inspection on a basis equivalent, though not identical, to without prejudice privilege. However, this right could not be maintained in civil proceedings, if the basis on which the Final Notice was decided is itself in issue in the proceedings. The Bank had pleaded in its defence that, ‘for the avoidance of doubt,
there have been no regulatory findings of misconduct on the part of [the Bank] in connection with GBP LIBOR’. The Bank was thereby considered to have put in issue the basis on which the regulatory findings were made (i.e. it positively relied on what is not in the Final Notice as supporting its denial). Birss J noted that the ‘communications on which the agreement is based might have been incomplete, mistaken or misleading (whether inadvertently or not)’. Accordingly, he ordered inspection of the documents. Documents disclosed to regulators The Bank claimed privilege in relation to six documents which had been shown to or handed over to regulators. PAG claimed that privilege had been waived in relation to these items. Birss J ruled that the Bank could, in principle, claim privilege as the documents were provided to the FSA for a limited purpose and on the express basis that privilege and confidentiality were maintained. However, inspection was ordered because the Bank relied on the regulator’s findings in its defence of PAG’s claim. Further matters Separately, on 20 November 2015,4 Birss J considered whether (i) audio recordings of discussions with the Bank secretly made by PAG during meetings and (ii) an email between PAG’s lawyers and a third party referring to these recordings (inadvertently sent to the Bank’s lawyers during disclosure), were protected by privilege. He decided that the audio recordings were disclosable, as the meetings were not for the dominant purpose of the litigation. In respect of the email, the Bank needed permission under CPR31.20 to use the email in subsequent proceedings, as it would have been obvious to a reasonable solicitor that it was likely to be privileged and that it had been mistakenly disclosed. Birss J granted the Bank’s application, although he imposed a cost sanction to reflect that the application should have been made at an earlier stage. Treatment of without prejudice privilege Elsewhere, recent case law has suggested that the English courts will not be persuaded easily to lift the protection offered by without prejudice privilege, particularly on the basis of waiver (Sang Kook Suh v Mace (UK) Limited).5 In this case, the Court of Appeal held that admissions made by an unrepresented party during a meeting with opposing counsel were inadmissible and protected by without prejudice privilege, (despite the fact that the meeting had not expressly been stated as being without prejudice, as any privilege had to be waived by both parties and had not been in this case).
Property Alliance Group Limited v Royal Bank of Scotland Plc  EWHC 3187 (Ch) Paragraph 44 of the judgment. 4 Property Alliance Group Limited v Royal Bank of Scotland Plc  EWHC 3341 (Ch) 5 Sang Kook Suh and anr v Mace (UK) Limited  EWCA Civ 4 2 3
UPDATE ON PRIVILEGE
Comment As noted above, the Bank has appealed Birss J’s decision in respect of the communications between the Bank and the FSA and the six documents disclosed to regulators. However, in the interim, this case illustrates the difficulties that arise in protecting legal professional privilege during internal/external investigations, prosecutions and settlement negotiations with regulatory and prosecuting authorities. To mitigate the risk of inadvertent waiver of privilege, parties should ensure that communications with, or provision of otherwise privileged documents to, regulators are conducted expressly on a confidential basis. Privileged documents should only be disclosed to regulators for a limited defined purpose, indicating an intention to preserve their confidentiality and privilege.
Finally, just because lawyers are involved does not mean that the resulting documents are always privileged.
Snowden J’s judgment provides some comfort that documents prepared by lawyers to inform discussions with their client in order to give legal advice will be privileged. However, in the context of an internal investigation, extreme caution still needs to be exercised to avoid the creation of unnecessary documents that may not amount to a communication concerning legal advice as the wider protection of litigation privilege may not apply.
Privilege: A Quick Guide Legal advice privilege attaches to: —— confidential communications —— between a lawyer and client —— for the purposes of seeking/receiving legal advice —— in a relevant legal context Litigation privilege attaches to: —— confidential communications —— where the dominant purpose is obtaining/receiving advice regarding anticipated or pending legal proceedings —— includes communications between the client/lawyer and a third party where ∙∙ legal advice is sought/received or ∙∙ evidence is being collated —— for the dominant purpose of the proceedings in question. Without prejudice privilege prevents parties relying upon: —— statements or offers —— made in the course of genuine settlement negotiations —— Communications can be submitted as evidence if an exception applies e.g.: ∙∙ when there is an issue as to whether the WP communications have resulted in a concluded settlement agreement ∙∙ where it evidences misrepresentation ∙∙ to evidence fraud, undue influence, perjury, blackmail or other impropriety ∙∙ where a statement may have given rise to an estoppel ∙∙ to explain delay ∙∙ as evidence about the reasonableness of a settlement ∙∙ on the question of costs when the parties have made ‘without prejudice save as to costs’ offers
Amy Smart Associate, Disputes T +44 (0)20 7367 3335 E firstname.lastname@example.org
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Alison Smith Senior Associate, Disputes T +44 (0)131 200 7868 E email@example.com
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The third edition of Disputes Digest, featuring commentary and analysis on the latest developments in disputes across the UK and beyond.
Published on Mar 18, 2016
The third edition of Disputes Digest, featuring commentary and analysis on the latest developments in disputes across the UK and beyond.