Issue 5 | October 2016 | Conference Edition
Disputes Conference 2016 Speed in disputes: when is faster better?
4 Conference programme 5 Speaker profiles 13 Will Lord Briggs’ proposed civil courts reform bring time and costs efficiencies? 16 A new statutory offence of failure to prevent economic crime 17 Need for speed in arbitral proceedings 21 Predictive coding – a faster, cheaper route to complying with disclosure obligations? 25 Conflict analytics: the game theory of legal dispute 30 Are you reducing the risk, and costs, of conflicts? 32 Multi-tiered dispute resolution clauses – what, where and do you want one? 34 Relaunch of the Professional Negligence Adjudication Scheme 36 The Financial Ombudsman Service: a speedy and effective form of ADR? 40 Fast-track CAT 42 Calls under performance bonds: greater leniency in Scotland?
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Introduction I am delighted to welcome you to CMS’ inaugural Disputes Conference (Speed in disputes: when is faster better?), and to the conference edition of our Disputes Digest, our periodic publication which features commentary and analysis on the latest developments in dispute resolution. We are fortunate to have a superb line-up of speakers attending our conference, including our first keynote speaker, Grant Dawson, GC of Centrica, and in-house speakers from RBS, Post Office Limited, Nokia and Hewlett Packard Enterprise. Throughout the course of today, our speakers will cover a broad range of topics, ranging from Robert Parnell’s talk on litigation from a game theory perspective, to discussions on the role technology plays in dispute resolution, better ways to manage your disputes and identifying the right time for Alternative Dispute Resolution. In keeping with our conference theme, this fifth edition of our Disputes Digest covers a variety of speed-related topics, including emergency procedures in arbitration, predictive coding technology, and ways to reduce the risk and costs of conflicts. We also take a look at reforms recommended or introduced by various courts and bodies, including Lord Briggs’ proposed reforms for the civil courts (and whether these will bring time and cost efficiencies), the Financial Ombudsman Service, the Fast Track Competition Appeal Tribunal and the Relaunch of the Professional Negligence Adjudication Scheme. If you would like to discuss any of the issues in this edition or which arise out of today’s conference, or wish to provide any feedback, please get in touch with me, the authors, the CMS panel chairs, or your usual contact at CMS. I hope you find today’s conference, and this edition of Disputes Digest, interesting and thought provoking. Thank you for joining us. Guy Pendell Partner, Disputes T +44 (0)20 7367 2404 E firstname.lastname@example.org
Conference programme 08:00 Breakfast 09:00 Registration 09:20 Welcome address – Stephen Millar, Managing Partner, CMS 09:30 Keynote 1 – ‘In-house reflections of litigation in the UK’ Grant Dawson, GC Centrica plc/Vice-Chair GC100 10:00 Panel 1: Litigation readiness: how do corporates choose to manage their disputes? Panel: Neil Stewart, Hewlett Packard Enterprise and Gaby Dosanj-Pahil, SSE. Chair: Guy Pendell, CMS 11:00 Panel 2: ADR: When is the right time? Panel: Rodric Williams, Post Office Limited and Karl Mackie CBE, CEDR. Chair: Tim Hardy, CMS 11:45 Panel 3: Emergency procedures: short cut or diversion? Panel: John Keith, BT and Michael Fealy QC, One Essex Court. Chair: Phillip Ashley, CMS 12:30
13:30 Keynote 2 – 'Litigation Settlement Delay: A Game Theory Perspective’ Robert Parnell, Settlement Analytics 14:00 Panel 4: Litigation: does reform always equal efficiency? Panel: Laura Durrant, RBS, Prof. Rachael Mulheron, Queen Mary University of London and Satyen Dhana, CMS Competition. Chair: Colin Hutton, CMS 15:05 Panel 5: Arbitration: fast track or slow lane? Panel: Caroline Waterworth, Nokia and Christopher Newmark, ICC. Chair: Adrian Bell, CMS 15:50 Panel 6: Technology: help or hindrance Panel: Anupam Razdan, RBS, Nick Rich, Stroz Friedberg and Tony Moss, British American Tobacco. Chair: Chris Baldwin, CMS 16:35 Closing remarks 17:00 Drinks and networking
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Speaker profiles Grant Dawson GC Centrica plc / Vice-Chair GC100 Grant Dawson has been Group General Counsel & Company Secretary of Centrica plc since the demerger of British Gas plc on 17 February 1997. Grant has overall responsibility for Legal, Regulatory, Ethics & Compliance and Secretariat activities across the Group and the day to day operating of the main board. Grant is a member of the Centrica plc Executive Committee. Grant is also Chairman of Centrica Storage Limited, the subsidiary which owns/operates the on-shore Easington Terminal and off-shore Rough platform, the largest UK gas storage facility. In addition, Grant holds three external appointments: Vice Chairman of the GC100, the association of FTSE100 General Counsel; Chairman of the CBI Competition Panel and he sits on the European General Counsel Association Committee.
Gaby Dosanjh-Pahil SSE Plc Gaby Dosanjh-Pahil is Head of Dispute Resolution at SSE PLC, having recently been appointed to manage and lead the group’s Litigation and Construction teams. As well as managing a team of claims handlers, litigators and constructions lawyers, most of Gaby’s time is spent leading sensitive internal investigations and providing strategic advice to executive and other members of the senior management team. Since 2006 Gaby has managed SSE’s litigation undertaking a wide variety of work including civil, health and safety, commercial disputes, Judicial Reviews, criminal and regulatory investigations. Gaby joined SSE as a legal advisor in 2002 before which she was a tenant at Victoria Chambers after completing her pupillage at 187 Fleet Street (formerly Temple Garden Chambers). Gaby completed her Bar Vocational Course at the Inns of Court School of Law and was called to the Bar in 1998. She studied Law at the University of Central England, during which she spent some time working at the Public Defenders Office in Miami assisting lawyers working with defendants who were facing the death penalty. Gaby is an associate member of the Chartered Institute of Arbitrators and the company secretary for Greater Gabbard Offshore Winds Ltd, which is currently one of the largest operational wind farms in England.
Laura Durrant RBS Laura Durrant is the Head of Litigation & Investigations at the Royal Bank of Scotland. Laura has responsibility for a team of lawyers and investigators based primarily in London and Edinburgh, who work across the bank globally on a very broad mix of litigation, regulatory and investigative matters. Prior to joining the bank in 2010, Laura worked for several years at Herbert Smith in London. While at Herbert Smith Laura worked very closely with RBS dealing with events surrounding the financial crisis, but her practice also involved a wide range of general civil litigation, white collar crime and regulatory matters.
Michael Fealy QC One Essex Court Michael Fealy practises across the broad range of commercial law, litigation and international commercial arbitration. He combines a busy and diverse commercial practice dealing with all the major issues of the day, with expertise in Energy Law and particularly Corporate Insolvency Law.
John Keith BT John Keith is Chief Counsel, UK Commercial Litigation, at British Telecommunications plc, with responsibility for all complex UK civil litigation matters. Prior to that, he was Chief Counsel, Employment, with global accountability for all labour-law issues concerning BT’s 102,000 employees. John studied law at the University of Oxford and qualified as a Solicitor at the legacy firm of Lovells LLP (now part of Hogan Lovells) in 2000. He gained 'Higher Rights of Audience' as a Solicitor-Advocate in 2004, allowing him to appear as an advocate to Supreme Court level and has substantial advocacy experience. He was appointed as a part-time Employment Judge in 2010 and as a Tribunal Judge in the UK’s Immigration and Asylum Chamber in 2014. His previous publications include as a co-author of Harvey’s supplement on Data Protection at Work.
Dr Karl J Mackie CBE CEDR Dr Karl J Mackie is one of the best-known names in commercial mediation practice as a founder of CEDR and top-ranked commercial and labour relations mediator. He has a background as a lawyer, business consultant and psychologist and has specialised in working with in-house counsel and mediating or facilitating complex legal and business disputes inside or outside the courts. In 2010 he became the only mediator ever to be honoured with Commander of the Order of the British Empire (CBE) for services to mediation. He is currently directing a CEDR project on business leadership and conflict.
Tony Moss British American Tobacco Tony Moss is currently Head of Discovery/Investigations at British American Tobacco. He has over 20 years’ experience of delivering business change and performance improvement across a global corporate legal environment. Proven domain expert in all areas of discovery and discovery practices including, developing and implementing discovery/e-discovery strategies and best practice across a global litigation environment. His expertise extends to all elements of the Electronic Discovery Reference Model (EDRM) with particular focus on full lifecycle management and exploitation of the latest developments in technology including data analytics and technology assisted review (TAR). Current responsibilities include the management of litigation driven law firm activity and large scale document discovery projects through a programme/project management governance structure, leveraging Legal Project Management (LPM) to increase efficiency and drive down external legal fees. 6 | Disputes Digest
Prof. Rachael Mulheron Queen Mary University of London Rachael Mulheron is a Professor at the Law Department, Queen Mary University of London, where she has taught since 2004. Her principal fields of academic research and publication concern Torts, Medical Negligence, Class Actions jurisprudence, and aspects of Civil Justice. In 2009, Rachael was appointed as a member of the Civil Justice Council. In that capacity, she has been involved in collective redress reform for many years, assisting Government and rules-drafting committees in that field; has chaired Working Groups tasked with the peer review of third party funding (2014), the reform of damage-based agreements (2014– 15), and the reform of concurrent expert evidence (2016), and will shortly chair a project which examines the present and future utility of 'before-the-event' insurance. Prior to her academic career, Rachael practised as a litigation solicitor in Brisbane, Australia.
Christopher Newmark ICC Chris Newmark has wide experience as both an arbitrator and a mediator. He sits regularly as chairman, panel and sole arbitrator under the rules of the leading arbitral institutions and in ad hoc proceedings, and was the first emergency arbitrator to be appointed under the 2012 ICC Rules of Arbitration. He conducts his mediation practice through CEDR Chambers, one of the UK’s leading groups of mediators. He is a mediator and arbitrator panellist for Sport Resolutions UK and a member of the panel of mediators of the Lausanne-based Court of Arbitration for Sport. He is the current Chair of the ICC Commission on Arbitration and ADR, a position to which he was appointed in January 2014.
Robert Parnell SettlementAnalytics Robert Parnell is the president and CEO of SettlementAnalytics, which he established in 2011 to bring the application of game theory and other analytic methods to the economic analysis of litigation and settlement bargaining strategy. Prior to founding SettlementAnalytics, Mr. Parnell had over 18-years of experience in finance and institutional investment management in analytic, risk management, portfolio management and executive roles. Robert holds a BSc in physics from King’s College London, an MBA from the Ivey Business School and a law degree from the University of London International Programmes. Robert is also a holder of the right to use the Chartered Financial Analyst® designation.
Anupam Razdan RBS Anupam Razdan is Head of eDisclosure at The Royal Bank of Scotland. He and his team are responsible for all eDisclosure/eDiscovery activities at the bank. Anupam is a U.S. qualified attorney and a former Engineer. His practice encompasses the disparate areas of law, technology and economics. He has represented both corporations and vendors in eDisclosure.
Nick Rich Stroz Friedberg Nick Rich is Vice President, Client Development, EDD Practice at Stroz Friedberg London, and is responsible for developing and expanding relationships with the firm's law firm and enterprise clients. His focus is on assisting clients to adopt practices, which create cost effective and repeatable workflows in specific matters, as well as helping them to design in-house processes to reduce ongoing litigation and investigative costs. He specialises in technologies to assist review, including for datatypes such as recorded voice, and brings expertise in machine learning systems. He brings over 20 years' experience in document analysis and management, and has spent the last six years implementing defensible processes for e-discovery and regulatory investigations.
Neil Stewart Hewlett Packard Enterprise (HPE) Neil Stewart is Associate General Counsel â€“ Director, Litigation Global Regions at HPE. The mission of the Litigation Global Regions group is to protect HPE's interests across the whole spectrum of significant litigation matters outside the US. They manage, monitor and accurately report on the HPE litigation portfolio for all countries across EMEA, APJ and LAC. Prior to this role, at HPE, Neil was Litigation Counsel and was responsible for managing the Litigation portfolio for UK&I (as well as some other jurisdictions). Neil was also the lead lawyer for the Affirmative Recoveries Program in the Regions.
Caroline Waterworth Nokia Caroline Waterworth qualified into a City law firm in 2002 and re-qualified as a Barrister in 2008 where she specialised in commercial and chancery matters. Caroline joined the Commercial Litigation team at Nokia in 2014 and is well acquainted with litigation and arbitration from any number of angles. She also contributes to various legal publications on Corporate Governance and insolvency.
Rodric Williams Post Office Limited Rodric Williams works in Post Office Limitedâ€™s in-house legal team, helping the business resolve the diverse disputes arising out of a business providing mails, financial, telephony and government products and services, on-line and through more than 11,600 branches serving 17 million customers and one-third of all UK small business each week. Prior to joining Post Office, Rodric worked in private practice law firms in London and New York, and as a barrister in New Zealand.
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SPEAKER PROFILES – CMS
Phillip Ashley CMS Phillip Ashley is a partner and Solicitor-Advocate who specialises in litigation and international arbitration relating to the oil and gas and power sectors and has advised on 'matters relating to oil and gas investments in every continent except Antarctica' (Global Arbitration Review). Prior to joining CMS he was in-house at an international construction and project management company. His interest in the process of resolving disputes goes back to University, where he studied Principles of Civil Procedure and Alternative Dispute Resolution as part of his LLM and was awarded the UCL Sir Jack Jacob Prize for Civil Justice.
Chris Baldwin CMS Chris Baldwin is a legal technology specialist with over 25 years of experience assisting lawyers and their clients with technology issues that arise in contentious matters. Formerly managing director of one of Europe’s leading litigation technology companies, he has been involved in international investigations across a breadth of markets and regulatory environments. He is engaged in the securing and analysis of electronic data collected relating to both direct regulatory investigations, and on behalf of client internal investigations. He directs a CMS team of technologists and review specialists and assists in the planning and execution of data related projects across CMS.
Adrian Bell CMS Adrian Bell specialises in the avoidance, management and resolution of complex disputes in the construction, engineering, infrastructure and energy sectors. He frequently represents clients in high value international arbitrations both under English and local laws. He also has a busy UK practice, which sees him acting in adjudications and court proceedings. He is a committee member of the Technology & Construction Solicitors’ Association and Chair of their Arbitration and International sub-committee. Adrian is credited by the legal directories as ‘successfully combining a magic mix of legal, strategic and commercial acumen’ and was recognised by Legal Week in 2016 as a ‘Rising Star’ in Litigation.
Satyen Dhana CMS Satyen Dhana is a partner in the CMS Competition team. He has over 10 years of experience advising on all aspects of EU and UK competition issues in a variety of industry sectors, in particular advising clients in the Financial Services, Consumer Products, Infrastructure and TMC sectors. He has advised on numerous merger notifications to the CMA, European Commission and in multi-jurisdictional cases, as well as on state aid, Article 101/Chapter I cartel investigations and Article 102/Chapter II dominance issues. Satyen is recognised in various legal publications, and is in particular noted for his commercial approach and client service.
SPEAKER PROFILES ‑ CMS
Tim Hardy CMS Tim Hardy is head of CMS‘ Commercial Litigation Team in London and deals primarily with disputes concerning finance, commerce, professional negligence, product and corporate reputations. He is a SolicitorAdvocate (Higher Courts Civil). He is a member of CEDR Select and the ICAEW’s Mediation Panels and a fellow of the Chartered Institute of Arbitrators and Chair of the Institute’s Practice & Standards Committee. He is a member of LexisNexis’ Dispute Resolution Editorial Board. Tim’s experience as a litigator, mediator and arbitrator covers a wide range of complex commercial and contractual disputes.
Colin Hutton CMS Colin Hutton has over 20 years' experience in dispute avoidance and resolution. He has acted for a wide range of clients and has significant experience working with financial services and energy sector clients. He also advises on shareholder disputes and disputes relating to corporate transactions. Colin specialises in the project management of the dispute resolution process and he advises clients on fraud issues and Bribery Act investigations. He is a keen advocate of alternative dispute resolution and regularly uses mediation to effectively resolve disputes.
Guy Pendell CMS Guy Pendell, is Head of Commercial, Regulatory and Disputes, and Head of International Arbitration at CMS. His main areas of work include international arbitration involving complex commercial and corporate/M&A disputes, TMC, international projects and finance disputes. Credited by the legal directories as 'giving clients the best chance of winning' he is an experienced solicitor advocate in arbitration, sitting as an arbitrator when workload permits. Guy is individually ranked for International Arbitration in Chambers and has been included as a legal expert in Who's Who Legal - Arbitration since 2013.
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LORD BRIGGS’ PROPOSED CIVIL COURTS REFORM
Will Lord Briggs’ proposed civil courts reform bring time and costs efficiencies? On 27 July 2016, Lord Justice Briggs published his final report on the Civil Courts Structure Review (CCSR) for England and Wales. The report followed several months’ consultation and review, which took place after the publication of Briggs’ LJ interim report on 12 January 2016. The final report sets out structural reform and in some cases a timetable for implementation. Online court Arguably the most eye-catching recommendation in Briggs' LJ interim report was the proposal to introduce a new Online Court (OC). The final report has developed this proposal, with firm recommendations as to the structure and procedure that the OC would adopt. The OC is meant to be a ‘civil solutions court’ with resolution at its forefront, rather than simply having the trial in mind. The OC is intended to be a new court, to be launched before April 2020, distinct from the County Court, to manage and decide less complex disputes of modest value (expected to be £25,000 and less, with potential for this threshold to rise to £50,000). It is envisaged that the OC will operate under its own simplified procedural rules, rather than the CPR. The rules are intended to be straight forward, to assist in increasing access to justice and to reduce the time taken to litigate lower value/less complex disputes. As set out in the interim report, a claim in the OC would progress through three broad stages: —— triage – a largely automated, interactive online process for the identification of issues and the provision of documentary evidence; —— conciliation and case management - conducted by a Case Officer both online and by telephone; and —— determination - either on the documents, by telephone, by video or at a face to face hearing as appropriate.
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The final report also envisages additional preliminary stages which would include essential guidance regarding dispute resolution, sources of affordable or free advice and even summaries of essential legal principles. These preliminary stages would also include a brief exchange between the parties to determine whether the dispute was suitable for court. Appeals from the OC are proposed to be heard by the County Court. Significantly, Briggs LJ recommends that the procedure for first appeals should be governed by the new OC rules, rather than the established procedure set out in the CPR. If implemented successfully, the OC would provide a fully digitised court system; enabling parties to issue claims online and proceed all the way through to a paperless trial should the claim not be solved in the interim. As Briggs LJ acknowledges, there is no recognisable precedent for this type of operation anywhere in the world. Case officers The final report has fleshed out how in practice Case Officers would take on considerably more ‘judicial’ and significant roles in terms of case management and decisions in the OC. Case Officers will be the ‘first legal mind’ that assesses a claim as it enters the OC system. As such, Briggs LJ places importance on the supervisory arrangements to be made to make this work: Case Officers should work in the same office space as judges. This would enable
LORD BRIGGS’ PROPOSED CIVIL COURTS REFORM
active recourse to supervision and guidance when necessary throughout the case management stages. This would also facilitate the transfer of a case to a judge when necessary, for example when complexities arise in a case making it more appropriate to be dealt with by a judge. The parties’ unfettered right to request reconsideration of decisions would remain but this would be expected to be used only rarely. The degree of judicial supervision of Case Officers should make it clear that reconsideration is unlikely to result in a different decision and Briggs LJ suggested the imposition of tight time limits for reconsideration requests or sanctions for abuse of this right, to keep the level of requests in check if necessary. Number of courts and divisions The overwhelming conclusion regarding the number of courts across the country was that no case should be too big to be resolved in the regions. As such, Briggs LJ recommends that the structure of the courts in the regions, whether in terms of number of specialist judges or centres, should be given the requisite investment in order to achieve this. Regional courts and centres should also benefit from a ‘ripple effect’ from London. For example, where the Rolls Building successfully pioneers new procedural techniques, these should be rolled out to regional centres as a matter of course so that the development or technique can be implemented across the board. With regard to divisional change, alternatives for reform set out in the final report include: —— the abolition of the boundary between Queen’s Bench and Chancery such that High Court judges from those divisions form a single group; —— retention of the divisional structure albeit with an adjustment of the boundaries; or —— retention of both structure and boundaries with an increased facility for cross listing. No firm recommendation is made at this stage, with a suggestion that the issue should be debated by the Judicial Executive Board. Briggs LJ is adamant nonetheless, that ‘no change should undermine the identity or international reputation of the Commercial Court, or the other specialist courts in the Rolls Building’. Mediation and ADR Mediation is understandably a recurring theme throughout the report. For example, in the OC, prior to reaching stage 1 (triage), the parties will be alerted
to alternative forms of dispute resolution. The OC should also emphasise to the parties that litigation is a last resort, only to be considered once the parties have engaged in ADR. At stage two, it is recommended that Case Officers actively identify and recommend suitable forms of ADR including online dispute resolution, telephone and face to face mediation as appropriate, and judicial Early Neutral Evaluation. In the County Court, proposed changes include the re-introduction of the funded National Mediation Helpline or an equivalent service. It also is recommended that the court provides free space for short mediations outside of court hours – another service that existed previously but was discontinued. The final report also identifies a bracket of civil claims of between £10,000 and £250,000 in value that are most at risk of suffering from a lack of ADR solutions. The report recommends that a court-sponsored low-cost mediation service is offered to address this swathe of claims where ADR is currently lacking. Briggs LJ also accepts that Online Dispute Resolution (ODR) as pioneered in the US, Netherlands and Canada has potential and likely a larger role to play in the settlement of claims of all values and types in England and Wales. Rights and routes of appeal Given that the recommended package of reform for the Court of Appeal from the March 2015 Genn/Balmer report had largely been implemented by the time of the CCSR final report, Briggs LJ made no specific recommendations at this level of the appeals system other than for the amendments to remain under constant review given the Court of Appeal’s heavy case-load. Briggs LJ was otherwise mindful that the appeal system in England and Wales must remain competitive, in terms of speed, on an international level. The proposal to possibly raise the threshold of the merits test from ‘real’ to ‘substantial prospect of success’ has been adjourned for further review so is likely to be revisited in the future as a possible way of reducing the volume of appeals across the whole court system. Enforcement Briggs LJ proposes that the County Court be made the single default court for enforcement, albeit with a permeable membrane allowing transfer of appropriate enforcement issues to the High Court. This step is intended to eliminate what he has called ‘haphazard differences’ in process across the different courts and to reduce what he considers to be excessive judicial involvement.
LORD BRIGGS’ PROPOSED CIVIL COURTS REFORM
Comment While Briggs LJ acknowledges that there are areas which are ripe for reform which fall outside the ambit of the CCSR, the final report has put the flesh on the bones of what was already an innovative plan in the interim report. The most significant modernisation in the form of the OC, should, in turn, presage the wider digitisation of court processes across the spectrum of the civil courts. Provided the expected and necessary investment is made in IT infrastructure, the OC has the potential to deliver tangible savings as a result of making the court process more efficient for eligible cases and to relieve pressure on the rest of the civil courts. The ideas set out in the final report regarding how Case Officers will be qualified and supervised, as well as ways of curbing an overuse of the right to request reconsideration of decisions are welcome and show potential for saving time and cost for litigants in person and small businesses. The report contains a definite focus on dispute resolution as a means to saving time and expense. For example, the OC which is at the centre of the report’s recommendations places emphasis on ‘solution’ rather than trial, and the report indicates that international examples of successful dispute resolution schemes should be investigated and possibly adopted, which could bring long term benefit and sustainability to the civil courts system.
Guy Pendell Partner, Disputes T +44 (0)20 7367 2404 E email@example.com
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The decision to resist the merger of the County Court and the High Court is also welcome. The international reputation of the High Court, built on the quality of its specialist judges, should not be risked. However, possible ways of reducing the number of appeals being brought, such as raising the threshold for obtaining permission, would have far reaching public policy implications. Making the appeal process even more challenging could threaten the attractiveness of the court system, for which the threshold for appeal is already high (and the test for second appeals even more so). A simplified and streamlined approach to enforcement should promise time savings. Whilst more complex cross border enforcement issues are still planned to be heard in the High Court, a unified approach for less complex enforcement actions would be a significant improvement on the current disjointed system and should speed up the process where possible. If you wish to read the final report it can be accessed here: https://www.judiciary.gov.uk/civil-courtsstructure-review/civil-courts-structure-review-ccsr-finalreport-published/.
Lisa Fox Associate, Disputes T +44 (0)20 7367 2377 E firstname.lastname@example.org
A NEW STATUTORY OFFENCE OF FAILURE TO PREVENT ECONOMIC CRIME
A new statutory offence of failure to prevent economic crime Observers at the G20 summit in September 2016 could be forgiven for focusing on Theresa May’s position on Brexit. However, amongst the Prime Minister’s other priorities for the coming legislative year was her vow to end ‘boardroom excess’ and make tackling corporate crime a key focus.
The Government now intends to consult on, arguably, the most significant corporate crime reform in UK history. It will be of interest to directors, business owners and senior managers, across both the private and public sectors, and all those with an interest in the ever-growing field of UK corporate crime legislation. The Government wants to extend the scope of the criminal offence of a corporation ‘failing to prevent’ offending, beyond bribery and tax evasion, to other economic crimes, such as money laundering, false accounting and fraud. What is the impact of the proposed change? Section 7 of the Bribery Act 2010 provides for an offence where a commercial organisation fails to prevent a member of its staff participating in bribery. A defence is available to organisations, where they can show that adequate procedures were put in place, designed to prevent bribery happening. At present, the offence extends only to bribery and corrupt practices, though the draft Criminal Finances Bill (published on 13 October 2016) now contains a similar offence in respect of failure to prevent tax evasion facilitation offences. The Government wants to go much further and extend the offence to cover all economic crime. The motivation behind this ambition is to ensure that the highest standards of corporate governance are maintained in the UK and that executives are no longer able to hide behind employees who actually carry out the relevant acts. By extending the offence in this way, the entity is held accountable for staff transgressions.
The Government’s intent was neatly summarised by Jeffrey Wright, Attorney General speaking at the Cambridge Symposium on Economic Crime: 'When considering the question ‘where does the buck stop?’ and who is responsible for economic crime, it is clear that the answer is to be found at every level, from the boardroom down. Both corporations and individuals are responsible.' A new reality: a carrot or a stick? At present, before a corporation can be prosecuted in the UK for economic crime, the ‘controlling mind’ of the company needs to be identified and evidence provided that such a person was actually complicit in the offence. This means that, intended or not, it serves senior executives well to distance themselves from knowledge of economic crimes (such as fraud) in the business, leaving the blame with more junior operational employees and thus, distancing the company itself from prosecution. The Government, as part of its drive to create a new corporate culture, wants this to change. Although it is rare to find evidence of fraud or money laundering at board or senior manager level, the proposed changes mean that an entity itself is likely to now take responsibility for failing to prevent crime, even if the offence sits at an operational level of the organisation. It is anticipated that for most companies, this new approach will lead to companies implementing and promoting good practices to ensure offences are not commissioned in the first place (if they are not doing so already). Senior executives who do not pay heed now face a greater risk of sitting on a board facing corporate prosecution.
A NEW STATUTORY OFFENCE OF FAILURE TO PREVENT ECONOMIC CRIME
Consequences: consider your next steps now
Planning for today and the future
The change has been described as the biggest reform to corporate crime in history, with its broad range touching every aspect of doing business as an entity in the UK.
If the offence is modelled on section 7 of the Bribery Act 2010, a similar defence should be available where an entity has put in place ‘adequate’ or ‘reasonable’ procedures with the aim of preventing the commission of an offence. There is no reason to expect this legislation not to be progressed and corporations should give consideration now to what this means for their organisation and take action to implement and/or update their procedures. A similar approach to the Bribery Act 2010 should be expected, with the relevant authorities issuing guidance on the offence and self-reporting. The disadvantage is that as a consequence, we can expect limited case law on what constitutes a breach, if the self-reporting route is likewise followed for this offence. Taking independent legal advice as soon as potential transgressions come to light is a sensible precaution.
The Government intends to move promptly to implement the offence following consultation, suggesting that businesses should be ready to take steps to adjust to this new environment. For companies with both UK and overseas interests, ensuring that appropriate oversight is maintained across international operations will be a key challenge to meet in the coming years, given the offence will likely have extra-territorial effect. For companies already engaged in anti-bribery and corruption efforts, this will add significantly to the burden for risk and compliance departments.
Colin Hutton Partner, Disputes T +44 (0)131 200 7517 E email@example.com
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Emma Boffey Lawyer, Disputes T +44 (0)131 200 7551 E firstname.lastname@example.org
NEED FOR SPEED IN ARBITRAL PROCEEDINGS
Need for speed in arbitral proceedings 'When we will get to a hearing? How quickly can we get a decision?' These are questions that will often be of paramount interest to parties to arbitration when proceedings commence. Although there was a time when ‘speed’ was frequently cited as a valuable characteristic of arbitration (by comparison with court proceedings) this is no longer the case.
For example, the Queen Mary International Arbitration Survey 2015 reported that only 10% of survey respondents (which were, in most instances, parties who made regular use of arbitration) cited speed as a valuable characteristic of arbitration. On the other hand, 36% of respondents cited lack of speed as one of the worst characteristics of international arbitration. Of course, while on many occasions speedy resolution of a dispute will be desirable (from the perspective of one or both parties to the dispute), in a smaller number of instances, speed will be absolutely critical; namely, where there is a need for emergency relief or implementation of protective measures. In recognition of this, in recent years many arbitral institutions have introduced emergency procedures. In this article, we take a look at the emergency procedures that are available to parties to arbitration, and the overlap between relief offered by arbitral institutions and the courts.
appoint an emergency arbitrator. SIAC granted all five requests, taking the total number of successful emergency arbitrator applications to 47 (as at 31 December 2015) since the introduction of these provisions in July 2010. By comparison, the LCIA did not receive any applications in 2015 for the appointment of an emergency arbitrator under Article 9B of the LCIA Rules. Remedies If a party is successful in its request for the appointment of an emergency arbitrator, it will then need to make its case for interim relief. When deciding whether to award an interim remedy, the emergency arbitrator will assess whether the harm in respect of which an emergency interim award is sought substantially outweighs the harm to the party affected by the measure if an award is granted. The emergency arbitrator has considerable discretion in this respect.
This process can work well:
Appointment The London Court of International Arbitration Rules (the LCIA Rules) (as well as the recently introduced new DIFC-LCIA Arbitration Rules (the DIFC-LCIA Rules)), the Singapore International Arbitration Centre Rules (the SIAC Rules) and the International Chamber of Commerce Rules (the ICC Rules) all provide for the appointment of an emergency arbitrator prior to the formation of the Tribunal, to conduct emergency proceedings and, if necessary, make interim orders. Appointments will usually take between one and three days, and an interim order could be granted within two weeks.
—— It reflects the agreement of the parties to resolve their disputes through arbitration – a selection which may have been made in international contracts because of concerns about biases or inadequacies of local courts and a desire to have a more commercial process. The parties can manage disputes without having to go to a national court.
To date, emergency arbitrator procedures have not been well used. In 2015, SIAC received five applications to
—— The choice of arbitration may reflect the fact that privacy and confidentiality is crucial – something which cannot be guaranteed in a publicly accessible court process. The application itself will not appear on any court lists, no legal press reporters can attend the hearing and there will be no reports of the decision in legal reports, national press or anywhere else. This alone may be enough to
NEED FOR SPEED IN ARBITRAL PROCEEDINGS
persuade an applicant in a highly sensitive dispute to seek the interim remedy through arbitration. —— Arbitral emergency remedies also work well where the parties are willing to be bound and will voluntarily comply with the emergency arbitrator’s award when made. —— It may be possible to obtain an emergency remedy through arbitration without having to provide a cross undertaking in damages. However, procedures in emergency arbitration will not mirror all of the robust powers of the English courts: —— The arbitral institutions will not be able to move as swiftly as the court. An arbitrator to hear the application should be appointed swiftly by the arbitral institution, but this may take a couple of days. It could then take a couple of weeks before a decision in made. The process is consensual and reflects the choice of the parties to resolve disputes through arbitration, but it is not as nimble as the court process when speed is of the essence. If for example the breach complained of is the dissemination of confidential data, a delay of days or even weeks will simply not be stringent enough in an era of electronic communications when damage can be done instantaneously. —— The emergency arbitrator procedures almost all require the process to be on notice to the opposing party, which may then challenge the appointment. This can be ineffective where the very nature of the protection sought will be undermined by alerting the breaching party that you are seeking to prevent their action. —— There will also be a cost to using an arbitral process, which is likely to outweigh the costs of going to court. This cost varies from institution to institution. —— Because the arbitral institutions will often appoint the emergency arbitrator there may not be the expected choice of candidates for arbitrator. This can be less than ideal in complex circumstances where the parties to an arbitration would want to choose a strong and specialist arbitrator and could lead to unpredictable outcomes. —— The emergency remedies in arbitration only bind parties which are bound by the arbitration agreement; an award from an emergency arbitrator will not bind a third party.
Gerald Metals SA v The Trustees of the Timis Trust & others  EWHC 2327
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—— If the institution brought in its emergency rules after the arbitration agreement was entered into by the parties, those rules may not be applicable unless the parties consent to their use. —— The decision of the emergency arbitrator is binding upon the parties but is subject to review, modification or termination by the arbitral tribunal and so is only a provisional award which protects the position until the final decision in the arbitration. This provisional status impacts on the enforceability of such awards. The rules of the arbitration institution may state that the decision is binding on the parties, but the arbitrator cannot include a penal notice as a judge might have done. In many jurisdictions it is unclear whether such awards carry with them a right of enforcement in the court. Without enforceability such awards lack bite and may prove worthless. Although breaching the award may cause the party difficulties in the final arbitration that may prove little consolation to the applicant who has sought the relief, as damages will not be adequate compensation. Overlap between court and arbitral emergency processes Whilst the preferred emergency process will vary from case to case, the limitations of the emergency arbitral processes continue to mean that the strong powers of the court will often remain compelling. However, following a recent judgment from the English High Court on this issue, the circumstances in which parties may seek court intervention may be restricted if arbitral emergency processes offer an appropriate remedy. In Gerald Metals SA v The Trustees of the Timis Trust & others,1 the claimant applied to the LCIA for the appointment of an emergency arbitrator, with a view to preventing the disposal of assets. The application was rejected and the claimant subsequently issued proceedings in the Commercial Court, under section 44 of the Arbitration Act 1996 (AA), seeking an urgent freezing injunction. Section 44(3) AA gives the court powers to make orders in support of arbitral proceedings about matters which include the preservation of evidence and the granting of an interim injunction if the case is ‘one of urgency’. However, this power is only exercisable if or to the extent that the Tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively (section 44(5) AA).
NEED FOR SPEED IN ARBITRAL PROCEEDINGS
The court declined to grant the relief sought on the basis that the tests for urgency in the LCIA Rules and section 44 AA were effectively the same, and it would be uncommercial and unreasonable for the court to accept the claimantâ€™s contention that the tests were different, in circumstances where the purpose of Articles 9A and 9B of the LCIA Rules is to 'reduce the need to invoke the assistance of the court in cases of urgency, by enabling an arbitral tribunal to act quickly in an appropriate case'. Whilst Gerald Metals suggests that parties will retain the ability to seek court intervention under section 44 AA where the arbitration process does not offer comparative protection â€“ for example if a remedy is needed immediately or in relation to a third party - it appears that the option to select court emergency processes may no longer be available if the parties are subject to an arbitration agreement and the available emergency arbitral procedures do appear to offer a remedy. This is not ideal, especially in circumstances where there are still questions about the enforceability of provisional arbitral awards. Gerald Metals is being appealed and so more clarity may be provided in due course. In the interim you should consider how and where to seek emergency relief with some care. Expedited formation of Tribunals The LCIA Rules (and the DIFC-LCIA Rules) also provide for the expedited formation of a Tribunal in
Gemma Lampert Partner, Disputes T +44 (0)131 200 7548 E email@example.com
circumstances of exceptional urgency, with applications to be decided as expeditiously as possible. If the application is granted, the LCIA Court may abridge any period of time specified in the arbitration agreement for the purpose of forming the Tribunal. The LCIA has previously expedited formation such that a Tribunal was constituted within 24 hours of receiving an application. In 2015, the LCIA received a total of 30 applications for the expedited appointment of Tribunals, of which 12 were granted, 17 were rejected, and one was withdrawn. The benefits of using this procedure is that the Tribunal that is constituted in this way will also hear the substantive dispute. For parties that wish to make a good impression on the Tribunal for the hearing of the substantive dispute, this route to formation of the Tribunal can have the effect of applying pressure on the relevant party to comply with any interim award. Conclusion Emergency procedures in arbitration are still in their infancy. Although the availability of such procedures is a step in the right direction, parties should be live to their limitations. Perhaps more importantly, in light of Gerald Metals, a party to an arbitration agreement who requires interim relief must give careful consideration to the most appropriate forum/s in which to seek that relief.
Kushal Gandhi Senior Associate, Solicitor Advocate, Disputes T +44 (0)20 7367 2664 E firstname.lastname@example.org
A CONTENTIOUS PREDICTIVE CODING SUMMER OF SPORT
Predictive coding – a faster, cheaper route to complying with disclosure obligations? The disclosure phase can be one of the most expensive and time consuming phases in a dispute. Prior to the Jackson reforms in 2013, the default position was ‘standard disclosure’, requiring each party to disclose documents which both support and adversely affect either party’s case. Although parties now have a wider variety of disclosure options available to them, standard disclosure continues to be the norm.
Since most ‘documents’ these days are held in electronic form, a disclosure order may require a party to identify relevant documents from a pool of hundreds of thousands, if not millions, of documents. Typically, parties have sought to reduce the pool of potentially relevant documents by limiting custodians, removing duplicates and near-duplicates and applying keyword searches and date parameters. Even though such measures usually have the effect of significantly reducing the pool of documents to be reviewed, the cost and time involved in carrying out human review of that pool of documents can still be significant. In recent years, parties have increasingly looked to technology for more cost (and time) efficient methods of review and in the landmark case of Pyrrho v MWB Property Limited and others (Pyrrho),1 the English courts have for the first time approved the use of predictive coding in disclosure. The Civil Procedure Rules When providing standard disclosure, a party is required to make a reasonable search for documents. In considering what would be a 'reasonable search', the Civil Procedure Rules (CPR) set out the following factors: —— The number of documents involved; —— The nature and complexity of the proceedings;
Pyrrho v MWB Property Limited and others  EWHC 256 (Ch)
20 | Disputes Digest
—— The ease and expense of retrieval of the documents; and —— The significance of any documents which are likely to be located during the search. The CPR provisions governing disclosure recognise that, in relation to e-disclosure, the parties should consider the extent of the search and bear in mind the CPR overriding objective, which requires that cases be dealt with proportionately. Although the CPR provisions contemplate the search for electronic documents, it is not set out in detail how such a search should be conducted, and the use of computer assisted programs is not considered. Some guidance is contained in Practice Direction 31B, paragraph 25, which recognises the use of 'Keyword Searches or other automated methods of searching if a full review of each and every document would be unreasonable.' One of the limitations of keyword searching is that it still requires considerable review time by human reviewers. If the keyword search terms are applied with the aim of returning a very small pool of documents, important documents may be missed; accordingly, one of the parties is unlikely to agree to such an approach. However, if the keyword search terms are too broad, the number of documents to be reviewed may still be considerable, in which case the time and cost consequences will be commensurate.
What is predictive coding? Predictive coding falls within the umbrella of ‘technology assisted review’ methods (TAR), which also includes deduplication and keyword searching. Predictive coding can be described as the evolution of keyword searching; rather than keyword programming, the software is programmed on the basis of a sample set of documents, which have been coded and determined by a human reviewer. Using the coding of the sample set, the software ‘learns’ which documents are likely to be relevant. The method of predictive coding will vary from case to case, however, broadly speaking, it involves the following steps: The parties settle on a predictive coding protocol, which includes defining the data set, custodians, confidence level and margins of error. A representative sample of documents is set to ‘train’ the software.
Applying the training it has received, the software analyses all the documents in the data set and ‘scores’ them for relevance. A sample of the relevant documents is reviewed by a human. The software will create a report of software decisions corrected by the human and this is fed back into the system for further learning. This process can be repeated as many times as necessary to bring the corrected software decisions to a level within the agreed tolerances. The software has to be trained for every single case and therefore the predictive coding process is unique and bespoke to each case. The use of predictive coding is relatively novel to the English disclosure process, although the technology has been used successfully for some time in other jurisdictions. Following Pyrrho, (in which the parties agreed on use of TAR and predictive coding), the High Court heard the first contested case on the suitability and application of TAR, in David Brown v BCA Trading2 (BCA) (discussed further below). In both cases, the courts allowed the use of predictive coding in the disclosure process, and in doing so
provided important guidance on its use. Previously there had been little guidance, although the use of TAR is contemplated in the judges’ e-Disclosure Protocol.3 The use of predictive coding in other jurisdictions There are no rules governing the use of predictive coding software, and prior to Pyrrho, there was little guidance and nothing by way of authority in the English courts, although the use of such software has been discussed. In 2009, Master Whitaker explained the e-disclosure problem clearly in Goodale v Ministry of Justice:4 '[There is] a serious practical problem for the case management of disclosure which is now occurring on a regular basis… [an]enormous volume of information is now created, exchanged and stored only electronically… [so] the incidence of paper disclosure is becoming less and less prevalent…'. He explained that it was important to decide not only the scope of the search, but how it was going to be carried out so that it was done correctly the first time. He also noted that 'a substantial industry has developed to handle the identification, collection, reduction and organisation for review of ESI'. Case law from other jurisdictions demonstrates the approaches to and the potential benefits (and downsides) of using predictive coding. In the United States, Judge Peck is at the centre of various cases recognising TAR and has offered his guidance on its use. For example in Moore v Publicis Groupe,5 Judge Peck recognised that 'computer-assisted review is not magic…the technology exists and should be used where appropriate'. The judge also explored the problems of using keyword searches and stated that it was the 'equivalent of the child’s game of ‘Go Fish’…[a] party guesses keywords [which] might produce evidence to support its case…without having much, if any knowledge of the responding party’s ‘cards’…'. In the three years since the Moore v Publicis case Judge Peck observed that the 'case law has developed to the point that is now black letter law that where the producing parties wants to utilize TAR for document review, courts will permit it'.6 In the recent Irish High Court case of Irish Bank Resolution Corporation Ltd v Quinn7 (Irish Bank), the judge, Fullam J, endorsed the use of predictive coding. Fullam J noted that since using TAR 'combines man and machines, the process must contain appropriate checks and balances'. In that case the use of predictive coding was not agreed by the parties but Fullam J considered
David Brown v BCA Trading Limited and other (judgment not yet published) http://www.tecsa.org.uk/sites/default/files/eDisclosure%20Protocol%20Version%2002%20-%209%20January%202015.pdf. 4 Goodale v Ministry of Justice  EWHC B40 (QB) 5 Moore v Publicis Groupe 11 Civ 1279 (ALC)(AJP) 6 Rio Tinto Plc v Vale S.A. 14 Civ. 3042 (RMB)(AJP) 7 Irish Bank Resolution Corporation Ltd v Quinn  IEHC 175 2 3
A CONTENTIOUS PREDICTIVE CODING SUMMER OF SPORT
that 'evidence establishes that in the discovery of a large data set…predictive coding is at least as accurate as, and, probably more accurate than, the manual... method'. The key question then turns to why a party wouldn’t want to make use of TAR in order to discharge its disclosure obligations. Factors in favour of predictive coding The claim in Pyrrho, which ran into the tens of millions of pounds, involved more than 17.6 million potentially relevant documents. The parties were obliged to provide standard disclosure by making a reasonable search for documents. The number of potentially relevant documents was reduced to 3.1 million documents by the process of electronic de-duplication, a practice which is widely accepted when dealing with electronically stored information (or ESI). In the Pyrrho decision, the court considered whether predictive coding should also be deployed and in doing so, identified a number of factors which support the use of predictive coding: 1. Experience of predictive coding in other jurisdictions demonstrates that this method can be useful in appropriate cases; 2. There is no evidence that the method is less accurate than carrying out a manual review or keyword searches. Indeed, there is some evidence in other jurisdictions which suggests the contrary; 3. Predictive coding provides greater consistency whereby the method is based on the computer applying a sample set by a senior lawyer, rather than a manual review of various lower grade fee-earners; 4. The CPR does not prohibit the use of the software; 5. The number of electronic documents which must be considered for relevance to the case; 6. The cost of manually searching documents; in Pyrrho, this would have been enormous; 7. The cost of using predictive coding software; in Pyrrho, this would have been far less expensive than the alternatives; 8. The value of the claim itself; in Pyrrho, the judge found that the costs associated with the software were proportionate; 9. The trial in Pyrrho was set for June 2017. If it transpired that the predictive coding method was proving 'unsatisfactory', there was still time to consider other methods; and
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10. Both parties in Pyrrho agreed to the use of the software and how to use it. The BCA case Just months after the decision in Pyrrho, the High Court decision in BCA provided further support for the use of predictive coding. In BCA the parties failed to reach agreement on the most appropriate and proportionate way to deal with the disclosure process. The petitioners wanted to adopt a ‘traditional’ approach to document review, including use of keywords and date parameters. The respondent (who controlled most of the relevant documents) argued that the cost of carrying out a review in this way would be excessive and that a more proportionate way to deal with disclosure would be to use predictive coding technology. Counsel for the respondent referred to the ten factors outlined in Pyrrho (above). Of those factors, number ten was not applicable, since the parties were not in agreement, and number four was neutral. The remaining eight factors also applied in BCA. On that basis, the court ordered that predictive coding should be used. This decision is significant not only because the parties did not agree on the use of the predictive coding technology, but also because the dataset only involved 500,000 documents (in the Irish Bank decision, the Irish High Court considered that predictive coding was only suitable for data sets containing more than one million documents.) A cost comparison In BCA, it was estimated that the cost of carrying out a traditional disclosure exercise would be more than two and a half times the cost of using predictive coding. Specifically it was estimated that the costs of conducting disclosure using TAR would be in the region of £132,000 with costs increasing significantly to between £250,000 and £338,000 if the ‘traditional’ approach was used. Case law from other jurisdictions suggests that cost savings are most apparent for data sets in excess of one million documents. However, regardless of the size of the data set, there is evidence that a significant cost saving can be achieved. The future of predictive coding As the use of TAR is still in its infancy in the UK, concerns have been voiced over the risks involved in its application; in many instances, those concerns are premised on a lack of understanding around the technology and how it operates, or that this method
of review will not prove as accurate as human review. However, although some cases may not be suitable for deployment of predictive coding technology, in most instances it will lead to a significant reduction in time and costs involved in disclosure, whilst providing a measurable level of accuracy. In the absence of any
compelling reasons not to use predictive coding, as Judge Peck in the US recognised TAR is no longer an 'unproven technology' and should be recognised as 'acceptable way to search for relevant ESI in appropriate cases.'8
What can CMS offer to assist in the disclosure process? CMS Evidence provides an in-house service which consists of CMS’ in-house review platform. This platform provides the support necessary for the collection, hosting, forensic analysis, review (including TAR capabilities) and distribution of evidence to our clients. CMS has the right blend of tools and resources to deliver an excellent end-to-end solution for clients, combining: —— Leadership and expert advice from your CMS partner; —— Secure online transfer of data from your teams (using CMS Collaborate); —— A proven review platform (CMS Evidence) to allow for efficient review of potentially relevant material; —— Experienced subject-matter expert lawyers to support and supervise the disclosure process and each review; —— Professional project management and process resources to ensure each review follows the required process; —— Technological resources to redact and produce the final bundle of disclosure documents (CMS Evidence); and —— An online platform to share bundles of evidence to be disclosed, along with any agreed metadata from the review process (CMS Collaborate). Please contact us if you would like to know more about how the CMS Evidence team can help.
Sarah Grenfell Partner, Disputes T +44 (0)20 7367 3549 E email@example.com
Emma Rodrigues Paralegal, Disputes T +44 (0)20 7367 2530 E firstname.lastname@example.org
Rio Tinto Plc v Vale S.A. 14 Civ. 3042 (RMB)(AJP)
CONFLICT ANALYTICS: THE GAME THEORY OF LEGAL DISPUTE
Conflict analytics: the game theory of legal dispute From an economic perspective, legal conflict has an inherently game theoretic quality to it. Disputes are a game of competing bilateral interests involving strategic interaction in the presence of a high degree of uncertainty. Sophisticated litigants already factor much of this complexity using experience, intuition and expert judgment. But since the mid-1980s a large body of theoretical research into the game theory of litigation and settlement has developed, providing a more formal analysis of the problems that confront litigants.
In this article we will examine the parallels between these formal and informal applications of game theory in legal conflict. Given that disputes themselves and the strategies already employed by corporate litigants are innately game theoretic, the more formal application of this analytic approach may be worth considering. The litigation game In the midst of a dispute, litigants attempt to solve two problems simultaneously. On the one hand they seek to maximise the strength of their legal case. At the same time, they seek to identify and implement legal and settlement bargaining strategies that will also maximise their economic outcome. This latter objective clearly involves substantial complexity. The economic outcome of any legal conflict is not simply a function of unilateral action or individual decision-making. The value that is extracted from or incurred in a dispute turns critically on bilateral processes including settlement bargaining and strategic interaction of the disputants throughout the entire pre-trial process. In this sense, economic optimisation in litigation and dispute resolution can be seen as a game theoretic problem. The parties make decisions in a bilateral context anticipating strategic responses. As the branch of mathematics devoted to games involving two or more players, game theory is thus aptly suited to the analysis of legal dispute.
Although they may not use game theoretic models in any formal sense, experienced litigants already recognise and attempt to factor this complexity in their decision making: they consider their opponent’s expectations; they weigh their own decisions in the context of these expectations; they anticipate strategic reactions to legal decisions and settlement offers, and they attempt to maximise wealth from settlement bargaining having regard to the risk of trial. Thus, participants in legal conflict already employ game theory – they just do so intuitively. In the place of mathematical models, they insert heuristic estimates. And in the place of a single mathematical solution to the settlement bargaining problem, they engage in the ‘price discovery’ process of iterative offer-counter-offer bargaining. Given the bilateral nature of disputes and the tendency of litigants to think and act strategically, it is perhaps surprising that the formal application of game theory has not been more widely embraced as a means of analysing and optimising dispute economics. Despite there being informal consideration of game theoretic ideas, when it comes to articulating the economics of conflict, attention has traditionally centred on the use of an older technology – that is, the expected value of going to trial. This is the well-known process of establishing unilateral expectations as to the outcome of a trial and computing its economic consequences.1
The expected value of going to court combines expectations as to the probability of winning, the likely award, expected costs, and cost shifting where applicable; all of which are discounted to adjust for the present value of future cash flows. 1
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CONFLICT ANALYTICS: THE GAME THEORY OF LEGAL DISPUTE
There is obviously some merit in this traditional analysis of trial. Just as claimants need to know that their claim is legally meritorious, they also need to know if it is economically sensible. And both litigants need to establish their individual valuation of going to court if only to define the rational economic limits of the familiar settlement bargaining zone (see Figure 1). Although it is an essential first step, this economic analysis has obvious deficiencies. In the first place, trial expected values and use of the settlement zone concept represent a unilateral description of an economic animal that is fundamentally bilateral in nature. While each litigant may consider their opponent’s economic exposure to continued litigation, the financial arithmetic of the settlement zone reflects a pair of unilateral opinions. Besides framing the settlement discussion, this rather simple model makes no attempt to solve the settlement bargaining problem – that is, it does not provide any guidance as to how the disputants should divide the ‘cooperative surplus’ comprising the combined costs that can be saved by avoiding continued litigation. And by focusing attention on trial expectations, the complex contribution of settlement to the value of a claim is overlooked – at least explicitly. Given the significantly higher incidence of settlement relative to trial, one could argue there is a tail-wags-dog quality about the traditional emphasis on trial economics. Trial expected value and the settlement zone* Claimant
Defendant Expectations: Award: £100 million Liability: 100% Costs: £20 million
are known to impact the value of a dispute, such as: i) the strategic interaction between the disputants; ii) the role of uncertainty; iii) the inherently contingent nature of legal claims; and iv) the value we ascribe to things like private information, its disclosure and the subtle informational exchange that takes place in the settlement bargaining process. These are all forces of dispute that play out bilaterally and which shape the economic landscape of conflict as much as they may influence its legal dynamics. The simple financial arithmetic of the trial expected value could be described as a ‘decision theory’ view of the problem. This being the theory of one-person games, the use of decision theory is more appropriate to an investment or purchase decision, where no one is pushing back on the other side. The decision theory description of litigation and its expected value framework could be said to fairly describe the state of legal-economic thinking as of the early 1970s. We see this reflected in papers by Landes (1971),2 Gould (1973)3 and Posner (1973).4 But in the 1980s game theoretic models of legal dispute began to emerge. These models use many of the same expectation inputs as their decision theory counterparts,5 but they differ inasmuch as they explicitly consider the role of both litigants and take account of their strategic interaction. In essence, a game theory model can be thought of as a combination of a set of rules as to how the particular game is played, as well as a set of assumptions regarding the attributes and motivations of its players. By describing games formally, and by imbuing players with certain stylised attributes, models of dispute can be expressed mathematically, and therefore potentially solved. Rather than hoping to discover the optimum strategy through trial and error bargaining, it can potentially be anticipated – and perhaps even influenced by modelling the dispute as a game. Solving the game of conflict
£80 million Trial Expected Value
£120 million Trial Expected Value
*Ignores cost shifting and time value for proposes of simple illustration
Figure 1. In addition to neglecting to make any formal consideration of settlement, the conventional model of trial ignores a number of other important factors that
The solution to a game theoretic model of legal conflict should be of interest to litigants because it identifies not an individual optimal course of action, but rather a unique pair of bargaining strategies that are simultaneously optimal for each litigant. By definition, neither party should be able to improve their economic interest by deviating from their part of this strategy pair. These are the essential elements of something called a ‘Nash equilibrium’, after the
William M. Landes, 'An Economic Analysis of the Courts.' The Journal of Law and Economics 14.1 (1971): 61-107. John P. Gould, 'The Economics of Legal Conflicts.' The Journal of Legal Studies 2.2 (1973): 279-300. 4 Richard A. Posner, 'An Economic Approach to Legal Procedure and Judicial Administration.' The Journal of Legal Studies 2.2 (1973): 399-458. 5 Game theory acts to enhance an existing expert system – it does not replace it. 2 3
CONFLICT ANALYTICS: THE GAME THEORY OF LEGAL DISPUTE
renowned mathematician and Nobel laureate John Nash. A Nash equilibrium, then, is the solution to a game involving two or more players. In the context of litigation settlement bargaining, such a strategy pair will typically identify the optimum settlement offer for one litigant, combined with a model of the rational strategic response for the opponent – that is, to accept or reject the offer with some probability. The exact nature of the response will depend on the type of game theory model being employed. Notice that the idea of an equilibrium is more analytically potent than a decision that is only unilaterally optimising, because it suggests strategies and an outcome that both players have an incentive to bring about or move towards. As such, one can imagine a ‘rational gravitational attraction’ to an equilibrium solution that might encourage players to pursue it. Indeed, empirical research has confirmed a degree of predictive value in certain game theoretic models.6 However, irrespective of their predictive value, game theoretic models of legal conflict offer useful normative guidance. This can include: theoretical estimates for the optimum settlement offer, the probability of settlement, the implied expected value of the trial award if a particular offer is rejected, and a broader measure of claim value having regard for the potential for settlement. Given the high degree of economic complexity associated with litigation, this is guidance that can help to bridge ‘the computational gap’ between the artificially clean lines of decision theory and the messier reality of a dispute. A solution concept What is perhaps most interesting about a game theory perspective of legal dispute is that by incorporating the essential strategic elements, it allows us to glimpse the real economic problem we are trying to solve as we navigate conflict, and to conceive of what the equilibrium solution might look like. In 1989, Cooter and Rubinfeld gave a succinct and elegant description of the broader problem facing litigants and sketched the outline of its solution as follows: 'When bargaining over distribution of the cooperative surplus, the players are uncertain about the extent to
which other parties will concede. A rational player will gauge his demands such that the gain from settling on slightly more favorable terms is offset by the increased risk of negotiations breaking down. The optimal strategy in settlement bargaining thus balances a larger share of the stakes against a higher probability of trial.'7 This is the familiar balancing act that all litigants attempt to achieve in settlement negotiations: to be sufficiently demanding that nothing is left on the table, but to make such concessions that trial is avoided if possible. The ‘gain’ that Cooter and Rubinfeld refer to is the combination of wealth contributions from both the potential for settlement and the potential for trial. We can think of this as the ‘wealth response’ to a settlement offer under conditions of uncertainty. In the final analysis, every litigant faces this binary probabilistic response to their settlement decision. Notice that this description of the problem and its solution is inherently game theoretic because it anticipates the increasing risk of rejection and impasse as one’s legal opponent responds strategically to a more aggressive settlement bargaining demand. Here we can see how a game theory view of a dispute takes us out of the one-dimensional framework of the settlement bargaining zone and into a two dimensional representation of the problem in which each possible settlement bargaining stance has a complex and probabilistic economic consequence. Visualising disputes A benefit of using a more formal game theory description of legal conflict is that it can be used to visualise the bargaining trade-off described by Messrs. Cooter and Rubinfeld. The graph in Figure 2 provides an illustration of the wealth response for a claimant across a range of settlement demands in a hypothetical dispute.8 Figure 2 reconciles with our intuition about settlement bargaining. We can imagine some settlement demand represented by point A that is so conciliatory that it would be accepted by the defendant with certainty. Accordingly, the wealth response at this point is comprised only of the proceeds of settlement. Conversely, there is some settlement demand represented by point B that is so aggressive that it would be rejected by the defendant with certainty.
The author has discussed these attributes of Nash equilibria elsewhere. See, Robert Parnell, 'Value in the Shadow of Conflict: IP Rights in Dispute', Intellectual Asset Management magazine, Issue 74, Nov/Dec 2015. 7 Robert D. Cooter and Daniel L. Rubinfeld, 'Economic Analysis of Legal Disputes and Their Resolution.' Journal of Economic Literature 27:3 (1989): 1067-1097, 1079. 8 Note that the exact shape and location of the wealth curves in Figure 2 will depend on the choice of model and the litigant’s input expectations concerning the dispute. 6
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CONFLICT ANALYTICS: THE GAME THEORY OF LEGAL DISPUTE
Wealth response to settlement demands (claimant) – Figure 2 £70m £60m
£30m Gains from settlement
Gains from trial
£20m £10m £0m
Settlement demand (claimant)
The wealth response in this case is comprised only of the economic consequences of going to trial. The middle ground reflects the potential for settlement and the risk of trial.
The reader can see that although game theory can certainly involve some complexity, the idea of maximising wealth over the dyad of trial and settlement is relatively straightforward.
Visualising disputes in this way, we can see that the problem litigants are attempting to solve is not the strict avoidance of trial or the maximisation of settlement, but rather the maximisation of wealth from the combination of both elements.9 This illustration of the bargaining problem also shows why the optimum bargaining strategy almost always involves some probability of going to court – because expected wealth is generally maximised when this is the case.
Analysis is not concession
Figure 2 The maximum wealth, represented by point C, thus balances the potential gains from an increased settlement demand against the increased risk of trial as suggested above. Because this description of the problem also factors the strategic response of the defendant, this wealth maximising settlement demand also represents the ‘solution’ to the bargaining game. Point C, then, is a visual representation of the Nash equilibrium for this particular dispute. More generally, Figure 2 shows that dispute has an interesting nonlinear economic shape to it.10
It sometimes happens that litigants will describe themselves as fundamentally averse to the idea of settlement. However, this policy does not have to be incongruent with the results of a game theoretic model. In fact, provided the litigant’s expectations and their aversion are internally consistent, the rationality of avoiding settlement would be revealed and confirmed by analysis. In Figure 2 this would show up in that point B (the demand that would result in a certain trial) would then be wealth maximising. Game theory is agnostic as to the question of settlement or trial. In a similar vein, the analysis of the settlement decision using game theory should not be construed as implying any particular willingness to settle or even concede. It is not to be confused with integrative bargaining notions such as ‘getting to yes’ or ‘win-win’ negotiation. In competitive game theoretic models, there is no inherent value attached to reaching agreement or finding an equitable division of the cooperative surplus. Modelbased game theory analytics is simply the rational
For a defendant, this ‘maximum’ is the minimisation of the equivalent negatives. Note, there are many different game theory models that can be applied. Figure 2 illustrates the shape of something called a ‘screening game’.
CONFLICT ANALYTICS: THE GAME THEORY OF LEGAL DISPUTE
examination of conflict and the optimisation of decisionmaking in a bilateral context. Game theorist, Nobel laureate and architect of US nuclear arms strategy, Thomas C. Schelling put it this way: 'To study the strategy of conflict is to take the view that most conflict situations are essentially bargaining situations.'11 Game theory gives us a way of exploring the bargaining situations that arise in litigation and in so doing it can shed light on legal conflict in general. However, it should be emphasised that all analytic approaches to law, whether they be data-driven or model-based, have their limitations. Theory always involves a degree of abstraction in the modelling process and game theory is no exception. As with any model or theory it is important to be aware of these limitations. By the same token, it must be said that the existing expected value model of trial already involves a high degree of abstraction. The settlement bargaining zone
Robert Parnell President and CEO, SettlementAnalytics T +44 (0)20 3287 9443 E email@example.com
Thomas C. Schelling, The Strategy of Conflict. Cambridge: Harvard UP, 1960.
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is a relatively crude representation of the real nature of a dispute, but it finds common application nevertheless. And if it was possible to deconstruct the heuristic models that litigants use in their attempt to wrestle with the bilateral complexity of a dispute, it is likely we would find not only abstraction, but error also. It is unlikely that our minds are naturally evolved to accurately factor the many inter-related and compounding bilateral forces that shape the value of risky contingent claims. In sum, as much as the law, legal strategy and the value of going to trial will dictate the strength of a litigantâ€™s case, there are tectonic economic forces playing out beneath the surface of a dispute that are equally influential to shaping its outcome. These forces are complex and bilateral and they are generally better described by game theoretic models of legal conflict than the conventional decision theory expression of trial value. Given the extent to which corporate litigants already recognise this complexity and employ these ideas intuitively, it may be beneficial to examine disputes with more formal game theoretic modelling.
ARE YOU REDUCING THE RISK, AND COSTS, OF CONFLICTS?
Are you reducing the risk, and costs, of conflicts? Many clients tell us that litigation is a major challenge - it is often costly and unpredictable, and businesses are increasingly subject to legislative and business controls, which only adds to the challenge. The good news is that proactive management of disputes can result in greater predictability, earlier resolution and a reduction in overall cost.
Reducing risk and costs: prevention is better than cure Businesses across all sectors face similar risks and challenges, particularly in relation to contracts and documentation. To help reduce the risk of a dispute arising, employees should be alive to the legal risks that arise during the formation of a contract, such as compromising on contractual protections and overpromising by sales teams. They should also understand the scope of contractual obligations once the contract commences. Even simple points, such as highlighting the timescales for the provision of services, or the deadlines and requirements for the service of notices, can assist to prevent disputes. Modern businesses receive, generate and store vast quantities of information. That imposes stringent data protection obligations, and exposes businesses to the regulatory, financial and reputational risks associated with cyber-crime. In particular, employees need to be aware of the risks of disclosing or losing confidential information. It is therefore vital to implement effective procedures for managing that information. The benefits are two-fold: first, well-managed information confers advantages both before and during disputes, by reducing risk and cost. Second, implementing robust information management policies (and ensuring that employees are aware and adhere to them), can mitigate the risks associated with data protection. Good information and document management should also make it easier to respond effectively to legal or regulatory complaints. Businesses need to have clear policies which set out how and where information should be held, how securely and for how long. The aim is to ensure that the right documents can be readily identified and accessed at the right time, so that they may be accessed effectively when the need arises.
The best laid plans Even with robust policies and practices in place, some disputes are unavoidable. Early engagement and case management can produce better and earlier results, as well as reducing costs. The key is to be proactive and strategic. You need to get in control of a dispute early, and stay in control. The following steps can help to achieve better outcomes in terms of earlier resolution and reduction in overall cost: —— Establish the nature of the dispute: for example, if the dispute involves a contract, identify the relevant terms, including any relevant obligations for the business. Check for provisions limiting liability, termination provisions, and dispute resolution and governing law clauses. Some contracts contain ‘escalation’ clauses that require various steps to be taken before a party commences litigation. —— Assess the financial consequences of the dispute: check both the amount in dispute and any potential larger financial impact to the business. Consider the amount that you could realistically recover from the other side, and what it could cost to achieve that. —— Identify and secure all relevant documentation and information and review that which is key: although this can be costly, the time and effort will usually be best way to understand the dispute properly. Do the documents support your business’ position? Similarly, speak with the individuals directly involved in the subject matter of the dispute to get their version of events. —— Involve the legal team: this is particularly important to ensure that documents obtain the protection of legal privilege.
ARE YOU REDUCING THE RISK, AND COSTS, OF CONFLICTS?
—— Undertake an early, comprehensive review of the merits of the dispute: what are the strengths and weaknesses of the parties’ respective positions? Is there a valid counterclaim? —— Assess the dispute objectively: try to understand the arguments being raised by the other side. —— Identify a realistic strategy: consider both what you want to achieve and what you want to avoid. But also consider the prospects of those outcomes and tailor your strategy accordingly. What degree of management input will be required? What is your business’ appetite for risk, including both financial and reputational risk? —— Consider appointing an independent expert to provide early technical analysis or opinion that could dictate the strategy for resolving the dispute? —— Establish whether insurance covers the dispute? Many insurance policies have strict requirements for the prompt notification of claims. —— Identify potential commercial considerations: is the other party a major customer, supplier, strategic partner or competitor? Are there any other relevant stakeholders? —— Communicate appropriately: ensure that all communications are clear, accurate and measured. Keep communications concise and specific. Don’t make demands or threats without the intention to follow through on them.
Colin Hutton Partner, Disputes T +44 (0)131 200 7517 E firstname.lastname@example.org
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—— Analysis of settlement: is it in your interests to settle? Consider, for example, the extent of your and the other party’s resources; the probable costs of the dispute; the merits of the case; and publicity and risks to your business’ reputation. Early and proactive engagement should improve the prospects of settlement, and reduce costs. —— Consider whether some form of alternative dispute resolution (ADR), such as mediation, is appropriate and attractive. Indeed, mediation should almost always be a consideration in the strategy for resolving disputes, however it is much more effective with a proper understanding of the issues, risks and figures of the dispute, and once you are in control of relevant data and evidence. Don’t let the dispute take control Dictate the shape of the dispute to match your strategic aims and to achieve a controlled exit. Although the precise profile of your legal spend on a dispute will be influenced by the circumstances of the case, the tactics of your opponent and orders made by the court, there are potentially significant savings in time and cost to be achieved by taking a proactive approach at the start. Don't let the dispute take control. [NB. a version of this article appeared in CMS’s Insight publication.]
Rory Thomson Associate, Disputes T +44 (0)131 200 7671 E email@example.com
MULTI-TIERED DISPUTE RESOLUTION CLAUSES
Multi-tiered dispute resolution clauses – what, where and do you want one? 'Multi-tiered' clauses, also referred to as 'escalation clauses' are a type of dispute resolution clause. As the name suggests a multi-tiered clause allows for a series of different tiers of dispute resolution, usually with increasing levels of formality and involvement from each party.
The idea is simple – if a dispute is not resolved at one tier the parties progress to the next, until they settle their differences or proceed to a final and binding form of dispute resolution. There are many options around how to structure a multi-tiered clause. Much drafting is bespoke. Otherwise sample clauses are provided by institutions (such as the International Chamber of Commerce and the London Court of International Arbitration) or are to be found in standard form contracts (such as building contracts). Typically the first tier will involve discussion among local representatives from each party to the contract and the top tier will be court or arbitration proceedings. Along the way parties can choose from 'friendly discussions', negotiation (perhaps with specified ranks of personnel, up to senior executives), mediation, expert determination, adjudication, dispute boards (whether dispute review boards or dispute adjudication boards) and others. Most clauses are relatively simple and have between two and four tiers. The exact details and the timescales to be followed at each tier are varied. Some clauses do not set out these details, leaving parties to fill in the gaps. Others are drafted unclearly, leaving parties to agree what exactly is required. When any of this needs to be done at the time of a dispute it can prove divisive. More importantly, it plays in to the critical question of whether these clauses are mandatory to follow or not, as explored below. Parties should therefore consider at the drafting stage how prescriptive they want to be and whether the process is intended to be mandatory.
Where are they used? Multi-tiered clauses are creatures of contract and can be drafted to meet parties’ requirements. They appear frequently in commercial contracts, supply contracts, building and engineering contracts, oil and gas contracts and PFI agreements. It is important to remember though, that a 'construction contract' which is subject to the UK’s Housing Grants, Construction & Regeneration Act 1996 will remain subject to statutory adjudication at any time, regardless of any multi-tiered clause which it may contain. Often multi-tiered clauses are used in larger contracts and projects, perhaps with multi-party or international elements, which might merit a more complex approach to dispute resolution. However they can also be drafted in short order for smaller or lower value ones. After all, disputes can arise on the most straightforward of contracts. Do you want one? Multi-tiered clauses can suffer the same fate as other dispute resolution clauses, where they may be the last clause to be looked at (if at all) before the contract is signed. But considering the range of dispute options available - and their vastly different processes and consequences - it is well worth giving your choice some thought. In the case of multi-tiered clauses there are plenty of advantages to consider. They can be drafted to suit a particular contract or project. They provide time for discussion and for getting to the nub of a dispute.
MULTI-TIERED DISPUTE RESOLUTION CLAUSES
They can bring in senior personnel (who may be more removed from a dispute) before involving a third party decision maker. These factors all encourage parties to iron out their differences before formal proceedings are raised. That in turn brings savings of time, money and better working relationships if court or arbitration can be avoided. Multi-tiered clauses have their disadvantages too. The additional steps before court or arbitration can take time which is not readily available, particularly if there is a question of time bar. An astute party may make the most of this when it suits. The extra layers of process can bring extra costs too. And on one view they are unnecessary â€“ a multi-tiered clause does not have to be written in for parties to choose to negotiate or mediate etc if they want to. A fundamental factor in considering a multi-tiered clause, is the question of whether or not it is mandatory. Not everyone will be; it depends on the drafting. Where
it is not mandatory, parties may choose to follow the tiers or not. Where it is mandatory, parties can insist upon compliance with the tiers or possibly raise jurisdictional arguments if they are not followed. Central to this issue is the principle that 'agreements to agree' or 'agreements to negotiate' are generally unenforceable under the laws in the UK. The courts have considered how this sits in the context of multitiered clauses and what is required to make a multitiered clause mandatory. In a nutshell the courts have taken the position that where there is 'sufficient certainty' as to the processes that must be followed a multi-tiered clause will be treated as mandatory ahead of proceeding to court or arbitration.1 That all comes down to the drafting. Setting out well defined tiers which require no further details to be agreed, with processes for appointing third parties like mediators, using fixed timescales and specifying out the obligations on each party clearly will all help to make a multi-tiered clause stick.
An example of a 2 tier dispute resolution clause is the LCIA-recommended clause for mediation and arbitration, which provides as follows: 'In the event of a dispute arising out of or relating to this contract, including any question regarding its existence, validity or termination, the parties shall first seek settlement of that dispute by mediation in accordance with the LCIA Mediation Rules, which Rules are deemed to be incorporated by reference into this clause. If the dispute is not settled by mediation within [............] days of the commencement of the mediation, or such further period as the parties shall agree in writing, the dispute shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause. The language to be used in the mediation and in the arbitration shall be [............]. The governing law of the contract shall be the substantive law of [............]. In any arbitration commenced pursuant to this clause, (i) the number of arbitrators shall be [one/ three]; and (ii) the seat, or legal place, of arbitration shall be [City and/or Country].' LCIA - http://www.lcia.org/Dispute_Resolution_Services/LCIA_Mediation_Clauses.aspx
Jane Fender-Allison Senior Associate, Construction T +44 (0)141 304 6162 E firstname.lastname@example.org
Such as Cable & Wireless Plc v IBM United Kingdom Ltd  EWHC 2059 (Comm); Wah (Aka Alan Tang) & Ors v Grant Thornton International Ltd & Ors  EWHC 3198 (Ch); Emirates Trading Agency LLC v Prime Mineral Exports Private Limited  EWHC 2104 (Comm). 1
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RELAUNCH OF THE PROFESSIONAL NEGLIGENCE ADJUDICATION SCHEME
Relaunch of the Professional Negligence Adjudication Scheme May 2016 saw the re-launch and expansion of the professional negligence adjudication scheme which will now cover a far wider group of professionals. The scheme offers a faster and cheaper alternative to litigation, with a binding adjudication decision within 56 days. Whether disputing parties will be keen to resort to adjudication remains to be seen.
The scheme The re-launch expands on the professional negligence adjudication pilot scheme, which was launched by the Professional Negligence Bar Association (PNBA) in February 2015. The pilot scheme was limited to professional negligence claims against solicitors and restricted to claims under £100,000 plus costs. Under the re-launch, the PNBA have extended the scheme to include professional negligence claims against all non-medical professions, with no financial limit on the maximum value of the claim. Adjudicator fee bands have also been introduced to reflect the complexity and value of the claim. The scheme is designed to encourage parties to seek a faster and cheaper form of alternative dispute resolution, loosely based on the existing statutory adjudication scheme for construction disputes (under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) and the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649) (www.practicallaw.com/1-5086559) ). However unlike construction adjudications, the professional negligence scheme is entirely voluntary and both parties must agree to participate before an adjudicator can be appointed. Parties will also have to decide whether the adjudicator’s determination will be final and binding. The scheme may be implemented at any stage of a dispute. However adjudication at an earlier stage will be more beneficial from a costs perspective, before parties have had a chance to incur significant legal fees.
How it works The new scheme will continue to be overseen by the PNBA, who will supply adjudicators from their panel of professional negligence barristers. Once parties have agreed to adjudicate, they must agree to be bound by the rules of the scheme (these may be found on the PNBA website) and to see the process through to the end. Currently there are no sanctions for a party who refuses to adjudicate, however it is possible that courts will decide to impose higher costs consequences on such parties at trial. Having agreed to adjudicate, the referring party must send a Notice of Adjudication to the PNBA, and an adjudicator must be nominated within five working days. The adjudicator has five working days to confirm his appointment and having agreed his terms, must then write to the parties setting out directions. The adjudicator’s full decision must be made within 56 days of the date of his appointment, although the process may be extended with both parties’ agreement. The decision may be made on paper or with a short hearing, depending on the parties’ preference. The decision will be binding, unless one or both parties decide to proceed to court. Alternatively the parties may agree from the outset that the adjudicator’s decision will be final. Any damages awarded will be payable within 21 days of the decision and the receiving party may resort to enforcement proceedings in the event of non-payment. Even if the parties have agreed to take the matter to court, the paying party must still pay in the meantime. The parties are jointly liable for the
RELAUNCH OF THE PROFESSIONAL NEGLIGENCE ADJUDICATION SCHEME
adjudicator’s costs. However the adjudicator may require that the losing party pay a greater share - or all - of their fees. The adjudicator’s decision is not confidential, unless agreed otherwise and all documents and statements relied upon may be disclosed in subsequent legal proceedings. Comment Although the uptake for the original pilot was limited, it is hoped that the expansion will make the scheme more attractive to parties in professional negligence disputes, as a speedier and more cost effective alternative to other forms of dispute resolution. The flexibility of the scheme may also appeal, as parties are able to mutually agree the scope and extent of the arbitrator’s role from the outset. Adjudication will not be suitable for all disputes, particularly where complex expert or witness evidence is required. However in such cases, the scheme could be used to assist in the determination of a single issue which has previously prevented settlement of the claim.
One possible outcome is that claims which were previously considered uneconomic to pursue to trial, despite a strong liability argument, will be adjudicated under the scheme in the future, leading to a greater number of claims against professionals. The scheme may also appeal to claimants with limited financial resources, who will now have another tool for recovering damages. Professionals, on the other hand, may find the scheme attractive for low value claims, particularly where the value of the claim falls below the level of the insurance excess, as the scheme offers an opportunity to save on the potential time and cost of litigation. It seems likely that professionals will be keen to agree that the adjudicator’s decision is confidential. It is hoped that the scheme will offer a viable alternative for parties in dispute. It will also be interesting to see what approach the courts will take to parties who have refused to arbitrate or who dispute the adjudicators’ decision unsuccessfully, and whether potential costs sanctions will encourage more parties to consider adjudication from the outset.
The scheme is likely to be most popular at the preaction stage, before significant cost has been incurred.
Simon Garrett Partner, IRG T +44 (0)20 7367 2786 E email@example.com
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Laura Gould Lawyer, IRG T +44 (0)20 7367 2197 E firstname.lastname@example.org
THE FINANCIAL OMBUDSMAN SERVICE
The Financial Ombudsman Service: a speedy and effective form of ADR? In this article, we consider the role of the Financial Ombudsman Service (FOS) as a form of alternative dispute resolution (ADR) in UK financial services. Although the FOS can offer advantages to firms when dealing with smaller claims, it does not always produce a quicker and fairer outcome than traditional civil litigation.
ADR in UK financial services Many forms of ADR, in particular early neutral evaluation, mediation, and arbitration, have as their foundation the consent of the parties in dispute. Consent may be given (for example) in a mediation agreement, or in the arbitration clause of a commercial agreement. The decision of the alternative decision making forum may or may not be binding on the parties and can be shaped by their consent. UK-regulated financial services firms are, however, now well used to a form of mandatory ADR in the form of the FOS, an independent dispute resolution body created by Parliament in the Financial Services and Markets Act 2000 as an alternative to the civil court system. The intention at the time was, in summary, to create a single institution capable of resolving most types of financial disputes between firms and consumers quickly, more cheaply and with less formality than the court system. The FOS built on earlier predecessor schemes, such as the PIA Ombudsman. Although it has its origins in domestic UK legislation, the implementation of the European ADR Directive in July 2015 has seen the FOS take its place alongside equivalent institutions in other EU Member States, as part of the European FIN-NET dispute resolution network.1 The FOS’ jurisdiction The FOS has a relatively broad compulsory jurisdiction, which is founded not on consent but in statute. It is supported by a detailed set of rules made by the FCA
in exercise of its statutory powers (the DISP sourcebook). The FOS’ jurisdiction is to consider and resolve complaints about financial services firms made by consumers, some small businesses, charities with an income of less than £1 million, and trustees of trusts with a net asset value of less than £1 million. Complainants must complain to the relevant financial services firm first, which must respond within a defined timescale and follow the FCA’s complaint handling rules. Many nascent disputes are resolved at that point, but in the event that the complainant is not satisfied with the firm’s response, the complainant can then refer his or her complaint on to the FOS for resolution. The FOS has an inquisitorial jurisdiction and must resolve complaints by reference to what is, in the Ombudsman’s opinion, fair and reasonable in all the circumstances of the case. Whilst the Ombudsman must take into account relevant law and regulations (as well as regulators' rules, guidance and standards, codes of practice, and what he or she considers to have been good industry practice), he or she is not strictly bound to apply the common law. This gives the FOS a very wide discretion when making a ruling and in practice means that the outcome of a particular case may be different to the decision a court would have reached on the same facts, through applying the law. Whilst there are provisions in the FOS’ procedural rules for gathering in written evidence and holding hearings, in practice hearings are rare and the Ombudsman will usually issue a decision on the papers it receives from the parties.
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This means, amongst other things, that complainants and firms typically do not have an opportunity to cross examine one another, often on events that took place some time ago. An Ombudsman’s final decision is nevertheless binding on the parties at the option of the complainant. If an Ombudsman makes a decision in favour of a complainant and the complainant accepts it, the firm is legally bound to comply, even where it disagrees with the Ombudsman’s reasoning and/or award. If, however, the Ombudsman finds in favour of the complainant, but the complainant does not accept the decision, neither party is bound. The role of the court As a statutory decision-maker, the FOS is subject to the supervision of the Administrative Court, by way of judicial review (JR). The FOS has been subject to a number of JR challenges since its creation, but successful JR challenges against it are rare. This is a complex area where affected firms should seek legal advice at an early stage, and in particular before the FOS has issued its final decision, given there are strict time limits for bringing JR claims and difficulties in mounting a successful challenge. The long running Heather Moor and Edgecomb litigation, for example, went as far as the European Court of Human Rights in Strasbourg in 2012, and is an example of a challenge that was ultimately unsuccessful from the firm’s perspective.2 The various decisions in this litigation confirmed (amongst other matters) that the statutory scheme creating the FOS did not require an Ombudsman to determine complaints in accordance with the common law, and that the FOS’ procedure, taken as a whole was compatible with Article 6 of the European Convention on Human Rights, despite there being no automatic right to a hearing before the FOS itself.
Instead, it would often be well advised to focus its efforts on convincing the Ombudsman of its case, before it reaches its final decision. We have seen the FOS reverse earlier adverse adjudications on the basis of the firm presenting a strong case. The civil courts also continue to play their traditional role alongside the FOS, which is an alternative to (and not a replacement for) them. Whilst the FOS has compulsory jurisdiction over firms, it is not mandatory for a complainant to pursue a remedy from FOS. He or she has a choice, and is free to pursue a remedy elsewhere, for example by mediation or by issuing civil proceedings. A complainant can also obtain a ruling from the FOS but decide to reject it, and then take the matter to court. Choices, choices The choice of route (FOS versus traditional litigation) is one that a complainant would be well advised to consider carefully, particularly in higher value cases. In addition to speed (which we consider below), a number of other factors are relevant, such as cost, the nature of the remedy sought, and the powers of the decision maker. For example, whilst the FOS is undoubtedly a cheaper route to a remedy for many complainants (complainants need not use lawyers or claims management firms to handle their matters) the maximum money award it may make is currently £150,000 (excluding costs, interest on the award and interest on costs). An Ombudsman may issue a recommendation that the respondent pays the complainant more than £150,000, if he or she considers that fair compensation requires payment of a larger sum. However, because this recommendation is (technically) non-binding, the FOS is not necessarily an attractive forum in which to bring higher value claims.
The FOS has, however, been challenged successfully by way of JR in the past. An example is the case of Garrison Financial Services, in which the Administrative Court ruled that there was no logical connection between an error that an Ombudsman had identified on the part of a firm, and the redress that the Ombudsman had subsequently awarded.3 That aspect of the Ombudsman’s decision was quashed and remitted to the Ombudsman for a further decision.
From a complainant’s perspective, the decision as to whether or not to accept a decision of the FOS is also important. In the recent case of Clark v In Focus Asset Management, in which CMS successfully acted for the appellant financial services company, the Court of Appeal confirmed that acceptance of a FOS award gave rise to res judicata.4 Having accepted an Ombudsman’s decision, the Claimant was prevented from starting separate legal proceedings in the civil courts, arising out of the same facts, to recover further sums over and above the amount awarded by the FOS.
However, a firm which believes the FOS has erred in how it is assessing a particular case should not rely on JR as a form of appeal, particularly in light of the cost and difficulties involved in pursuing such a challenge.
There are also circumstances where a firm may wish to have a complaint heard before the courts, rather than the FOS. An example may be where an important point of law needs to be decided to resolve it. The DISP rules
Heather Moor and Edgecomb (2012) 55 EHRR SE20. Garrison Investment Analysis, R (on the application of) v Financial Ombudsman Service EWHC 2466 (Admin). 4 Clark v In Focus Asset Management  1 EWCA Civ 118. 2 3
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THE FINANCIAL OMBUDSMAN SERVICE
provide for the FOS to decline a complaint on the grounds that the subject matter would be 'more suitable' to be dealt with by the court, arbitration or another complaints scheme.5 Any firm wishing to have a matter referred to the court instead should make its case for this to the FOS, when the complaint is first referred. This is a discretion awarded to the FOS so a firm will need to present a strong case. The FOS may need some convincing that it should not take jurisdiction. Test case procedures have also been used as a method of ensuring consistency between the FOS and the courts where an industry issue has arisen. An example of this is the test case brought to the Supreme Court by the OFT and a number of representative banks to resolve legal uncertainty over unauthorised bank charges, where the FOS stayed complaints pending the outcome of the test case.6 Speed This background brings us to our key theme for this digest: the speed of dispute resolution. Often, one of the potential benefits of using ADR is a quicker outcome than it would otherwise be possible to achieve through traditional civil litigation. The timely resolution of disputes, giving parties certainty and an ability to draw a line under an experience, has a value to many litigants. Some financial services firms may, for legitimate commercial reasons, consider it worth sacrificing the rigour of traditional civil court process in favour of a speedier outcome. The European ADR Directive recognises that speed is an ingredient of effective ADR, by putting in place a requirement that the ADR procedures it covers should produce outcomes within a period of 90 calendar days from the date on which the decision-making entity receives the complete file. However, the Directive also provides that in the case of highly complex disputes, the decision-making entity may extend the 90 day period at its own discretion. Where it does this, the parties are to be informed of any extension and of the expected length of time that will be needed for the conclusion of the dispute. The FOS has published views in which it states its support for the aims of the Directive and that it has always tried to deal with complaints as quickly as possible. It has indicated that in most of the cases it deals with â€“ other than those about PPI â€“ it already gives answers in less than 90 days.7
In its annual review for 2015/2016, published in May 2016, the FOS also set out some interesting data about the time it takes to resolve complaints, broken down by financial services product category.8 There is considerable variation. For example, some 85% of complaints it received about payday loans were resolved within the 90 day period. However, complaints about mortgages, investments and pensions took materially longer to resolve. Only around 51% of complaints about investments and pensions were resolved within three months. In none of the product categories listed did FOS resolve all complaints within 90 days. The sale of PPI products, which has generated an exceptionally large number of complaints, remains an outlying product category. Only 18% of PPI complaints were resolved within 90 days. Some 20% of the complaints about PPI products outstanding at the FOS as at 31 March 2016 had waited over 2 years for resolution. These statistics can be contrasted with the lead times for resolution of cases in the civil courts. According to UK Ministry of Justice (MOJ) statistics for April to June 2016 (the most recent available to us) some 8367 small claims trials took place during that period, and on average these took place 31.7 weeks (approximately 222 days) after the claim was originally issued.9 3742 fast and multi-track trials took place, and on average these took place 54.3 weeks (approximately 380 days) after the claim was originally issued. Of course, these are only trials, and the vast majority of civil claims issued in the UK are never tried, but settled before trial (usually on a confidential basis). Not all of these trials will have been in financial services cases, and the underlying time period used for measurement is different. The MOJ statistics are therefore not directly comparable with those published by FOS. However we suggest that they nevertheless give a reasonable indication that contested civil cases (even on the small claims track) are generally likely to take longer to reach a resolution than contested FOS complaints. But is FOS always quicker? But is the FOS always quicker than traditional civil litigation? The data mentioned above, and our own experience, suggest that FOS will produce a quicker outcome in many cases, but it is not always quicker. There is no doubt that FOS can and does decide many complaints more quickly than the civil court system would ever be able to do, even under the small claims
DISP 3.3.4 (10) OFT v Abbey National plc & others  UKSC 6 7 http://www.financial-ombudsman.org.uk/publications/technical_notes/alternative-dispute-resolution.html 8 http://www.financial-ombudsman.org.uk/publications/annual-review-2016/ar16.pdf at p39 9 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/549424/civil-justice-statistics-april-june-2016.pdf at p9 5 6
THE FINANCIAL OMBUDSMAN SERVICE
track. In our experience, these are likely to be high volume, lower value, and less complex complaints. This is not surprising and is in line with the original aims of the FOS. However, it is also our experience that some FOS complaints are hard fought, and can take years to reach a final Ombudsman’s decision, notwithstanding the timing provisions in the European ADR Directive. This is particularly the case for complaints that have ‘wider implications’ for the respondent firm. Whilst the FOS rightly points out in its publications that its role is to resolve individual disputes rather than act as a regulator, in practice a FOS decision may nevertheless have an important regulatory effect, because of the FCA’s rules and guidance. In particular, DISP rule 1.3.6G states that where systemic issues are identified during complaints handling, firms should consider whether it is fair and reasonable to consider pro-active redress or remediation to other affected customers who have not complained. The consequences of a single ‘lead’ case at the FOS can as a result be very significant for a firm and go well beyond the particular dispute in issue. In our experience, there have been numerous such cases in recent years, and not just in the field of PPI. They are typically associated with industry-wide events, such as in the collapse of a widely sold investment product or firm. Many ‘follower’ complaints can find themselves in a lengthy ‘holding pattern’ at FOS whilst the ‘lead’ case is fought and resolved.
In that regard, we have seen other forms of ADR, particularly mediation, produce much faster outcomes in financial services disputes, and at modest cost for the parties concerned. The parties also retained greater control than they would have had in circumstances where the complaint had been referred to FOS. We have also seen the effective deployment of CPR Part 36, and even the general rule of civil litigation that the unsuccessful party will be ordered to pay the costs of the successful party, act as strong incentives to early and effective dispute resolution, in cases which might otherwise have taken years to reach an outcome at FOS, where complainants generally do not run costs risk.10 In short, it is our view that FOS is not always a quicker way, or indeed the right way, to resolve a case raising points of law, or more complex cases that have wider implications. Traditional civil litigation, in spite of its disadvantages, can in these types of case still produce fair outcomes just as quickly, if not more quickly, than the FOS. However, unfortunately, this is often not a choice the firm can make, as the forum decision resides with the claimant and the FOS. While there is no doubt that the FOS performs an important and often more cost effective function for both firms and claimants, due to the binding nature of its process and the breadth of FOS’ discretion, firms can be left having to implement FOS decisions which may not always fairly reflect the legal or industry standard.
Our experience of these types of case in particular is that the FOS process is rarely a quicker or more effective route to a resolution than traditional civil litigation, or indeed than other forms of ADR.
Alison McHaffie Partner, Financial Products and Services T +44 (0)20 7367 2785 E email@example.com
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David Pygott Of Counsel, Financial Products and Services T +44 (0)20 7367 2543 E firstname.lastname@example.org
Fast-track CAT The Competition Appeal Tribunal (CAT) will commence hearing the first claim assigned to its fast-track procedure (FTP) on 7 November 2016. The claim has been brought by Socrates Training Limited (Socrates) against the Law Society of England and Wales (Law Society), alleging abuse of a dominant market position which has restricted competition.1
Fast track The CATâ€™s FTP was introduced on 1 October 2015, following the enactment of The Consumer Rights Act 2015 which amended both the Competition Act 1998 and the Enterprise Act 2002 to make changes to the competition private damages actions regime. The FTP applies to follow-on and standalone competition claims made under section 47A of the Competition Act 1998. Allocation to the FTP, as the name suggests, has implications for the speed at which a claim will proceed â€“ the main hearing of a claim must take place as soon as possible after allocation to the FTP, and in any event within six months. Under the new regime, the CAT is also granted the power to determine the level at which recoverable costs are to be capped for each party. Accordingly, the FTP is intended to enable less complex claims to be decided quickly with limited risk as to costs. Under the FTP, the CAT is also empowered to grant interim injunctions without requiring a cross undertaking in damages. If that power is exercised, the financial risk to a claimant obtaining an interim undertaking is significantly reduced. Under the usual rules, a claimant that obtains an interim injunction will be liable for significant sums in damages if it fails to be granted a final injunction. Interim injunctions may therefore be more attractive to claimants under the FTP. In determining whether it should be subject to the FTP, the CAT will consider all the circumstances of the case. Cases most suited to the FTP are likely to be those where injunctive relief is being sought, or, in the case of a claim for damages, where all the parties are clearly committed to a tightly constrained and focused approach to the litigation.
Whilst Socrates is the first case that has proceeded to the CAT on the FTP, applications have been made in other cases. In NCRQ Ltd v Institution of Occupational Safety and Health2 and Shahid Latif & Mohammed Abdul Waheed v Tesco Stores Limited,3 applications for FTP allocation were made to the CAT. However, prior to any allocation decision, both cases were settled. In Breasley Pillows Limited and others v Vita Cellular Foams (UK) Limited and another, 4 the CAT refused allocation to the FTP. Reasons for refusal included an estimated 18 day trial, significant disclosure requirements and the complexity of the case. The CAT also cited the lack of urgency in bringing the claim, which was lodged near the end of limitation period, as a reason to refuse allocation to the FTP. Background Socrates is a provider of training to business and professional services industries. It provides online anti-money laundering (AML) training and fraud prevention training for property lawyers. Socrates claims that the Law Society provides the same training, also on a commercial basis. The Law Society, as the professional body for the legal industry, operates paid accreditation schemes for solicitors, including the Conveyancing Quality Scheme (CQS). Socrates alleges that, in 2015, the Law Society began to stipulate that law firms wishing to maintain CQS accreditation must purchase AML and fraud prevention training from the Law Society, rather than any alternative provider. Socrates claims that this action has restricted competition in the downstream market for online AML and fraud prevention training, causing it loss. Socrates is seeking inter alia: an injunction restraining further abuse of
Socrates Training Limited v The Law Society of England and Wales [Case No. 1249/5/7/16] NCRQ Ltd v Institution of Occupational Safety and Health [Case No. 1242/5/7/15] Shahid Latif & Mohammed Abdul Waheed v Tesco Stores Limited [Case No. 1247/5/7/16] 4 Breasley Pillows Limited and others v Vita Cellular Foams (UK) Limited and another [Case No. 1250/5/7/16] 1 2 3
the dominant position of the Law Society, a declaration that the Law Society has abused its dominant position and damages. Case management In Socrates, the CAT has taken clear steps to meet its FTP obligation to hear claims within six months of allocation. At the time of allocation to the FTP, the CAT bifurcated proceedings and ordered that liability (including consideration of any anti-competitive effect) be determined first, adjourning the issue of quantification of damages until after a judgment on liability has been made. A robust approach to case management has also been taken. In an order made on 30 June 2016, the CAT gave instructions for disclosure and provision of information. Instructions were prescriptive with limited timescales imposed. The Law Society made an application on 30 September 2016 to adduce further evidence from its expert evidence on issues of foreclosure, after the imposed deadline. This request was partially refused by the CAT, with the effect that the Law Society was not able to adduce substantive new evidence. Comment It remains to be seen what the outcome of the case will be. However, Socrates provides an early indication that faster justice in specific competition actions will be delivered through increased procedural rigidity under the FTP. Further, the CAT has given clear direction that, once in the FTP, parties should be committed to that procedure and undue delay will not be tolerated. This can be a challenge given the unpredictable nature of litigation, and it is unclear how the FTP will in future accommodate cases in which there is late disclosure or late evidence adduced in the proceedings. The robust approach required to achieve a hearing within six months of allocation may need some flexibility in that regard.
Satyen Dhana Partner, Competition T +44 (0)20 7367 2621 E email@example.com
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The introduction of the FTP fulfils a policy objective of the UK Government to provide an avenue for small and medium size enterprises (SMEs) to assert their rights in competition actions. The cost, complexity and length of the ordinary regime were perceived as a deterrent to such SMEs bringing actions against larger rivals. Claimants considering applying to the FTP will need to assess the risk of potentially lower costs recovery on success, and a truncated timetable for the production of evidence and other procedural matters including preparation for the hearing. This must be weighed against reduced financial risk if the action is unsuccessful, and (if applicable) the significant benefit of an interim injunction without a cross undertaking in damages. The FTP could have significant implications for larger businesses more likely to be defendants in such actions. Faster justice, combined with a cost capping regime could lead to a rise of speculative claims against firms with a large market share. Even if claims are unsuccessful, there are likely to be significant financial consequences for larger defendants. In Socrates, the Law Society submitted a cost budget of just over GBP 637,000. Recovery of these costs from the claimant was capped at GBP 350,000 by the CAT. A claimant friendly environment has clearly been created. It is significant, however, that the CAT capped the claimantâ€™s cost at the lower level of GBP 200,000. In its earlier judgment on cost capping dated 21 June 2016, the CAT expressly recognised that a larger defendant organisation will usually incur more costs defending a competition action on such a short timetable. Key factors cited include the larger number of individuals likely to be involved and a wider dispersion of documentary evidence. However, that the CAT appreciates the burden the FTP will have on larger defendants may come as small comfort to those parties on the receiving end of claims.
David Bridge Senior Associate, Solicitor Advocate, Disputes T +44 (0)20 7367 3021 E firstname.lastname@example.org
CALLS UNDER PERFORMANCE BONDS: GREATER LENIENCY IN SCOTLAND?
Calls under performance bonds: greater leniency in Scotland? A recent Scottish Inner House decision has considered the approach to be taken in Scotland to interpreting performance bonds and may indicate a greater leniency in approach north of the border. The decision also contains an interesting finding that an anticipatory breach is sufficient for the purpose of 'stating a breach' under such a bond, meaning that beneficiaries may in some circumstances be able to call on a performance bond in advance of the actual date of breach of the underlying contract.
South Lanarkshire Council v Coface SA1 Coface granted a performance bond in favour of South Lanarkshire Council as security for the land restoration obligations of the operator of an open cast mine, the Scottish Coal Company Limited (Scottish Coal), following the cessation of mining operations. Coface’s maximum aggregate liability under the bond was fixed at GBP 4,499,411 and various sub-limits were to apply on an index linked basis depending on the period which had passed since commencement of work by Scottish Coal. Coface’s obligation to make payment under the bond was expressed as follows: 'In the event of a breach of the Restoration Obligations as referred to in Clause 2.1 above, [Coface] shall, if called upon by the Council, pay to the Council the cost to the Council of the works required to be carried out in implement of the Restoration Obligations (which works are hereinafter referred to as the Restoration Works).' Interim liquidators were appointed to Scottish Coal on 29 April 2013. They later informed the Council that Scottish Coal’s funds were insufficient to pay for any restoration works. The Council wrote to Coface on 1 May 2013 stating that it was likely that the bond would be called up. On 29 May 2013 the Council sent a notice intended to call up the bond which stated the original cost of the
restoration works but did not specify the sum that Coface was being asked to pay. Nor did the Council indicate the cost which it would incur in carrying out the restoration works itself. Coface did not consider a valid demand had been made and did not make payment. The Council raised proceedings in the Commercial Court of the Court of Session. At first instance, the Commercial Court rejected Coface’s argument. Coface appealed to the Inner House. Approach to interpretation The Inner House’s decision contains a useful overview of the principles applicable to the interpretation of performance bonds. The court emphasised that the ordinary rules of interpretation apply equally to performance bonds as they do to other contracts, requiring careful attention to be paid to the terms and context of any given performance bond. The court also noted that the 'commercial purpose of such bonds and the contractual and business structure in which they operate are … of great importance.' With regard specifically to the making of demands under performance bonds, the court noted the existence of a principle of strict compliance which derives from cases dealing with letters of credit. Whilst the court noted that 'similarities unquestionably exist' between letters of credit and performance bonds, it did
South Lanarkshire Council v Coface SA  CSIH 15.
CALLS UNDER PERFORMANCE BONDS: GREATER LENIENCY IN SCOTLAND?
not consider it necessary to consider the law as to letters of credit. Instead the court adopted the conclusion reached by the English Court of Appeal in IE Contractors v Lloyds Bank2 that 'the degree of compliance required by a performance bond may be strict, or not so strict. It is a question of construction of the bond'.
element was that both aspects be covered. It maintained that the letters received did not fulfil these requirements and, specifically did not demand payment of a specified sum. As the bond contained provisions for different levels of liability at different times and required index linking, the sum demanded was not known.
Although the proposition that a performance bond must be interpreted in accordance with its terms is uncontroversial, the IE Contractors decision also suggests that a more lenient approach to performance bonds may apply generally in comparison to letters of credit. Lord Justice Staughton in IE Contractors commented that:
Coface’s argument was based on the following requirements stated in the bond:
'… there is less need for a doctrine of strict compliance in the case of performance bonds, since I imagine that they are used less frequently than letters of credit, and attract attention at a higher level in banks. They are not so much part of the day-to-day mechanism of ordinary trade. And….the kind of documents which they require is usually different from the kind required under a letter of credit.' IE Contractors was decided in 1990 and more recently the existence of such a distinction has been challenged. In Sea-Cargo Skips AS v State Bank of India3 Teare J noted that: 'The distinction suggested by Staughton LJ between letters of credit and performance bonds has not met with universal approval … For my part I would respectfully doubt that there is less need for a doctrine of strict compliance in the field of performance bonds than in letters of credit. In the field of performance bonds, as in the field of letters of credit, the banks who provide the bonds deal with documents. Banks must honour their obligation to pay if documents which conform with the requirements of the bond are tendered. Thus the banks must determine, on the basis of the presentation alone, whether it appears on its face to be a complying presentation; see articles 6 and 19(a) of the ICC's Uniform Rules for Demand Guarantees 2010 Revision which are good evidence of banking practice.' More recently still, the Privy Council has noted that: 'The principles governing letters of credit are as much applicable to letters of indemnity of the present nature, as well as other forms of on demand guarantee.'4 The two stage process Coface argued that the wording of the bond required any call to be a two-stage process. First, notice in writing of the breach must be served. Second, a demand for payment. These could be contained in one demand letter, or more than one, but the essential
'3.1 Prior to the obligation upon the Cautioner to pay any sums due hereunder becoming enforceable by the Council, notice in writing of any breach of the Agreement by the Company and the cost of Restoration Works to be carried out must be provided to the Cautioner at its above-mentioned address for service. 3.2 The Cautioner shall not be obliged to investigate the authenticity or validity of a claim; a written demand for payment from an authorised official of the Council being sufficient evidence of any sum due hereunder.' The Inner House disagreed that these paragraphs incorporated a two stage process and emphasised the need for a common sense approach and to avoid an unduly technical interpretation. The court accepted that the cost of the restoration works was not the same as the amount due under the bond. However, it considered Coface could easily examine the terms of the schedule to the bond, carry out the index-linking exercise and determine its liability. The Council’s notice was therefore sufficient. An additional point of difference between the Council’s notice and the terms of the bond was that the bond referred to the cost 'to the Council' of carrying out the restoration works, whereas the Council’s notice referred only to the original cost agreed with Scottish Coal for carrying out the restoration works. This may have provided a further objection to the Council’s notice, although the point is not discussed in the judgment. Anticipatory breach Coface also argued that the notice did not state in plain terms what the breach of contract was other than stating that there had been a breach of the restoration obligations. Coface argued that specification of the precise breach that had occurred was required. The court rejected this argument stating the bond merely requires 'notice in writing of any breach'. The court said that such a breach might occur 'at an anticipatory stage' where it became apparent before the termination of mining operations that Scottish Coal was insolvent and would be unable to carry out the restoration works.
I.E. Contractors Ltd v Lloyds Bank Plc  2 Lloyd’s L R 496. Sea-Cargo Skips AS v State Bank of India  2 Lloyd's Rep 477. 4 Mauri Garments Trading and Marketing Ltd v The Mauritius Commercial Bank Ltd  UKPC 14. 2 3
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CALLS UNDER PERFORMANCE BONDS: GREATER LENIENCY IN SCOTLAND?
Conclusions and implications This decision appears to show the Scottish courts adopting a more lenient approach to the interpretation of performance bonds in comparison to what might be expected from an English court: —— The court’s reliance on the IE Contractors decision and the reference to the interpretation of performance bonds being 'strict, or not so strict' might be thought to suggest approval of the more lenient approach to performance bonds indicated in IE Contractors as compared to letters of credit. As noted above, such a difference in approach seems unlikely to represent the modern approach to the interpretation of performance bonds under English law. —— Although the general approach to interpretation indicated by the court is uncontroversial in either jurisdiction, elements of leniency can be seen in some of the court’s conclusions which might not have been similarly approached in England. For example, it is conceivable that an English court may have required the Council to state expressly what amount was demanded from Coface under the bond, rather than leave this to Coface to calculate. The existence of a two stage notification procedure might, however, be thought to be unduly technical. However, on the basis that this could be contained within one demand incorporating both elements, that objection may be less of an issue. The requirement for a demand to be made for payment of a specified sum does not appear unreasonable.
Aidan Steensma Of Counsel, Construction T +44 (0)20 7367 2137 E email@example.com
—— Although not specifically mentioned by the Inner House, it is conceivable that an English court may also have required the Council’s notice to specify the cost 'to the Council' of carrying out the restoration works (rather than the original cost of those works agreed by Scottish Coal). —— The Inner House’s conclusion that an anticipatory breach was sufficient for the purpose of a demand under the bond might also be considered differently by an English court. An anticipatory breach is not of itself a breach of contract and only provides a cause of action for renunciation where it is accepted as bringing an end to the contract by the innocent party. The Inner House’s conclusion therefore represents a broad view of what could constitute 'a breach of the Restoration Obligations'. The court’s conclusions with regard to anticipatory breach potentially have wider implications for the calling of securities in insolvency situations or where claims are made following the termination of a construction contract which must await assessment following completion of the works. In such circumstances, the need to specify an existing rather than future breach of contract can pose difficulties. This may therefore be an argument which beneficiaries faced with a prematurely expiring bond might seek to make use of in the future.
Shona Frame Partner, Construction T +44 (0)141 304 6379 E firstname.lastname@example.org
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