Selborne summer 2017 newsletter

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selborne CHAMBERS

NEWSLETTER SUMMER 2017

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S U M M ER N E W S L E T T ER 2017

How To Lose A Meritorious Case – Abuse Of Process Revisited Written by MARK WARWICK QC and JUSTINA STEWART

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Bagum v Hafiz Written by STEPHEN BOYD

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Pre-action disclosure – not worth the candle? Written by RICHARD CLEGG

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Why Arbitrate? (and how to do it) Written by JONATHAN MCNAE

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Professional Negligence Update – The Buck Stops Here Written by CHRIS DE BENEDUCCI

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Welcome to Selborne Chambers’ Summer Newsletter 2017 Much has happened since the last Newsletter. We had the very popular Selborne Chambers Dispute Resolution Seminar in May, and then Chambers’ arbitration service was launched later the same month. The Chambers team walked the annual London Legal Walk, now our 11th year of doing so (see top-right). These are but a few of the highlights!

trusts of land case, Bagum v Hafiz, Richard Clegg considers the nitty gritty of pre-action disclosure, and Jonathan McNae explains the benefits of arbitration. Finally, Chris de Beneducci offers his thoughts on the recent Supreme Court decisions on professional negligence. We hope that you find these articles both interesting and useful to your practice.

Looking to the future, we are pleased to say that Rosie Baker will be joining Chambers as a tenant in September, after successful completion of her pupillage. She has already proved popular with our clients.

As ever, I welcome any comments you may have. Very kind regards,

In this Newsletter, Justina Stewart and I examine recent applications of Henderson v Henderson, Stephen Boyd writes on the implications of the

MEMBERS

Mark Warwick QC (Head of Chambers) Romie Tager QC Ajmalul Hossain QC Gary Blaker QC Ian Clarke QC Philip Kremen

Stephen Boyd Hugh Jackson David Uff Neil Mendoza Stuart Hornett Duncan Kynoch Alexander Goold Richard Clegg

MARK WARWICK QC Head of Chambers

Justin Kitson Jonathon McNae Julia Beer Henry Webb Nicholas Trompeter Paul de la Piquerie Rahul Varma Camilla Chorfi

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Simon McLoughlin Justina Stewart Alice Hawker Isabel Petrie Lara Kuehl Greg Plunkett Sarah Walker Chris de Beneducci

CLERKS

Paul Bunting Darren Madle James Clarke Oliver Ventura


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How To Lose A Meritorious Case – Abuse Of Process Revisited Introduction

This article is concerned with abuse of process of the Henderson v Henderson variety. This is the fifth variety of res judicata identified by Lord Sumption in Virgin Atlantic Airways v Zodiac Seats UK Limited (2014) AC 160 (at paragraph 17). It is the principle that: “a litigant should in general bring forward all his claims in one proceeding rather than successively ...” (per Longmore LJ in Dickinson v UK Acorn Finance Limited (2016) HLR 17 (at paragraph 10). Generally speaking, if a claim or a defence is an abuse of process within the Henderson v Henderson principle, then that claim or defence should be struck out regardless of its merit. The only exception is if the claim or defence is “cast iron”, or otherwise suitable for summary judgment, see Stuart v Goldberg Linde (2008) 1 WLR 823. Therefore, it is important for all litigants and their advisors to be aware of the scope of Henderson v Henderson abuse. Otherwise a good claim may be lost, or a defence may become unsustainable. Recently, we have seen several reported cases delineating the scope of Henderson v Henderson abuse, and applying it. The topic is a wide one, and this article is intended to provide an overview.

The Principles

In her judgment in Otkritie Capital International Limited v Threadneedle Asset Management Limited (2017) EWCA Civ 274, at paragraph 39, Arden LJ explained that: “In Dexter v Vlieland-Boddy [2003] EWCA Civ 14, Clarke LJ helpfully summarised the principles on which the courts will strike out an action in

these circumstances, as established by the authorities, as follows: “49. The principles to be derived from the authorities, of which by far the most important is Johnson v Gore Wood & Co [2002] 2 AC 1; [2001] 1 All ER 481, can be summarised as follows: (i) Where A has brought an action against B, a later action against B or C may be struck out where the second action is an abuse of process. (ii) A later action against B is much more likely to be held to be an abuse of process than a later action against C. (iii) The burden of establishing abuse of process is on B or C or as the case may be. (iv) It is wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. (v) The question in every case is whether, applying a broad merits based approach, A’s conduct is in all the circumstances an abuse of process. (vi) The court will rarely find that the later action is an abuse of process unless the later action involves unjust harassment or oppression of B or C.” Using the above terminology, it is therefore possible to categorise the cases as follows: 1. Where the first action was A v B, and the second action was A v B. 2. Where the first action was A v B, and the second action was A v C.

1 A swap between two departments of B – the two departments were not different legal entities 2 A swap between B and a third party

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Written by, MARK WARWICK QC JUSTINA STEWART

As the above citation emphasises: “A later action against B is much more likely to be held to be an abuse of process than a later action against C”.

The First Category (A v B, A v B)

A very recent example of the first category is Barnett-Waddington Trustees (1980) Limited v Royal Bank of Scotland PLC (2017) EWHC 834 (Ch). In that case, borrowers (A) had taken out a loan with a bank (B). When A contacted B, asking for a redemption figure, this was given. However, B contended that the small print in the loan agreement obliged A to pay B its costs of unwinding an interest rate swap (“the Swap Cost”). This cost was significant. In the first action A sought a declaration (under CPR Part 8) that it did not owe B the Swap Cost. In pre-action correspondence, in its evidence and at trial before Warren J, B defended the claim on the basis that the Swap Cost arose from an internal swap arrangement1. The Judge ruled in favour of A, saying that A was not liable to pay the Swap Cost. Following its success in the first case, A then wrote to B, seeking to redeem the loan. B responded contending that A owed the Swap Cost. However, now B relied on an external swap arrangement2, which it said it had found after the first case. A then began a second action, seeking orders permitting it to redeem its loan without paying the Swap Cost. When B sought to defend, raising the external swap, A sought summary judgment on the basis that B’s defence was an abuse. Mann J ruled in favour of A. In the course of his detailed judgment, Mann J ruled that:


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1. in “exercising reasonable diligence” B should have found the external swap that it sought to rely upon at an earlier stage, and ought to have raised it within the first case. Even though no individual may have had knowledge of an external swap during the first proceedings, that did not assist B. As a matter of corporate knowledge, B did know or should be taken to have known of the swap. It would have been apparent to anyone who looked. What happened is that no-one bothered to look. It was now too late to raise such a swap in the second action; 2. B’s argument that it was not obliged to raise a defence of an external swap because A had framed the Part 8 claim on the basis of an internal swap was unsuccessful. It was B which chose the ground by justifying the claims on the basis it did. An appropriate parallel was with a redemption action, in which the dispute was flushed out before an “accounts and inquiries” stage, because B itself had defined the dispute; 3. it would amount to harassment of A if A was now to face proceedings again, with B having a second go, having done belatedly what it should have done in the first place (see whether B had a potential external swap available to it); 4. although B contended that the external swap entitled it to over £4.7 million, the Judge was not satisfied that B’s claim was “cast iron”3; 5. B therefore lost the opportunity to pursue this claim.

The Second Category (A v B, A v C)

Central to the second category of case are “the Aldi Guidelines”. They are so named because they originated in Aldi Stores Limited v WSP Group PLC (2008) 1 WLR 748. The Court of Appeal has very recently emphasised that the Aldi Guidelines are mandatory. See in particular Otkritie (supra). At paragraph 48 of her judgment, Arden LJ stated: “If there is a view among commercial practitioners that the Aldi Guidelines

Generally speaking, if a claim or a defence is an abuse of process within the Henderson v Henderson principle, then that claim or defence should be struck out regardless of its merit. are subject to exceptions or optional, I would remind them that (following this decision) there will be at least five decisions of this Court when this Court has been asked to strike out proceedings because the Aldi Guidelines have not been followed”. So what are the Aldi Guidelines? Essentially they involve case management. The relevant passage in Aldi reads as follows: “30. Parties are sometimes faced with the issue of wishing to pursue other proceedings whilst reserving a right in existing proceedings. Often, no problem arises; in this case, Aldi, WSP and Aspinwall each in truth knew at one time or another between August 2003 and the settlement of the original action in January 2004 that there was a potential problem, but it was never raised with the court. I have already expressed the view that it should have been. The court would, at the very least, have been able to express its view as to the proper use of its resources and on the efficient and economical conduct of the litigation. It may have seen if a way could have been found to determine the issues applicable to Aldi in a manner proportionate to the size of Aldi’s claim and without the very large expenditure that would have been necessary if Aldi had to participate in the trial of the actions. It may be that the court would have said that it was for Aldi to elect whether it wished to pursue its claim in the proceedings, but if it did not, that would be the end of the matter. It might have enquired whether the action against excess

underwriters could have been expedited. Whatever might have happened in this case is a matter of speculation. 31. However, for the future, if a similar issue arises in complex commercial multi-party litigation, it must be referred to the court seized of the proceedings. It is plainly not only in the interest of the parties, but also in the public interest and in the interest of the efficient use of court resources that this is done. There can be no excuse for failure to do so in the future.” In the simplest of terms, if A might have a claim against C, that is related to its claim against B, then A should raise this claim at an early stage in the life of the A v B claim. Directions can then be given as to what should be done about A’s claim against C. The possibilities include involving C directly in the A v B case, or postponing the A v C case. If the Aldi Guidelines are breached, then the Court hearing A v C will not necessarily strike out that case, but may do so. In Otkritie Knowles J did not dismiss the A v C case, although he did order A to pay most of C’s costs of C’s unsuccessful application to strike out A’s case. The Court of Appeal upheld both the refusal to strike out, and the costs order. The Court of Appeal emphasised that the decision not to strike out was a “broad meritsbased judgment”. The decision as to costs was an exercise of discretion.

Conclusion

The lessons to learn from the above are: 1. If A is suing B then both A and B should exercise all reasonable diligence to pursue the available claims and defences. A failure to do so may render the subsequent deployment of those claims or defences an abuse. 2. If A is suing B and realises, or ought to realise, that it may have a related claim against C, then A should raise this at an early stage in the life of A v B, and seek judicial guidance as to what to do. A failure to seek such guidance may render the subsequent claim of A v C an abuse.

3 While the date of the external swap was the same as the loan date, the principal was significantly different, and the fixed interest rate was at least 1.5% different. Also, no emails, letters or notes were produced which would forge any link between the loan and the external swap.

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Written by, STEPHEN BOYD

Bagum V Hafiz

The discretionary power of the court to make an order giving one party the first right to bid under section 14 of the Trusts of Land and Appointment of Trustees Act 1996 (“TOLATA”) The usual order made regarding the sale of property subject to a trust of land is that all beneficiaries will be entitled to bid. However, there may be circumstances where one beneficiary is given the opportunity to buy the property before the other/s. I refer to this as a “Bagum Order” as the issue arose for determination in Bagum v Hafiz [2016] Ch 241. Mrs Bagum’s late husband purchased the property, a 4-bedroom house, as a right to buy tenant in 2003, two years before his death intestate. Those family members with an interest in his intestate estate gave up their interests to Mrs Bagum, so that she became the sole registered owner of the property. Both she, her three sons, and one of her daughters, continued to live at the property, to the purchase of which her two eldest sons, Mr Hafiz and Mr Hai, had made financial contributions.

They both married and started families of their own. The increasingly crowded conditions in the house led to tensions, in particular between the two wives, which eventually led to Mr and Mrs Hai leaving to find separate rented property of their own.

property or (ii) for Mr Hai to sell his interest in the property to Mr Hafiz. She contended that Mr Hai had demonstrated a reluctance to co-operate with any sale or transfer of the property to herself, to Mr Hafiz or to a third party.

Shortly before he left, Mr Hai sought to protect his investment in the property (which by then included his original contribution to its purchase and contribution to mortgage payments thereafter) by securing his mother’s and brother’s agreement to the making of a declaration of trust, by which they declared themselves to be trustees of the property for the three of them in equal shares.

In his defence, Mr Hai agreed the property should be sold and denied that he had been unco-operative.

Mr Hai made various proposals to release some funds from the property to him through rental, remortgage or even sale. Eventually, the family agreed to sell, prepared the property, marketed it and obtained an offer. When it came to it, however, Mr Hai refused to sign the transfer document, instead offering to purchase the house himself. Mrs Bagum, who had not wanted to move out, refused to consent to this. In her particulars of claim, Mrs Bagum asserted that, in the light of the family division, she wished (i) to sell the

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Section 6 of TOLATA, headed “General powers of trustees” provides: “(1) For the purpose of exercising their functions as trustees, the trustees of land have in relation to the land subject to the trust all the powers of an absolute owner… (5) In exercising the powers conferred by this section, trustees shall have regard to the rights of the beneficiaries. (6) The powers conferred by this section shall not be exercised in contravention of, or of any order made in pursuance of, any other enactment or any rule of law or equity.” Section 14, headed “Applications for order”, provides as follows:


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“(1) Any person who is a trustee of land or has an interest in property subject to a trust of land may make an application to the court for an order under this section. (2) On an application for an order under this section the court may make any such order – (a) relating to the exercise by the trustees of any of their functions (including an order relieving them of any obligation to obtain the consent of, or to consult, any person in connection with the exercise of any of their functions), or (b) declaring the nature or extent of a person’s interest in property subject to the trust, as the court thinks fit”. Section 15, headed “Matters relevant in determining applications”, provides: “(1) The matters to which the court is to have regard in determining an application for an order under section 14 include – (a) the intentions of the person or persons (if any) who created the trust, (b) the purposes for which the property subject to the trust is held, (c) the welfare of any minor who occupies or might reasonably be expected to occupy any land subject to the trust as his home, and (d) the interests of any secured creditor of any beneficiary” Subsection (3) provides, save for irrelevant exceptions, that the matters to which the court is to have regard: “also include the circumstances and wishes of any beneficiaries of full age and entitled to an interest in possession in property subject to the trust or (in case of dispute) of the majority (according to the value of their combined interests)”. At the trial of a preliminary issue, namely, her claim for an order that Mr Hai sell and transfer his interest in the property to Mr Hafiz, the judge concluded that she had no jurisdiction to make such an order, but that she both could and should make an order directing the trustees to sell the property, on terms that Mr Hafiz should first have the opportunity to buy it for a price to be determined on valuation evidence by the court, failing which (within 6 weeks of that determination) the property should be sold on the open market, with liberty for all the beneficial owners to bid. Mr Hai appealed, asserting first, that the judge had no jurisdiction to make

such an order and secondly, if she did, that it was not a proper exercise of her jurisdiction under TOLATA. In agreement with the judge, and with the dicta of Mr Thomas Ivory QC in Rahnema v Rahbari [2008] 2 P & CR DG5, the Court of Appeal held that the court had no power to order or direct one beneficiary under a trust of land to sell or transfer their beneficial interest to another beneficiary. Briggs LJ said [249] that the direct disposal of a beneficiary’s interest, whether on sale to another beneficiary or otherwise, is, quite simply, not a function of trustees of land. The next question was whether the court has the power under section 14 to direct trustees of land to sell the trust property to particular beneficiaries, without the consent of the beneficiary or beneficiaries to whom the land is not being sold. It was submitted on behalf of Mr Hai that the court had no such power for three reasons: Such a sale would have the same effect as a compulsory transfer of the non-consenting beneficiary’s interest to the other beneficiaries. Briggs LJ acknowledged that, save perhaps for certain tax consequences, a sale by trustees of the trust property to beneficiaries A and B has much the same effect as a compulsory transfer of beneficiary C’s interest to beneficiaries A and B, in exchange for money. However, it did not follow from the fact that one type of transaction lies outside the functions of a trustee that another type of transaction must do as well, merely because it has broadly the same economic effect. 1. Such a sale would be contrary to the established rule of equity that the overriding duty of a trustee of land, on sale, is to obtain the best price for the beneficiaries as a whole. 2. Such a sale would also be contrary to the established rule of equity that trustees may not exercise their powers with a view to advance the particular purposes of one party interested in the execution of the trust at the expense of another party. Briggs LJ considered that the purpose

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of section 6(6) is not to define the extent of the trustees’ powers or even functions, but rather to prohibit the trustees from exercising them in certain ways. He said that it was in marked contrast with the effect of section 14(2), by which the court is given the widest discretion to make orders relating to the exercise by the trustees of any of their functions, having regard, in particular, to the non-exclusive list of the matters to which the court is to have regard, set out in section 15(1)(3). More generally, he took the view that the clear object and effect of sections 14 and 15 is to confer on the court a substantially wider discretion, exercised on the basis of wider considerations, than might be enjoyed by the trustees themselves, acting without either the consent of the beneficiaries or an order of the court. The Court of Appeal held that the judge’s order that there should be a sale of the trust property, preceded by the conferring on Mr Hafiz of an opportunity to be the purchaser, should he within the stated time pay the amount determined by a valuation of the property by the court, fell squarely within her jurisdiction under section 14(2). However, the Court acknowledged that it was an unusual form of order and that in many similar cases the court has ordered a sale of the trust property, with liberty to all beneficiaries to bid, thereby maximising the prospects of the achievement of best value. It may be drawn from the judgment that the following circumstances may persuade a court to make a similar order in future cases: a) Where the risk of undervaluation is low due to the large number of available comparables; b) Where one of the beneficiaries (A) had moved out of the property, but the other/s (B and C) wished to retain it. 3. Where a) applied, it would minimise the risks that the interests of B and C in continued occupation, and the interests of A in obtaining a payment representing the proper value of his interest, might be materially compromised.


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Written by, RICHARD CLEGG

Pre-action disclosure – not worth the candle?

The recent decision in Arena Leisure Ltd v Ladbrokes and others [2017] EWHC 431 (Ch) serves to emphasise once again the reality that it generally requires an exceptional case to succeed on an application for pre-action disclosure. And of course whether successful or not, the application and giving of disclosure is ordinarily all conducted at the applicant’s own expense. In Arena Leisure the intended claim was about licensed betting offices providing commentaries in those offices on horse races at Arena Leisure Ltd race courses but without having purchased a license to use the Arena Leisure Ltd course coverage. Being unaware of the source of the commentaries, Arena Leisure Ltd applied for pre-action disclosure. In responding to the application, the method by which the commentaries were produced was explained in general terms in evidence on behalf of the operators of the betting offices. The applicants nonetheless persisted in their application so as to seek documents which would evidence the detail of the method used. The application was refused. It failed at almost every stage of the legal test: the documents sought went beyond those that would be required by standard disclosure; disclosure would not achieve any of the threshold objectives; and anyway, disclosure would not be desirable having in mind those objectives. Not a difficult case, after all, you may think. However, it is the reasoning that shows just how difficult it is to succeed. First, to recap on the required elements of the test under the CPR. Those are:

1. The applicant and respondent are both likely to be parties to subsequent proceedings; 2. If the proceedings had started, the documents sought would fall within standard disclosure; 3. Disclosure before proceedings have started is desirable in order to: a. Dispose fairly of the anticipated proceedings; or b. Assist the dispute to be resolved without proceedings; or c. Save costs. The courts treat (3) as involving both a jurisdictional element and a discretionary element (Black v Sumitomo [2001] EWCA Civ 1819). The jurisdictional element is that an applicant must show that there is a real prospect in principle of one of the stated objectives being met. The discretionary element is that as a matter of discretion disclosure is considered to be desirable. It has frequently been said that a case outside the normal, or usual, run is required (e.g. Hutchinson 3G v O2 [2008] EWHC 55 (Comm)). In Arena Leisure, whilst element (1) was satisfied, elements (2) and (3) were not. It might have been possible to tailor the documents sought so as to satisfy element (2), but the application was sunk on element (3). The key finding of the Judge was that he

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“it must not be forgotten that the whole process is generally at the expense of the applicant”

considered it possible for the applicants to commence proceedings without pre-action disclosure, even though the detail of the method used to produce commentaries had not been provided. That finding was treated as fatal to all of the objectives in element (3). In essence, because the applicants knew enough to commence proceedings, they “already know quite enough to engage in settlement discussions” (objective ‘b’) and “it is impossible to see how this disclosure can be needed to dispose fairly of the anticipated proceedings” (objective ‘a’). Furthermore, the delay and expense caused by the application for pre-action disclosure (self-) defeated objective ‘c’: Continuing with preaction disclosure would lead to further costs and delay whereas “To my mind, the single most important step, in terms of fairness, achieving settlement and for the saving of costs is for the Applicants to put their claim, properly pleaded, so that the [respondents] know where they stand, and can respond appropriately” ([43(iii)] of Arena Leisure). In other words, being in a position to commence proceedings ought to mean that you already to know enough, absent some special circumstance, and do not need pre-action disclosure. However, it is certainly not plain sailing if not enough is known, since pre-action disclosure is not an opportunity for “fishing” either (Black, [95]). Not knowing enough can therefore also lead to a refusal of pre-action disclosure.

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So somewhere in the middle there is a narrow band of cases where enough is known to satisfy a court that the application is not “fishing” whilst at the same time not enough is known simply to commence proceedings. That band is likely to be a very narrow one indeed in a commercial case. In reality it is likely to be confined to situations where it is demonstrable that there exist a limited number of identifiable documents of potentially decisive importance, where there is already strong supporting evidence for the intended claim, but where that claim cannot be fully articulated without those documents. And of course it must not be forgotten that the whole process is generally at the expense of the applicant. CPR 46.1(2) states as the general rule that the respondent is to have its costs of the application and of the disclosure exercise. Even if the application is unsuccessfully opposed, it is likely to require a finding of unreasonable conduct on the part of a respondent even to achieve the modest victory of no order as to costs of the application (SES Contracting v UK Coal [2007] EWCA Civ 791). What a way to start litigation: a difficult application entirely at your client’s own expense. It will be a rare case where an application for pre-action disclosure is worth the candle.


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Written by, JONATHAN MCNAE

Why Arbitrate? (and how to do it)

As ardent readers of Chambers’ missives will know, Selborne has launched an arbitration service. Please feel free to visit our specialist website at selbornearbitration.com for further details.

to be bound by the outcome. The determination is unknown at the point of agreement, and may, therefore, result in an outcome that would not have been achievable by other forms of ADR.

This article is intended to broaden understanding of arbitration’s place in the litigator’s arsenal; and to debunk a couple of fallacies about arbitration along the way.

It is in this point that arbitration’s greatest strength and weakness lies. All other things being equal, a party should do as well at arbitration as before a judge, as the process to reach the outcome is essentially the same. For the vindicated party, this means an outcome that does not involve any compromise. A losing party still loses just as heavily as would be the case at trial.

ADR V LITIGATION

The benefits to clients of ADR will be familiar to the reader. Perhaps more importantly, the potential costs consequences of not engaging in meaningful attempts to avert litigation are equally well known. The Appellate Courts have repeatedly given strong guidance that if you litigate without attempting ADR, you may open yourself up to adverse costs orders, even if your position is ultimately vindicated at trial1. All successful ADR is consensual. In the preponderance of variations, the consensus is founded in an agreement to compromise proceedings on terms acceptable to both parties. However, arbitration is different. In arbitration, the consensus is that the parties will appoint someone to act in the position of a judge; and that the parties agree

SO, WHY ARBITRATE WHEN YOU CAN JUST LITIGATE?

If arbitration is essentially a court process by another name, then what are the benefits of paying someone to act as the judge? A point obvious to lawyers, but perhaps paradoxical to lay clients is that paying for an arbitrator is just about the only expense that is greater than the comparative cost in court proceedings. However, this is far from the whole story. There is no issue fee, and indeed this and other court costs could quickly outweigh the costs of an arbitrator.

Beyond this, then there are myriad savings to be made by arbitrating, in time, money and effort: •

The parties can agree the ambit of the process, providing real flexibility from the outset.

The overall length of the dispute will usually be significantly shorter than for a Court determination.

The availability of your arbitrator will be greater than that of a judge, and brief fees will not be incurred only to find that your case is unassigned.

Perhaps often overlooked, but the arbitral process can be confidential, which is rarely the case for court proceedings.

Arbitration confers a greater degree of finality since, in the usual case, arbitral awards can only be challenged on appeal in a limited set of circumstances.

QUICK, CHEAP AND CONFIDENTIAL, EH? SO WHY AREN’T MORE PEOPLE ARBITRATING?

First, there are a lot of arbitrations, but they tend to be confidential. Even with a keen eye on the latest law reports, you won’t find out that they

1 Although see the recent CA decision in Gore v Naheed [2017] EWCA Civ 369. This case provides some support for those litigants who choose to row against the tide, although it remains to be seen whether we have reached high water. Henry Webb acted for the Respondent, who was successful on this point.

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are happening. They aren’t just for unwieldy shipping cases, either. Secondly, as noted above, if you are on the right side of the case, then an arbitration should be good for you. The corollary is that your opponent may prefer to mediate, which may produce a better outcome for the paying party than an arbitration. However, there will be some cases where both parties are equally convinced that they will win, and neither side wishes to compromise. If the case isn’t of any great value, then this can have the effect of entrenching both parties in expensive trial preparation. This mutually-assured downward spiral often acts as a major deterrent to compromise. An arbitration would give a judicial determination and a shot at the vindication that both sides crave, without necessarily running up the same levels of costs. Thirdly, it is often assumed that unless there is a contractual arbitration provision, then there is no scope for using arbitration to resolve a dispute. Plainly, if a party would be reluctant to arbitrate after the dispute has arisen for the reasons given above, then a pre-existing arbitration provision is of real value. But even the party more likely to lose has something to gain by arbitration: a lower bill at the end of

the case. There remains much scope for what is known as an ‘ad hoc’ arbitral agreement to be concluded after the problem has arisen.

1. Explore the possibility of arbitrating with the opposing party/inform the other side that you wish to invoke pre-existing arbitral provisions.

INTERESTING. HOW DO WE SET THIS UP FOR OUR CLIENTS?

2. Telephone one of our experienced clerks for some advice on suitable arbitrators.

To start with, give some consideration to the form that the arbitration may take. For example, you may conclude that no hearing would be necessary, as the dispute is capable of resolution on the paperwork alone. Also give some thought to the level of experience that would be suitable to determining your case: like judges, arbitrators have varying degrees of specialisation and experience, but with an arbitration, you can choose who determines the dispute. A word of warning: picking an arbitrator who is well known to you may prove counterproductive, as the pre-existing relationship is likely to be disclosable and may provide a good reason for the other side to object to the appointment. There are various arbitral schemes available to litigants, but one easy way of learning more about how arbitration could work in practice is to spend a couple of moments on the Selborne Chambers Arbitration (‘SCA’) website, selbornearbitration.com. In short:

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3. If there is no pre-existing arbitration agreement, then an agreement will need to be reached. SCA has a standard form agreement, which can be tweaked consensually by the parties. 4. Jointly appoint an arbitrator. SCA offers fixed pricing structures for all but the larger arbitrations. 5. Prepare/present your case in accordance with the relevant directions. The benefits of ADR are clear, but arbitration is sometimes overshadowed by the increasing focus on mediation. Both have their place. Practitioners are well advised to bear arbitration in mind – it could be just what your client is after! Jonathan McNae is a barrister and arbitrator.


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Written by, CHRIS DE BENEDUCCI

Professional Negligence Update – The Buck Stops Here

Property work can be risky business. In this article, I will look at two recent Supreme Court decisions which consider the limits of solicitors’ liability when things do go wrong. In the first case, the Supreme Court examined the principles concerning the “scope of duty” restrictions on recoverable losses. In the second, their Lordships were asked to determine when the Law Society’s Minimum Terms and Conditions for Professional Indemnity Insurance allow individual claims to be aggregated together.

Hughes-Holland v. BPE Solicitors [2017] UKSC 21 The sole judgment, given by Lord Sumption, is a tour de force exposition of the “scope of duty” principles famously enunciated by Lord Hoffmann in South Australia Asset Management Corpn v. York Montague Ltd [1997] AC 191 (“SAAMCo”). The Supreme Court’s decision brings much-needed clarity to the question of what constitutes “advice” and “information” when assessing the scope of a professional’s duty of care towards his or her clients.

Facts

In late 2007 Richard Gabriel, an experienced businessman, agreed to lend a friend’s company £200,000 in order (so he thought) to finance the development of a disused heating tower into office accommodation. Having visited the site, Mr Gabriel had decided that the tower was worth around £150,000 but that the site’s value would be more than £400,000 once developed.

In reality, three-quarters of the loan were to be put towards purchasing the tower and the remaining quarter was to be used to meet a related company’s VAT liabilities. The judge at first instance found that, rather than anything more sinister, there had simply been a misunderstanding between Mr Gabriel and his friend regarding the purpose of the loan.

Decision

Mr Gabriel instructed BPE Solicitors (“BPE”) to draft the loan documentation. BPE made two mistakes. First of all, the friend had left BPE a voicemail indicating that Mr Gabriel’s loan would go towards purchasing the tower. BPE failed to clarify these instructions with Mr Gabriel. Secondly, the facility letter drawn up by BPE (using a template from a previous transaction) contained statements which expressly reinforced Mr Gabriel’s mistaken belief that his loan would be applied solely as a contribution to the costs of the development of the site.

The key finding was that the development project was in reality unviable: even had Mr Gabriel’s £200,000 loan been applied to the development, the value of the property would not have been enhanced in the slightest. On the evidence presented at trial, the development would have cost far more than £200,000. Given that there were no further funds available, the project would inevitably have been left incomplete and substantially worthless.

With no money left to fund the development after purchasing the tower and paying off the VAT, the project never got off the ground. Of the £200,000 loaned – not to mention the agreed £70,000 profit on top – Mr Gabriel recovered nothing bar £8,191.56 paid personally by his erstwhile friend. Mr Gabriel exercised a power of sale over the plot but no buyer could be found. The land was then auctioned for the galling sum of £13,000, which was (in a further cruel twist) entirely cancelled out by the costs of sale.

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At first instance Robert Englehart QC found that, had BPE acted properly and so alerted Mr Gabriel to his misunderstanding, he would not have made the loan. “But for” causation was therefore satisfied, and yet both the Court of Appeal and the Supreme Court held that BPE was not liable to Mr Gabriel.

In the circumstances, the Supreme Court held that none of the loss suffered by Mr Gabriel fell within the scope of BPE’s duty to him. BPE had not assumed responsibility for Mr Gabriel’s wider decision to lend the money. Their instructions were simply to draw up a facility agreement and charge. Had they done so properly, the evidence was that Mr Gabriel would still have lost his money. Rather, the loss “arose from commercial misjudgements which were no concern of [BPE’s]”.

Discussion

This decision will provide little succour for claimants. Indeed, having been


S EL B O R N E C H A M B ER S

Lord Sumption acknowledged that the distinction between advice and information has “given rise to confusion largely because of the descriptive inadequacy of these labels”. ordered to repay the damages awarded to him at first instance, the original claimant was adjudicated bankrupt while the case travelled from the Court of Appeal to the Supreme Court, and his trustee in bankruptcy was substituted in for the final round of proceedings. To use Lord Hoffmann’s terminology in SAAMCo, the Supreme Court’s decision turns on the distinction between the different responsibilities assumed by professionals providing “advice” and those providing “information”. The primary significance of the judgment in Hughes-Holland v. BPE is its commentary on (and affirmation of) these two terms. Lord Sumption, who in his previous incarnation had successfully represented the Defendants in SAAMCo, emphasised certain fundamental features of the House of Lords’ reasoning in that case. First and foremost, their Lordships operated on the basis that “where the contribution of the defendant is to supply material

which the client will take into account in making his own decision on the basis of a broader assessment of the risks, the defendant has no legal responsibility for his decision”. That is to say, where a professional provides a client with particular “information” as opposed to wideranging “advice”, the professional’s liability will only extend to the consequences of that information being incorrect and will not cover all losses flowing from the client’s underlying decision. To take the classic example, a valuer providing a negligent valuation will only be liable for the difference between the negligent valuation and the true value of the property, and not for the entirety of the loss suffered by the lender or purchaser who had entered into a transaction on the basis of the negligent valuation. Lord Sumption acknowledged that the distinction between advice and information has “given rise to confusion largely because of the descriptive inadequacy of these

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labels”. However, his Lordship expressed continuing support for the two categories, which he explained as follows: “In cases falling within Lord Hoffmann’s “advice” category, it is left to the adviser to consider what matters should be taken into account in deciding whether to enter into a transaction. His duty is to consider all relevant matters and not only specific factors in the decision. If one of those matters is negligently ignored or misjudged, and this proves to be critical to the decision, the client will in principle be entitled to recover all loss flowing from the transaction”. “By comparison, in the “information” category, a professional adviser contributes a limited part of the material on which his client will rely in deciding whether to enter into a prospective transaction, but the process of identifying the other relevant considerations and the overall assessment of the commercial merits of the transaction are exclusively matters for the client (or possibly his other advisers). In such a case… the defendant’s legal responsibility does not extend to the decision itself. It follows that even if the material which the defendant supplied is known to be critical to the decision to enter into the transaction, he is liable only for the financial consequences of its being wrong and not for the financial consequences of the claimant entering into the transaction so far as there are greater”.


S U M M ER N E W S L E T T ER 2017

The result of the distinction outlined above is to prevent professionals who have been retained to give “information” becoming “the underwriter of the financial fortunes of [a] whole transaction by virtue of having assumed a duty of care in relation to just one element of someone else’s decision”. It is therefore clear that the SAAMCo principles still represent one bulwark against the gradual erosion of the legal protections which the professions have historically enjoyed. As a result of the clarification provided in Hughes-Holland v. BPE Solicitors, we can expect to see those principles deployed more often.

AIG Europe Ltd v. Woodman [2017] UKSC 18

In spite of obstacles such as those identified above, assume a claimant manages to secure a judgment against a firm of solicitors. How far will the firm’s professional indemnity insurance stretch? In particular, what do the Law Society’s Minimum Terms and Conditions (“MTC”) mean when they state that “all claims arising from similar acts or omissions in a series of related matters or transactions will be regarded as one claim”? Lord Toulson’s sole judgment presents the definitive construction of this aggregation clause, with very real consequences for when firms will be required to dip their hands into their own pockets.

Facts

The unfortunately named Midas International Property Development plc (“Midas”) wanted to develop two holiday resorts. External investors were to provide the funding for these developments, one of which was in Turkey and the other in Morocco. In 2004 Midas instructed a firm of solicitors to devise an appropriate financing mechanism. A trust was created in respect of each development, with the solicitors as trustees. The investors would either provide loans or purchase holiday properties at the developments off-plan. The funds advanced for these purposes were to be held by the solicitors in an escrow account. Pursuant to a “cover test” in the trust deed, the funds would not be released to Midas until the amount in the escrow account was sufficient to finance the relevant development. In the event, Midas failed to complete the purchase of either development site and was eventually wound up in November 2009. By that time, however, the solicitors had already paid out all the money in the escrow account. The investors naturally brought claims against the solicitors alleging, through various causes of action, that the cover test had not been properly applied before funds were released to Midas. These claims were valued at over £10mi.

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Under the terms of the firm’s professional indemnity policy – which followed the MTC – the insurer’s liability in respect of a single claim was limited to £3mi in respect of each claim. AIG argued that the investors’ claims all arose from “similar acts or omissions in a series of related matters or transactions” and therefore sought a declaration that the claims should be aggregated as a single claim under the £3mi limit of indemnity. Alternatively, AIG contended that the claims relating to the Turkish and Moroccan developments respectively should be aggregated into two separate pots of indemnity.

Decision

At first instance Mr Justice Teare held that all the claims arose from similar acts or omissions. This finding was not challenged on appeal. As regards the other requirement of the clause, however, Teare J held that these acts or omissions were not “in a series of related matters or transactions”. This phrase was interpreted as referring to transactions which, by reason of their terms, were conditional or dependent on each other. On Teare J’s reasoning, therefore, the aggregation clause was not engaged. Accordingly, the heat of argument on appeal turned on what it means to say that matters or transactions are “related”. What degree of connection is required between the matters or


transactions for the purposes of the aggregation clause?

As Lord Toulson rightly observed, “it is possible to describe things or people as having certain intrinsic qualities or characteristics, but it is a more elusive term when used as a descriptor of a relationship between two transactions”. In its place is a common-sense test which is much more easily applicable.

The Court of Appeal concluded that Teare J’s interpretation was too stringent. Instead Lord Justices Longmore, Kitchin, and Vos opted for a construction of “related” which required the matters or transactions to have “an intrinsic relationship with each other, not an extrinsic relationship with a third factor”. In turn, Lord Toulson held that the Court of Appeal’s formulation was neither “necessary or satisfactory”. In Lord Toulson’s view, “use of the word “related” implies that there must be some inter-connection between the matters or transactions, or in other words that they must in some way fit together”. Adopting this approach, his Lordship held that, although the entirety of the claims could not be aggregated, the respective Turkish and Moroccan claims did each arise from acts or omissions in a series of related transactions: “the transactions fitted together in that they shared the common underlying objective of the execution of a particular development project, and they also fitted together legally through the trusts under which the investors were co-beneficiaries”.

“Practitioners advising on liability will be relieved to see that the “intrinsic relationship” test has been jettisoned”.

Furthermore, both insurers and those insured will note that the Supreme Court eschewed a narrow view of what constituted the relevant matter or transaction. The matter or transaction concerned was not (as the Court of Appeal held) the payment of money out of the escrow account, but rather the investment in a development scheme under a particular contractual arrangement. This approach widens the potential scope of the aggregating provisions in the MTC. Finally, Lord Toulson made the point that, faced with the broad contractual language of the MTC, “determining whether transactions are related is therefore an acutely fact sensitive exercise… [involving] an exercise of judgment, not a reformulation of the clause to be construed and applied”. This is an observation which can usefully be applied to all questions of contractual interpretation, whether or not in the sphere of insurance law. Grasp the nettle and ask yourself: do the facts actually fit the natural and ordinary meaning of the words in front of you?

Discussion

Practitioners advising on liability will be relieved to see that the “intrinsic relationship” test has been jettisoned.

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S U M M ER N E W S L E T T ER 2017

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10 Essex Street, London WC2R 3AA Phone 020 7420 9500 Fax 020 7420 9555 clerks@selbornechambers.co.uk www.selbornechambers.co.uk


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