Litigation Update: Spring 2015

Written on 9 Apr 2015

Developments

High Court decisions on conflicting jurisdiction and dispute resolution
clauses

Settlements made “subject to contract

High Court decision on contractual right to inspect and copy documents

High Court guidance on notices of claim under SPA warranty clauses

Defendant deliberately misled the court, but was allowed to amend defence and add claims against others

High Court guidance on costs budgeting

Initial payments of costs at end of trial hit 90% – or more

Changes to CPR Part 36 in force on 6 April 2015

Developments

High Court decisions on conflicting jurisdiction and dispute resolution
clauses

The courts have had to consider
conflicting clauses in related agreements in a number of cases in the past few
years.  As ever, the main test is one of
contractual interpretation: finding the parties’ intentions from the words used
in the overall circumstances of the case. However, there are some rebuttable
presumptions to consider as well.  Two recent
cases illustrate the difficulties in this area. 

In one case the dispute
resolution clause in a settlement agreement provided for litigation, but the
underlying contract had an arbitration clause. 
In the other case a novation agreement gave exclusive jurisdiction to
the courts of Guernsey, but the underlying contract provided for the exclusive
jurisdiction of the courts of England and Wales.  The uncertainty in interpreting the parties’
intention was costly and time-consuming.

A settlement agreement

In Monde Petroleum SA
v Westernzagros Ltd [2015] EWHC 67 (Comm)
, Mr Justice Popplewell had to
consider an appeal under section 67 of the Arbitration Act 1996.  The parties had agreed a consultancy services
agreement, which provided for disputes to be arbitrated under the ICC rules in
London.  A dispute arose.  The parties settled the dispute and entered
into a settlement agreement which included an exclusive jurisdiction clause
specifying the courts of England and Wales.

Monde then alleged that it was induced to enter the
settlement agreement by misrepresentation and/or duress.  Monde started proceedings for this claim in
the Commercial Court.  As it was close to
the end of the limitation period, Monde also started arbitration proceedings
under the consultancy agreement and asked to stay the arbitration in favour of
the court proceedings.  Westernzagros
refused the request to stay the arbitration proceedings and counterclaimed in
them for declarations.  The arbitration then
went ahead and the tribunal found in favour of Monde.  Westernzagros appealed under section 67.

Did the dispute resolution clause in the settlement
agreement override the arbitration agreement in the original agreement?  The judge referred to the guidance from the
House of Lords in Fiona Trust &
Holding Corporation v Yuri Privalov [2007] UKHL 40
.  In that case, the judges held that the courts
should presume that the parties intend any dispute arising from their
relationship to be decided by the same tribunal, unless the language used made
it clear to the contrary.  That judgment
was in relation to an arbitration clause, but also applies to choice of
jurisdiction.  However, it is a
presumption only.

The judge went on to decide that:

“the dispute
resolution clause in the termination/settlement agreement should be construed
on the basis that the parties are likely to have intended that it should
supersede the clause in the earlier agreement and to apply to all disputes
arising out of both agreements.  Whether
it does so in any particular case will depend on the language of the clause and
other surrounding circumstances.”

Applying that test to this case, he decided that the clause
in the settlement agreement superseded the clause in the consultancy
agreement.  He refused the appeal.

A novation agreement

By contrast, last year in Rawlinson & Hunter Trustees SA v ITG Ltd [2014] EWHC 3764, the
High Court had to consider the effect of a jurisdiction clause in a deed of novation,
which was inconsistent with the jurisdiction clause in the original loan
agreement.  The two judges involved in
the case applied the same principles of contract interpretation to the
circumstances, but came to opposite conclusions.  Mr Justice Nugee allowed an appeal from the
Chief Chancery Master and held that the jurisdiction clause in the deed of novation
only applied to that document.

Like Popplewell J, the judge referred to the Fiona Trust case.  However, in trying to establish the parties’
intentions, the judge considered the position of the jurisdiction clause within
the novation agreement.  If the parties
had intended to change the jurisdiction provisions of the loan agreement, they
should have made or referred to this change in the main operative part of the
deed of novation.  He also considered the
use of defined terms “this deed” and “the loan
arrangements
” in the deed of novation. 
Their use indicated that the deed of novation was not intended to alter
the jurisdiction clause of the loan agreement.

Practice points

  • When drafting termination or settlement agreements for contract disputes or novation agreements, make the dispute resolution method, the jurisdiction and choice of law clauses identical.
  • If there is good reason to have a different dispute resolution method, jurisdiction or choice of law from an underlying or original contract, express the parties’ intentions very clearly. This might include referring to the intended change in the main operative part or in a “background” section at the start of the document.
  • Where there are competing dispute resolution or jurisdiction clauses, it might be necessary to start different methods of dispute resolution process or issue proceedings in different jurisdictions. This would inevitably cause delay and increase costs.

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Settlements made
“subject to contract”

In Taylor v Burton
[2015] EWCA Civ 142
, the Court of Appeal had to consider the effect of a
settlement agreement that was expressed to be “subject to
contract”.  The main point is that
parties may agree settlement terms that are conditional on court approval.

The case involved a dispute between adjacent landowners over
a right of way.  The parties agreed a
compromise “subject to contract”, which involved granting a temporary
right of way.  The parties submitted a
draft consent order, with a draft deed between the parties and mortgagees.  The court declined to approve the consent
order, because the deed had not been entered into and the court did not have any
power over the mortgagees (who were not parties to the proceedings).

Sir Colin Rimer gave the leading judgment.  The consent order with the draft deed
“subject to contract” was conditional on court approval.  The court does not “rubber-stamp”
consent orders.  “The court always wants and needs to be
satisfied that the order it is being asked to make is in a form that it can and
should make.

Practice points

  • If there is any doubt that the court might not approve a settlement by consent order, make it clear that the settlement terms are conditional on court approval.
  • Be careful to make sure that the court has the power to make the order in the terms of the consent order.  Also consider if the court might have any concerns about approving it. 

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High Court decision
on contractual right to inspect and copy documents

In Alfa Finance
Holding AD v Quarzwerke GmbH [2015] EWHC 243 (Ch),
the claimant made a
claim for specific performance based on its contractual right to have access to
certain documents.

Clause 12.1.3 of the agreement between the parties provided
that “the relevant Group Companies
shall allow the seller and its professional advisors reasonable access to such
books, records and documents, including the right to take copies at the
seller’s expense.”

The claimant required access to documents by written
notification, but the defendant did not comply. 
Therefore, the claimant brought an action for specific performance.  The defendant argued that such an order
should not be granted as the claimant had not established a reasonable reason
for their access to the documents.

HHJ Purle QC rejected the defendant’s argument and found in
favour of the claimant. 
“Reasonable” access only meant the method and timing of
access.  The “reasons for the claimant seeking to exercise its contractual
rights are neither here nor there, because that is exactly what it is doing,
exercising its contractual rights.” 
Where there is a clear contractual entitlement to access to
documents the courts may intervene to enforce the terms.

The judge gave directions for the exercise of the right,
including that the respondent buyer must use its “best endeavours” to
make the documents available to the applicant seller.  He also set a specified period of time for
compliance.

Practice points

  • If a party has a contractual right of access to documents, a court may grant specific performance.
  • Don’t forget to consider exercising existing contractual rights to documents at the start of a dispute, rather than waiting for disclosure. 

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High Court guidance
on notices of claim under SPA warranty clauses

In The Hut Group Ltd v
Nobahar-Cookson and another [2014] EWHC 3842 (QB)
, the High Court
considered various aspects of notices required under the warranty provisions of
a share purchase agreement (SPA). The court gave some useful guidance for
interpreting warranty clauses which require notices be given within a certain
period of time or require a minimum level of detail about the claim.

It is common in SPA warranty provisions for the warrantor to
negotiate certain contractual limitations to any potential claims. In the Hut Group case, the warranty provision
required the claimant to serve notice on the warrantor:

(specifying in reasonable detail the nature of the Claim and, so far as
practicable, the amount claimed in respect of it) as soon as reasonably
practicable and in any event within 20 Business Days after becoming aware of
the matter)

The defendants argued that the claimant’s warranty claim was
served out of time. The defendants’ interpretation of the clause was that the
20 day period for notifying claims began to run when the claimant became aware
of the factual grounds for a breach of warranty claim, and not when it became
aware that those grounds might constitute an actionable claim. 

The claimant argued that the proper interpretation (and the
most commercially sensible approach) would be that time would not start to run
until the claimant became aware that there was a proper basis for putting
forward a warranty claim. Mr Justice Blair agreed with the claimant’s
interpretation. In this case, the point at which the claimant received advice
from its accountants that there was a proper basis for putting forward a
warranty claim was considered to trigger the claimant ‘becoming aware’ for the
purposes of the SPA.

In addition to the timing considerations, the defendants
also argued that even if notice of the claim had been given in time, it should
not be considered valid because it did not contain sufficient detail concerning
the claim and its quantum. The judge considered that the sort of information
that should be provided in a warranty claim notice will be determined on a case
by case basis. This claimant had to provide what was  practicable at the point by when the notice had
to be provided. In this case the judge decided that the claimant had done that.

Practice points

  • It is sometimes difficult to determine the amount of detail that will be required in a warranty claim notice. It will depend on precisely what the clause says and how the contract term is interpreted in all the circumstances.
  • Where there is ambiguity in the drafting of a timing limitation in a warranty provision, unless it is expressly linked to the buyer’s actual knowledge, then the mere knowledge of the facts giving rise to the potential claim might not be sufficient. It will depend on the usual rules of contractual interpretation, in all the circumstances.

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Defendant
deliberately misled the court, but was allowed to amend defence and add claims
against others

In Orb ARL and others v Ruhan and others [2015] EWHC 262
(Comm),
the Commercial Court gave
the defendant permission to amend his defence and make a counterclaim.  The court found that his original defence was
“misleading and deliberately so.”  For deliberately misleading the court, the
defendant was ordered to pay indemnity costs.

The case involves a
claim for up to £100 million and a counterclaim in respect of assets alleged to
be worth around £150 million to £200 million. 
The original defence advanced a false case that the defendant had no
beneficial interest in the relevant assets. 
He sought to amend the defence to assert that the assets were his and to
add a counterclaim for their misappropriation.

Mr Justice Cooke
commented that the defendant had deliberately refrained from mentioning the
relevant assets, to give the misleading impression that he had no beneficial
interest of any kind.  Despite this the
judge allowed the defendant to amend his defence.  The defendant’s proposed amended case was
arguable.   The claimants could have no
objection to the amendments, as they amounted to an admission of the claim put
forward by them.

The case is a
reminder of the benefits of agreeing to accept service on the “Sphere
Drake
” basis (Sphere Drake Insurance Plc v Sirketi [1988] 1 Lloyds
Rep 139
).  If a claimant needs
permission to serve a claim on a party resident outside the jurisdiction, the
claimant will need to apply to court for this. 
If permission is granted, the claimant will then need to take the
relevant steps to serve the claim form. 
This might be both time-consuming and expensive, depending on the
relevant jurisdiction and that defendant. If the claimant succeeds in serving
the defendant, the defendant may then contest jurisdiction and apply to set
aside service of the claim form. 
Alternatively, the defendant can agree that its solicitors in England
and Wales agree to accept service on the “Sphere Drake” basis
and go straight to the last stage – contesting jurisdiction.  This saves all parties costs, delay and
inconvenience.  

Practice points

  • If a party has misled the court and subsequently wishes to amend its statement of case to correct the error, the court might give permission.  This may even extend to cases in which the party’s original statement was deliberately misleading.  The court is likely to award indemnity costs as punishment.
  • If you would need the court’s permission to serve a claim form outside the jurisdiction, consider asking the defendant to appoint solicitors in England and Wales to accept service on the Sphere Drake basis.

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High Court guidance
on costs budgeting

Costs-budgeting has been required for some cases for well
over two years, but it continues to cause problems.  It is still not clear whether costs-budgeting
has reduced overall costs as it was intended to.  Also, judges have not applied costs budgeting
consistently or even dealt with the procedure in a consistent manner.

However, some recent judgments have shown that costs
budgeting can be effective to limit unreasonable costs.  They provide some guidance on factors to be
considered and the procedure to follow when setting costs budgets.

In the case of Yeo v
Times Newspapers Ltd [2015] EWHC 209,
Mr Justice Warby’s judgment gave
helpful guidance on costs budgetingThe case involves a claim for libel by
Tim Yeo MP against the Sunday Times.

Warby J referred to the provisions on costs budgeting in section
II of CPR Part 3
and Practice
Direction 3E
.  He provided the
following additional guidance on costs budgeting:

  • Where parties set out their arguments about proposed costs budgets fully in
    correspondence, those letters may be treated as a substitute for a
    skeleton argument.
  • Costs management is not a prospective detailed assessment.  Judges should look at overall reasonableness and proportionality, but may need to consider hourly rates and estimated hours.
  • Contingencies should only be included in costs budgets if more than likely to be required and would fall outside the main categories.
  • Costs budgets may be desirable at an even earlier stage, where disproportionate costs are incurred early or there is a wide disparity in the parties’ resources.

In CIP Properties
(AIPT) Limited v Galliford Try Infrastructure Limited and others [2015] EWHC
481 (TCC)
, Mr Justice Coulson gave a very robust judgment on
costs-budgeting.  The case is a
construction claim for allegedly defective work on a large development site in
Birmingham, valued at a maximum of just over £18 million.  We covered his previous judgment, imposing
costs budgeting, in our last litigation update.

At this hearing, Coulson J reduced the claimant’s proposed
costs budget from £9.5 million to £4.28 million.  As the claimant had declared that it had
already incurred costs of £4.22 million, this effectively leaves it with hardly
any more recoverable costs between the case management conference and trial.

The judge found fault with the claimant’s budget in almost
all respects, especially because it was disproportionate in each phase of the
costs budget.  He set out detailed
reasons why he was setting a much lower budget for the claimant’s costs. This
included (like Warby J) that the hourly rates and estimated hours were
unreasonable.  His judgment provides a
good checklist for parties seeking to limit another party’s unreasonable costs
budget.

By contrast, the defendant’s costs budget was passed
relatively unscathed.

Practice points

  • The courts are still gradually adapting to costs budgeting.
  • Reasonableness and proportionality are the key tests.
  • The judges are taking already incurred costs into account more, especially if they seem disproportionate.

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Initial payments of
costs at end of trial hit 90% – or more

At the end of a trial, the judge will usually make an order
for payment on account of costs. 
Depending on the particular circumstances, this used to be about 40% of
the costs claimed.  In cases where a
costs budget has been agreed or approved, the starting point is probably now
90% of the budgeted costs.  The usual
order is that this must be paid within 14 days. 

In Thomas Pink Limited
v Victoria’s Secret UK Limited [2014] EWHC 3258 (Ch)
Birss J referred to Mars v Teknowledge (1999), the original
CPR authority for payments on account.  “The court should strive to ensure that
it does not overpay and should select a figure which is an irreducible
minimum.”
  Under CPR 3.18 the
court is required not to depart from an agreed or approved costs budget unless
there is good reason to do so.  This has
an important impact on payments on account of costs, but does not mean they
should be the same as the budgeted amount. 

The judge decided that it was at least possible that the
costs allowed on detailed assessment might be less than the approved
budget.  On this basis, he ordered a
payment on account of 90% of the costs budget, rounded up to the nearest £1,000
– a sum of £645,000.

In Kellie v Wheatley
& Lloyd Architects Limited [2014] EWHC 2886 (TCC)
the successful defendant
sought a payment on account of costs of the full amount of the approved costs
budget of £91,700.  The trial had taken
longer than the expected four days and the defendant argued that it would
inevitably be awarded more than the budget. The judge did not want to pre-empt
detailed assessment entirely, so he awarded a payment on account of £90,000
(about 98% of the budget).

Practice points

  • In cases where there is an approved or agreed budget, the parties can expect the trial judge to make an order for payment on account of costs for a very significant percentage of the budget – probably around 90% of it.
  • Where there is a very high payment on account of costs, there is likely to be less need for detailed assessment.

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Changes to CPR Part
36 in force on 6 April 2015

On 6 April 2015, a new look CPR Part 36 came into force.  The revised CPR Part 36 addresses some of the
issues presented by case law over the past 10 years or so. 

Although some provisions merely codify some of the case law,
there are also some new rules which are worth taking into account.
Unfortunately, there are still points of uncertainty.

As part of the review, the rules have been re-arranged and
partly re-numbered.

High offers

The case of AB v CD and others [2011] EWHC 602 attempted to address the issue that there was no definition of an “offer to settle” within Part 36. This case stated that the offer must contain some element of concession by the claimant to which a significant value could be attached. 

The new Part 36 adds a new test when the court is considering whether it would be unjust to make the usual order. Courts can now take into account “whether the offer was a genuine attempt to settle the proceedings” (CPR 36.17(5)(e)). It is not clear how this will be applied. What if a claimant offers a reduction of £50,000 to settle a claim for £1 million? If the offer is rejected and judgment against the defendant is at least £950,000, the claimant’s additional benefit under CPR 36.17(4)(d) would be £75,000 (more than the offered reduction). Is that relevant? 

Split trials

The court may order a split trial, so that liability can be decided before quantum or that one or more issues are decided as a preliminary stage. This caused difficulties with some Part 36 offers. If the claimant won at the liability or preliminary issues stage, what costs order should the judge have made? If the defendant made a global offer for the whole proceedings, this may have been be relevant but could not be seen by the judge until the final trial. 

The new CPR 36.12 addresses a number of issues related to split trials. It provides that a judge can be informed of a Part 36 offer relating to any part of a case that has been decided (CPR 36.16(d)(ii)). The judge may also be informed of the existence of a Part 36 offer, but not its terms, where there is still an issue or part of the case to be resolved (CPR 36.16(4)(b)). 

The new Part 36 also makes it clear that an offer which relates to any parts of a claim that have already been decided cannot be accepted. Any other offers cannot be accepted earlier than 7 days after the judgment is handed down. This will allow parties to re-assess their offers in the light of events and comments by the judge during the liability or preliminary issues trial. 

Most of the new rules only apply to Part 36 offers made after 6 April 2015. The exception is the new rules relating to split trials: they apply to Part 36 offers made before that date as well. 

Counterclaims 

The new rules provide that if a counterclaiming defendant makes an offer to receive payment, it is treated as a claimant’s offer. This means that if the offer is not accepted and judgment in the defendant’s favour is at least as advantageous, the defendant will usually receive the claimants’ benefits under new CPR 36.17(4). 

Appeals

Part 36 offers made during proceedings leading to trial do not continue to apply to appeals from those trials. Parties wishing to make Part 36 offers within appeals must make new Part 36 offers. New CPR 36.4 clarifies this by providing that references such as “claim” will be treated as “appeal” and references to “claimant” or “defendant” will be treated as “appellant” or “respondent“. 

Withdrawing an offer at the end of the relevant period

New CPR 36.9(4)(b) provides that an offer may be expressed to be automatically withdrawn after the expiry of the relevant period, without the need to serve notice of withdrawal. However, we think it is unlikely that this provision will be used much. As previously, a withdrawn offer will lose its default Part 36 costs consequences. 

Reducing an offer after the end of the relevant period 

An offeror may reduce an offer after the end of the relevant period without withdrawing the original offer. The offeree does not have an additional relevant period within which to accept the offer. The Part 36 costs consequences at judgment are as if the original offer had been withdrawn and replaced by the reduced offer. If the offeree accepts the reduced offer, the usual costs consequences for late acceptance will apply. 

Withdrawing or reducing an offer before the end of the relevant period 

Under new rule CPR 36.10, an offeror may attempt to reduce an offer within the relevant period. If the offeree decides not to accept the original offer, the reduced offer will apply. If the offeree accepts the original offer within the relevant period, the offeror has a choice: either to allow the offeree to accept the original offer; or apply to court within 7 days and ask for permission to withdraw the original offer. If the latter, the court may give permission “if satisfied that there has been a change of circumstances since the making of the original offer and that it is in the interests of justice to give permission“.

Improving an offer 

Where the terms of a Part 36 offer are improved, it will be treated as a new Part 36 offer on the improved terms rather than a withdrawal (CPR Part 36.9(5)(a)). Both offers will remain open for acceptance. If neither offer is accepted, the original offer will still be considered when assessing the costs consequences of the judgment. 

The “Mitchell problem” – how does a Part 36 offer work where a costs budget is limited to court fees? 

If a party fails to file a costs budget on time, the court may order that future costs are limited to court fees only. To encourage a defaulting party to make offers to settle, the new CPR 36.23 provides that such a party can recover 50% of the costs they would otherwise have been able to claim if their opponent fails to beat a Part 36 offer. 

What about other offers “without prejudice except as to costs“? 

Sometimes it is better to make an offer “without prejudice except as to costs”, rather than an offer under CPR Part 36. Also known as “Calderbank” offers, these offers allow more flexibility to include terms other than simple payment. Such offers will still be considered by the court when deciding costs, but do not come with the default additional benefits for claimants under Part 36. The changes to CPR Part 36 on 6 April 2015 do not affect this.

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