- High Court decides no costs sanction, despite a refusal to mediate
- Supreme Court decision on agents’ bribes and secret commissions
- Supreme Court decision on disclosure statements and the effect of the merits of a case on case management decisions
- Legal professional privilege – when the “crime/fraud” exception means that communications with lawyers are not protected from disclosure
- Costs budgeting – TCC judge exercises power to impose costs budgeting above £10 million
- Excalibur case – costs orders against third party funders
- Supreme Court threatens to hold that the legislation allowing for recovery of CFA success fees and ATE premiums breaches article 6 ECHR rights
- New guidance on instructing experts – in force 1 December 2014
- Changes to the EU ‘Brussels Regulation’ on jurisdiction and enforcement – on 10 January 2015
- Review of damages-based agreements
For more information about any of the issues within this publication please contact one of our litigation experts or your usual Osborne Clarke contact.
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In Northrop Grumman Mission Systems Europe Limited v BAE Systems (Al Diriyah C4I) Limited  EWHC 3148 (TCC), the High Court decided that BAE’s costs should not be reduced by 50%, despite BAE’s unreasonable refusal to mediate the dispute.
When deciding costs, courts need to consider the conduct of the parties. The case of Halsey v Milton Keynes General NHS Trust  EWCA Civ 576 laid down factors which a court should consider in deciding whether a party has unreasonably refused to mediate. Guidance was also issued in the case of PGF II SA v OMFS Company 1 Limited  EWCA Civ 1288 (which we covered in our Spring 2014 litigation update). In that case, Briggs LJ referred to paragraph 11.56 of the Jackson ADR Handbook. He outlined the practical steps which a party should take if it considers it has reasonable grounds for refusing to take part in ADR:
“The advice includes: (a) not ignoring an offer to engage in ADR; (b) responding promptly in writing giving clear and full reasons why ADR is not appropriate at the stage based if possible on the Halsey guidelines; (c) raising with the opposing party any shortage of information or evidence believed to be an obstacle to successful ADR together with consideration of how that shortage might be overcome; (d) not closing off ADR of any kind and for all time in case some other method than that proposed or ADR at some later date might prove to be worth pursuing.”
The claim involved CPR Part 8 proceedings on the construction of a contract term for terminating a license agreement for convenience. Mr Justice Ramsay decided in favour of BAE. The starting point for the costs order was therefore that NGM should pay BAE’s costs. However, NGM argued that BAEs costs should be reduced by 50%, because BAE had unreasonably refused to mediate.
To resolve the costs argument, the parties disclosed a number of without prejudice letters. From these, it was clear that both sides claimed to have good prospects of success. It was also clear that NGMs solicitors kept pressing the need for mediation and BAEs solicitors kept pressing for more information before agreeing to a mediation. From witness statements made by lawyers involved in the dispute, it appeared that BAE thought that NGM would not accept anything less than a substantial payment.
BAE made a “drop hands” offer to settle: no payment passing between the parties and each party bearing its own costs. NGM did not accept it.
Ramsey J felt that BAE did have a strong case. He referred to Halsey stating that “the fact that a party reasonably believes that it has a watertight case may well be sufficient justification for a refusal to mediate.” He continued by saying that this only provides limited justification for not mediating. Other factors indicated that BAE was unreasonable in refusing to mediate.
However, the refusal to mediate was not the only factor to consider. In deciding what order (if any) to make about costs, the court will have regard to all the circumstances, which includes in CPR 44.2(4)(c): “any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply.” NGM’s conduct in not accepting the “drop hands” offer to settle made by BAE was a factor to take into account. Accordingly, NGM lost the argument for a reduction in BAE’s costs.
- Even if a refusal to mediate is unreasonable, the factors under CPR 44.2(4) need to be considered. This includes the following:
“(a) the conduct of all the parties;
(b) whether a party has succeeded on part of its case, even if that party has not been wholly successful; and
(c) any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply.”
- A party considering whether to refuse an offer to mediate should follow the advice (quoted above) given by Briggs LJ in the PGF II SA case.
In FHR European Ventures LLP and others v Cedar Capital Partners LLC  UKSC 45, the Supreme Court considered the status of bribes and secret commissions received by agents. The Court decided that a principal has a proprietary right over bribes and secret commissions received by its agent.
Lord Neuberger gave the judgment of the court. There were conflicting judgments and academic commentary on the law relating to an agent’s breach of fiduciary duty in receiving a bribe or secret commission. Lord Neuberger considered the principles and practicalities of the issue and referred to judgments in other common law jurisdictions.
The end result is that the court decided that all benefits (including bribes or secret commissions) received by an agent in breach of fiduciary duty are held by the agent on constructive trust for his principal. The principal has a proprietary right to them.
- If the agent becomes insolvent, the right of the principal to bribes and secret commissions received in breach of fiduciary duty takes precedence over unsecured creditor claims.
- A principal can use equitable tracing to follow the bribe or secret commission into other assets held by a knowing recipient.
Supreme Court decision on disclosure statements and the effect of the merits of a case on case management decisions
In Prince Abdulaziz v Apex Global Management Ltd and another  UKSC 64, the Supreme Court decided that the conclusions of the High Court and Court of Appeal were correct. A direction requiring a disclosure statement to be personally signed reflected normal practice. Also, when making case management decisions, courts may not normally take into account the strength of a party’s case unless it would entitle that party to summary judgment.
This case stems from a joint venture between Apex Global Management Ltd (“Apex”) and a British Virgin Islands company owned by Prince Abdulaziz (“the Prince”). The dispute involves allegations and counter-allegations of unlawful misconduct, including money-laundering, financial misappropriation and funding of terrorism. The relief sought by Apex included a claim for just under $6m which it believed was owed by the Prince.
At a Case Management Conference during July 2013 Vos J made a direction that the parties should “file and serve a statement, certified by a Statement of Truth signed by them personally in the case of individuals and by an officer of the company in the case of the two companies.” The Prince argued that he was not required to sign the document as there was a Saudi Arabian protocol that members of the Royal Family should not become involved in any litigation. As the Prince failed to comply with this order, Apex sought an unless order from Norris J. Norris J made the order, which had the effect that if the Prince failed to comply then his defence would be struck out and judgment would be entered against him. The Prince failed to comply and judgment was granted in favour of Apex on 14 October 2013. The Prince applied under CPR 3.1(7) for a variation of Vos J’s order to enable his solicitor to confirm on his behalf that he had given full disclosure and for relief from sanctions. Mann J refused to vary Vos J’s decision.
The Prince was unsuccessful in his appeal of the decisions of Vos J, Norris J and Mann J to the Court of Appeal. The Prince was however given permission to appeal to the Supreme Court on the basis that he paid $6m (plus interest) to his solicitors. He complied with this condition, albeit late.
The Prince lost his appeal at the Supreme Court by a majority of 4-1. The Supreme Court concluded that “when it comes to case management and application of the CPR, just as the Court of Appeal is generally reluctant to interfere with trial judges’ decisions so should the Supreme Court be very diffident about interfering with the guidance given or principles laid down by the Court of Appeal.”
The Supreme Court stressed the importance of obeying court orders. When a court order is disobeyed it is inevitable that a sanction will be imposed. The Prince had been given opportunities to comply with the order. He had not provided a reasonable explanation as to why he was not complying with the order.
The Supreme Court confirmed that the merits of a party’s case will generally be irrelevant in case management decisions. The only possible exception would be where a party’s case is strong enough to entitle that party to summary judgment.
- Disclosure statements must usually be signed by an individual who is a party to the proceedings or by an officer of a company party. Where there are doubts about the accuracy of another party’s disclosure, consider applying for a specific order that the individual or an officer signs the disclosure statement personally.
- The strength or weakness of a party’s case will not usually affect the nature or the enforcement of directions and case management decisions.
- This judgment is not intended to effect the Court of Appeal decision in Mitchell v New Group Newspapers Ltd  EWCA Civ 1537 or Denton v TH White Ltd  EWCA Civ 906.
Legal professional privilege – when the “crime/fraud” exception means that communications with lawyers are not protected from disclosure
Two recent cases have highlighted a long-standing principle of legal professional privilege: that it does not apply when the “crime/fraud” exception or an “iniquity” applies. This exception operates when the legal advice is given in order to carry out a crime or fraud or to conceal it. It extends to situations where a client is an innocent party, but a conduit for someone else’s crime or fraud.
In JSC BTA Bank v Ablyazov and others  EWHC 2788 (Comm), the court considered the latest development in the long-running litigation against Mr Ablyazov and others. Mr Ablyazov had been trying every possible tactic to avoid the claimant bank’s claim against him and from recovering its assets from him. He had sought advice from solicitors in relation to his defence of the action. He lied about and concealed his assets. He dealt with his assets, despite being subject to freezing orders. He was found guilty of serious contempt of court. He is currently in prison in France, awaiting a re-trial of extradition proceedings.
The latest twist in this litigation is that the claimant bank applied for three firms of solicitors who advised him to disclose their advice, to the extent that it fell within the crime/fraud exception. The claimant bank’s application was also made against solicitors for his brother-in-law, Mr Shalabayev.
Mr Justice Popplewell made the disclosure order. His judgment contains some useful guidance in this difficult area.
The main difficulty is drawing a distinction between legitimate legal advice on a defence and using legal advice to further a criminal purpose. The judge decided that whether the crime/fraud exception applies, when a lawyer is engaged to put forward a false case supported by false evidence, is “a question of fact and degree … in the circumstances in question“.
Mr Ablyazov’s counsel argued that allowing the application would contravene the right to privacy under Article 8 of the European Convention on Human Rights. The judge disagreed. The interference with those rights was justified where proportionate. The claimant bank also had rights not to have its property stolen. It was important to uphold the rule of law and not permit a concerted attempt to pervert the course of justice. It was likely that a disclosure order would “carry a real prospect of yielding valuable material to assist in enforcement of the orders of the court“.
The judge also considered the position where a communication is both for the proper conduct of litigation and for the furtherance of a crime/fraud. In that case, the usual test for litigation privilege would apply: that the dominant purpose of the communication had to be for the proper conduct of the litigation.
Given the importance of the issue, it will be interesting to see if this decision is considered by the Court of Appeal.
The Ablyazov judgment was applied recently in Brent LBC v Kane (Chancery Division, unreported 4 November 2014). A local authority was successful in applying for disclosure of legal advice relating to an alleged transaction at an undervalue. There was prima facie evidence that the transaction was carried out in order to avoid payment for residential care.
- In the right circumstances, the crime/fraud exception is a potentially powerful weapon to be used by claimants in fraud cases.
- In most cases it will be difficult to make a prima facie case that an opponent has been using legal advice to further a criminal or fraudulent purpose.
In CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd and others  EWHC 3546 (TCC), Mr Justice Coulson ordered costs budgeting in a claim for about £18 million. He also confirmed that parties should normally each provide one costs budget in a multi-party claim.
The claim is a construction dispute over remedial works for alleged defects on a large development in Birmingham. The main contractors are the defendants. They have issued CPR Part 20 proceedings against the architects and some of the sub-contractors. In total, there are currently six parties. At a Case Management Conference, the parties could not agree on costs-budgeting.
Is there a discretion to order costs-budgeting; if so, is it fettered?
The claimants opposed costs budgeting applying to the claim. The other parties argued for it. The judge had to consider two points: firstly whether the court has the discretion to apply costs budgeting outside the default maximums; and, if so, whether the discretion is fettered.
The judge had no doubt about the interpretation of the pre-22 April 2014 rules. The court had the discretion to apply costs budgeting for claims above the £2 million figure that applied at the time. He also found that the court has a complete discretion to decide whether costs budgets should be filed and exchanged. He said:
“the court has to weigh up all the particular circumstances of the case, in order to decide whether, in the exercise of its discretion, such budgets should be provided. There is no presumption against ordering costs budgets in claims over £2 million or £10 million, and no additional burden of proof on the party seeking the order.”
CPR 3.12, as it applies to claims issued after 22 April 2014, now states:
(1) This Section and Practice Direction 3E apply to all Part 7 multi-track cases, except –
(a) where the claim is commenced on or after 22nd April 2014 and the amount of money claimed as stated on the claim form is £10 million or more; or
(b) where the claim is commenced on or after 22nd April 2014 and is for a monetary claim which is not quantified or not fully quantified or is for a non-monetary claim and in any such case the claim form contains a statement that the claim is valued at £10 million or more; or
(c) where the proceedings are the subject of fixed costs or scale costs or where the court otherwise orders.
(1A) This Section and Practice Direction 3E will apply to any other proceedings (including applications) where the court so orders.
The judge suggested that he might possibly see a difference in the correct interpretation of the old (£2 million) and new (£10 million) rules, in relation to the first point, namely whether there is a discretion. However, it is difficult to see how he came to that conclusion as the text is almost identical. Also, the associated Practice Direction could not be clearer. It states at paragraph 2:
“In any case where the parties are not required by rules 3.12 and 3.13 to file and exchange costs budgets, the court has a discretion to make an order requiring them to do so. That power may be exercised by the court on its own initiative or on the application of a party. Where costs budgets are filed and exchanged, the court will be in a position to consider making a costs management order: see Section C below. In all cases the court will have regard to the need for litigation to be conducted justly and at proportionate cost in accordance with the overriding objective.”
Multiple costs budgets in multi-party claims?
One of the Part 20 defendants had argued that the defendant should file different costs budgets for the different Part 20 claims. The defendant argued that it would be difficult and expensive to attempt to allocate common costs between the different parties and overlapping issues. The judge agreed. In multi-party litigation the parties will be able to provide some information about specific costs in relation to another party, but should not be required to allocate common costs at budget stage.
- The court has the discretion to apply costs budgeting to cases valued at more than £10 million and will take into account all the circumstances. Despite the additional costs involved, it will sometimes be to a party’s advantage for the court to order costs-budgeting.
- In multi-party claims, judges are unlikely to order a party to split their estimated costs between their various opponents.
Lord Justice Christopher Clarke recently made a non-party costs order in the high profile Excalibur litigation (Excalibur Ventures LLC v Texas Keystone Inc and others  EWHC 3436 (Comm)). The judgment contains a number of notable points about costs orders against third party funders.
Excalibur made a claim for $1.6 billion, which was funded by a complex set of third party funding agreements that changed over time. The third party funders also gave security for costs. The claim was dismissed entirely with the judge expressing severe criticism of the claim and how it had been conducted. The successful defendants were awarded multi-million pound indemnity costs against Excalibur. As Excalibur would not be able to pay them, the defendants applied for non-party costs orders against the funders under section 51, Senior Courts Act 1981.
Although he was promoted to the Court of Appeal 2013, the judge has continued to sit in the High Court for this case. In this judgment, Christopher Clarke LJ:
- repeated the severe criticism of the solicitors who conducted the claim;
- ordered the third party funders to pay indemnity costs – the funders stepped into the shoes of the party they funded and should “follow [their] fortunes”;
- included the parent companies of the funders in the non-party costs orders, as they provided the funds and would have been the ultimate beneficiaries of the litigation had it been successful;
- applied the “Arkin cap” (see below) to the total of the costs funded and the amount provided for security for costs;
- held that funders that only provided funding later in the proceedings were only responsible for costs after they had started to fund the claim – until then their action was not an “effective cause” of the defendants’ costs;
- subject to the timing point above, made the funders jointly and severally liable for the defendants’ costs;
- commented that the test for making a non-party costs order had a lower threshold than making a wasted costs order (the funders had argued the defendants should have applied for a wasted costs order first); and
- confirmed previous authority that making a non-party costs order against the parent companies of the funders is not the same as piercing the corporate veil.
The “Arkin cap” comes from Arkin v Borchard Lines Ltd  EWCA Civ 655. That case decided that professional funders should only be liable for a non-party costs order up to the same amount as they had funded the litigation. It was a pragmatic decision, intended to strike the balance between access to justice for claimants and costs protection for innocent defendants.
Although the Excalibur litigation was exceptional on a number of grounds, it has implications for all cases supported by third party funding.
- Third party funders are likely to exercise more care in choosing the cases they are prepared to fund and may want more reporting on funded cases as they progress.
- However, funders will need to be careful not to meddle in any funded litigation, as that might amount to champerty and therefore make the funding agreement unenforceable.
- If a party suspects that an opponent is being funded by a third party, it should consider if a security for costs application would be appropriate. If the funder puts up the security, it will increase the amount available under the “Arkin cap”.
- If a successful party suspects that the paying party was funded, but is unable to pay the final costs order, it should consider applying for the party or its solicitors to reveal the names of any funders. The courts have the power to require disclosure of funder identity, recently applied in SC DG Petrol SRL v Vitol Broking Ltd (Walker J in the Commercial Court, 24 October 2014).
Supreme Court threatens to hold that the legislation allowing for recovery of CFA success fees and ATE premiums breaches article 6 ECHR rights
In Coventry v Lawrence (No 2)  UKSC 46, the Supreme Court considered a nuisance claim and whether a costs order breached article 6 of the European Convention of Human Rights (ECHR).
The Supreme Court gave its first judgment in February 2014 on the principles of private nuisance. The case relates to a nuisance claim by owners of a house against landlords and tenants of a nearby stadium which is used for various types of motor racing. The Supreme Court held that the tenants of the stadium were liable in private nuisance to the claimants.
The claimants had a CFA and ATE insurance cover. Base costs were £400k, the success fee was £319k and the ATE premium was £350k. The proposed order was that the defendants pay 60% of the claimants’ costs.
On 23 July 2014, the Supreme Court dismissed the claim in nuisance against the landlords as they did not authorise or participate in the nuisance.
The important aspect of the second judgment however is the court’s determination on the costs order. It held that the costs order was so high in relation to the issues at stake that it affected the losing defendants’ rights under article 6 ECHR.
Lord Neuberger referred to Callery v Gray  UKHL 28 and Campbell v MGN Ltd (No 2)  UKHL 61 in his judgment. In Callery, the House of Lords stated that, subject to reasonableness, success fees and ATE premiums were recoverable. The responsibility for monitoring and controlling the developing practice, by which the new regime for funding introduced by the Access to Justice Act 1999 (1999 Act) was operated, lay with the Court of Appeal. The House of Lords “should ordinarily be slow to intervene.” In Campbell, the House of Lords held that the 1999 Act did not infringe article 10 of the ECHR.
In light of these two judgments, Lord Neuberger considered that the issue of whether the costs regime under the 1999 Act infringes the convention is open to the Court of Appeal to consider. He argued that it was possible that the respondent’s liability in terms of costs under the Courts and Legal Services Act 1990, as amended by Part II of the 1999 Act, could be inconsistent with their article 6 rights. However, any declaration of incompatibility should not be made without giving the government the opportunity to address the Court.
Therefore, a further hearing will be scheduled to address the issue of whether the costs order is a breach of article 6 ECHR and/or article 1 of the First Protocol to the Convention.
- If the court decides that the 1990 legislation, as amended, infringes rights under article 6 ECHR, it could have significant consequences. Potentially, parties who have paid additional liabilities may have compensation claims against the government. However, most commentators believe that outcome is highly unlikely.
On 1 December 2014, the “Protocol for the instruction of experts to give evidence in civil claims” was replaced by revised guidance produced by the Civil Justice Council. The revised guidance is called “Guidance for the instruction of experts in civil claims 2014”. Unlike its predecessor, it is not annexed to CPR Practice Direction 35. Instead, there is merely reference to the fact that the 2014 guidance is available on the judiciary website.
The 2014 guidance makes numerous small changes. The few material changes include:
- an increased emphasis on costs and proportionality, especially for the expert to give costs estimates required for costs budgeting purposes;
- that parties should, where practicable, agree the terms of instruction to their separate experts in the same field of expertise;
- that each expert in the same field of expertise has access to the same documents; and
- “If a solicitor sends an expert additional documents before the report is finalised the solicitor must tell the expert whether any witness statements or expert reports are updated versions of those previously sent and whether they have been filed and served.” (Paragraph 31).
On 10 January 2015 a new regulation replacing Council Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Regulation) will take effect. There will be five main changes to the existing rules. They reflect widespread complaints about the problems with the existing regime.
Limited scope for abusive forum shopping where there is an exclusive jurisdiction clause
One of the major causes of complaint with the existing EU rules on jurisdiction has been the “court first seised rule” and the ‘Italian torpedo’. This is where proceedings are commenced in a “slow” EU country to prevent the commencement of proceedings in the appropriate forum.
Under the new regulation, an exclusive jurisdiction clause will now take priority over the “court first seised” rule. This means that the chosen court can proceed irrespective of other EU proceedings. Furthermore, any other EU court must stay its proceedings until the courts of the chosen jurisdiction have determined the validity of the clause.
However, it is unclear how the courts will interpret asymmetric, one-sided or hybrid jurisdiction clauses. These could still be subject to the “court first seised rule”, leaving scope for the ‘Italian torpedo’.
If there is no exclusive jurisdiction clause, the “first-in-time” court will continue to have precedence.
Amendments to the provisions on jurisdiction agreements
Where parties include an express jurisdiction clause in their contract in favour of the courts of an EU member state, those courts will have jurisdiction even if neither party is domiciled in the EU. Previously, there was a requirement that one of the parties be domiciled in the EU.
The new regulation also confirms that:
- the law governing the validity of a jurisdiction clause will be the law of the place specified by the clause, irrespective of the governing law of the contract; and
- the principle of separability will apply to jurisdiction clauses (in other words a jurisdiction clause will remain valid, even if the main agreement is void).
New discretion to stay proceedings in favour of proceedings in a non-EU state
Under the existing regime, the courts of an EU member state have very limited ability to stay proceedings brought in that state in favour of proceedings in courts outside the EU. This is even where proceedings outside the EU would clearly be more appropriate (Owusu v Jackson).
EU courts will have the discretion to stay proceedings in favour of non-EU states if:
- the non-EU proceedings are commenced before an EU court is seised of the proceedings;
- for related proceedings, it is “expedient to hear actions together to avoid irreconcilable judgments“;
- a non-EU judgment must be capable of recognition and enforcement; and
- the stay of EU proceedings must be “necessary for the proper administration of justice“
This is a significant improvement, but it still means that the English court would have no power to stay proceedings in favour of a non-EU state if the English proceedings were commenced first. This creates an incentive for a party to race to issue in its preferred EU jurisdiction before another party issues proceedings outside the EU.
Expansion of the arbitration exclusion to protect arbitral process
The West Tankers case determined that English courts could not grant anti-suit injunctions to prevent proceedings in breach of an arbitration clause. It raised problematic issues regarding the relationship between the Brussels Regulation and arbitration. The amended Brussels Regulation seeks to address these issues.
- The amended Brussels Regulation will not apply to decisions relating to arbitration, including appointment of arbitrators, conduct of arbitration or challenges to awards.
- Arbitration-related decisions of courts will not be enforceable under the Brussels Regulation.
- The New York Convention will take precedence over the Brussels Regulation.
However, it is still unclear whether anti-suit injunctions in support of arbitration clauses will be possible in an EU context. It seems most likely that they will not be permitted.
Automatic recognition of judgments of other member states
The current process of recognising judgments of other EU member states can be slow. The amended Brussels Regulation will provide that: “A judgment given in a Member State which is enforceable in that Member State shall be enforceable in the other Member States without any declaration of enforceability being required.” The process is therefore being simplified, although there remains an ability to challenge recognition and enforcement.
Furthermore, ex-parte interim decisions are to be enforceable under the revised regulation (unlike previously) if proof of service of the judgment on the respondent is provided. This will be a significant change in respect of cases where service can be effected quickly, but will be less significant where service abroad will be time-consuming.
The Ministry of Justice has asked the Civil Justice Council to review the operation of damages-based agreements (DBAs). The main criticism of the existing DBA Regulations is that they do not permit partial or hybrid agreements. This means that no element of the solicitors’ fee may be payable irrespective of sums recovered. Also, there are concerns about the lack of termination provisions. Unfortunately, the Ministry of Justice has made it clear that the terms of the review do not include partial or hybrid DBAs. Two senior members of the judiciary have openly expressed their disappointment about this. The terms of the review are available in the CJC website.