Dispute Resolution round-up - October 2020

In this judgment, the Court of Appeal clarified that, in cases where dishonesty by a corporate body is pleaded, it is not necessary specifically to identify in the Particulars of Claim the individuals within the corporate body whom it is alleged had the relevant knowledge of the dishonesty (and which knowledge is to be attributed to the corporate defendant). Claimants must instead simply provide the best particulars that they can in this regard, pending disclosure.

To read the judgment, please click here, and to read a more detailed briefing produced by Stephanie Lee and Conor Redmond, Partner and Senior Associate respectively in our Dispute Resolution department, please click here.

In this judgment, the High Court clarified the process that a professional services provider should follow when faced with a regulatory request for client documents, in circumstances where a party contends that all or a portion of those documents are privileged.

The Court concluded that in the face of such a request, the professional services provider must make its own determination of whether the documents at issue are privileged, rather than simply relying on an assertion by another party that that is the case. If that determination subsequently proves to be wrong, the remedy for the party to whom the privilege belongs is to bring a claim against the service provider.

To read the judgment, please click here, and to read a more detailed briefing produced by Angela Taylor, Senior Counsel in our Dispute Resolution department, please click here.

In this judgment, the Commercial Court clarified for the first time that communications with foreign lawyers, including in-house foreign lawyers, will be protected by legal advice privilege regardless of whether and how those lawyers are regulated in their home jurisdiction (i.e. there is no requirement for the foreign lawyer to hold the equivalent of an English Practising Certificate or membership of the Bar before the protection will apply). Instead, the only requirement in order for legal advice privilege to attach is that the foreign lawyer must be acting in their capacity or function of a lawyer in connection with the provision of legal advice.

Read the judgment.

This case centred on a challenge by Grant Thornton to a first instance decision that it was liable to pay AssetCo damages for losses "sustained through AssetCo's (continued) trading in a fundamentally dishonest manner, in reliance on [a] negligent audit". Grant Thornton sought to persuade the Court of Appeal (amongst other things) that the Judge erred in finding that such losses (in particular substantial sums provided by AssetCo to support its subsidiaries) fell within the scope of Grant Thornton's duty and that its admitted breaches of duty were the legal or effective cause of those losses (as opposed to merely the occasion for them).

The Court of Appeal confirmed that in most cases the "SAAMCO" principle - which established, typically in the context of a particular transaction or course of action, the importance of determining whether the defendant was providing information or giving advice - should be applied to determine whether particular losses fall within the scope of the auditor's duty when signing an unqualified audit report.

In largely dismissing the appeal, the Court of Appeal held that, while a negligent auditor will not be held liable for losses suffered simply because a company remains in existence and carries on trading, in circumstances where an auditor negligently fails to detect management's dishonest concealment of the claimant company's insolvency (which is the only basis on which the business was seemingly sustainable), the auditor will be liable for losses suffered by the company in continuing to conduct its loss-making business (since it has been deprived of the opportunity to call senior management to account and cease its loss-making activities).

Read the judgment, which also helpfully addresses the courts' approach to assessing loss of a chance claims.

In this landmark decision, the Supreme Court fundamentally restated the rule against recovery of reflective loss first established nearly 40 years ago in Prudential Assurance v Newman Industries (No 2) [1982] 1 Ch 204, namely that a shareholder cannot recover damages simply because the company in which that shareholder has an interest has suffered damage.  In such circumstances, sums equal to the diminution in the market value of the shares held or in dividends to be received are considered to be merely a reflection of the loss suffered by the company and therefore not independently recoverable.

Over the years since the Prudential decision the application of the rule has broadened, and its scope extended to the point where the Court of Appeal in Marex applied it to bar claims advanced by Marex Financial as an unsecured creditor.

Seven justices heard Marex Financial's appeal in May last year and took the opportunity to provide some welcome clarification and containment of the no reflective loss rule. They unanimously allowed the appeal (although were split as to the basis for doing so). The majority confirmed the ambit of the rule was limited to "claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way."

It is clear, following this decision, that the rule: (i) does not extend beyond shareholders; (ii) does not apply where a shareholder suffers loss of a different type than stated above (which is to be considered distinct from the company's loss); and (iii) does not apply where the company, as a matter of law, has no cause of action of its own.

Read the judgment.

This judgment provides yet another cautionary tale for those seeking to serve notice of a claim under an SPA.

The SPA in question contained a tax covenant given by the sellers in favour of the buyer to reimburse the buyer for any tax liabilities of the target group arising out of events that occurred prior to completion (as is commonly provided for).  The parties had placed a portion of the purchase price into an escrow account to cover such claims, should they arise, with an agreement to release sums at various intervals after completion in the event they did not. One week prior to the release date for the final tranche of escrow monies (and the deadline for notification of claims), the buyer sent the sellers written notice of a claim under the tax covenant (relating to an investigation then on foot by the Slovenian tax authority into the transfer pricing policies of one of the target group's subsidiaries).  The notice provisions of the SPA required the buyer to provide “written notice…stating in reasonable detail the matter which give [sic] rise to such Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed in respect thereof…”.

The Court held that the notice served did not comply with the above requirements and consequently that the remaining escrow monies could be released to the sellers.  This was despite the fact that (amongst other things) the notice referred to the relevant tax covenant, explained that the claim related to an investigation by the Slovenian tax authority (of which the sellers had been kept informed) and set out a timeline of events relating to that investigation.  In doing so, the Court considered that typically the purpose of such notice provisions is to achieve commercial certainty, and to allow the recipient of the notice to understand the claim that is being advanced against them to enable them to consider their exposure and how to address it. 

It was not fatal (at least at summary judgment) that the buyer had not set out the amount being claimed, as the notice provision itself provided for a scenario where it was not yet possible to quantify the claim.  Its downfall was that it failed to explain, in reasonable detail, the matter giving rise to the claim, which the Court said referred to the "facts, events or circumstances on which the Claim is based". Instead of referring only to the investigation by the authorities, which itself did not give rise to any tax liability, the notice should have set out (for example) details of the transfer pricing practices in question, or of specific transactions.

Importantly, the information about the investigation provided to the sellers prior to receipt of the notice could not in some way be imported into the written notice to make it compliant with the notice provisions under the SPA.  

Read the judgment.

This judgment helpfully considers the meaning of a number of phrases which commonly occur in Sale and Purchase Agreements.  This includes clarifying that: (i) a reference to costs and losses "incurred" should be read as meaning costs and losses which the relevant party has come under an obligation to pay (rather than costs and losses which that party has actually paid); and (ii) a reference to amounts "subject to taxation in the hands of the receiving party" in a gross-up clause should be read as meaning amounts actually taxed in the hands of the receiving party (rather than simply amounts within the scope of a tax and not exempt).

Read the judgment.

This judgment considered the question of whether a counterparty to a contract could make its consent to an amendment to a schedule to the contract conditional on a revision to the tariff payable under that contract, in circumstances where the contract stated that consent to revise the schedule was not to be unreasonably withheld.

The court essentially held that the changes proposed by the counterparty to the tariff amounted to a fundamental revision of the bargain the parties had struck when they entered in to the contract, and that, as a result, it was not open to the counterparty to make its consent conditional on those changes being accepted.

The court did, however, also acknowledge that in other, different circumstances, where the parties' bargain would not be fundamentally affected, it could have been reasonable and within the bounds of the contract for the counterparty to make its consent conditional on receiving something else in return. 

Read the judgment.

In this appeal against the dismissal of CFH's claim on a summary basis, the Court of Appeal considered whether it was arguable that the effect of Merrill Lynch's T&Cs (which sat alongside an ISDA 2002 Master Agreement) was to incorporate into FX transactions conducted between the parties a contractual obligation to comply with "market practice" (such that Merrill Lynch was required to re-price the transactions in question or otherwise to cancel them). 

The relevant wording in the T&Cs stated that "All transactions are subject to all applicable laws, rules, regulations howsoever applying and, where relevant, the market practice of any exchange, market, trading venue and/or clearing house and including the FSA Rules (together the "applicable rules").  In the event of any conflict between these Terms and any applicable rules, the applicable rules shall prevail…"

In dismissing the appeal, Lord Justice Phillips concluded that CFH's contention that market practice had been incorporated into the contract had no real prospects of success. 

First and foremost, he found that the T&Cs were (expressly stated to be) subject to any documentation relating to the specific transactions between the parties, including the ISDA Master Agreement which contained express pricing and settlement provisions. 

Second, he determined that the wording of the clause in question did not give rise to an arguable case of incorporation. In arriving at that conclusion, he considered that the words "subject to" do not necessarily result in incorporation and that each clause must be considered in its own context. 

In this case it was relevant that one of the items included in the list of matters which CFH argued were incorporated was elsewhere in the same T&Cs expressly stated not to be incorporated. 

The decision serves as a helpful reminder to bear the ejusdem generis rule of construction in mind when drafting, i.e. the rule that says that general words which follow specific words in a list will be construed more narrowly by reference to the specific words which have come before it. 

In applying the rule in this case, the Court of Appeal held that the clause in question could not be read as referring to practice in the FX market generally (as CFH argued), but rather as covering specific markets, such as the EBS platform. Importantly, even if the clause had referred to broader FX market practice, Lord Justice Phillips considered that the alleged market practice was too vague and uncertain to be incorporated as a term of the contract.

Read the judgment.

This judgment, while not making any new law, provides a useful illustration of the difficulties in arguing that a set of regulatory rules (in this case, the FCA's COBS rules) should be implied into a contract in the absence of express wording to that effect.

The court emphatically rejected any suggestion that there should be a mandatory implication of such rules into relevant contracts as a matter of law, and also found that the particular contract at issue simply did not contain sufficiently clear wording to support an argument that they had been expressly incorporated.

Read the judgment.

This judgment concerned an attempt to bring a representative action against Shell on behalf of various individuals and communities in Nigeria which have allegedly suffered damage as a result of a 2011 oil spill. In it, the High Court considers the thorny question of when such an action should be allowed to proceed under the representative action procedure in CPR 19.6, which provides that such actions can only proceed where the members of the proposed claimant group can be said to have the "same interest" in the claim.

The mood music from the judiciary recently has been that CPR 19.6 should be interpreted broadly, leading to more representative actions being allowed to proceed. However, in this case, Mr. Justice Stuart-Smith reached the opposite conclusion. In holding that the members of the proposed claimant group did not have the requisite "same interest" in the proceedings, and that there instead existed a large number of individual claims requiring individual consideration and proof of damage and generating individual defences, he highlighted once again the difficulties in getting representative actions off the ground under the current rules in this jurisdiction, notwithstanding the incremental widening of those rules in recent years by the judiciary.

Read the BAILII judgment.