Corporate and commercial disputes update - November 2021

Welcome to our corporate and commercial disputes update, the bi-annual publication in which we summarise some of the most significant decisions from corporate and commercial cases in the English courts.

This edition includes:

• Representing claimants: the rise of the class action
• Disclosure is the 'price' to pay for a 'hint' of expert shopping – Rogerson v Eco Top Heat and Power Limited
• Muller, cornered: the fraud and 'Muller' exceptions to the without prejudice rule (Berkeley Square v Lancer)
• Unfair prejudice and the entitlement to buy-out: Macom v Bozeat
• Good faith and unfair prejudice: Faulkner v Vollin Holdings
• SAAMCO reconsidered: the purpose of advice
• Limitation in professional negligence: (Sciortino v Beaumont and Elliot v Hattens)
• Liquidated damages and delay: a victory for commercial common sense
• Notice provisions: how much detail is reasonable detail? (Dodika v United Luck Group)
• Contractual damages and exclusion clauses: you get what you bargained for (CIS v IBM)
• Doctrine of duress clarified: lawful commercial pressure or economic duress?

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In this issue: Welcome to our corporate and commercial disputes update, the bi-annual publication in which we summarise some of the most significant decisions from corporate and commercial cases in the English courts. This edition includes: Executive Summary 2 Representing claimants: the rise of the class action 3 Disclosure is the 'price' to pay for a 'hint' of expert shopping – Rogerson v Eco Top Heat & Power Limited 7 Muller, cornered: the fraud and "Muller" exceptions to the without prejudice rule (Berkeley Square v Lancer) 10 Unfair prejudice and the entitlement to buy-out: Macom v Bozeat 13 Good faith and unfair prejudice: Faulkner v Vollin Holdings 16 SAAMCO reconsidered: the purpose of advice 19 Limitation in professional negligence: (Sciortino v Beaumont and Elliot v Hattens) 22 Liquidated damages and delay: a victory for commercial common sense 25 Notice provisions: how much detail is reasonable detail? (Dodika v United Luck Group) 28 Contractual damages and exclusion clauses: you get what you bargained for (CIS v IBM) 31 Doctrine of duress clarified: lawful commercial pressure or economic duress? 33 Why choose Stephenson Harwood? 36 Contacts 37 Corporate and Commercial Disputes Update – November 2021 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Executive Summary We start this issue with an analysis of a series of key decisions on the framework for collective actions before the English courts. Class action claims are undoubtedly on the rise and we look at the guidance which can be gleaned from recent decisions, including the Supreme Court's ruling in Merricks v Mastercard, the Court of Appeal in Jalla v Shell and the Competition Appeal Tribunal's decision in Le Patourel v BT. Next, we consider two further decisions relating to the procedural rules by which claims can be brought. In Rogerson v Eco Top Heat & Power Limited, the High Court confirmed that when a party wants to change its expert, any report produced by the original expert is likely to be ordered to be disclosed, no matter how informal the report and how early the original instruction. In Berkeley Square Holdings v Lancer Property, the Court of Appeal considered the scope of the 'fraud' exception to the without prejudice rule. In a judgment perceived to be widening the scope of the fraud exception, the court confirmed that defendants could rely on without prejudice statements made in a mediation position paper in order to rebut fraud allegations. Moving on to shareholder disputes (which have seen a substantial increase over the last six months), we look at two recent decisions on unfair prejudice. In Macom v Bozeat, the court made a finding of unfair prejudice but instead of ordering a buy-out of the petitioner's shares, unusually it made an order regulating the future conduct of the company. This case highlights the risks inherent in unfair prejudice proceedings given the discretionary nature of the remedy. In Faulkner v Vollin Holdings, the court also found unfair prejudice. In this case, the court was heavily influenced by the inclusion of a good faith clause in a shareholders' agreement, demonstrating the significance of such clauses in contractual and company disputes. The law on professional negligence has developed over the last six months through a number of key cases. In Manchester Building Society v Grant Thornton the Supreme Court considered the scope of a professional advisor's duty of care. In a detailed judgment intended to simplify the analysis of the duty, the court confirmed that the scope of duty is principally determined by the purpose for which the advice is given. In two decisions relating to solicitors' negligence (Sciortino v Beaumont and Elliott v Hattens), the court clarified the date on which a cause of action accrues in negligence, addressing: i) whether a separate cause of action accrues each time a professional provides the same or similar advice; and ii) whether a cause of action accrues at the time a mistake is made, or when the claimant becomes aware that loss has arisen. Standard clauses in contracts are never out of the spotlight and this year has been no exception. The Supreme Court's decision on liquidated damages in Triple Point v PTT was welcomed by many as a victory for common sense. The court confirmed that such a clause will generally entitle a party to all liquidated damages accruing prior to termination, unless the contract expressly provides to the contrary. Similarly, in Dodika v United Luck Group Holdings, the Court of Appeal's analysis of notice clauses was hailed as taking a commercial approach to a procedural problem. While emphasizing the importance of careful compliance with contractual notice provisions, the court held "reasonable detail" to be dependent on the circumstances, including the detail already known to the recipient. CIS v IBM addresses the issue of exclusion clauses and whether a claim for wasted costs fell within a clause excluding liability for loss of profit and revenue. The court held the wasted costs were caught by the exclusion clause, highlighting the need for careful consideration of the scope and application of such clauses when contracting. Finally, we conclude this issue with an examination of the Supreme Court’s decision on economic duress in Pakistan International Airline v Times Travel. In a detailed judgment considering the concept of illegitimate pressure, the Supreme Court has clarified the extremely limited circumstances in which a contract can be rescinded because of a threatened unwelcome, but not unlawful, act. We hope you enjoy this update on some of the cases we consider to be of particular interest over the last 6 months. If you would like any further information on any of the issues raised or, indeed, how we might help you, please get in touch using the contact details set out below. Sue Millar Partner T: +44 20 7809 2329 E: [email protected] Kate Cordery Partner T: +44 20 7809 2397 E: [email protected] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Representing claimants: the rise of the class action The number of class actions proceeding before the English courts is on the rise. From a series of recent decisions, the criteria by which collective action claims can be pursued are now being refined. In this article, we consider the particular requirements for each procedural route and look at the guidance given on suitability in recent case law, including the Court of Appeal decision in Jalla v Shell International Trading and Shipping Co Ltd1 and the Competition Appeal Tribunal decisions in Merricks v Mastercard2 and Le Patourel v BT3. There are four principal procedural mechanisms via which collective redress may be pursued before the English court on behalf of a claimant class: 1. separate claims which are collectively case managed under a group litigation order pursuant to CPR 19.10 – 19.15 and PD19B (“GLOs”); 2. representative actions pursuant to CPR 19.6 or 19.7 ("representative claims"); 3. opt-out and opt-in actions for breaches of competition law pursuant to s47A of the Consumer Rights Act 2015; and 4. test cases (primarily under the Financial Markets Test Case Scheme pursuant to paragraph 6 of PD63AA). 1 [2021] EWCA Civ 1389 2 Merricks v Mastercard Incorporated & Ors [2021] CAT 28 3 Justin Le Patourel v BT Group Plc & British Telecommunications Plc [2021] CAT 30 GLOs: Lungowe v Vedanta Resources Plc4 GLOs are becoming increasingly popular and over a hundred GLOs have now been granted in relation to a diverse range of claims including product liability, financial services, shareholder actions, data breach and ESG-related issues. Under a GLO, each claimant commences a claim in their own right (known as "opting in"). However, to be brought under the remit of a GLO, claims must give rise to “common or related” issues of fact or law. This test permits some differences in the claims pursued by different members of the group (by contrast to the stricter criteria for representative claims, as to which see below). While a trial will determine collectively the contested issues of fact or law, damages are assessed for each individual claimant (or category of claimant) separately. Either claimant or defendant can apply for a GLO at any time and if it is opposed by either party, the court will hear submissions on the application. The Nchanga Copper Mine GLO gave rise to a number of significant judgments, including the Supreme Court's decision establishing jurisdiction in Vedanta v Lungowe5 . Following that decision, the High Court ruled on the application by Vedanta (the anchor defendant to the claim) to have the claims against it heard under a GLO. The resulting judgment provides a useful analysis of the principles by which claims can be joined under GLOs and the role of the lead solicitor. 4 Lungowe & ors v Vedanta Resources plc & anor [2020] EWHC 749 (TCC) 5 [2019] UKSC 20. More information on the jurisdictional aspects of that case can be found in our article here. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 The claim related to environmental damage from a copper mine in Zambia brought by some 2000 claimants. More than one firm of solicitors acted for different claimant groups and the claims were issued several years apart. Vedanta applied for a GLO because it argued (and the court agreed) that the issues in the separate sets of proceedings were "classic GLO issues". Although different communities were involved, the pollution all resulted from the same mine and the same type of damage was alleged in each claim. The court observed that while there were inevitably some "claimant-specific issues", this did not prevent the making of a GLO. In imposing a GLO, the court acknowledged there is "limited authority" on the interaction between solicitors for different claimant groups in a GLO. However, it identified the following principles: • Parties are generally entitled to choose their own representatives but in group litigation, that right is qualified and takes second place to the rights of the group as a whole. This is achieved by the role of the lead solicitor. • The relationship between the lead solicitor and other firms must be carefully defined in writing. Where it is not, the court will become involved. • In group litigation, claimants represented by a lead solicitor are only entitled to instruct one counsel team. Different groups of claimants are not entitled to instruct different groups of counsel. The judgment in this case illustrates the necessity for careful planning in group litigation. Where parties are represented by multiple sets of solicitors (as is frequently the case due to the size and scope of group litigation actions), documentation of the respective roles is key. As to the nature of the claim, a group litigation order permits some variation in the individual claimants' cases, in contrast to other forms of collective redress. Representative claims – Lloyds v Google LLC6 and Jalla v Shell By contrast to a GLO, a representative claim is pursued on an opt-out basis; one or more claimants represent the other members of the class, who must all have “the same interest in a claim”. This means the test is considerably higher than for a GLO. Further, claimants in a representative claim must all seek the same remedies pursued on a 'lowest common denominator basis'. This means the claim is brought at the most 6 Judgment is expected later this year [UKSC 2019/0213]. 7 . Including SMO A child by Anne Longfield her Litigation Friend v TikTok Inc. and others. 8 For further details regarding these proceedings, and the judgment on appeal before the Supreme Court (Lloyd v Google basic level, i.e. without relying on any specific circumstances which might increase an individual's damages award. Claims with materially different factual backgrounds cannot therefore be brought. A number of representative claims are currently being pursued through the courts7 . However, the extent to which the procedure can be adopted in data breach claims is currently uncertain pending the Supreme Court's decision in Lloyd v Google LLC. In this case, Mr Lloyd (the representative claimant) is trying to pursue a claim on behalf of several million affected data subjects in relation to the so-called “Safari Workaround” (by which Google obtained, without consent, browser generated information of Apple iPhone users)8 . In the context of an application to serve out of the jurisdiction, the Court of Appeal considered that the claim was appropriate to be pursued as a representative claim because the class of claimants all had the “same interest”, having all suffered the same type of damage over the same period of time. If the Supreme Court upholds the Court of Appeal’s decision, this is very likely to lead to the increased use of representative claims in this area. The "same interest" test More recently, in Jalla v Shell, the Court of Appeal gave further guidance on the "same interest" test, concluding that in this instance, it was not met. The claim against Shell is procedurally complex and based on alleged environmental damage to some 28,000 claimants as a result of an oil spill off the coast of Nigeria. Unlike the claimant class in Lloyd v Google, here the court found that there was no commonality of interest. On issues ranging from limitation to causation and damage, the court found the class of claimants was LLC [2019] EWCA Civ 1599) see: https://www.shlegal.com/news/court-of-appeal-hands-downsignificant-judgment-in-lloyd-v-google-llc-2019-ewca-civ-1599 . CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 so diverse that the proceedings would have to be casemanaged and tried as if they were 28,000 separate claims. Although the claimants argued that their claim was "materially indistinguishable" from Lloyd v Google, the Court of Appeal disagreed: • In Lloyd v Google the relief claimed was damages for the loss of control of data which the Court of Appeal found could be awarded without the need to prove financial loss or distress. The relief claimed was therefore common to every claimant. • In Jalla v Shell, by contrast, the claim was for remediation relief. This required each claimant to prove sufficient damage either to warrant injuncting the defendants to carry out the clean-up or to award compensation sufficient for the claimants to carry it out themselves. • There were also complex issues of limitation which would have caused difficulties for some but not all claimants, making it difficult to proceed on a representative basis. In short, the court found that none of the purposes of a representative action (to save time and costs) would be met. In rejecting the appeal, the court noted that representative actions remain relatively uncommon and that in cases where there are significant numbers of claimants with similarities in their claim but also not insignificant differences, the parties and/or the courts will usually choose to proceed under a GLO or via a representative sample of claimants. Competition law claims The Supreme Court has recently considered collective action in competition law cases. Its decision in Mastercard v Merricks [2020] UKSC 519 , confirming that an opt-out collective action could go forward (likely to encompass some 46 million individuals), has signalled support for collective redress procedures where it would not otherwise be economically viable for individual members of a significant class to otherwise pursue claims. The Competition Appeal Tribunal (CAT) had originally found that the claim was not suitable for the collective procedure order (CPO) regime. However, the Supreme Court overturned that decision, ruling that the difficulty identified by the CAT in analysing and distributing damages across the claimant class was not a sufficient reason to refuse certification. Since the Supreme Court's decision, the Competition Appeal Tribunal has certified most aspects of the collective proceedings in Merricks as an opt-out CPO. 9 For more information on this decision, see our article here However, the tribunal addressed three issues which may have a bearing on future CPOs: • The authorisation of Mr Merricks to act as the class representative was subject to two challenges. First, Mastercard alleged he was unsuitable on account of his handling of a historic dispute with a proposed class member, which argument the tribunal dismissed. • Secondly, the tribunal itself determined that it was necessary (even without challenge by Mastercard) for it to scrutinise the new litigation funding agreement (LFA) put in place by Mr Merricks following a change in funder. The tribunal noted it had a responsibility to protect the interests of the members of the proposed class and expressed concern that the funder had too broad a discretion to terminate. The LFA was therefore amended to provide that termination by the funder had to be based on independent legal and expert advice. Following an objection by Mastercard that it had no means of enforcing the new LFA, the funder also provided an undertaking that it would discharge any adverse costs award that might be made against Mr Merricks. • In relation to the claim for compound interest, the CAT held that Mr Merricks had failed to put forward a credible or plausible methodology to calculate the costs incurred in financing additional borrowing or to cover the lost interest that would otherwise have been earned but for the overcharge. It therefore refused to certify the compound interest element of the claim. While the Supreme Court concluded there should be only a limited examination of the merits in the certification process, this decision shows that the CAT retains a role in scrutinising the scope of the claim. Following this decision, the CAT also recently granted a second opt-out CPO in Le Patourel v BT Group10. These decisions mark a significant expansion of the class action mechanism in competition law (and a number of other CPO applications are currently awaiting judgment). However, to obtain a CPO it remains necessary to establish not only that a CPO is more suitable than an individual claim but that the claim itself can survive an application for strike out/summary judgment and that, where an opt-out is sought – that this is a more appropriate mechanism than an opt-in claim. Both tests were satisfied in Le Patourel. 10 Justin Le Patourel v BT Group Plc & British Telecommunications Plc [2021] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 The future for class actions The appropriate procedural mechanism for a class action will always depend on the facts of the case. In general, the two key issues for claimant lawyers to consider are the economic viability of the claim and the similarities in the claims. The practical and economic difficulties inherent in GLOs mean that often, if viable, a representative claim is considerably more attractive. However, the type of claim for which this procedure can be used is limited. Where a GLO is used, it is crucial that the role of the lead solicitor and any other representatives are clearly defined. 11 [2021] EWCA Civ 1156 Even where a claim does not fit within the specific procedural mechanisms available, group litigation is still possible. In Jalla, the court observed that while the claim could not proceed on a representative basis, it remained the subject of "perfectly workable litigation". Further, in Município de Mariana and others v BHP Group PLC11, the Court of Appeal recently granted permission to appeal a decision striking out a claim by over 200,000 Brazilian claimants, concluding that despite concerns regarding the "inherent unmanageability" of the claim, the litigation retained a "real prospect of success". Sue Millar Partner T: +44 20 7809 2329 E: [email protected] "Great strength and depth across shipping, financial services, art and real estate with a particular expertise in multi-jurisdictional, cross-border disputes." Legal 500, 2021 Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Disclosure is the 'price' to pay for a 'hint' of expert shopping – Rogerson v Eco Top Heat & Power Limited When a party wants to change its expert, the court can, and usually will, order disclosure of any previous expert's report as a condition of granting permission for the change. In Rogerson (t/a Cottesmore Hotel, Golf and Country Club) v Eco Top Heat & Power Limited, the High Court confirmed that a party may be required to waive privilege and disclose previous expert reports or documents even where the first expert was engaged at an early pre-action stage and was not instructed to produce a formal expert report or opinion. Background A fire broke out at the claimant's hotel in June 2018. The claimant alleged it was caused by the defendant building contractor's negligence. The defendant disputed this. Immediately after the fire, both parties instructed forensic experts to establish the cause of the fire. The defendant instructed Dr Nagalingam, who interviewed witnesses jointly with the claimant's expert on two site visits in June 2018. At the end of the interviews, Dr Nagalingam and the claimant's expert were alleged to have agreed that the fire was likely to have been caused by a discarded cigarette. Whilst no expert report was prepared, Dr Nagalingam's views on the cause of the fire were recorded in an attendance note, subject to litigation privilege. In August 2020 (several years after Dr Nagalingam's involvement), the claimant issued proceedings. In March 2021, the defendant proposed draft directions that included a provision permitting the defendant to instruct Ms Wilson, rather than Dr Nagalingam, as its CPR35.4 expert on the cause of the fire. The claimant did not oppose the change of expert but applied to impose the disclosure of various categories of document as the 'price' for permitting the defendant to change its expert. Mr Alexander Nissen QC, sitting as a High Court Judge, granted the claimant's application and required the defendant to disclose a redacted version of the attendance note. The judge identified two relevant factors in the exercise of the court's discretion: (1) Was the Defendant really changing expert at all? The defendant argued that the "nature and timing" of its instruction of Dr Nagalingam at a pre-action stage meant that its decision to instruct Ms Wilson for the litigation did not amount to a change of expert. The court disagreed. The jurisdiction to require disclosure of previous expert reports is not a freestanding one. It arises when the court presents a party with a choice in which the 'price to be paid' for the court's permission to change from expert A to expert B is a waiver of privilege in relation to documents produced by expert A. Although disclosure of pre-issue as well as post-issue reports can be ordered, the court will not impose such a condition in every case. Where a party chooses to take private pre-action expert advice (for example, on the viability of a claim), and that expert is not instructed to write a report for the court, disclosure of the earlier expert's opinion or report will not usually be ordered, unless there are 'unusual factors' which warrant it. The key issue for the court to decide in this case was 'where CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 to draw the line' on the scope of the original expert's instruction. The judge referred to the decision in Edwards-Tubb v J D Wetherspoon [2011] EWCA Civ 136. In that case, the Court of Appeal required the party changing expert to disclose documents because they were created at the stage when the parties co-operated in the selection of experts (a step under the applicable personal injury pre-action protocol). It held that this was a 'critical' point in time where the parties engaged with each other in the claim. Whilst there was no comparable process in this case, the judge concluded that an analogous 'critical point' had been reached for a number of reasons, in particular: 1. By the time that the experts met, it was already assumed in correspondence that litigation would occur. The defendant had denied liability and had even asserted a claim for its costs. 2. It was not a "one-off private inspection" undertaken by the defendant's expert; instead, there were two inspections undertaken jointly with the claimant's expert. 3. The claimant's and defendant's experts had met with witnesses and engaged with each other on possible causes of the fire. 4. Dr Nagalingam continued to exchange emails with the claimant's expert after the inspections and meeting with witnesses had taken place. An expert instructed for a pre-action investigation will not always be instructed to advise on the litigation. However, on the facts, the court concluded that Dr Nagalingam had been so instructed. If that assumption were wrong, the judge found that the above four factors were sufficiently 'unusual' to justify treating Dr Nagalingam as if he were an expert instructed for the litigation in any event. The court was also very critical of the defendant's failure to disclose Dr Nagalingam's retainer. As the defendant had sought to distinguish between experts instructed for a preliminary inspection and those instructed for the purposes of prospective litigation, it was incumbent on the defendant to disclose the retainer to demonstrate that Dr Nagalingam was in fact instructed on the former and not the latter basis. (2) Should the court exercise its discretion to impose a condition on the grant of permission to change expert Counsel for both parties agreed at the hearing that there was a "sliding scale" between a case of flagrant expert shopping and where an expert is to be replaced for objectively justifiable reasons, such as illness or retirement. The closer to the former, the more likely the court would impose onerous conditions for permission to change expert. Further, because expert shopping is discouraged, a conclusion that it has happened is one which will 'almost always have to be one reached by inference'. In this case the court concluded the inference could be drawn and that this warranted disclosure of privileged documents. Key factors included: 1. The defendant had sought to distance itself from Dr Nagalingam, having implied that Dr Nagalingam was initially instructed by a third party, when the instruction was properly a joint instruction with the defendant. 2. The defendant had failed to disclose Dr Nagalingam's retainer which would have demonstrated the nature of his instruction. 3. The defendant had denied (and subsequently retracted) that Dr Nagalingam had expressed a view on causation to the claimant's experts. 4. Dr Nagalingam was in the judge's view a suitable expert for the role and was as qualified as Ms Wilson to opine on the cause of the fire. The judge ordered that the defendant disclose the attendance note recording Dr Nagalingam's opinion on the cause of the fire. It was not fatal to the claimant's application that Dr Nagalingam had not produced a written report for the defendant. This was simply one factor for the court to consider, as other documents, such as preliminary notes and materials, could fall within the court's jurisdiction. He made no order as to the other documents sought as the defendant confirmed that they did not exist. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Comment Instructing an expert, pre-action, can be crucial to evaluate whether litigation is appropriate or not. However, this judgment is an important reminder that where that pre-action expert advice 'crosses the line', parties should anticipate having to disclose previous reports (or other documents showing the previous expert's views) as the 'price' for the court's approval of any change of expert. This may be the case even where those views were provided at a very early stage of a dispute. The case also demonstrates that being opaque as to the scope of a pre-action expert's instruction is unlikely to help attempts to resist the court's request for disclosure; indeed, the court may treat the same as an indication that a party is trying to shop for experts. Sue Millar Partner T: +44 20 7809 2329 E: [email protected] Michael Barron Associate T: +44 20 7809 2428 E: [email protected] Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] "A team that achieves what few can; a balance of phenomenal legal ability, fantastic organisational skills and straightforward common sense.’ Legal 500 UK 2021 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Muller, cornered: the fraud and "Muller" exceptions to the without prejudice rule (Berkeley Square v Lancer) The Court of Appeal confirmed that defendants could rely on without prejudice statements made in a mediation position paper in order to rebut fraud allegations: Berkeley Square Holdings v Lancer Property Asset Management Ltd [2021] EWCA Civ 551. The judgment is the first reported appellate decision to consider the “fraud” exception to without prejudice protection, and provides helpful guidance on the socalled “Muller” exception. Exceptions to the rule on without prejudice privilege Without prejudice (“WP”) communications made by parties to a dispute in a genuine attempt to settle it, are normally protected from disclosure. The purpose behind the rule is to encourage parties to speak freely in negotiations, without worrying that admissions or concessions can later be used against them in litigation. However, there are circumstances in which this rule will be overridden. The leading case of Unilever plc v Procter & Gamble Co [1999] EWCA Civ 3027 identified six commonly understood exceptions to the rule. Two of these exceptions were relied on by the defendants in Berkeley Square: • “the fraud exception”, which, as formulated in Unilever, permits WP negotiations to be admitted to set aside an agreement on the basis of misrepresentation, fraud or undue influence; and • “the Muller exception”, arising from Muller v Linsley [1994] EWCA Civ 39, where WP communications were produced to show a party acted reasonably in mitigating its loss by reaching a settlement with a third party. Hoffmann LJ determined that the issue was unconnected to the truth of anything stated in the negotiations or "admissions", so fell outside the public policy justifying the WP rule. The other members of the court agreed but would also have based their decision on the grounds of waiver. Both bases of the Muller exception have been subject to doubt in subsequent case law, but the decision remains good law. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 The without prejudice material in Berkeley Square Berkeley Square and others (“Berkeley”) brought a fraud claim against the manager of their £5 billion London property portfolio (“Lancer”) and its directors and holding company (the “Defendants”). Berkeley alleged that Lancer and the Defendants were complicit in a fraudulent agreement with Berkeley’s representative to make increased payments to Lancer without Berkeley’s knowledge. In 2012, a dispute between Berkeley and Lancer regarding the latter’s entitlement to fees had been settled by Berkeley and Lancer following a mediation. Following Berkeley’s alleged discovery of the fraudulent agreement, in 2018 it commenced these proceedings, arguing that its representative had had no authority to enter into the settlement. However, the Defendants argued Berkeley had known and approved of the increased payments since at least 2012 (that is, more than six years before it issued its claim), relying upon passages referring to the payments in Lancer’s earlier mediation position paper. Berkeley argued that the content of the position paper was inadmissible on the basis that it was part of a WP mediation on confidential terms and applied to strike out the relevant passages of the defence. At first instance, Roth J refused the application, determining that mediation statements fell within both the fraud and Muller exceptions. Berkeley appealed the decision. The Court of Appeal dismissed the appeal, agreeing with the High Court’s finding that the fraud exception applied. David Richards LJ gave the leading judgment, with which Henderson and Popplewell LJ agreed. The Court of Appeal's consideration of the fraud exception Berkeley argued that the fraud exception formulated in Unilever only applied where a party sought to set aside an agreement. In this case, the Defendants were seeking to rely on the fraud exception to uphold the validity of an agreement. Richards LJ, however, rejected this argument, finding that there was no principled basis for admitting evidence in the former case but not the latter. The Court of Appeal held that the reference to "misrepresentation, fraud or undue influence" in Unilever was not intended to be exhaustive. The fraud exception potentially also applies where an apparent contract is concluded without the necessary consent of the parties to it including, for example, where a party asserts that its agent lacked the authority to make the contract (as was Berkeley's case on the facts). Richards LJ emphasised that the outcome of successful WP communications is a contract that compromises the dispute. Such contracts, he held, are no different to other types of agreement. In the context of the “very limited” fraud exception, there is no principled basis for excluding WP negotiations to determine their terms, meaning and validity. To hold otherwise would be to elevate settlement agreements into a separate class of contract. The Muller exception Richards LJ described the Muller exception as "troublesome" but confirmed that the decision, if not the underlying reasoning, remains correct. On the present facts, however, Richards LJ held that reliance on the Muller exception was "misplaced". At first instance, Roth J relied on the decision in Briggs v Clay [2019] EWHC 102(Ch) in finding that the Muller exception applied. He held that the Muller exception (as developed in Briggs) permitted disclosure of WP communications where such disclosure was necessary to make an issue raised by the party resisting disclosure "fairly justiciable". Richards LJ, however, considered this (and the underlying Briggs judgment) to be a new exception, rather than an application or even an extension of Muller. While not opining on the legitimacy of such a new exception, he voiced concerns about whether the development of such an extension of the rule would involve an “unacceptable interference with the public policy of encouraging compromises”. Richards LJ preferred to analyse Muller as establishing an exception encompassing its own facts. In both Muller and Briggs, there were third parties in the negotiation who were not party to the litigation (referred to as a “three-party” case). Waiver was not therefore possible without the consent of those third parties. Although the Court of Appeal did not expressly address this issue, the real question in Muller, he held, was the extent to which the absence of a waiver by the third party can in appropriate cases by overridden. By contrast, in this case, the parties to the litigation and the WP negotiations were the same (a “two-party” case). As such, if one party elected to waive privilege, it was open to the other party to either object or affirm the waiver. The Muller exception (as interpreted here), did not therefore apply. The relevant question was whether Berkeley had waived its right to privilege in the mediation by pleading a lack of knowledge vitiating its consent. This question was not, however, raised at first instance or on appeal as the issue of waiver was not before the court, the Defendants having made clear they did not rely on it. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Analysis The Court of Appeal's formulation of the fraud exception is wider than previously accepted. Litigants may be able to rely on the exception both offensively and defensively in setting aside or upholding settlement agreements. In particular, parties need to be aware that if a settlement reached at mediation is challenged, confidential and without prejudice communications may be admitted into evidence to rebut allegations that the settlement was reached without all the necessary parties’ consent. In addition, whilst the Court of Appeal accepted that courts should exercise caution in extending the categories of WP exception, Richards LJ avoided being over-prescriptive as to the circumstances of any future extension. Given that the "new" exception from Briggs and Berkeley at first instance was not expressly overruled, it will be interesting to see whether the exception is pursued in other cases (potentially on narrower terms) and how the courts respond. "Innovative thinking and commercially savvy." Legal 500 UK 2022 Kate Cordery Partner T: +44 20 7809 23979 E: [email protected] Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] Michael Barron Associate T: +44 20 7809 2428 E: [email protected] "A fantastic group of people doing some of the most high-profile fraud work in the London market – a highly efficient and savvy team with real strength in depth." Legal 500 UK 2022 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Unfair prejudice and the entitlement to buy-out: Macom v Bozeat Where the Court makes a finding of unfair prejudice against a shareholder, and that unfair prejudice relates principally to the governance and management of a company, in certain circumstances the Court may decline to make the 'usual order' requiring the party at fault to purchase the petitioner's shares (a "Buy-Out Order"). In Macom GmbH v Bozeat & Ors [2021] EWHC 1661 (Ch), a somewhat unusual unfair prejudice claim in that the petitioner was the majority shareholder, HHJ Hodge QC (sitting as a High Court Judge) found that the minority shareholder had acted in a manner unfairly prejudicial to the interests of the majority shareholder in the conduct of the company's affairs by acting in a unilateral manner in breach of the express provisions of the company's articles of association and a shareholders' agreement, thereby undermining its corporate governance. Notwithstanding the finding, HHJ Hodge QC did not make a Buy-Out Order, and instead made an order regulating the future conduct of the company’s affairs, which he considered was the appropriate remedy to grant in all the circumstances of the case. Background Macom GmbH (the "Petitioner"), a German company specialising in the provision of digital consulting and audio-visual technology services, transferred its UKbased projects to a company incorporated by Mr Bozeat1 (the "Respondent") in exchange for a majority share (60%) in the acquiring company, Macom GmbH (UK) Limited (the "Company"). Pursuant to the terms of a shareholders' agreement relating thereto, the Petitioner was entitled to appoint a director to the board of directors, although the Respondent – the Company's Chair and Managing Director – had a casting vote in the event that the board (comprising two directors) was deadlocked. Such an arrangement gave the Respondent effective control of the Company, notwithstanding that he was the minority shareholder. Subsequently, differences in opinion between the shareholders (and in particular between the Respondent and the Petitioner's appointed board representative) arose as to the direction and management of the business. These differences were exacerbated by the Respondent's misunderstanding of the Petitioner's 1 Mr Bozeat's wife was also a nominal respondent to the petition in light of her having a 20% shareholding (which she had sought to transfer to Mr Bozeat prior to judgment) in the Company. rights pursuant to the shareholders' agreement and the articles of association, in particular as to decision making, the calling of board meetings, and the Petitioner's entitlement to appoint a director. Matters were further aggravated when individuals introduced by each party to assist with mediating the differences of opinion served only to raise the temperature and entrench the parties' respective positions. The Petitioner ultimately pursued an unfair prejudice petition alleging that the Respondent had: (1) taken payments and dividends which had not been authorised; (2) acted (and caused the Company to act) in breach of the shareholders' agreement by taking unilateral action with respect to reserved matters without the Petitioner's consent; (3) undermined the Company's corporate governance; (4) failed to provide information to the Petitioner to which it was entitled; and (5) disclosed confidential information in breach of the shareholders' agreement. It sought an order that the Respondent acquire its shares in the Company. The Respondent denied all the allegations made against him and argued that the Petitioner had in any event suffered no financial prejudice. Was the Respondent's conduct unfairly prejudicial? As a preliminary point, HHJ Hodge QC accepted the Petitioner's submission that nothing in section 994 of the Companies Act 2006 (the "Act") prevents the presentation of a petition by a majority shareholder. Moreover, HHJ Hodge QC acknowledged that: "prejudice is not limited to cases where there is an actual, or potential, diminution in the value of the petitioner's shareholding… [and] may extend to a breakdown of the relationship of trust and confidence amongst the shareholders as a result of the respondent's conduct of the company's affairs and failures of good administration… Where a petitioner has a right to be consulted and involved in the management of the company as a condition of his investment, he may not suffer any financial loss if he is excluded from such consultation and involvement; but he may nevertheless suffer unfair prejudice because he is being denied the full benefit of his investment in the company" (at paragraph 47). When he turned to consider the particulars of alleged unfair prejudice, with respect to each of the Petitioner's CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 five complaints HHJ Hodge QC found that the Respondent's actions were unfairly prejudicial. While certain of these (in particular with respect to reserved matters and information failures) might have been less egregious when taken alone, HHJ Hodge QC found that in the context of the other complaints, they tended to undermine the contractual relationship between the parties and compromise the good and proper administration of the Company. The appropriate remedy The Petitioner submitted that the purpose of granting relief is to remedy the unfair prejudice and that a BuyOut Order will be the usual order where to order otherwise would be to perpetuate "a dysfunctional relationship and an impossible relationship of joint management" and was appropriate on the facts. By contrast, the Respondent submitted that the Court's discretion is wide in relation to remedy and that notwithstanding the Respondent's failure to advance his own Points of Claim, the appropriate remedy would be for the Petitioner to buy-out the Respondent. In the alternative, the Respondent submitted that given HHJ Hodge QC's findings in relation to the governance of the Company, the Court should make an order regulating the conduct of the Company’s affairs for the future, and that absent any financial prejudice suffered by the Petitioner, any buy-out order would be overly punitive. HHJ Hodge QC accepted the Respondent's submissions that it would be wholly disproportionate (and itself unfair) to order the Respondent to buy-out the Petitioner’s shares, particularly since his unfairly prejudicial conduct had caused no financial loss. Where relief is to be given, the over-arching requirement of section 996 of the Act is that the Court should “make such order as it thinks fit for giving relief in respect of the matters complained of”. Moreover, any relief must be proportionate and must respond to the particular unfair prejudice established. Accordingly, where unfair prejudice relates to the governance and management of the company, an order regulating the future conduct of the company’s affairs may be the most appropriate remedy to grant in all the circumstances of the case (see paragraph 97) and such an order was made2 . 2 Which, amongst other things, obliged the parties to conduct the Company's business in line with its constitutional documents, as Analysis At first blush, HHJ Hodge QC's decision might appear somewhat unfair to Petitioner. He found in its favour on each of the five allegations of unfair prejudice and yet the Petitioner was unable to extricate itself from its dealings with the Respondent and ordered the Petitioner to adhere to the provisions of the shareholders' agreement and articles of association by way of an injunction. However, HHJ Hodge QC took care to set out the rationale for departing from the "ordinary and usual" rule and why that step was appropriate in all the circumstances of the case. The rationale was developed in an addendum to the judgment (paragraphs 101 following), which addressed various grounds of appeal raised by the Petitioner prior to handing down. Ultimately, the Court is not restricted in the scope of relief which it can award by either the wishes or preference of a successful petitioner or by the ability of an impecunious respondent to meet a Buy-Out Order. The purpose of granting relief is to remedy specific acts of unfair prejudice and in determining what relief is appropriate, the Court's discretion is very broad. The case serves to highlight the risk inherent in the pursuit of relief of a discretionary nature, namely that what a successful party is granted may not ultimately be what it wants, notwithstanding the considerable time and costs which will necessarily be committed in pursuing an unfair prejudice petition to trial. supplemented by certain additional requirements (e.g. a requirement that board meetings be held with greater frequency). Ben Sigler Partner T: +44 20 7809 2919 E: [email protected] Adam Polonsky Associate T: +44 20 7809 2780 E: [email protected] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Good faith and unfair prejudice: Faulkner v Vollin Holdings Where a shareholders' agreement includes a requirement for all parties to act in good faith in their dealings with each other, in appropriate circumstances this may make it easier for minority shareholders to pursue an unfair prejudice petition under section 994 of the Companies Act 2006. In Faulkner & Ors v Vollin Holdings Limited & Ors [2021] EWHC 787 (Ch), Adam Johnson J found that minority shareholders had been unfairly prejudiced by the actions of the majority shareholder investors, who had, amongst other things, excluded two founding directors from the management of the company. Background Mr Faulkner (the First Petitioner) and Dr Sachs (the Second Petitioner) were founding directors (and former chairman and CEO respectively) of Compound Photonics Group Limited ("CPGL"). CPGL’s business was to harness technology developed by Dr Sachs to revolutionise the market in projectors. The remaining petitioners were individual investors in CPGL who had been introduced by Mr Faulkner (the “Petitioners”). The Respondents were the majority shareholders in CPGL (the “Investors”). The Petitioners claimed that they were unfairly prejudiced because, contrary to the terms of the shareholders' agreement relating to CPGL (the "Agreement"), Dr Sachs and Mr Faulkner had been excluded from the management of CPGL. Further, they claimed that the Investors’ nominee directors had acted in breach of CPGL’s articles of association (the "Articles"), the Agreement, and their duties under the Companies Act 2006 (by, for example, permitting the sale of a property at undervalue), resulting in them being unfairly prejudiced. The Investors claimed, by contrast, that they had invested in CPGL in order to support Dr Sachs’s vision but that after long delays and failures, they had entirely reasonably asked Dr Sachs to resign, which he agreed to do. Mr Faulkner’s removal from the business was, they claimed, as a result of his acting in an erratic and unpredictable manner which was damaging to CPGL. The Investors claimed to have acted in good faith at all times, and not to have acted in breach of the Agreement or, in the case of the directors, in breach of CPGL’s articles or their duties under the Companies Act 2006. 1 Which derived from the 2013 Agreement. 2 Which derived from the 2013 Articles. Key clauses in CPGL's constitution Adam Johnson J examined the Agreement and the Articles, agreed in 2010 and then updated in 2013. He focussed in particular on the following aspects: • “…resolutions arising at any meeting of the Directors shall be decided by a majority of votes provided that both of the Founder Director and the CEO must at all times form part of that majority” 1; • “The Board shall not be able to pass a resolution to remove the CEO as a director or the Founder Director as a director and nor shall those individuals vacate the office of director if they make any arrangement or composition with their creditors generally” 2; • “Each Shareholder undertakes to the other Shareholders and the Company that it will at all times act in good faith in all dealings with the other Shareholders and with the Company in relation to the matters contained in this Agreement" 3; • Further requirements in the 2013 Agreement obliging the parties to: (1) cooperate with the CPGL's Board in respect of the conduct of CPGL and any group companies' business; (2) ensure that CPGL's business was conducted in accordance with good business practice and on sound commercial and profit making principles; (3) ensure that CPGL and any group companies' business was conducted in a proper and efficient manner and on arm’s length terms and for their own benefit; and (4) keep shareholders informed regarding all CPGL and any group companies' material financial and business affairs. 3 Which derived from the 2013 Agreement. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 The Petitioners argued that, read together, CPGL’s constitutional documents gave rise to a “contractual quasi-partnership”. Mr Faulkner and Dr Sachs were, it was argued, “entrenched” in the management of CPGL and the Investors were prevented from obtaining control of CPGL's Board. By contrast, the Investors asserted that: (1) there was nothing in CPGL’s constitution preventing them, as majority shareholders, from removing Mr Faulkner and Dr Sachs as directors pursuant to section 168 of the Companies Act 2006; and (2) without prejudice to this contention, at most, the good faith provisions in the Agreement obliged them to exercise this power honestly and in a commercially justified manner, which they contended was the case. The scope of good faith clauses In considering the parties’ arguments, Adam Johnson J focussed on the effect of the good faith requirement in CPGL’s constitution. While the entire agreement clause in the Agreement precluded analysis of the parties’ precontractual negotiations, he examined the factual matrix at the time the constitutional documents were entered into in order to establish the ambit of the provision. Overall, Adam Johnson J concluded that the structure agreed by the parties was a compromise designed to “maintain an acceptable balance of power between the existing and new shareholders”. This was manifested by, amongst other things, the protections which had been agreed to ensure that the minority's position was protected against the Investors' otherwise unrestricted ability to control CPGL. These protections provided in particular that: • Mr Faulkner and Dr Sachs' positions were specifically protected in line with the minority's expectation that they would deliver on their investments; • The Board would conduct itself in accordance with the Agreement and the Articles, free from interference from the Investors; • Dr Sachs and Mr Faulkner retained a controlling role in CPGL's Board's decision making and were subject to restrictions on their removal. Within that structure, the good faith obligation was intended to act as a contractual restriction on the “otherwise untrammelled” rights of the Investors to exercise their majority power as they saw fit. Part of the good faith obligation meant, Adam Johnson J held, 4 For further analysis in this regard see our article on Chu v Lau [2020] UKPC 24. “respecting the balance of power achieved by means of the overall constitutional settlement”. Adam Johnson J found that the Investors had instigated processes by which both Dr Sachs and Mr Faulkner were removed from the management of CPGL in breach of their contractual obligation of good faith. In particular, the Investors' failure to deal with matters openly and fairly and to take account of minority interests represented such a breach; the Agreement and the Articles were specifically designed to prevent just such actions from being valid. This was unfairly prejudicial to the minority for two reasons: i) it deprived the minority of the benefit of the technical expertise which they had invested in; and ii) it deprived the minority of the protection which their presence on the Board had been designed to achieve. Furthermore, in supporting the Investors' conduct in this regard the Investors' directors were in breach of various fiduciary duties pursuant to the Companies Act 2006. Adam Johnson J also identified other examples of unfairly prejudicial conduct, (which also constituted breaches of the Agreement and the Articles, and breaches by the Investors' directors of various fiduciary duties pursuant to the Companies Act 2006) including withholding information concerning CPGL’s affairs in the period after Dr Sachs' and latterly Mr Faulkner's removal from the Board. Analysis Although the Petitioners had argued that CPGL was a “quasi-contractual partnership”, this was not a case in which the parties relied upon an equitable entitlement or agreement as established in Ebrahimi v Westbourne Galleries [1973] AC 3604. Here, Adam Johnson J focussed on the contractual bargain to which the parties had agreed and the extent to which that CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 bargain had been breached. In particular, he focussed on the good faith obligation, which he preferred to analyse as: “the obligation to deal fairly and openly, the need to take into account the interests of the other party as well as one's own interests, and the fact that the duty may be breached where an otherwise justifiable result is achieved in procedurally noncompliant way.” Although the Investors had the power to remove Dr Sachs and Mr Faulkner under the Companies Act 2006, the inclusion of a requirement to act in good faith meant that in exercising their statutory rights, the Investors were susceptible to a claim by the minority for unfair prejudice if their exercise of this right was in breach of contract. This case serves to highlight the significant effect the inclusion of express good faith obligations can have on the outcome of shareholder disputes and the way in which such obligations can assist parties contemplating unfair prejudice petitions. However, it should be borne in mind that, the extent of the impact in this regard will, of course, depend on the formulation of the relevant obligations applicable in each case, and the extent to which it can be said that they have been properly respected. Ben Sigler Partner T: +44 20 7809 2919 E: [email protected] Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] "They are hugely responsive and attentive and can manage a case well, event across multiple different time zones." Legal 500, 2021 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 SAAMCO reconsidered: the purpose of advice The Supreme Court has simultaneously handed down two landmark judgments – in two very different contexts (one medical negligence, the other accounting/audit negligence) – concerning the approach to determining the scope of a professional adviser’s duty of care laid down in the case of South Australia Asset Management Corporation (SAAMCO) v York Montague Ltd. In Khan v Meadows, the Supreme Court dismissed Ms Meadows’ appeal against the Court of Appeal’s finding that Dr Khan (who was asked to advise on whether Ms Meadows carried the haemophilia gene) was liable only for costs associated with Ms Meadow’s child being born with haemophilia and not the additional costs associated with his autism. Meanwhile, in Manchester Building Society (MBS) v Grant Thornton (GT), the Supreme Court allowed MBS’ appeal and held that MBS had suffered a loss within the scope of GT’s duty of care (albeit subject to a 50% reduction for contributory negligence). In both cases, which need to be read together, the majority in the Supreme Court emphasised the importance of looking at the purpose for which the professional advice was given. In this article, we will focus on the decision in MBS v GT and the implications arising for accountants and auditors. Background In a nutshell, the facts of MBS v GT are as follows: the claimant, MBS, had been negligently advised by the defendant, GT, that it could apply an accounting treatment (hedge accounting) to reduce the effect in its accounts of the volatility of long term interest rate swaps. At the time of its advice, GT was aware that MBS was required to maintain a certain level of capital under the then regulatory regime. In reliance upon GT’s advice, which was repeated annually in audit opinions signed by GT, MBS entered into the swaps. When, in 2013, GT advised MBS that it could not in fact apply hedge accounting, MBS closed out the swaps and incurred “mark-to-market” losses of over £32 million. GT accepted that its advice in relation to the hedge accounting was negligent. The High Court held that MBS could not recover damages from GT on the basis that a defendant is only responsible for losses that flow from matters for which it has assumed responsibility and, in this instance, the losses flowed from market forces for which GT did not assume responsibility. The Court of Appeal upheld the High Court’s decision but found that the judge should have considered whether GT gave “advice” or “information” to MBS, concluding that this was an “information” case such that GT was only responsible for the foreseeable financial consequences of the information being wrong (not of the decision to enter into the swaps). The question before the Supreme Court was whether the Court of Appeal was right to hold that the costs claimed by MBS fell outside GT’s duty of care as professional accountants. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 The Supreme Court's decision Whilst all the Supreme Court justices were in agreement regarding the outcome of the appeal, there were divergent views on the approach and three different judgments were handed down. This article considers the decision of the majority, which was given in just 39 paragraphs and which, in contrast to the lengthy decision of Lord Leggatt, moves away from framing the scope of duty principle in the language of causation and the counterfactual test. A conceptual framework The Khan and MBS cases were both heard by the same constitution of the Supreme Court with the aim of providing general guidance on the approach to determining the scope of duty and extent of liability of professional advisers for negligence. To that end, the Court suggested it might be helpful to locate this within a conceptual framework for the tort of negligence and posed the following six questions: 1. Is the harm (loss, injury and damage) which is the subject matter of the claim actionable in negligence? 2. What are the risks of harm to the claimant against which the law imposes on the defendant a duty to take care? (the "scope of duty question") 3. Did the defendant breach his or her duty by his or her act or omission? 4. Is the loss for which the claimant seeks damages the consequence of the defendant’s act or omission? 5. Is there a sufficient nexus between a particular element of the harm for which the claimant seeks damages and the subject matter of the defendant’s duty of care as analysed at stage 2 above? (the "duty nexus question") 6. Is a particular element of the harm for which the claimant seeks damages irrecoverable because it is too remote, or because there is a different effective cause in relation to it or because the claimant has mitigated his or her loss or has failed to avoid loss which he or she could reasonably have been expected to avoid? The Court reiterated that this framework is not intended to be comprehensive, and that it is possible to consider matters in a different order and to address more than one question at the same time (such as the second and fifth questions). The scope of duty question Turning to the second question (described as the “scope of duty question”), which was central to MBS’ appeal, the Court drew three key conclusions: • First, the Court held that the scope of the duty of care assumed by a professional adviser is governed by the purpose of the duty, judged on an objective basis by reference to the purpose for which the advice is being given. Having first identified what risk the duty was supposed to guard against, it is then necessary to see whether the loss suffered represents the fruition of that risk. • Second, the Court found that the distinction drawn between “advice” and “information” cases in SAAMCO has not proved to be satisfactory; it is too rigid because there is in reality a spectrum of cases between these two extremes. Rather than trying to shoe-horn a case into either of these categories, the primary focus should be on identifying the purpose to be served by the duty of care. The Court even went so far as to suggest that the terms “information” and “advice” should be dispensed with altogether, not least because they both involve giving advice. • Third, the Court stated that a counterfactual causation-based analysis of the nature proposed in SAAMCO, which looks at whether the claimant’s actions would have resulted in the same loss had the advice been correct, should only be used as a tool to cross-check the result pursuant to an analysis of the purpose of the duty – noting that even as a crosscheck it was 'subordinate' to that analysis (and query, therefore, what role it will actually serve). In particular, the Court highlighted that one problem associated with a counterfactual analysis is the scope for arguments on both sides about how the counterfactual world should be constructed, which risks driving the outcome in the case. Indeed, here, GT had sought to argue that the counterfactual world should be constructed in a way that meant MBS would have suffered the same loss if GT’s advice had been correct. Applying these principles to the facts, the Court found that examination of the purpose for which GT’s advice was given shows that the loss suffered by MBS fell within the scope of their duty of care. GT’s advice was sought in order that MBS could assess whether it could use hedge accounting in order to implement its proposed business model within the constraints of the regulatory environment. GT effectively advised MBS that hedge accounting could enable it to have sufficient capital resources to carry on its business (and thus also have sufficient regulatory capital), but in fact it did not. The duty nexus question The Court acknowledged that sometimes answering the second question also answers the fifth question (described as “the duty nexus question”). However, where the professional adviser guides the whole CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 decision-making process, the duty nexus question becomes important in order to separate out the element of the loss attributable to the defendant’s negligence. The mechanism by which the duty nexus question is answered in the SAAMCO valuer negligence cases is to look at the counterfactual, in order to identify the loss which falls within the scope of the defendant’s duty. In Khan, the Court clarified that the question is not whether the claimant would have behaved differently if the defendant’s advice had been correct, but whether, on the assumption that the claimant would have behaved as they did in fact behave, their actions would have resulted in the same loss if the defendant’s advice had been correct. However, the Court recognised that it may not always be appropriate to use this counterfactual test: in some cases, the scope of duty question may allocate the risk without need for the counterfactual and, in other cases, the counterfactual may contribute nothing. Analysis and implications What is clear from the majority decision in MBS is that there is a definitive move away from the information/advice distinction towards looking at the purpose of the advice given by the professional adviser. Whilst the intention of the majority seems to have been to simplify this complex area of law in just 39 paragraphs, it remains to be seen whether the Court’s new conceptual framework and its accompanying guidance will, in fact, achieve this objective. In particular, it is unclear whether a counterfactual analysis has any substantive role to play in analysing scope of duty and there are questions surrounding precisely how the “duty nexus question” should be answered. As to the implications for accountants and auditors, the advice in this case dates back to 2005/2006 when auditors would more frequently provide advice or guidance on key accounting treatment issues arising from the accounts. With the increased focus on auditor independence, advice of this nature has become less prevalent, but auditors are still required to point out non-compliance with accounting standards or policies. Where a significant disagreement arises, audit clients will often need specialist independent accounting advice. In a case of this nature, the auditor then unreasonably relying on negligent advice would not relieve the audit firm of liability. However, the audit firm could achieve better protection for these types of issues through the company obtaining independent accounting advice and/or the auditor limiting the scope of any reliance on that advice (or any guidance the auditor provides itself on accounting treatment) to the accounting treatment in the accounts (i.e. seeking to disclaim responsibility for commercial/regulatory matters). Kate Cordery Partner T: +44 20 7809 2397 E: [email protected] Adam Culy Partner T: +44 20 7809 2371 E: [email protected] Laura Andrewes Associate T: +44 20 7809 2229 E: [email protected] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Limitation in professional negligence: (Sciortino v Beaumont and Elliot v Hattens) Professional negligence claims (whether based on contract or tort) are generally subject to a six year limitation period under the Limitation Act 1980. However, the precise date on which a cause of action accrues can be complicated. In the recent cases of Sciortino v Beaumont1 and Elliott v Hattens Solicitors2, the Court of Appeal examined: 1) whether a separate cause of action accrues each time a professional provides the same or similar advice; and 2) whether a cause of action in tort accrues at the time a mistake is made, or when the claimant becomes aware that a loss has arisen. Sciortino v Beaumont In this case, a barrister (Mr Beaumont) provided advice on the prospects of an appeal. Some six months later, he provided further written advice on the same topic. The appeal was not successful. Mr Sciortino issued a claim against Mr Beaumont in negligence. The claim was just within the limitation period for the later, written advice but over six years since the original advice. The Court of Appeal held that the claim was not timebarred. The second advice gave rise to a claim for a second breach of duty within the limitation period. Mr Beaumont could, the court held, have changed his view on the prospects on the appeal (further 1 [2021] EWCA Civ 786 documentation having been provided to him before that second opinion was given) and the claimant was not committed to pursuing the appeal (per the initial advice). A claim for the cost consequences from the second advice onwards was therefore a claim referable to that advice, regardless of the earlier advice to pursue the appeal. The court distinguished the decision in Khan v Falvey [2002] EWCA Civ 400. In that case, the court held that where a negligent act or omission causes actionable damage outside the limitation period - and further attributable damage inside the limitation period - only one cause of action accrues which is statute-barred. In Sciortino v Beaumont, there were two allegedly negligent acts causing actionable damage, although the court did signal that the decision could have been different had the pleadings not differentiated the two advices. The continuing duty of advice? Although potential liability was found in Sciortino v Beaumont, the Court of Appeal confirmed that there is no “continuing duty” to review or revisit earlier advice. Subject to the specific terms of the retainer, professionals are not therefore under a general duty to review previous advice for latent errors. If negligent advice causes loss arising outside of the limitation period, the claim will (generally) be time-barred. That 2 [2021] EWCA Civ 720 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 result cannot be avoided by arguing that the professional was under a continuing duty to review their previous advice. However, where there are two alleged breaches of duty, one outside the limitation period and one within it, a claim for damages caused by the later breach may succeed. In Sciortino v Beaumont, the court held “there is no general principle of logic or common sense which requires any sort of ‘relation back’, such as to say that the limitation period was triggered by the first occasion on which the negligent advice was given, regardless of any subsequent breaches of duty.” Plainly, however, liability will depend on the facts of a case. Where a claimant is “irretrievably committed” to a course of action based on initial advice, similar later advice may not amount to a separate breach. Elliot v Hattens Solicitors Hattens was retained to act for Mrs Elliot in connection with a property transaction: her husband was to grant her a lease and she would then grant an underlease to a Mr Malster. The buildings on the premises were effectively destroyed by fire later that year, following which Mr Malster vacated the property without undertaking repairs and Mrs Elliot lost rent. It was alleged that Hattens had failed to: (a) ensure that Mr Malster’s parents entered into a guarantee; and (b) advise Mrs Elliott on her insurance obligations. Mrs Elliot brought proceedings against Hattens more than six years after the lease and underlease were executed, but less than six years after the fire. The issue before the Court of Appeal was therefore when the cause of action accrued for the purposes of limitation; in particular, when the negligence first caused actionable damage. Hattens argued that she suffered damage as soon as the lease and underlease were executed (and was thus outside the six-year limitation period), whereas Mrs Elliott claimed that she did not suffer any damage as a result of (a) and (b) above until after Mr Malster defaulted and after the fire respectively. The Court of Appeal held that the claim was time-barred in its entirety. Hattens’ failure to ensure Mr Malster’s parents were guarantors caused damage to Mrs Elliott as soon as the lease and underlease were entered into. The Court saw no reason to adopt a different approach in respect of Hattens’ failure to advise Mrs Elliott on her insurance obligations. Must a claimant be aware loss has arisen for the cause of action to accrue? The Court of Appeal found that loss had arisen even though the claimant was not aware of it. It noted the distinction between “no transaction” cases (where the defendant would not have proceeded with the transaction but for the negligence) and “flawed transaction” cases (where the claimant would have proceeded with the transaction but for the negligence, but the transaction would have been a better one). The court concluded that Elliott was a “flawed transaction” case – i.e. Mrs Elliott would still have entered into the lease and underlease had Hattens not been negligent. As such, the question was whether the value of the flawed transaction was measurably less than the value of a flawless transaction (whereas in a no transaction case, the question would be whether/when the transaction caused the claimant's financial position to be measurably worse than if s/he had not entered the transaction). The lease was objectively less valuable from the outset because there was no guarantor in respect of the underlease granted to Mr Malster. The court observed an expert “could doubtless have put a figure on the difference” and the fact that Mrs Elliot did not, in fact, wish to assign the lease, meaning it was not (viewed subjectively) less valuable, was not determinative. As to Hattens’ failure to advise Mrs Elliott regarding her insurance obligations, the court applied the same test. It found that her lease would be less valuable at the date of grant if valued on the basis that she would not comply with her insurance obligations. Accordingly, the fact that the flawed transaction did not create a problem for Mrs Elliott until the fire happened several months later was irrelevant. The court did observe that it might have been possible to argue that the insurance issue should have been decided differently from the guarantee issue. However, given that no distinction was drawn between the two issues by Mrs Elliot’s counsel (and no evidence adduced on the point), it concluded no differing treatment should apply. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Limitation as a defence The purpose of limitation periods is to set time limits for bringing claims – and there is clearly a public interest in preserving a clear cut-off point. These cases show, however, that despite the courts’ efforts, the point at which limitation expires is not always clear. In addition to the complexities involved in determining when a cause of action accrues, it is also important to bear in mind that s.32(1) of the Limitation Act postpones the limitation period where the claimant cannot reasonably be expected to know they have a cause of action because of fraud, deliberate concealment or mistake. In a number of recent decisions, the courts have clarified the application of this exception. See here for further analysis on this topic. 18 Laura Andrewes Associate T: +44 20 7809 2229 E: [email protected] Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] Kate Cordery Partner T: +44 20 7809 2397 E: [email protected] "Stephenson Harwood provide an excellent, allround legal service. Good client management, very able lawyers, with sound judgement." Legal 500, 2022 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Liquidated damages and delay: a victory for commercial common sense The Supreme Court’s judgment in Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29 has clarified the extent to which a liability to pay liquidated damages survives termination of a contract. In a unanimous decision, the Supreme Court held that absent clear words to the contrary, a party will be entitled to liquidated damages that have accrued prior to termination. In reaching its decision the Supreme Court has reverted to the decision at first instance, partially reversing what it described as the Court of Appeal's “radical re-interpretation” of the case law on liquidated damages clauses. Background The background to the case is set out in our previous article on the Court of Appeal’s decision. In brief, the Appellant, PTT Public Company Ltd ("PTT") entered into a software contract (the "CTRM Contract") with Triple Point Technology Inc. ("Triple Point"). The CTRM Contract provided for the contractor, Triple Point, to customise its proprietary software for PTT. The contract provided for work to be completed in phases with payment made in accordance with completion of various "milestones". Liquidated damages were payable for delay “from the due date for delivery up to the date PTT accepts such work”. Unfortunately, work proceeded slowly and Phase 1 of the project was delivered late. Triple Point then submitted an invoice for the completed work, and PTT paid the sum requested. Triple Point then asked PTT to pay further invoices (the "Outstanding Invoices") for work that had not yet been completed, on the basis that the CTRM Contract specified payment dates. PTT refused to pay. PTT argued that the relevant milestones in the CTRM Contract had not been met, and so payment was not due. In May 2014, Triple Point suspended work pending receipt of further payment. In February 2015, PTT terminated for repudiatory breach of contract in light of Triple Point's suspension of work. On 25 February 2015, Triple Point commenced proceedings to recover sums it alleged to be due pursuant to the Outstanding Invoices. PTT denied all of 1 "12.3 CONTRACTOR shall be liable to PTT for any damage suffered by PTT as a consequence of CONTRACTOR’s breach of contract, including software defects or inability to perform ‘Fully Complies’ or ‘Partially Complies’ functionalities as illustrated in Section 24 of Part III Project and Services. The total liability of CONTRACTOR to PTT under the Contract shall be limited to the Contract Price received by CONTRACTOR with respect to the services or deliverables involved under this Contract. Except for the specific remedies expressly identified as such in this Contract, Triple Point's claims and counterclaimed for the following principle heads of loss: • Damages for wasted costs prior to termination; • Damages for the costs of procuring a replacement software system on termination; and • Liquidated damages for the delays incurred up to the date of termination. Triple Point denied liability, and without prejudice to this, relied on a limitation of liability comprised in the CTRM Contract1 (the "Limitation of Liability") which capped the damages recoverable by PTT in certain circumstances (the "Liability Cap"). The decision at first instance and in the Court of Appeal At first instance2 , Jefford J dismissed Triple Point's claim in respect of the Outstanding Invoices. She found that the delay in performance of the CTRM Contract was caused by Triple Point's breach. As the contractual milestones had not been reached, Triple Point was not entitled to further payment, had not been entitled to suspend work in May 2014, and was in repudiatory breach of contract. Jefford J also held that PTT was entitled: • to terminate the CTRM Contract and/or to accept Triple Point's repudiatory breach; PTT’s exclusive remedy for any claim arising out of this Contract will be for CONTRACTOR, upon written notice, to use best endeavor to cure the breach at its expense, or failing that, to return the fees paid to CONTRACTOR for the Services or Deliverables related to the breach. This limitation of liability shall not apply to CONTRACTOR’s liability resulting from fraud, negligence, gross negligence or wilful misconduct of CONTRACTOR or any of its officers, employees or agents.” 2 [2018] EWHC 45 (TCC). CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 • to recover its wasted costs and the costs of sourcing an alternative software system, subject to the Liability Cap; and • to recover liquidated damages for delay up to the date of termination, which were not subject to the Liability Cap. The Court of Appeal3 partially overturned the first instance decision finding that: • Liquidated damages for delay were only available in respect of work ultimately completed and accepted by PTT, because that was what the express wording of the liquidated damages clause provided for. Such damages were not available where work had been delayed but ultimately not accepted because a decision had been taken to terminate the contract for that delay; and • The liquidated damages were also subject to the Liability Cap. Issues to be determined by the Supreme Court The issues which fell to be determined by the Supreme Court were: • Issue 1: Are liquidated damages payable where work is not completed or accepted by the paying party prior to termination? • Issue 2: Did the Liability Cap limit PTT's ability to recover losses for breach of a contractual duty of skill and care? • Issue 3: Were liquidated damages included within the Liability Cap? Issue 1: Availability of liquidated damages The Supreme Court unanimously allowed the appeal on Issue 1. It held that the Court of Appeal, in interpreting the clause as extinguishing PTT’s right to liquidated damages where delayed work was neither completed nor accepted, had adopted an approach “inconsistent with commercial reality and the accepted function of liquidated damages clauses”. The orthodox approach, namely that a contractual liquidated damages clause applied up until termination (with general damages available thereafter), was a “well-trodden” one and there had been no reason for the Court of Appeal to depart from it. Requiring, in line with the Court of Appeal's decision, a contracting party to surrender accrued rights, and to prove its pre-completion losses in 3 [2019] EWCA Civ 230. the event it wished to terminate a contract, would render the inclusion of a liquidated damages clause pointless, and deprive that party of the certainty and simplicity of calculation which it would otherwise permit. The Court of Appeal’s reliance on British Glanzstoff Manufacturing Co Ltd v General Accident, Fire and Life Assurance Corporation Ltd [1913] AC 143 had been misplaced. In Glanzstoff, the House of Lords had concluded that a liquidated damages clause only applied to work that had been delayed but ultimately completed. However, the Supreme Court felt that Glanzstoff turned on its own facts. The clause in Glanzstoff had been a bespoke clause, not a standard or commonly used one. The Supreme Court therefore held that the decision on the meaning of the relevant clause in Glanzstoff was not binding on decisions on meaning of other clauses, even where similar in nature. The Supreme Court also concluded that, in fact, it was more probable that the meaning of the clause in this case was that PTT's right to liquidated damages would cease on completion of the relevant phase, rather than completion of the relevant phase being a pre-condition for liability under the liquidated damages provision. Lord Leggatt (agreeing with Lady Arden's leading judgment) noted that finding to the contrary could create commercial difficulties. For example, if a contractor had overrun on time for completion, it would (if the Court of Appeal's analysis were followed) have reason not to complete the works at all, so as to avoid any liability for liquidated damages, payable upon acceptance of completion of the relevant task by their counterparty. There is, he found, "no reason – in law or in justice" why termination should deprive PTT of the right to recover liquidated damages. The Supreme Court concluded that the Court of Appeal's reliance on Glanzstoff had led to a "radical reinterpretation" of the case law on liquidated damages, when the case was highly fact-specific. It did not create "some special rule applying to liquidated damages clauses" more generally. PTT's right to liquidated damages was in line with the "generally understood position" that such damages would accrue until the contract was terminated. Issue 2 and 3: Scope of the Limit of Liability On Issue 2, the majority allowed the appeal4 . Lady Arden analysed the Limitation of Liability as containing: i. a statement that Triple Point is liable to PTT for any damage in consequence of any breach of 4 Lady Arden provided the Leading Judgment, and Lord Leggatt and Lord Burrows allowed the appeal, with Lord Sales and Lord Hodge dissenting. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 contract, including software defects or inability to meet the functionality criteria; ii. the Liability Cap: a global limit of liability for all breaches of contract; iii. a form of remedies sub-clause: for Triple Point to use best endeavours to cure the defect and, failing that, to return the attributable part of the fees paid; and iv. a Liability Cap carve out sub-clause (the "Carve Out"): for Triple Point's liability resulting from any fraud, negligence, gross negligence or wilful misconduct on their part would be unlimited. According to Lady Arden, 'negligence' has an "accepted meaning in English law" (which governed the CTRM Contract), covering both the tort of failing to use due care, and also breach of a contractual provision to exercise skill and care. Consequently, unless a "strained meaning" was given to the Carve Out, its effect is that all damages resulting from negligence on Triple Point's part, including damages for negligent breach of contract, fell outside the Liability Cap. The Court of Appeal had erred in finding that the word "negligence" referred to any independent tort, as this would give the term a "convoluted meaning which the word cannot reasonably bear". The Supreme Court dismissed the appeal on Issue 3, confirming that the Court of Appeal was right to find that the Liability Cap included liquidated damages, so that these counted towards the maximum damages recoverable by PTT. The Limitation of Liability provided for a Liability Cap, and for a limitation on the form of remedies available. The latter contained an exception for special remedies under the CTRM Contract, of which the liquidated damages clause was one specified form special remedy. However, that did not mean that the same exception should be read into the Liability Cap. Comment The Supreme Court's orthodox analysis of liquidated damages clauses, and reversal back to the first instance decision, will be welcomed. Such clauses are designed to provide contracting parties with "certainty, simplicity and efficiency". Now, parties relying on such clauses can have some comfort that the provisions will apply until termination, regardless of whether this is expressly stated. Thereafter, a claim for general damages remains an option, to the extent damage can be proven. Of course, if parties do wish to contract on an alternative basis, the Supreme Court's decision makes it clear that they are entitled to do so, but express words will be required to this effect. Ben Sigler Partner T: +44 20 7809 2919 E: [email protected] Emily Rivett Senior associate T: +44 20 7809 2290 E: [email protected] Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Notice provisions: how much detail is reasonable detail? (Dodika v United Luck Group) The Court of Appeal has handed down its judgment in Dodika Ltd & Ors v United Luck Group Holdings Ltd [2021] EWCA Civ 638, overturning the High Court's decision that notice given under a tax covenant was invalid. The case provides guidance on the Court's approach to contractual notice provisions. Background The buyer ("Dodika") had entered into a share purchase agreement (the "SPA") with a number of sellers, some of whom were also warrantors (including the Respondents "United"). The SPA contained a Tax Covenant, pursuant to which United agreed to pay Dodika an amount equivalent to any tax liability of any Group Company arising (in summary) from precompletion matters. Any such payment would be made from a tranche of the purchase price held in escrow. If Dodika failed to claim under the Tax Covenant, or failed to give adequate notice of any claims, the funds held in escrow would be released to the sellers. The relevant contractual notice provision in the SPA (the "Notice Provision") stated that: "any Indemnity Claim or Claim under the Tax Covenant shall be enforceable if the Buyer gives written notice to the Warrantors stating in reasonable detail the matter which gives rise to such a Claim, the nature of such Claim and (so far as reasonably practical) the amount claimed in respect thereof on or before the Second Claims Escrow Release Date" In June 2019, a week before the escrow release date, Dodika sent a letter (the "June Letter") to the sellers purporting to be a written notice of an indemnity claim under the Tax Covenant. This letter stated: "We hereby give you written notice … of Claims under the Tax Covenant of the SPA. Such claims relate to an investigation by the Slovene Tax Authority (the "Tax Authority") into the transfer pricing practices of Ekipa 2 d.o.o. ("Ekip") a Subsidiary Undertaking of the Company and a Group Company" Whilst the June Letter included a chronology of key milestones, it provided no further detail regarding the facts and matters giving rise to the Ekip investigation (which, at the time, remained live). However, representatives of United knew of the investigation, had access to relevant documents, attended various important meetings, and were involved in strategy discussions about it. The first instance decision Thereafter, United issued Part 8 proceedings seeking declarations that: 1) the June Letter did not comply with the Notice Provision; 2) the claim by Dodika was invalid; and 3) the funds held in escrow should be released to the sellers. Peter Macdonald Eggers QC (sitting as a Deputy High Court Judge) held that the June Letter failed to state "in reasonable detail" the matter giving rise to the claim. He held that the reference to Ekip's transfer pricing methods indicated the existence of a tax investigation, but did not serve the purpose of explaining or identifying the underlying facts and circumstances giving rise to Dodika's claim, and was not therefore compliant with the Notice Provision. Accordingly, he granted summary judgment on United's claim. Dodika appealed, with permission granted by Lord Justice Males, on 23 November 2020. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Court of Appeal Judgment was given by Lord Justice Nugee, Lord Justice Popplewell and Lord Justice Underhill, all allowing the appeal and overturning Peter Macdonald Eggers QC's decision at first instance. Lord Justice Nugee's leading judgment considered two issues in detail: (1) "what was the 'matter' giving rise to the claim?" (2) "was the matter stated in 'reasonable detail'"? What was the 'matter' giving rise to the claim? Lord Justice Nugee found the former question more straightforward to analyse than the latter. He concluded that the matter that gives rise to a claim under the Tax Covenant is a reference to any underlying precompletion facts giving rise a tax liability. It was not, therefore, the mere fact that there had been an investigation, but the underlying matters themselves, namely the transfer pricing practices now being investigated. Lord Justice Nugee grappled with the fact that the June Letter did not provide great detail on these underlying matters. However, he accepted that the SPA did not specify precisely what information the notice needed to contain, therefore a compliant notice was simply required to state matters in "reasonable detail". What is reasonable detail? An important consideration in Lord Justice Nugee's approach to assessing what was reasonable was that United's representatives already possessed full details of the tax investigation. In this regard, Counsel for United conceded that "he could not think how [providing the underlying detail] would have made any difference to the Respondents" but argued that, in any event: "notification clauses of this type served a particular purpose and whether that had any practical impact in a particular case did not affect what such a clause required". However, Lord Justice Nugee disagreed holding that: (i) the purpose of this type of notice was, prima facie, to provide information. He considered that the Court should therefore be "slow to conclude" that the June Letter failed to qualify as a compliant notice for failing to spell out facts which both parties already knew. To require this information to be repeated would "elevate the requirement to state matters in reasonable detail into empty formalism"; and (ii) given this context, on the facts, sufficient detail had been provided of the "matter giving rise to a claim". Lord Justice Nugee emphasised that "what is reasonable must depend on all the circumstances. In my view those circumstances must include in particular what is already known to the recipient". Lord Justice Popplewell agreed with this analysis, and added that he "reached that conclusion with less hesitation" as, in addition to being known to United already, the further level of detail required by the Notice Provision: (i) was still "at a high level of generality”, which would not have aided the recipients' understanding; and (ii) would not have served any commercial purpose. He considered that the purpose of a notice clause is to enable the recipient to assess the merits of the claim, participate in any investigation with a view to influencing it, and to take into account the nature and scope of the claim in its future business dealings. The additional detail required pursuant to the Notice Provision would not have advanced any of those purposes; "what is reasonable takes its colour from the commercial purpose of the clause … businessmen would not expect or require further detail which served no commercial purpose. That would be the antithesis of what is reasonable". Accordingly, the panel considered that the June Letter described the matter giving rise to the claim in reasonable detail and complied with the Notice Provision. Practical considerations Where a notice clause does not specify precisely what information must be included in it, the Court of Appeal’s decision suggests that sellers may potentially struggle to rely on highly prescriptive arguments to seek to avoid the protections they have agreed to give to a buyer. However, relying on such an approach naturally entails some degree of risk. The Court of Appeal's decision (and the decision at first instance which preceded it) also highlights the care that CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 must be taken in the preparation and service of contractual notices. Whilst in this case the buyer was, on appeal, able to successfully demonstrate that it had complied with the notice requirement, the decision was fact-specific. In this case the Notice Provision was not prescriptive thereby giving the Court broad discretion to take into account all the circumstances. Indeed, in reaching its decision, the Court of Appeal emphasised the need for strict compliance with such clauses, making it clear that a notice which failed to comply with a contractual notice provision would be invalid, even if the sellers already knew about the matter in question1 . 1 See paragraph 33 of the Court of Appeal's judgment at which Lord Justice Nugee explained: "Suppose for example a contract which entitled one party to give a notice in relation to one of several properties. If such a contract required the notice to specify the address and postcode of the property concerned, a failure to give the address and postcode in the notice would no doubt mean that the notice was not compliant, however much the recipient knew the address and postcode already. But if the contract did not require this, but merely required the notice to identify which property the notice was being given in relation to, then it might well be sufficient to refer to the property by name, or description, even in quite vague terms such as "the London property" or "the premises I hold of you". Ben Sigler Partner T: +44 20 7809 2919 E: [email protected] Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] Emily Rivett Senior associate T: +44 20 7809 2290 E: [email protected] ‘Brilliant international firm with exciting global reach into markets where London lawyers are not always prominent. The commerciality and skill of the lawyers and their knowledge of comparative legal systems and experience of big litigation ought to place them at the top of London’s legal offering. Also their diversity and gender balance is very impressive.’ Legal 500 UK 2022 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Contractual damages and exclusion clauses: you get what you bargained for (CIS v IBM) Where a party terminates a contract for repudiatory breach, a damages award should place it in the position it would have been in had the contract been properly performed. Assuming the contract was a profitable one, there are two alternative measures of loss which might be sought: 1) “expectation loss” (the financial benefit which the non-defaulting party expected from the contract, e.g. increased profits or reduced expenditure); or 2) “reliance loss” (the wasted costs incurred in the expectation of the financial benefit, e.g. payments to the counterparty, third parties and internal costs). In CIS General Insurance Ltd v IBM United Kingdom Ltd [2021] EWHC 347 (TCC), O'Farrell J analysed the authorities on the two measures of contractual loss. She held that, although the two methods for quantifying loss of bargain are different, there is no change in the underlying characteristics of the losses for which compensation is sought. Here, this meant that a claim for reliance losses (or wasted expenditure) fell within an exclusion of liability clause which excluded claims for “loss of profit, revenue, savings… (in all cases whether direct or indirect)…” (the "Exclusion Clause"). The effect of this finding was to reduce the damages awarded from £128 million to £15.9 million. This judgment provides a stark reminder of the need to carefully consider the scope and application of exclusion clauses when contracting. 1 For completeness, whilst IBM was found to be in repudiatory breach of the contract, which breach CIS had accepted, O'Farrell J did not accept all of CIS’ claims in this regard. In particular, she held that: • IBM was not in breach of warranty to take all reasonable steps to ascertain the risks associated with implementing the new IT system; Background Following a reorganisation within the Co-operative Group Limited (the "Co-op Group"), in 2015, CIS General Insurance Limited ("CIS") (the former insurance business of the Co-op Group) contracted with IBM for a new IT system (the "System"). The cost of supply and implementation of the System was over £50 million and the cost of the management services to be provided by IBM over a 10-year period was estimated at £125.6 million. The implementation did not go well. In 2017, CIS, disputed an invoice from IBM, which O'Farrell J determined it had done validly. Thereafter, IBM purported to terminate the contract by notice following CIS’ failure to pay the invoice, without adhering to the contractual escalation process. O'Farrell J accepted CIS’ claim that in wrongfully purporting to terminate the contract, IBM was in repudiatory breach, which breach CIS accepted1 . Conclusions on contractual exclusion clauses CIS sought damages on the "reliance loss" basis rather than on the basis of "expectation loss" (i.e. the additional costs of obtaining the System (or a system of equivalent functionality) from another vendor). CIS’ primary claim was for wasted expenditure in the sum of £128 million. In the alternative, it claimed £27.2 million in additional resource and third-party costs which it would not have incurred but for IBM’s breaches of contract. The key question before the Court in relation to quantum was whether the claim for wasted expenditure was excluded by the Exclusion Clause. IBM argued it was a claim for “loss of profit, revenue or savings” (and therefore excluded by the Exclusion Clause). Although the claim referenced the expenditure incurred, the actual loss, IBM argued, was the profit, revenue or savings through which the expenditure would have been recouped, but for the breach. CIS, unsurprisingly, argued that the claim was not one for loss of profits. Instead, it argued that its financial and non-financial benefits from IBM’s performance of the contract would have been worth at least as much as the amount it expended in reliance on the contract. Its • IBM was responsible for critical delays to the project in breach of contract and was in breach of its reporting obligations in respect of the delays to the contract; • CIS did not prove, however, that if IBM had provided more accurate reporting of the delay, it would have terminated the contract early; and • In purporting to wrongfully terminate the contract, IBM’s actions did not constitute “wilful default” under the contract. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 claim for wasted expenditure was, it argued, a claim to put it into a “break-even position” rather than to recompense it for lost profit. O'Farrell J considered the authorities in relation to this issue at length. Ultimately, she concluded that she had correctly summarised the position in her judgment in The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWHC 2197 (TCC) in which she held that (emphasis added): “a claim for wasted costs can be explained as compensation for the loss of the bargain based on a rebuttable presumption that the value of the contractual benefit must be at least equal to the amount that the claimant is prepared to expend in order to obtain such benefit.” Applying that reasoning to the facts, O'Farrell J concluded that the benefit for which CIS had contracted (and which it had lost as a result of IBM’s breach) was the profit, revenue and savings that would have been achieved by a successful implementation of the System. Although the claim was framed as one of “wasted expenditure”, as a claim for lost profits was covered by the Exclusion Clause, re-framing the claim in this manner did not alter that fact: "CIS… is entitled to frame its claim as one for wasted expenditure but that simply represents a different method of quantifying the loss of the bargain; it does not change the characteristics of the losses for which compensation is sought”. O'Farrell J rejected CIS’ arguments seeking to distinguish the findings in Royal Devon and Exeter on the facts. In that case, the contractual benefit was wholly non-pecuniary, and it was on that basis that a claim for wasted expenditure was held to fall outside of an exclusion clause for loss of profits. Where profit or other pecuniary benefit was not part of the contractual bargain, the loss suffered could not be characterised as profit, revenue or savings. By contrast, in this case the whole purpose of the contract was for CIS to derive a pecuniary benefit. Comment The key points to take away from this judgment: • Terminating an ongoing contract for breach is a major step. As this case shows, getting it wrong opens the door to a potentially substantial claim for repudiatory breach of contract. Although ultimately the damages ordered in this claim were not as significant as they might have been, the fact that IBM was exposed to those claims emphasises that it is essential to ensure that any purported or actual termination is carried out in accordance with the contract; and • Limiting or excluding liability for loss of profits in large IT (and many other) contracts is a relatively standard method of risk allocation. Few contracting parties are prepared to accept unlimited liability for unquantifiable and potentially significant claims over which they have very little control. However, agreeing to exclude liability for claims for wasted expenditure on a failed contract is less typical. It remains to be seen whether this decision will be appealed and what any appellate Court will decide. However, for now, contracting parties need to understand that agreeing to exclude liability for "loss of profits" may well also mean excluding liability for wasted expenditure. If that does not reflect the parties’ agreed positions, careful and clear drafting will be required to accurately represent the intended contractual bargain. Ben Sigler Partner T: +44 20 7809 2919 E: [email protected] Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Doctrine of duress clarified: Lawful commercial pressure or economic duress? A contract can be avoided on the grounds of economic duress but, to date, it has been far from clear when lawful commercial pressure crosses the line into duress. The Supreme Court has clarified the scope of the doctrine of lawful act duress in a detailed and important judgment, which considered the concept of illegitimate pressure and the extremely limited circumstances in which a contract can be rescinded because of a threatened unwelcome, but not unlawful, act (Pakistan International Airline Corporation v Times Travel (UK) Ltd ([2021] UKSC 40). Disputes over commission Times Travel (UK) Ltd is a small, family business that sold tickets for Pakistan International Airline Corporation’s (PIA) flights. At the time, PIA was the only operator of direct flights between the UK and Pakistan, and Times Travel’s business was almost exclusively tied to that route. Disputes arose relating to the rate and payment of commission between PIA and some of its sales agents, including Times Travel. Ultimately, PIA gave notice to terminate its contract with Times Travel in accordance with its terms. As a condition of entry into a new contract, PIA required Times Travel to provide a waiver of any prior claims, including those relating to the disputed entitlement to commission under the previous contract. The High Court held that the new contract could be avoided on the grounds of economic duress ([2017] EWHC 1567). The Court of Appeal, however, disagreed ([2019] EWCA Civ 828.. It held that the doctrine of lawful act duress does not extend to the use of lawful pressure to achieve a result to which the person exercising the pressure believes, in good faith, it is entitled. The court held that PIA had believed that it was entitled to the disputed commission and therefore the new contract could not be avoided. Times Travel appealed. Analysis of lawful act duress The Supreme Court unanimously upheld the Court of Appeal’s decision, although differed from the Court of Appeal’s reasoning in some respects, and dismissed the appeal. The court examined the following three requirements for the tort of lawful act duress: • There is an illegitimate threat or pressure by the defendant. • The cause of the claimant entering into the contract is the illegitimate threat. • The claimant has no reasonable alternative but to enter into the contract. The focus of the court’s analysis was on the first of these three elements: the illegitimacy of the threat. Illegitimate threats. An illegitimate threat can include a threat to do a perfectly lawful act. What makes it illegitimate, according to the majority judgment, is that it leads to an agreement which it would be unconscionable for the party making the threat to enforce. Unconscionability can be defined as “morally reprehensible behaviour”. This concept is closely CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 connected to, but distinct from, the equitable concepts of undue influence and unconscionability. Unconscionability, the court emphasised, is not a test to be applied across the board and without context. The courts should not become the arbiters of what is morally and socially acceptable. In fact, because in English contract law, by contrast to that of other jurisdictions, there is no doctrine of good faith or imbalance of bargaining power, the court made it clear that the scope for lawful act duress in commercial contractual negotiations is extremely limited. The court identified two principal circumstances in which the courts have recognised lawful act duress: • The exploitation of knowledge of criminal activity. • The use of illegitimate means to manoeuvre the claimant into a position of weakness to force it to waive its claim. The latter circumstance potentially applied on the facts. However, the court found that PIA did not act in an unconscionable or morally reprehensible manner. There was no finding that it had used reprehensible means to manoeuvre Times Travel into a position of increased vulnerability for it to exploit. For that reason, the court agreed with the Court of Appeal that there had been no economic duress. It also clarified that, although the tort of lawful act duress exists, and should continue to exist, it will only apply in a rare circumstance (see box “Interventions”). The role of bad faith Where the court disagreed with the Court of Appeal was in relation to the role of bad faith. The majority found that acting in bad faith alone is not sufficiently unconscionable or morally reprehensible to constitute illegitimate pressure. It observed that bad-faith demands based on an asserted pre-existing entitlement may not be a rare occurrence in commercial life and that discreditable behaviour can be a feature of commercial activity. Even if it had found that PIA had not believed in its entitlement to the disputed commission, it would not therefore have found PIA’s actions to have been illegitimate. Bad faith has a role to play in economic duress in relation to the analysis of the overall context but it is not, of itself, a necessary or definitive ingredient of the tort. Lord Burrows, giving a minority judgment, disagreed. In relation to waiver, Lord Burrows held that a demand would be unjustified, and therefore illegitimate, where both: • The threatening party deliberately created or increased the threatened party’s vulnerability to the demand. • The demand was made in bad faith. The majority, however, considered that Lord Burrow’s test would expand the scope of claims for lawful act duress too broadly. Bad faith in these circumstances would be where the threatening party did not genuinely believe that it had any defence and there was no defence to the claim being waived. Lord Burrows therefore agreed with the Court of Appeal, that if PIA had not held a genuine belief in its entitlement to commission, its actions could have constituted duress. Implications in practice While the tort of lawful act duress exists, the Supreme Court has severely restricted its scope and set the bar higher where parties assert these claims. The cornerstone of the majority judgment was the need to consider the overall context and whether the threatening party deliberately manoeuvred the threatened party into a position of increased vulnerability. Beyond that, the court expressed its reluctance to intervene in commercial negotiations, commenting that the courts have taken the position that it is for Parliament, and not the judiciary, to regulate inequality of bargaining power where a person is trading in a manner which is not otherwise contrary to law. For businesses such as financial institutions, where negotiations frequently take place against a backdrop of unequal bargaining power and inevitable financial pressure, this decision is likely to provide welcome clarity. The scope of liability for threatening to do something that a business is, by law, entitled to do has been severely curtailed. © 2021 Thomson Reuters (Professional) UK Limited. This article first appeared in the October 2021 issue of PLC Magazine, published by Practical Law, part of Thomson Reuters (Professional) UK Limited, and is reproduced by agreement with the publishers.. CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Interventions In Pakistan International Airline Corporation v Times Travel (UK) Ltd, interventions were made on behalf of Ukraine, The Law Debenture Trust Corporation plc and The All Party Parliamentary Group on Fair Business Banking ([2021] UKSC 40). Ukraine and The Law Debenture Trust Corporation are parties to an appeal to the Supreme Court, in which judgment is pending. In Pakistan International Airline, The Law Debenture Trust Corporation submitted that lawful act duress should be abolished as a cause of action, whereas Ukraine and the All Party Parliamentary Group argued to the contrary, with the latter proposing that these claims should be determined by reference to the extent to which a defendant acted with good faith in the context of the relevant dealings. Harriet Campbell Senior Knowledge Development Lawyer T: +44 20 7809 2517 E: [email protected] "Very experienced and highly effective litigation team, well able to compete on the biggest commercial disputes including fraud, banking and international cases." Legal 500, 2021 Ben Sigler Partner T: +44 20 7809 2919 E: [email protected] CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 Why choose Stephenson Harwood? Corporate and commercial disputes Stephenson Harwood’s highly regarded corporate and commercial disputes team advises on the full range of disputes. We represent clients in High Court litigation, international and domestic arbitration, and advise and assist clients on ADR, including mediation. Most of what we do is truly international and often multijurisdictional; we manage complex proceedings in other jurisdictions and co-ordinate proceedings in more than one jurisdiction. The team is renowned for its depth and ability to handle a broad range of disputes but has particular expertise in banking and financial services litigation and regulation, competition litigation, fund litigation, shareholder disputes and corporate litigation, professional and management liability and sanctions litigation. Register here to receive updates from the Stephenson Harwood corporate and commercial disputes team. "It's a very strong, well-resourced team with a wide set of abilities and which is right at home on a range of complex litigation cases." Chambers UK 2020 CORPORATE AND COMMERCIAL DISPUTES UPDATE – NOVEMBER 2021 © Stephenson Harwood LLP 2021. Any reference to Stephenson Harwood in this document means Stephenson Harwood LLP and/ or its affiliated undertakings. Any reference to a partner is used to refer to a member of Stephenson Harwood LLP. The fibre used to produce this paper is sourced from sustainable plantation wood and is elemental chlorine free. LONADMIN/16223860/211021 Contacts If you have any questions about any of the issues raised in these articles, please get in touch with one of the authors, or your usual Stephenson Harwood contact. Kate Cordery Partner T: +44 20 7809 2397 E: [email protected] Adam Culy Partner T: +44 20 7809 2371 E: [email protected] Edward Davis Partner T: +44 20 7809 2327 E: [email protected] Roland Foord Partner T: +44 20 7809 2315 E: [email protected] John Fordham Partner T: +44 20 7809 2300 E: [email protected] Richard Garcia Partner T: +44 20 7809 2346 E: [email protected] Richard Gwynne Partner T: +44 20 7809 2321 E: [email protected] Guy Harper Partner T: +44 20 7809 2398 E: [email protected] Sue Millar Partner T: +44 20 7809 2329 E: [email protected] Donna Newman Partner T: +44 20 7809 2357 E: [email protected] Genevieve Quierin Partner T: +44 20 7809 2174 E: genevieve.quierin @shlegal.com Ben Sigler Partner T: +44 20 7809 2919 E: [email protected] •