THE ARBITER InternaƟonal Disputes NewsleƩer Autumn 2018 Editor: Melanie Willems IN THIS ISSUE Flaux-ting the rules: punitive damages in English law 03 by Markus Esly 08 13 Stand down if you can’t deliver: the trials and tribulations of experts by Ryan Deane Structuring for Brexit: the Achmea decision by Robert Blackett THE ARBITER AUTUMN 2018 2 THE ARBITER AUTUMN 2018 3 Flaux‐Ɵng the rules: puniƟve damages in English law by Markus Esly English law is slow to award puniƟve or exemplary damages. They are rarely seen in commercial disputes where the meas‐ ure of damages tends to be compensato‐ ry. Nonetheless, as a maƩer of legal prin‐ ciple, puniƟve damages are available for all torts that involve a wilful element on the part of the torƞeasor. PuniƟve dam‐ ages have been awarded for defamaƟon, trespass to land or the person (including assault) or false imprison‐ ment, but they are also available for torts involving dishonesty, such as deceit. VicƟms of commercial fraud could therefore be able to claim more than the loss they have suffered, provided that the re‐ quirements for an award of puniƟve damages are saƟsfied. In Axa Insurance UK Plc v Financial Claims SoluƟons Ltd  EWCA Civ 1330, the Court of Appeal overturned the High Court and recently awarded puniƟve damages for an insurance fraud, where the insurer had detected the fraud before making any payments. This arƟcle considers to what extent the Court of Appeal’s decision clarified the law or expanded the scope for puniƟve damages. The crucial quesƟon is precisely what needs to be shown to elevate the torƞeasor’s conduct from a ‘run of the mill’ fraud to something more, that warrants a puniƟve award. A brief history of puniƟve damages in English law Any discussion of the modern principles relaƟng to puniƟve dam‐ ages starts with Rookes v Barnard  UKHL. In that case, the House of Lords narrowed down the circumstances in which such damages can be awarded. As McGregor on Damages put it, the “situaƟon totally changed” as a result of Rookes v Barnard (19th Ed, 13‐03). Prior to 1964, awards of puniƟve damages had increasingly featured in the English legal landscape since making their first ap‐ pearances in the 1760s. It should, however, be noted that even in the relaƟve heydays of puniƟve damages, they were never available for breach of contract, no maƩer how egregious or deliberate the breach. That limitaƟon was affirmed in Addis v Gramophone Co. Ltd  AC 488 and has not been eroded since. UnƟl Rookes v Barnard, the House of Lords itself had never had the opportunity to consider the raƟonale for puniƟve damages. That led their Lordships to ask whether, in the absence of binding precedent, they could “… remove an anomaly from the law of Eng‐ land.” They did not go quite go that far, instead noƟng the excep‐ Ɵonal nature of puniƟve damages in the civil law of damages (primarily concerned with compensaƟon and not punishment), con‐ fining them to a few excepƟonal circumstances. Those circumstanc‐ es are set out in the speech of Lord Devlin, described by the High Court in Axa as the “fount of the modern jurisdicƟon to award exem‐ plary damages”. Lord Devlin established two categories of cases as surviving the cull. The first category relates to misconduct by public official. The second category, much more likely to be relevant in commercial disputes, was described as follows: “Cases in the second category are those in which the defend‐ ant’s conduct has been calculated by him to make a profit for himself which may well exceed the compensaƟon payable to the plainƟff … …. Where a defendant with a cynical disregard for a plainƟff’s rights has calculated that the money to be made out of his wrongdoing will probably exceed the damag‐ es at risk, it is necessary for the law to show that it cannot be broken with impunity. This category is not confined to moneymaking in the strict sense. It extends to cases in which the defendant is seeking to gain at the expense of the plainƟff some object—perhaps some property which he covets—which either he could not obtain at all or not obtain except at a price greater than he wants to put down. Exemplary damages can properly be awarded whenever it is necessary to teach a wrongdoer that tort does not pay.” The debate about whether puniƟve damages had any place in English law has conƟnued since Lord Devlin’s pronouncement. In 1997, the Law Commission published a report concluding that, in their view, the power to award such damages should conƟnue to be part of English law. In 2001, the House of Lords again considered the maƩer, in Kud‐ dus v Chief Constable of Leicestershire Constabulary  UKHL 29. A police officer had simply forged the vicƟm’s signature on a form consenƟng to the abandonment of a police invesƟgaƟon into the crime in quesƟon. The Chief Constable, sued vicariously for the officer’s acƟon, argued that exemplary damages had never before been awarded for this parƟcular type of misfeasance in public office, and sought to have the claim struck out. Their Lordships decided that puniƟve damages were not confined to just certain causes of acƟon in tort. Their jusƟficaƟon lay in the outrageousness of the defendant’s conduct. As Lord Slynn put it, there was nothing in Lord Devlin’s statements to suggest that, in addiƟon to the parƟcular requirements (for the second category, cynical disregard of the claimant’s right and a calculaƟon that the profit may exceed the compensaƟon payable), one also had to con‐ sider the law reports going back to the 1760s to check whether puniƟve damages had previously been awarded for the parƟcular cause of acƟon. It was the defendant’s behaviour that had to be looked at. As Lord Nicholls put it: “From Ɵme to Ɵme cases do arise where awards of compensa‐ tory damages are perceived as inadequate to achieve a just 4 THE ARBITER AUTUMN 2018 result between the parƟes. The nature of the defendant’s conduct calls for a further response from the courts. On occa‐ sion conscious wrongdoing by a defendant is so outrageous, his disregard of the plainƟff’s rights so contumelious, that something more is needed to show that the law will not toler‐ ate such behaviour. Without an award of exemplary damag‐ es, jusƟce will not have been done. Exemplary damages, as a remedy of last resort, fill what otherwise would be a regreƩa‐ ble lacuna.” The fraudulent scheme in Axa Turning to the dishonest scheme that led to the liƟgaƟon in Axa v Financial Claims SoluƟons, the defendants had sought to defraud Axa by obtaining default judgments and then seeking to enforce those against Axa in respect of ficƟƟous road traffic accidents alleg‐ edly caused by motorists insured by Axa. These claims had been pursued by an enƟty purporƟng to be authorised to conduct liƟga‐ Ɵon when it was not, which was controlled by the fraudsters. The fraudsters had manufactured medical evidence suggesƟng whip‐ lash injuries and hire purchase agreements said to show the cost of replacement cars. They obtained default judgments against the insured, for more than £85,000 in total. Having obtained default judgment against the alleged Axa policyholders, the fraudsters then commenced proceedings against Axa under the Road Traffic Act 1988 seeking to enforce the default judgments against the insurer. To prove service on Axa, they sent envelopes full of junk mail by registered post. Unsurprisingly, Axa’s mail room disposed of them. The fraudsters persisted in conducƟng the liƟgaƟon as if they were solicitors (a criminal offence) and making misrepresentaƟons to the court, including a cerƟficate of service on Axa which led to a de‐ fault judgment against the insurer. They also obtained writs of enforcement. Bailiffs aƩended Axa’s offices intent on seizing com‐ puters to saƟsfy the apparent judgment debt. At that point, the scheme began to unravel. Axa’s solicitors obtained an urgent stay of execuƟon and a transfer of the proceedings to the High Court. They then uncovered the extent of the decepƟon. Soon enough, the claims against Axa were struck out and, following third party (Part 20) proceedings by Axa, judgment was entered against the fraudsters for deceit and unlawful means conspiracy. Separately, the main perpetrators of the fraud were also convicted of criminal offences. No puniƟve damages for Axa in the High Court In Axa’s tort claim, the High Court awarded Axa the costs it had incurred (both internal and external) in invesƟgaƟng the fraud, of just under £25,000, as compensatory damages. The learned judge did not, however, award puniƟve damages that had also been claimed. Axa had relied on Lord Devlin’s famous dictum in Rookes v Barnard, submiƫng that the second category (“… the defendant’s conduct has been calculated by him to make a profit for himself which may well exceed the compensaƟon payable to the plainƟff …”) was directly applicable to the fraud that had been aƩempted against it. The fraudsters had tried to extract as much as £85,000 from Axa, when the costs of puƫng the maƩer right came to about a third of that. It was put to the learned judge that such conduct was quite deliberate, difficult to detect and potenƟally highly profitable, such that puniƟve damages were jusƟfied. The High Court disagreed. The judge emphasised the limited scope and excepƟonal nature of puniƟve damages. He thought that a puniƟve award could only be jusƟfied where compensatory damages were insufficient to remove the torƞeasor’s unlawful gain. Among the examples given in the judgment of cases that would merit a puniƟve award was that of a newspaper which knowingly and deliberately published a defamatory story, thinking that the profit to be made from the paper’s increased circulaƟon would outweigh any damages for libel that might be awarded against it. In the High Court’s view: “... Lord Devlin was not talking merely about conduct that simply is so malign or anƟ‐social that it seems to call for pun‐ ishment. That descripƟon could apply to many cases that do not usually aƩract exemplary damages; for example, all cas‐ es of fraud might be so described. Nor does his dictum jusƟfy awarding exemplary damages just because a defendant has commiƩed a tort in the hope of geƫng away with it; proba‐ bly most fraudsters do that, many of them successfully. Ex‐ emplary damages are not a subsƟtute for the criminal law. They are (at least so far as the second category is concerned) available for the case where compensatory damages are inadequate to remove the wrongful gain achieved by the tort where paying compensaƟon in accordance with normal prin‐ ciple would leave the torƞeasor “up on the deal”.” However, the insurance fraudsters were not ‘up on the deal’ – nor could they ever be. They had tried to scam Axa out of money. The profit and the compensaƟon would always be idenƟcal be‐ cause damages for deceit would amount to any money that had been extracted. The judge felt that Axa’s case amounted to saying that puniƟve damages should be awarded because the loss caused by the fraud, if the fraud had succeeded, would have been greater than compensatory damages that could be awarded when the fraud had actually been discovered. To accept that proposiƟon would be, the judge thought, to extend the scope of puniƟve dam‐ ages too far. He did not accept that puniƟve damages could be used as a vehicle for social policy, when Axa or other insurers that fell vicƟm to these kinds of schemes had avenues open to them through the criminal courts. This parƟcular case did not “fall re‐ motely within Lord Devlin’s second category”. To suggest other‐ wise would, the judge thought, be a fundamental misunderstand‐ ing of the law. THE ARBITER AUTUMN 2018 5 The Court of Appeal has no difficulty in allowing Axa’s appeal Undeterred by the judge’s criƟcism, Axa appealed. One of the few things that the Court of Appeal and the judge below appear to have agreed on was the proposiƟon that puniƟve damages were an excepƟon and ought not to be extended. Even so, Flaux LJ, giving the judgment of the court, had no difficulty in allowing the appeal. The object of the fraud had been to extract as much money as pos‐ sible from the insurer. He considered it relevant that if the fraud failed, then compensaƟon would be much less than the potenƟal profit (the point which the judge had roundly rejected), so puniƟve damages ought to be available. Flaux J held that: “The judge's analysis that the profit and the compensaƟon would be idenƟcal looks at the maƩer through the wrong end of the telescope and overlooks that the second category re‐ quires the Court to analyse the posiƟon prospecƟvely when the tort is commiƩed, at which Ɵme the torƞeasor may or may not ulƟmately achieve the profit it seeks to achieve. Hence Lord Hailsham’s references to “the chances of econom‐ ic advantage” outweighing “the chances of economic penal‐ ty”, reflecƟng what Lord Devlin had said about the wrongdoer calculaƟng that the profit “will probably exceed the damages at risk”. In any event, as Sharp LJ pointed out during the course of argument, if the fraud had been successful, Axa would have paid the claims and the monies would have disap‐ peared, so that even if the fraud had been subsequently un‐ covered, the compensaƟon Axa would be likely to have recov‐ ered would be nothing like the profit the wrongdoers had achieved.” The Court of Appeal concluded that this was a paradigm case for awarding puniƟve damages. The defendant’s conduct had been very serious, and warranted an award that would deter others from pursuing similar ‘cash for crash’ frauds, which the Court of Appeal felt had already increased insurance premiums. As for the criminal proceedings against the fraudsters, Flaux LJ felt that this did not affect the power to make a puniƟve award. The Court of Appeal awarded £20,000 in such damages against each of the defendants. Did the Court of Appeal expand the scope for puni‐ Ɵve damages? The Court of Appeal’s decision is robust, but does it expand the scope of puniƟve damages by perhaps not strictly applying some of the requirements that Lord Devlin set out for the second category of cases? There are two points that merit closer consideraƟon. The first is the requirement that, for any award of puniƟve damages under the second category, the defendant’s conduct must have been “… cal‐ culated by him to make a profit for himself which may well exceed the compensaƟon payable …”. What exactly is meant by that calcu‐ laƟon? The second is the key maƩer on which the Court of Appeal and the judge differed: the torƞeasor had not in fact made a profit, and was thus punished for his conduct alone. Does this fit with the earlier authoriƟes, or must the torƞeasor have made a profit? What is meant by ‘calculated conduct’? Flaux LJ’s statement of principle was as follows (at 30): “[CiƟng Rix LJ in Borders (UK) Ltd v Commissioner of Police of the Metropolis  EWCA Civ 197]: “… controversial as [puniƟve damages] are, they are not to be contained in a form of straight‐jacket, but can be awarded, ulƟmately in the interests of jusƟce, to punish and deter out‐ rageous conduct on the part of a defendant. As long therefore as the power to award exemplary damages remains, it is not inappropriate in a case such as this, where the claimants have been persistently and cynically targeted, that they, rather than the state, should be the beneficiaries of the court’s judg‐ ment that a defendant’s outrageous conduct should be marked as it has been here. They are truly vicƟms, and … there is no quesƟon at all of the award becoming a mere windfall in their hands.” “Provided that it is recognised that the criterion which Lord Devlin idenƟfied, that the wrongdoer has calculated that the profit to be made from the wrongdoing may well exceed any compensaƟon he has to pay the claimant, must have been saƟsfied for exemplary damages in the second category to be available, this seems to me to be an appropriate statement of the approach to be adopted to the award of exemplary dam‐ ages in this category.”” The first paragraph of Flaux LJ’s statement (ciƟng Rix LJ in Bor‐ ders) emphasises the wrongdoing that is being punished – an obvi‐ ous and understandable jusƟficaƟon for awarding puniƟve damag‐ es. The second paragraph stresses the requirement (‘Lord Devlin’s criterion’) of a (prospecƟve) calculaƟon that the profit to be made from the wrongdoing “may well” exceed the compensaƟon payable to the vicƟm. As noted earlier, Flaux LJ found that this had to be considered prospecƟvely, when the tort was being commiƩed. However, assuming that what is required is a calculaƟon of the likely net outcome of the fraud, it is not easy to think of a fraud which involves obtaining money or property from the vicƟm that could saƟsfy the requirement. All that the fraudster stands to gain, the vicƟm stands to recover in a claim for compensatory damages. Assume that the fraudsters in Axa had ‘calculated’ their chances before embarking on the fraud. They work out their ‘economic advantage’: that is all the money that they hope Axa will pay them. Presumably they also think that the chances of securing that ad‐ vantage are good (they are careful fraudsters who would not em‐ bark on a scheme they think will see them caught). They then con‐ sider the other side of the coin. What are the chances of suffering an ‘economic penalty’? If the fraud succeeds but they are caught, 6 THE ARBITER AUTUMN 2018 they would be liable to repay Axa any money they have been able to extract. That penalty is the same as the economic advantage they are seeking. They are probably also going to be liable for Axa’s costs in invesƟgaƟng, uncovering and then ‘prosecuƟng’ (in the civil courts) the fraud, reclaiming the money. With those costs added into the mix, it now looks as if the chances of economic pen‐ alty outweigh the advantage. The judge’s newspaper example would of course saƟsfy this requirement – because in that example, the torƞeasor is able to moneƟse the tort by increasing its own circulaƟon by publishing the defamatory piece. Suppose the wrongdoing is aimed at discov‐ ering some business secret or proprietary informaƟon, which the torƞeasor can use to boost its own business. That would amount to a breach of confidence, an equitable wrong, for which an ac‐ count of profits (actually made by the wrongdoer) is available – but not an award of puniƟve damages. What about Sharpe LJ’s comment in Axa, noƟng that if the fraud had been successful, the money would have disappeared – so “… that even if the fraud had been subsequently uncovered, the com‐ pensaƟon Axa would be likely to have recovered would be nothing like the profit the wrongdoers had achieved.” That amounts to saying that puniƟve damages should be awarded if the fraud was unsuccessful, because, if the fraud had been successful, the fraud‐ sters would have made off with the money, or would have dissipat‐ ed it, and been unable to saƟsfy a compensatory award. Presuma‐ bly, in that scenario the fraudsters would be equally unable to saƟsfy a puniƟve award. Sharpe LJ’s comment may be a jusƟfica‐ Ɵon on public policy grounds: because the fraudster was unlikely to be caught and full restoraƟon was unlikely if they had succeed‐ ed, they should be punished even though they failed. It does not, however, squarely address Lord Devlin’s requirement for a ‘calculaƟon’ (to be done prospecƟvely). However, it appears that this calculaƟon does not need to be mathemaƟcal, as noted briefly by Flaux LJ (at 18), or a precise bal‐ ancing process. It is more rough and ready than that. As the House of Lords found in Broome v Cassell  AC 1027: “What is necessary is that the torƟous act must be done with guilty knowledge for the moƟve that the chances of econom‐ ic advantage outweigh the chances of economic, or perhaps physical, penalty. ... The situaƟon contemplated is where someone faces up to the possibility of having to pay damages for doing something which may be held to have been wrong but where neverthe‐ less he deliberately carries out his plan because he thinks that it will work out saƟsfactorily for him.” So the crux of the maƩer may lie in the fraudster thinking that they will get away with it and that it will be worth it. But which fraudster thinks any different? And what about the fraudster who has such animosity for their chosen vicƟm that their moƟve is to cause injury regardless of the consequences that they might suffer – their moƟve in commiƫng the wrong is to cause damage, rather than to make a gain or be beƩer off as a result. Presumably they are also deemed to be sufficiently ‘calculaƟng’? Looked at in this light, this part of Lord Devlin’s requirement may not help much when trying to differenƟate fraudulent conduct meriƟng an award of puniƟve damages from fraudulent conduct for which only ‘normal’ (compensatory) damages are available. Of course, Lord Devlin also required there to be a cynical disregard of the claimant’s rights, or ‘outrageous conduct’. Precisely what may saƟsfy that separate requirement is not easy to disƟl from the au‐ thoriƟes, but the decision in Borders (discussed below) suggests that repeatedly (and perhaps successfully) targeƟng the same vic‐ Ɵm may warrant a puniƟve award. Must the fraudster have made a profit? That sƟll leaves the quesƟon whether the fraudster must have made a profit or whether conduct alone warrants puniƟve damag‐ es. In his analysis, Flaux LJ thought that Lord Devlin’s second cate‐ gory should not be limited to cases where “… the profit made by the wrongdoer cannot be fully recovered by the vicƟm through an award of compensatory damages” (at 26). Other authoriƟes also suggested that an award of puniƟve damages should not be affect‐ ed by “… whether the claimant could have claimed the disgorge‐ ment of the torƞeasor’s profit” as compensaƟon (at 27). All this, however, presupposes that the torƞeasor is siƫng on a profit, which was not the case in Axa. Flaux LJ agreed with Counsel for Axa that it would be wrong to limit exemplary damages to situaƟons when “the profit made by the wrongdoer cannot be fully recovered by the vicƟm” through compensatory damages (at 28). That does not go as far as saying that exemplary damages are available where no profit has been made (even though, logically, the vicƟm could not claim compensa‐ tory damages). Here, Flaux LJ referred to an earlier decision by the Court of Appeal, Ramzan v Brookwide Ltd  EWCA Civ 985. In that case, the claimant could have claimed an account and thus “stripped [the defendant] of all its remaining profits” which had been made through the wrongful appropriaƟon of the claimant’s property. The claimant failed to bring that claim, but did claim (and was awarded) puniƟve damages. Arden LJ held that (at 81): “To award exemplary damages by reference to the profits for which a claim could have been made would also set a prece‐ dent which might lead to a disproporƟonate remedy in a case where the profits were much larger.” This does not deal with the situaƟon where no profits have been made. On the contrary, it suggests that exemplary damages ought not to be linked to such profits as the claimant could recover through an account, because there might be other (greater) profits which the claimant could not so recover – but for which exemplary damages might be awarded. THE ARBITER AUTUMN 2018 7 In Kuddus, the House of Lords made a number of comments which relate to that point. Lord ScoƩ (at 109) described Lord Devlin’s second category as relaƟng to cases where the defendant, through his wrongful conduct had made a profit which exceeded the compensaƟon payable to the vicƟm. His Lordship appears to have focused on the ulƟmate outcome or effect of the conduct (like the judge at first instance did in Axa), as opposed to the likely result at the Ɵme of commiƫng the tort. Lord ScoƩ also suggested that the second category had largely been overtaken by the law of resƟtuƟon, such that “… the profit made by a wrongdoer can be extracted from him without the need to rely on the anomaly of liquidated damages.” This further suggests that his Lordship was concerned about taking away a gain that the torƞeasor had actual‐ ly realised. One could perhaps ask whether that is sufficient pun‐ ishment, because removing the gain would not leave the torƞeasor worse off than he was before the tort was commiƩed. Lord Nicholls in Kuddus (at 67) said that, for his part, he was not enƟrely persuaded by Lord Devlin’s second category, which he said was about “wrongful conduct expected to yield a benefit in excess of any compensatory award likely to be made”. That is not about disgorging a real profit – because the expected benefit may not materialise. However, Lord Nicholls then immediately went on to say that the law of unjust enrichment had developed at a consider‐ able pace, which was why he wondered whether Lord Devlin’s second category was sƟll needed. Unjust enrichment, however, requires that there has been an enrichment, not just conduct ex‐ pected to lead to enrichment. Both Lord ScoƩ and Lord Nicholls were speaking obiter in Kud‐ dus, because the House of Lords only had to decide whether puni‐ Ɵve damages could be awarded for misfeasance in public office (and Lord ScoƩ considered himself in a minority posiƟon). Some further guidance can be obtained from the decision of the Court of Appeal in Borders (cited by Flaux LJ in Axa). That case involved the fraudulent and criminal acƟviƟes of Mr Jordan, described as a “literary Fagin”. Mr Jordan was a street trader. He had sold hun‐ dreds of thousands of stolen books from his stalls in Waterloo and the City, making very considerable profits. When he was charged with unlicensed trading, a total of 46,780 books were seized. When Mr Jordan was arrested, his bank balance was a very healthy £600,000. He was duly arrested, convicted of (criminal) conspiracy and sentenced to almost three years imprisonment. As part of the criminal proceedings, his remaining assets were also being made the subject of a confiscaƟon order. He then faced a civil, torƟous claim for damages, which came before the Court of Appeal. A consorƟum of booksellers had start‐ ed to mark books of the kind that Mr Jordan specialised in selling. As the books seized from Mr Jordan had their marks, the booksellers could prove that they were the vicƟms of the fraud. Compensatory damages were assessed by taking the retail value of the books when they were stolen and deducƟng from it the resale value when recovered. That came to about £230,000. To this were added the costs of marking and tracing the books, a further £46,000. The booksellers were also able to persuade the High Court that they were sƟll out of pocket, because Mr Jordan was likely to have sold many thousands of books, also stolen from them, which were never recovered. They were awarded an addi‐ Ɵonal £100,000 in puniƟve damages. The Court of Appeal upheld this award. It did not maƩer that the booksellers could have claimed addiƟonal damages on a compensatory basis, by proving their greater losses. Neither was there any real danger that Mr Jordan might end up having to pay the same £100,000 twice, bear‐ ing in mind the criminal confiscaƟon proceedings. Rix LJ felt that the case came within Lord Devlin’s second cate‐ gory. Mr Jordan knew from his own long‐standing criminal experi‐ ence that his conduct was profitable and that the law was not readily able to stop him. He took a gamble that the rate at which his criminal enterprise generated profits were worth the future risk of having to pay compensaƟon. That was sufficient to saƟsfy Lord Devlin’s requirement for a ‘calculaƟon’ (as discussed above). It seems that Rix LJ also took note of the fact that Mr Jordan’s crimi‐ nal enterprise had been ongoing, and profitable, for some Ɵme: Mr Jordan had been acƟng with “cynical persistence, preferring his own profit to any regard for his vicƟm’s losses.” He also noted that the claimants had been “persistently targeted”. These comments could also suggest that Mr Jordan having actually made a profit over a prolonged period of Ɵme jusƟfied the award of puniƟve damages. Sedley LJ took a similar view. He thought that the modern ‘enhanced’ compensatory system of damages could accommodate a puniƟve element (though that was an anomaly), commenƟng that (at 26): “When one recalls that the raƟonale of the second category of exemplary damages is, precisely, the confiscaƟon of profits which cannot be got at through the ordinary compen‐ satory mechanisms, this is an aƩracƟve synthesis. Exemplary damages fill a moral gap, and it has always been the princi‐ pal moral objecƟon to them that by handing the penal sum to whoever happens to be the claimant the law hands them a windfall.” None of this expressly supports the Court of Appeal’s decision in Axa, that puniƟve damages for deceit and unlawful means conspir‐ acy could be awarded where the defendant had made no profit, and where it seems difficult to say that the vicƟm had been cynical‐ ly or persistently targeted. Conclusion It is tempƟng to describe Axa v Financial Claims SoluƟons as a policy‐driven decision dealing with a legal principle that has fre‐ quently been described as controversial. The Court of Appeal’s decision does seem to go further than previous case law, focusing 8 THE ARBITER AUTUMN 2018 solely on the defendant’s conduct and seemingly placing no em‐ phasis on any wrongful gains realised through the unlawful enter‐ prise. As maƩers stand, anyone who has been the vicƟm of dis‐ honest conduct could seek to claim puniƟve damages, provided the conduct is sufficiently outrageous. Of course, awards of puni‐ Ɵve damages will be proporƟonate and principled, and tend to be modest, usually around £15,000 to £20,000. The sums awarded may, however, reflect the sums at stake in the relevant cases (which include a number of County Court maƩers relaƟng to insur‐ ance frauds). It remains to be seen how the courts or arbitral tri‐ bunals would react to a much larger claim for puniƟve damages advanced on the basis of Axa following a major (aƩempted?) fraud in the corporate, financial or projects sector. Stand down if you can’t deliver: the trials and tribulaƟons of experts by Ryan Deane IntroducƟon The deficiencies of expert witnesses are a recurring theme in many exasperated judgments by the courts. Most disputes lawyers will have experience of working with, or against, an expert witness who did more harm than good to their client’s case. Given that cases are frequently decided on the strength of the expert evidence, guarding against those deficiencies is vital. This arƟcle is not meant to tar all experts with the same brush, but intended as a salutatory tale. There are many good experts who assist the court or tribunal and take their duƟes of imparƟality and independence very seriously. Nonetheless, the amount of judicial criƟcism in the reported cases suggests that for some, there is room for improvement. This arƟcle is in two parts. The first examines two recent decisions in the Technology and Con‐ strucƟon Court that showcase the typical mistakes of experts, complete with judicial guidance on how to prevent them. The second tells the story of two experts who made extraordinary mis‐ takes and the judicial chasƟsement they received. Bank of Ireland In Bank of Ireland v WaƩs Group Plc  EWHC 1667, the claimant (the “Bank”) sought damages for professional negligence against the defendant monitoring surveyors (“WaƩs”) relaƟng to a residenƟal development in the centre of York. The developer, who had borrowed £1.4 million from the Bank, went into liquidaƟon and could not repay the loan. The Bank subsequently sold the property but suffered a £750,000 loss. It was the Bank’s case that WaƩs’ iniƟal appraisal report was negligent and that, if it had been properly prepared, the Bank would not have permiƩed the draw‐ down of the loan to the developer, and so would not have suffered any loss. In assessing whether WaƩs had exercised the degree of skill and care to be expected of a surveyor of reasonable competence and experience, the court allowed the parƟes to adduce expert evi‐ dence. There was liƩle dispute between the parƟes on the facts or the law, so the case would turn on which expert’s evidence the court preferred. As it turned out, that was very unfortunate for the Bank. AŌer seƫng out the facts in his judgment, Mr JusƟce Coulson (as he then was), devoted three full pages to explain why Mr V, the expert for the Bank, was “unreliable”. Lack of realism The first problem with Mr V’s approach was his lack of realism. WaƩs were paid £1,500 to produce their appraisal report. That modest fee reflected the fact that they had not been expected to conduct their own detailed analysis of the cost, Ɵme or cash‐flow of the project, but instead to check the calculaƟons and proposals of the developer. By contrast, Mr V produced two detailed re‐ ports. Each, together with appendices, filled a lever arch file. Fees of £50,000 were incurred to produce the first report alone. Coul‐ son J concluded: “Thus, whilst WaƩs’ report cost just £1,500, the report and associated work done to criƟcise it cost more than 30 Ɵmes that amount. In my view, that is a clear indicaƟon that the criƟcisms which have been generated are based on an enƟre‐ ly unrealisƟc expectaƟon of what it was that WaƩs were required to do.” This should act as a reminder to experts (and their legal advis‐ ers) that, in cases involving an alleged breach of a contractual duty, throwing every available resource and the kitchen sink into an expert report will more oŌen detract from the report than add to it. An expert’s evidence will be more credible, and realisƟc, if they first ask themselves which resources the party who is alleged to have breached the duty would reasonably have been expected to use, bearing in mind the nature of the duty. Although it is im‐ portant to be thorough, excessive industry might give the impres‐ sion that the expert will go to any lengths to reach the ‘right’ an‐ swer for their client. Applying the wrong test The test that Mr V should have been applying was: what would a reasonably competent monitoring surveyor have done in the circumstances? Instead, Mr V fell into the common trap of ex‐ plaining what he would have done in the circumstances, line‐by‐ line, and figure‐by‐figure. His evidence was that was what he did, so that is what WaƩs should have done too. The problem with this THE ARBITER AUTUMN 2018 9 analysis was that there were no margins of error. He ignored the broader parameters against which a monitoring surveyor’s perfor‐ mance should have been judged, if the correct test had been ap‐ plied. So, for example, he neglected to menƟon the plus or minus 10% metric habitually used in negligent valuaƟon cases. Where the duty is one of reasonableness, an expert must take care to undertake their exercise from the posiƟon of a reasonable party, giving a range of reasonable results. A failure to do so will lead a judge to conclude that the expert has applied the wrong test, greatly reducing the value of their evidence. AƩempt to mislead More seriously, Coulson J found that Mr V had misled the court. As menƟoned above, Mr V had conducted his own detailed analy‐ sis of the costs of development, rather than simply check the cal‐ culaƟons of the developer. He jusƟfied this approach by referring to guidance published by the Royal InsƟtuƟon of Chartered Survey‐ ors, which he quoted as saying: “the Project Monitor … may have to develop his or her own elemental breakdown of construcƟon costs to prove or dis‐ prove the Developer’s figures”. Now see if you can spot the difference in the full quotaƟon: “When involved with smaller developments and inexperi‐ enced Clients and Contractors, the Project Monitor, whilst strictly responsible to the Client, may also be asked to per‐ form a hand‐holding exercise with the Client and may have to develop his or her own elemental breakdown of construc‐ Ɵon costs to prove or disprove the Developer’s figures.” The words Mr V omiƩed were exactly the words which would have shown that this part of the RICS guidance was irrelevant. The Bank was not inexperienced. Neither was the developer. It was not a small development. WaƩs were not being asked to perform a “hand‐holding exercise”. Coulson J did not mince his words, and called this a “blatant misuse of a source document, in order to pre‐ sent a criƟcism on a false basis.” Few experts may be as blatant as this, but they should be reminded that any aƩempt to ‘creaƟvely’ quote from documents is likely to backfire. One of the first things that opposing lawyers will do on receipt of an expert report is check if any quotaƟons harmful to their case have been taken out of context. Indeed that exercise should be carried out by compe‐ tent lawyers on their own experts’ reports. Unreasonableness Coulson J considered that Mr V’s overall approach was “thoroughly unreasonable”. Mr V made no concessions in his oral evidence nor in the experts’ joint statement and had instead, as noted in that report, used the experts’ meeƟngs to raise enƟrely new maƩers. Indeed the experienced TCC judge went so far as to say “I have never seen a Joint Statement between experts that contained no agreement at all”. Another example of Mr V’s unreasonableness was his criƟcism of WaƩs’ subsequent monitoring reports, which formed no part of the Bank’s pleaded case. This only served to add to the impression that the expert was prepared to go to any lengths to criƟcise the opposing party and shore up the Bank’s case. It would be wrong to think that what will help the client the most is an unwavering de‐ fence of the client’s case and an undiscerning aƩack on the behav‐ iour of the opposing parƟes. Taking either of these stances will, in all likelihood, be counter‐producƟve. Independence Coulson J concluded that Mr V was not a properly independent witness. On the facts, this conclusion came as no surprise; the Bank had been Mr V’s principle client over the last few years, and had given Mr V numerous instrucƟons to act as an expert witness in acƟons against monitoring surveyors arising out of the 2008 financial crash. UnƟl this case, every dispute had been seƩled out of court. Coulson J said that he suspected Mr V was unaware of the difference between acƟng as the Bank’s advocate in, say, a mediaƟon, and his duƟes to the court when giving expert evi‐ dence. Guidance for experts Mr V’s lack of independence contributed to each of the deficien‐ cies in his evidence. The judge noted that the duƟes of an inde‐ pendent expert were long established, and were set out in the well ‐known judgment of The Ikarian Reefer  1 WLR 603. That case concerned the loss at sea of the Ikarian Reefer, which had run aground and then caught fire, causing it to be abandoned off the coast of Sierra Leone. The quesƟon was whether those acts were deliberate or accidental, and much depended on the expert evidence. Mr JusƟce Cresswell believed that a misunderstanding on the part of some of the eight expert witnesses in the case as to their duƟes and responsibiliƟes contributed to the length of court proceedings. He therefore set out the following guidance, which should be brought to any prospecƟve expert witness’s aƩenƟon: 1. Expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert uninfluenced as to form or content by the exigencies of liƟgaƟon. 2. An expert witness should provide independent assistance to the Court by way of objecƟve unbiased opinion in relaƟon to maƩers within his experƟse. An expert witness in the High Court should never assume the role of an advocate. 3. An expert witness should state the facts or assumpƟon upon which his opinion is based. He should not omit to consider mate‐ rial facts which could detract from his concluded opinion. 4. An expert witness should make it clear when a parƟcular ques‐ Ɵon or issue falls outside his experƟse. 10 THE ARBITER AUTUMN 2018 5. If an expert’s opinion is not properly researched because he con‐ siders that insufficient data is available, then this must be stated with an indicaƟon that the opinion is no more than a provisional one. In cases where an expert witness who has prepared a report could not assert that the report contained the truth, the whole truth and nothing but the truth without some qualificaƟon, that qualificaƟon should be stated in the report. 6. If, aŌer exchange of reports, an expert witness changes his view on a material maƩer having read the other side’s expert’s report or for any other reason, such change of view should be communi‐ cated (through legal representaƟves) to the other side without delay and when appropriate to the Court. Mr V did not comply with these duƟes, and was likely not aware of them or had had them explained. Coulson J wryly concluded: “For him, it might be said that The Ikarian Reefer was a ship that passed in the night.” Imperial Chemical Industries The case of Imperial Chemical Industries Ltd v Merit Merrell Tech‐ nology Ltd  EWHC 1577 (TCC) involved a long running dispute concerning an employer’s repudiatory breach of contract relaƟng to works at a paint processing plant in Northumberland. A trial on liability had already taken place, finding a balance due to the con‐ tractor. This was the trial on quantum, heard by Mr JusƟce Fraser. Mr K was the expert quanƟty surveyor appointed by the employ‐ er (“ICI”). He was instructed to consider the correct valuaƟon of the works carried out by the contractor (“MMT”). The contract be‐ tween the parƟes was an amended NEC3 form opƟon A with pay‐ ments of lump sums to be made against idenƟfied acƟviƟes. Com‐ pensaƟon events (variaƟons to the contract) were to be valued by reference to a schedule of rates. Although that was the clear contractual division for valuing the works, Mr K proceeded to value the whole of the works using the actual cost to MMT as the basis of the valuaƟon. There was no contractual basis for this method of valuaƟon whatsoever. Mr K jusƟfied his approach by saying that a valuaƟon on any other basis would result in a windfall to MMT. He explained: “Whilst interpretaƟon of the Contract is a maƩer for the Court to decide, I am of the view that the rates that I propose to use, represenƟng what I believe to be MMT’s actual costs, are more reflecƟve of the true cost to MMT, whereas the rates proposed by MMT would, in my opinion, provide MMT with a windfall.” Fraser J listed a mulƟtude of reasons why this was not the type of evidence that an independent expert, complying with their duty to the court, should be giving. ICI, Mr K’s instrucƟng party, had not even pleaded that MMT was to be paid based on its actual costs. He had therefore failed to consider the pleaded issues and was aƩempƟng to rewrite the parƟes’ bargain. His use of the term ‘windfall’ made it clear that he had adopted a different method of valuaƟon because he felt MMT would be paid more than it ought to have been if the correct contractual approach was used. That was “diametrically opposed” to the exercise he should have done, as it suggested that he had worked towards a figure he thought was fair, rather than doing a proper valuaƟon in accordance with the contract and ascertaining the correct figure. It also suggested that he had carried out some valuaƟons using the schedule of rates, was unhappy with the result, and so decided to use a different method. Mr K commiƩed another cardinal sin amongst experts that is guaranteed to annoy a judge, namely taking posiƟons on maƩers of fact in dispute which were outside his area of experƟse. So, for example, there was factual evidence from MMT’s witnesses that the majority of the steelwork was outside the main building under construcƟon. Mr K refused to accept this, calling it a “common misconcepƟon”. Fraser J was surprised that Mr K believed himself to be in a beƩer posiƟon than any of the contemporaneous wit‐ nesses to evaluate these maƩers of fact, or that he saw fit not to agree with their factual evidence. Finally, Fraser J admonished Mr K for providing two witness statements in support of a disclosure applicaƟon in which he idenƟ‐ fied documents he said were required in order for him “to perform his expert funcƟon”. This was highly unusual and should be discour‐ aged – it was a maƩer to be leŌ to the parƟes. Involving an expert in a fiercely contested applicaƟon could only weaken their inde‐ pendence. In the trial on liability, Fraser J had also been the judge, and had found each of ICI’s experts on that part of the case to be parƟsan. He remarked that it was unfortunate that in a case with sums in excess of £10 million in issue, he felt able to rely on the expert evi‐ dence of only one party. He said: “The principles that govern expert evidence must be carefully adhered to, both by the experts themselves, and the legal advisers who instruct them. If experts are unaware of these principles, they must have them explained to them by their instrucƟng solicitors. This applies regardless of the amounts at stake in any parƟcular case, and is a foundaƟon stone of expert evidence. There is a lengthy pracƟce direcƟon to CPR Part 35, PracƟce DirecƟon 35. Every expert should read it.” Fraser J then referred approvingly to the principles set out in The Ikarian Reefer. However, he went further and added a few more principles of his own, targeted at the deficiencies he had encoun‐ tered with the expert evidence in this later case: 1. Experts of like discipline should have access to the same material. No party should provide its own independent expert with materi‐ al which is not made available to his or her opposite number. 2. Where there is an issue, or are issues, of fact which are relevant to the opinion of an independent expert on any parƟcular maƩer upon which they will be giving their opinion, it is not the place of THE ARBITER AUTUMN 2018 11 an independent expert to idenƟfy which version of the facts they prefer. That is a maƩer for the court. 3. Experts should not take a parƟsan stance on interlocutory appli‐ caƟons to the court by a parƟcular party (almost invariably the party who has instructed them). This is not to say that a party cannot apply for disclosure of documents which its expert has said he or she requires. However, the CPR provides a comprehen‐ sive code and it may be that disclosure is not ordered for reasons of disproporƟonality. However, if documents are considered to be necessary, and they are not available (for whatever reason), then an opinion in a report can be qualified to that extent. 4. The process of experts meeƟng under CPR Part 35.12, discussing the case and producing an agreement (where possible) is an important one. It is meant to be a construcƟve and co‐operaƟve process. It is governed by the CPR, which means that the Overrid‐ ing ObjecƟve should be considered to apply. This requires the parƟes (and their experts) to save expense and deal with the case in a proporƟonate way. 5. Where late material emerges close to a trial, and if any expert considers that is going to lead to further analysis, consideraƟon or tesƟng, noƟce of this should be given to that expert’s opposite number as soon as possible. Save in excepƟonal circumstances where it is unavoidable, no expert should produce a further re‐ port actually during a trial that takes the opposing party com‐ pletely by surprise. The Bank of Ireland and ICI decisions showcase the most com‐ mon flaws in expert evidence, and the guidance provided by the judges should be drawn to the aƩenƟon of any prospecƟve expert witness. The next two decisions, on the other hand, involve experts that have made rather extraordinary mistakes. The resulƟng guid‐ ance for any prospecƟve expert is narrower, but simpler: “Don’t do what they did.” Castle Trustee In Castle Trustee Ltd v Bombay Palace Restaurant Ltd  EWHC 1602 the claimant (“Castle”) and the defendant (“BP”) were in dispute over the costs of refurbishing BP’s restaurant, Bombay Palace. An adjudicaƟon took place in which Castle obtained the report of a delay expert. BP did not call a delay expert but in any event succeeded in the adjudicaƟon. Some Ɵme passed and Castle, unhappy with the result of the adjudicaƟon, commenced liƟgaƟon against BP. Castle again sought to instruct a delay expert but the previous expert was now unavail‐ able. They instead instructed Mr B, who began to familiarise him‐ self with the documents. Mr B had been instructed late in the day and thus rushed to produce his report. AŌer spending 41.5 hours reviewing the case he was made aware of a draŌ of the report produced by the previous expert in the adjudicaƟon. This led to Mr B including the following introduc‐ tory paragraph in his final report: “I have considered [the previous expert’s] report, the docu‐ ment he has referred to, the methodology he has adopted and the conclusions he has reached. I agree with [the previ‐ ous expert’s] approach and have independently reached the same conclusions in respect of cause(s) of delay to the Build‐ ing Programme and the extent of such delays. Severe limita‐ Ɵons of Ɵme, the requirement for me to submit my report by Friday 23 June  and as a proporƟonate response I have adopted the findings of [the previous expert] ...”. What Mr B then did was reproduce the previous expert’s report in its enƟrety without any material amendment. He simply copied and pasted the report with no aƩempt to hide what he had done. Counsel for Castle objected to that approach as a maƩer of princi‐ ple, but the judge, Mrs JusƟce Jefford, disagreed. There was noth‐ ing wrong in principle with adopƟng another expert’s report. This was most commonly observed, she said, in doctors agreeing as to a diagnosis or prognosis. However, where there was pressure of Ɵme the court would adopt a healthy scepƟcism and call into quesƟon the extent of the expert’s invesƟgaƟons and the care taken in forming their opinions. The second expert would have to be as familiar with the relevant material as the first, otherwise how could he purport to have reached the same conclusions? It was in this area that Mr B’s evidence was seriously deficient. It became apparent in cross‐examinaƟon that Mr B could not explain many of the assumpƟons in his own report, in part because he had not seen much of the relevant material the previous expert had. One can almost hear the disbelief in the judge’s voice as she de‐ scribes just how incredible it was for Mr B to claim this report as his own: “In fact, in this case, it seemed to me that [Mr B] had formed no independent view at all. I am frankly at a loss to under‐ stand on what basis he could possibly have formed such a view. Quite extraordinarily, [Mr B] had not even seen, and had apparently not thought it relevant to see, the parƟes’ pleaded cases or any disclosure. He had, therefore, paid scant regard to BP’s case – indeed he did not have BP’s pleaded case or evidence before him. He had however been provided with (and to some extent relied upon) [Castle’s] witness state‐ ments in the adjudicaƟon – or at least [the previous expert] had – even though no statements from these witnesses had been served in the liƟgaƟon and their evidence was not be‐ fore me. I fail to see how, in those circumstances, [Mr B] can have thought that he was providing the court with an inde‐ pendent view.” Naturally Jefford J. found that she could place no reliance on Mr B’s report. The adjudicator’s award was largely upheld. 12 THE ARBITER AUTUMN 2018 Cala Homes Finally, while doing research for this arƟcle I came across many cases with many bad experts. But my favourite, containing perhaps the worst expert and the most excoriaƟng remarks from a judge, is Cala Homes (South) Ltd v Alfred McAlpine Homes East Ltd  EWHC 7 (Ch). The case involved an acƟon for copyright infringe‐ ment. The claimant (“Cala”) and the defendant (“McAlpine”) were both companies that designed and built houses. Cala alleged that a number of McAlpine’s design drawings for their range of houses were substanƟally reproduced from Cala’s own drawings. McAl‐ pine denied this. Each side adduced expert evidence from an archi‐ tect to explain the extent of the similariƟes between the drawings. McAlpine’s expert was Mr G. At some point in their prepara‐ Ɵons for the trial Cala’s lawyers struck gold in the form of an arƟcle wriƩen by Mr G in the Journal of the Chartered InsƟtute of Arbitra‐ tors. The arƟcle had been wriƩen in 1990, only a few years previ‐ ously, and was Ɵtled “The Expert Witness: ParƟsan with a Con‐ science”. Presumably McAlpine’s lawyers had missed this arƟcle when doing their due diligence. The arƟcle set out what Mr G believed was the appropriate ap‐ proach an expert should adopt when preparing a report for use in liƟgaƟon. He confirmed in court that the report he had produced for McAlpine followed the principles set out in the arƟcle. Some of the highlights of the arƟcle include: “How should the expert avoid becoming parƟsan in a process that makes no pretence of determining the truth but seeks only to weigh the persuasive effect of arguments deployed by one adversary or the other?” “... the man who works the Three Card Trick is not cheaƟng, nor does he incur any moral opprobrium, when he uses his sleight of hand to deceive the eye of the innocent rusƟc and to deny him the informaƟon he needs for a correct appraisal of what has gone on. The rusƟc does not have to join in: but if he chooses to, he is ‘fair game’. If by an analogous ‘sleight of mind’ an expert witness is able so to present the data that they seem to suggest an interpre‐ taƟon favourable to the side instrucƟng him, that is, it seems to me, within the rules of our parƟcular game, even if it means playing down or omiƫng some material considera‐ Ɵon. ‘CelaƟo veri’ is, as the maxim has it, ‘suggesƟo falsi’, and concealing what is true does indeed suggest what is false; but it is no more than a suggesƟon, just as the Three Card Trick was only a suggesƟon about the data, not an out‐ right misrepresentaƟon of them.” “Thus there are three phases in the expert’s work. In the first he has to be the client’s ‘candid friend’, telling him all the faults in his case. In the second he will, with appropriate sub‐ tlety, be almost what the Honorary Editor’s American counsel called ‘a hired gun’, so that client and counsel, when consid‐ ering the other side’s argument can say, with Marcellus in Hamlet, ‘Shall I strike at it with my parƟsan?”. The third phase, which happens more rarely than is acknowledged in much of the comment on expert witness work, is when the acƟon comes to court or arbitraƟon. Then, indeed, the earlier pragmaƟc flexibility is brought un‐ der a sharp curb, whether of conscience, or fear of perjury, or fear of losing professional credibility. It is no longer enough for the expert like the ‘virtuous youth’ in the Mikado to ‘tell the truth whenever he finds it pays’: shades of moral and other constraints begin to close upon on him.” Summarising Mr JusƟce Laddie’s scathing response would not do it jusƟce. I will leave you with the lion’s share of the judge’s com‐ ments which, one expects, ended Mr G’s career as an expert wit‐ ness: “No doubt it is currently fashionable to say that our legal system makes no pretence to determining the truth. I accept that some people not only say it but also believe it. If it were true then [Mr G] would be right in thinking that anything short of outright misrepresentaƟon is permissible in an ex‐ pert’s report and that not only the other party but also the person trying to decide the issue, the ‘rusƟcs’, are fair game. On reflecƟon, if [Mr G] were right, I am not sure that even outright misrepresentaƟon should be avoided. If liƟgaƟon is to be conducted as if it were a game of Three Card Trick, what is wrong with having a couple of aces up your sleeve?” … “The whole basis of [Mr G]’s approach to the draŌing of an expert’s report is wrong. The funcƟon of a court of law is to discover the truth relaƟng to the issues before it. In doing that it has to assess the evidence adduced by the parƟes. The judge is not a rusƟc who has chosen to play a game of Three Card Trick. He is not fair game. Nor is the truth.” “An expert should not consider that it is his job to stand shoulder‐to‐shoulder through thick and thin with the side which is paying his bill. ‘PragmaƟc flexibility’ as used by [Mr G] is a euphemism for ‘misleading selecƟvity’. According to this approach the flexibility will give place to something clos‐ er to the true and balanced view of the expert only when he is being cross‐examined and is faced with the possibility of being ‘found out’. The reality, of course, will be somewhat different. An expert who has commiƩed himself in wriƟng to a report which is selecƟvely misleading may feel obliged to sƟck to the views he expressed there when he is cross‐ examined. Most witnesses would not be prepared to admit at the beginning of cross examinaƟon, as [Mr G] effecƟvely did that he was approaching the draŌing of his report as a parƟ‐ san hired gun. The result is that the expert’s report and then THE ARBITER AUTUMN 2018 13 his oral evidence will be contaminated by this aƩempted sleight of mind.” “Near the beginning of his report, [Mr G] says the following: “I believe that the inspecƟons I have made and the graphic and other material that I have seen are sufficient to enable me to reach an informed opinion on the maƩers in dispute in the present acƟon that fall within my discipline. I have no connexion with either of the parƟes in this acƟon, nor have I any prior acquaintance with instrucƟng solicitors or Counsel. I have no pecuniary or other interest in the outcome of the current liƟgaƟon.” The clear purpose of these statements was to convey the impression to the plainƟffs and the court that the report was the independent unbiased product of the expert. Some may characterise this as pragmaƟc flexibility. In my view that impression is simply false. In the light of the maƩers set out above, during the prepara‐ Ɵon of this judgment I re‐read [Mr G]’s report on the under‐ standing that it was draŌed as a parƟsan tract with the ob‐ jecƟve of selling the defendant’s case to the court and ignor‐ ing virtually everything which could harm that objecƟve. I did not find it of significant assistance in deciding the issues.” Structuring for Brexit: the Achmea decision by Robert BlackeƩ Any business which is planning to invest either in Bulgaria, CroaƟa, the Czech Re‐ public, Estonia, Hungary, Latvia, Lithua‐ nia, Malta, Poland, Romania, Slovakia or Slovenia, or in the energy sector any‐ where the UK or EU, should consider whether its investment might have to be structured differently, because of the combined effect of the UK’s planned withdrawal from the EU and a surprise ECJ decision from March 2018. BITs Some EU Member States are party to “bilateral investment trea‐ Ɵes” (“BITs”) with other EU Member States. States which are party to BITs agree to treat investments by one another’s investors to a certain standard. Typically each state agrees: a) to accord investments by the other state’s naƟonals or compa‐ nies: i) the most favourable treatment that it accords to invest‐ ments by its own, or any third country’s, naƟonals or com‐ panies; ii) “fair and equitable treatment”; and iii) “full protecƟon and security”; b) to pay compensaƟon in the event that it expropriates invest‐ ments belonging to the other state’s naƟonals or companies; and c) that the investors may bring claims against the host state for breach of the treaty by way of binding internaƟonal arbitraƟon, instead of through the host state’s domesƟc courts. The UK is party to bilateral investment treaƟes (“BIT”) with twelve EU Member States (Bulgaria, CroaƟa, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slo‐ vakia and Slovenia). Those same countries are also party to BITs with a number of other EU Member States. BITs give investors some protecƟon against poliƟcal risk. In the past, investors from the EU who invested in those Eastern Europe‐ an countries have enjoyed protecƟon under their respecƟve BITs. For example: a) In 2006 Cypriot investors who funded a new terminal at a state‐ owned airport in Hungary in exchange for the right to operate that terminal were awarded $84 million in a claim against Hun‐ gary under the Cyprus‐Hungary BIT. Hungary had unlawfully expropriated the investment (ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary (ICSID Case No. ARB/03/16). b) In 2007 two Finnish banks and a German bank which had loaned an Estonian company money to build a fish processing factory were awarded $6 million and €10 million in a claim against Estonia under Finland‐Estonia and Germany‐Estonia BITs. Estonia breached its obligaƟon to act “fairly and equita‐ bly” when it failed to honour representaƟons made to the banks, persuading the banks to restructure the loans to the detriment of the banks (Oko Pankki Oyj, VTB Bank (Deutschland) AG and Sampo Bank Plc v. The Republic of Esto‐ nia, ICSID Case No. ARB/04/6). c) In 2017 a Lithuanian investor was awarded $4.5 million in re‐ spect of claims against Latvia under the Lithuani‐Latvia BIT. The claims arose out of the early terminaƟon of a lease agreement, and alleged naƟonalisaƟon of a heaƟng and hot water supply system in which the claimant had invested. d) In 2017 an Italian investor was awarded an undisclosed sum in respect of claims against Romania under the Italy‐Romania BIT. The claims arose out of alleged breaches of a privaƟsaƟon agreement concerning a steel manufacturer in which the claim‐ ant had invested, which had led to its liquidaƟon. Energy Charter Treaty The Energy Charter Treaty (“ECT”) is a mulƟlateral treaty which 14 THE ARBITER AUTUMN 2018 creates a framework between the ContracƟng ParƟes for trade, transit and investment in the energy sector. All EU Member States, including the UK, are ContracƟng ParƟes to the ECT. The EU itself is also a ContracƟng Party. ArƟcle 10(1) of the ECT sets out invest‐ ment protecƟons similar to those found in BITs which are to apply as between a ContracƟng Party and an Investor from another Con‐ tracƟng Party. Structuring investments to obtain treaty protec‐ Ɵon An investor may wish to invest in a country which is not party to an investment treaty with the investor’s home state. In such a case a quesƟon arises as to whether the investor can make its invest‐ ment via an enƟty in a state which is party to a relevant treaty and thereby obtain treaty protecƟon. Whether such a strategy is successful depends upon the wording of the parƟcular investment treaty. Saluka v Czech Republic (ParƟal Award, 17 March 2006) con‐ cerned a claim by Saluka, a Netherlands company, against the Czech Republic under a BIT between those countries. The Czech Republic complained that the Netherlands company was just a shell, and that the “real” investor was a Japanese company, which was not enƟtled to protecƟon under the BIT. The Tribunal should recognise that reality, “pierce the corporate veil” and deny Saluka, which was really a Japanese company, the protecƟons of the trea‐ ty. The Tribunal said of this argument: “[the terms of the Treaty] expressly give a legal person con‐ sƟtuted under the laws of The Netherlands – such as, in this case, Saluka – the right to invoke the protecƟon of the Treaty. To depart from that conclusion requires clear language in the Treaty, but there is none. The parƟes to the Treaty could have included in their agreed definiƟon of “investor” some words which would have served, for example, to exclude wholly‐ owned subsidiaries of companies consƟtuted under the laws of third States, but they did not do so. The parƟes having agreed that any legal person consƟtuted under their laws is enƟtled to invoke the protecƟon of the Treaty, and having so agreed without reference to any quesƟon of their relaƟonship to some other third State corporaƟon, it is beyond the powers of this Tribunal to import into the definiƟon of “investor” some requirement relaƟng to such a relaƟonship having the effect of excluding from the Treaty’s protecƟon a company which the language agreed by the parƟes included within it. While it might in some circumstances be permissible for a tribunal to look behind the corporate structures of companies involved in proceedings before it, the Tribunal is of the view that the circumstances of the present case are not such as to allow it to act in that way.” Denial of benefits in the ECT and the UK’s intra‐EU BITs Some treaƟes do contain express provisions which are ad‐ dressed to this issue (known as “denial of benefits clauses”). The ECT provides: “ArƟcle 17: Non‐ApplicaƟon of Part III in Certain Circum‐ stances Each ContracƟng Party reserves the right to deny the ad‐ vantages of this Part to: (1) a legal enƟty if ciƟzens or naƟonals of a third state own or control such enƟty and if that enƟty has no substan‐ Ɵal business acƟviƟes in the Area of the ContracƟng Party in which it is organised; …” This provision was considered in Plama ConsorƟum Ltd v Bulgar‐ ia (ICSID Case No. ARB/03/24, Award). The tribunal in that case accepted that, in ArƟcle 17, the ContracƟng Party did not deny protecƟons to such investors, but only reserved its right to do so. And that, if a ContracƟng Party exercised that right, it would not have retrospecƟve effect (i.e. the investor would sƟll be enƟtled to the protecƟons of the treaty in respect of the period preceding the denial). None of the UK’s intra‐EU BITs contain denial of benefits clauses (i.e. the UK’s BITS with Bulgaria, CroaƟa, the Czech Republic, Esto‐ nia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia). Sunset clauses in the UK’s intra‐EU BITs The UK’s intra‐EU BITs are generally terminable on either 1 year or 6 months noƟce. They all, however, contain ‘sunset’ clauses. The effect of these clauses is that the treaty remains effecƟve, and investments will conƟnue to be protected, for a further ‘sunset’ period (15 or 20 years) following terminaƟon. ArbitraƟon procedure under BITs BITs provide for different arbitral procedures, and may give the investor a choice as to what procedure is to be followed. Many BITs provide for arbitraƟon under the UNCITRAL rules. ArbitraƟons under those rules do not enjoy any special status. ArbitraƟons under the UNCITRAL awards have a jurisdical seat, and will be subject to the supervisory jurisdicƟon of the courts of that seat. The award which results from such an arbitraƟon is just like any arbitral award, and can be challenged in the courts of the seat according to the rules of the seat. If the arbitraƟon were seated in England, secƟons 67 and 68 of the ArbitraƟon Act 1996 would gov‐ ern any challenge. One ground on which awards can be challenged under secƟon 68 is if they are contrary to public policy. When recogniƟon or enforcement is sought in a country other than the seat the award will be treated like any other foreign award. Enforcement of the award in England would be governed THE ARBITER AUTUMN 2018 15 by secƟons 100 to 103 of the ArbitraƟon Act 1996 (which give effect to the New York ConvenƟon in England). One ground on which enforcement of an award can be declined is if it is contrary to public policy (secƟon 103(2) of the ArbitraƟon Act 1996). In many BITs, however, the state parƟes consent to submit dis‐ putes to a different system of arbitraƟon, which is governed by different rules. The ConvenƟon on the SeƩlement of Investment Disputes between States and NaƟonals of Other States (“ICSID ConvenƟon”) established the InternaƟonal Centre for SeƩlement of Investment Disputes (“ICSID” or the “Centre”). All EU Member States (but not the EU itself) are ContracƟng States to the ICSID ConvenƟon. ArƟcle 25 of the ICSID ConvenƟon provides: “The jurisdicƟon of the Centre shall extend to any legal dis‐ pute arising directly out of an investment, between a Con‐ tracƟng State … and a naƟonal of another ContracƟng State, which the parƟes to the dispute consent in wriƟng to submit to the Centre. When the parƟes have given their consent, no party may withdraw its consent unilaterally …” ArƟcle 54(1) of the ICSID ConvenƟon provides: “Each ContracƟng State shall recognize an award rendered pursuant to this ConvenƟon as binding and enforce the pecu‐ niary obligaƟons imposed by that award within its territories as if it were a final judgment of a court in that State …” The ICSID ConvenƟon sets out limited grounds allows Con‐ tracƟng States to decline to recognise and enforce awards. In par‐ Ɵcular, it does not make any provision for enforcement to be re‐ fused on the grounds that any award is contrary to public policy. In the UK the ICSID ConvenƟon is given effect by the ArbitraƟon (InternaƟonal Investment Disputes) Act 1966. It allows awards rendered pursuant to the ICSID ConvenƟon to be registered in the High Court (Court of Session in Scotland), whereupon the pecuniary obligaƟons imposed by the award are of the same force and effect as if the award had been a judgment of that court. The UK’s intra‐EU BITs variously provide for UNICTRAL and/or ICSID arbitraƟon. In the ECT the ContracƟng ParƟes consent to submit disputes to ICSID, to arbitraƟon under the ArbitraƟon Rules of the United NaƟons Commission on InternaƟonal Trade Law or to the ArbitraƟon InsƟtute of the Stockholm Chamber of Commerce, at the investor’s opƟon. TFEU, TEU The EU is founded on two treaƟes, the Treaty on European Un‐ ion (“TEU”) and the Treaty on the FuncƟoning of the European Union (“TFEU”). Each of the EU’s Member States, including the UK, is a party to those two treaƟes. The TEU, TFEU and the law adopted by the EU pursuant to those treaƟes have ‘primacy’ over the laws of Member States. This has long been recognised in the case law of the ECJ, and of the Mem‐ ber States and is also set out in a declaraƟon annexed to the TFEU. BITs between EU Member States and non‐ Member States The EU intends to replace BITs between Member States and non ‐Member States with new agreements negoƟated by the EU. On 12 December 2012, the EU adopted RegulaƟon 1219/2012 establishing transiƟonal arrangements with respect to the thou‐ sands of BITs already concluded between Member States and non‐ Member States. Under that regulaƟon all exisƟng BITs with non‐Member States remain in force. Member States must noƟfy the Commission of those BITs. If the Commission considers that a provision of such a BIT is a “serious obstacle” to the negoƟaƟon of BITs between the EU and other countries, the Commission must enter into consulta‐ Ɵon with the Member State to idenƟfy appropriate acƟons. When a Member State intends to negoƟate a new BIT, or an amendment to an exisƟng BIT, with a non‐Member State, it must seek authori‐ saƟon from the Commission. The Commission will authorise nego‐ ƟaƟons unless they would be inconsistent with EU investment poli‐ cy or EU law, superfluous, or consƟtute a “serious obstacle” to negoƟaƟon or conclusion of agreements with third countries by the EU. Member States must also seek the Commission’s agree‐ ment before acƟvaƟng dispute seƩlement mechanisms against a third country and shall, where requested by the Commission, acƟ‐ vate such mechanisms. Achmea ‐ background The Netherlands and the Slovak Republic (both EU Member States) are party to a BIT (this is the same BIT which was invoked in the Saluka case discussed above). ArƟcle 8 of that BIT provides for “all disputes between one ContracƟng Party and an investor of another ContracƟng Party concerning an investment of the laƩer” to be referred to arbitraƟon, under the UNCITRAL Rules. In 2004, as part of a reform of its health system, the Slovak Re‐ public opened the Slovak market in 2004 to those offering private health insurance services. Achmea, an undertaking belonging to a Netherlands insurance group, set up a subsidiary in Slovakia to which it contributed capital and through which it offered private sickness insurance services on the Slovak market. In 2006 the Slovak Republic partly reversed the liberalisaƟon of the private sickness insurance market. In parƟcular, by a law of 25 October 2007, it prohibited the distribuƟon of profits generated by private sickness insurance acƟviƟes. In October 2008 Achmea brought arbitraƟon proceedings against the Slovak Republic under the BIT. The seat of the arbitra‐ Ɵon was Germany. On 26 January 2011, the ConsƟtuƟonal Court of the Slovak Re‐ public held that the prohibiƟon was contrary to the Slovak consƟ‐ tuƟon, and the Slovak Republic once more allowed the distribuƟon of such profits. 16 THE ARBITER AUTUMN 2018 By an arbitral award of 7 December 2012, the arbitral tribunal ordered the Slovak Republic to pay Achmea damages in the princi‐ pal amount of €22.1 million. Under Paragraph 1059(2) of Germany’s Zivilprozessordnung (Code of Civil Procedure), an arbitral award can be set aside only if one of the grounds in that provision is present. The grounds in‐ clude the arbitraƟon agreement being invalid under the law to which the parƟes have subjected it, and the recogniƟon or enforce‐ ment of the arbitral award being contrary to public policy. The Slovak Republic brought court proceedings in Germany, seeking to set aside the award on the grounds that the arbitraƟon agreement was invalid or that recogniƟon of the award was contra‐ ry to public policy. The Slovak Republic argued that the arbitraƟon provision in the BIT was incompaƟble with ArƟcles 267 and 344 of the TFEU. The German court referred the issue to the ECJ for a preliminary ruling. EU Treaty provisions considered in Achmea The EU treaty provisions which the Slovak Republic relied upon were as follows. ArƟcle 19(1) of the TEU provides: “the Court of JusƟce of the European Union … shall ensure that in the interpretaƟon and appli‐ caƟon of the TreaƟes the law is observed. Member States shall pro‐ vide remedies sufficient to ensure effecƟve legal protecƟon in the fields covered by Union law”. The TFEU provides: “ArƟcle 267 The Court of JusƟce of the European Union shall have jurisdic‐ Ɵon to give preliminary rulings concerning: (a) the interpretaƟon of the TreaƟes; (b) the validity and interpretaƟon of acts of the insƟtuƟons, bodies, offices or agencies of the Union; Where such a quesƟon is raised before any court or tribunal of a Member State, that court or tribunal may, if it considers that a decision on the quesƟon is necessary to enable it to give judgment, request the Court to give a ruling thereon. Where any such quesƟon is raised in a case pending before a court or tribunal of a Member State against whose decisions there is no judicial remedy under naƟonal law, that court or tribunal shall bring the maƩer before the Court. …” “ArƟcle 344 Member States undertake not to submit a dispute concerning the interpretaƟon or applicaƟon of the TreaƟes to any meth‐ od of seƩlement other than those provided for therein.” Slovakia pointed to the fact that ArƟcle 8(6) of the BIT required the tribunal to “decide on the basis of the law, taking into account in parƟcular though not exclusively: … the law in force of the Con‐ tracƟng Party concerned; [and] the provisions of … other relevant Agreements between the ContracƟng ParƟes”, which would include EU legislaƟon and the EU TreaƟes. Hence there was a theoreƟcal possibility that a tribunal appoint‐ ed under the BIT might be called upon to decide a dispute concern‐ ing the interpretaƟon of EU legislaƟon or of the EU TreaƟes (note that there was no suggesƟon that the dispute between Achmea and Slovakia had actually involved any issue of EU law whatsoever). TFEU requires that Member States not submit disputes concern‐ ing the interpretaƟon of the EU TreaƟes to any method of seƩle‐ ment other than that provided for in the TreaƟes. The only method for seƩling such quesƟons which is referred to in the treaƟes is raising them before a “court or tribunal of a member state”. Once the quesƟon comes before a court or tribunal “against whose deci‐ sions there is no judicial remedy under naƟonal law” that court is required to refer the mater to the ECJ. Slovakia argued that an arbitral tribunal consƟtuted under ArƟ‐ cle 8 of the BIT would not be a “court or tribunal of a Member State” and there would be no “judicial remedy” against (the sub‐ stance/merits of) its decisions. An arbitral tribunal, not being a court or tribunal of a Member State, could not refer an issue to the ECJ. The Advocate General delivered an opinion on 19 September 2017 that the arbitraƟon provision in the BIT was compaƟble with TFEU. The ECJ’s ruling in Achmea On 6 March 2018 the ECJ issued a judgment in Slovak Republic v Achmea BV (6 March 2018 C‐284/16). In a surprise decision, the ECJ took the unusual step of deparƟng from the Advocate General’s opinion. The operaƟve part of the judgment states: “ArƟcles 267 and 344 TFEU must be interpreted as precluding a provision in an internaƟonal agreement concluded between Member States, such as ArƟcle 8 of the Agreement on en‐ couragement and reciprocal protecƟon of investments be‐ tween the Kingdom of the Netherlands and the Czech and Slovak FederaƟve Republic, under which an investor from one of those Member States may, in the event of a dispute con‐ cerning investments in the other Member State, bring pro‐ ceedings against the laƩer Member State before an arbitral tribunal whose jurisdicƟon that Member State has undertak‐ en to accept.” Does Achmea affect other arbitraƟon agreements with EU Member States? The ECJ’s ruling is directed to “a provision in an internaƟonal agreement concluded between Member States”. Quite apart from such state‐to‐state agreements, however, states regularly enter THE ARBITER AUTUMN 2018 17 into commercial contracts which contain arbitraƟon agreements. One might have thought that such agreements would be equally objecƟonable, since there is equally a theoreƟcal possibility that a tribunal appointed under such a commercial arbitraƟon agreement might be called upon to decide a dispute concerning the interpreta‐ Ɵon of EU legislaƟon or of the EU TreaƟes. In Achmea, the ECJ says that commercial arbitraƟon agreements are nonetheless not affected by its ruling: “… in relaƟon to commercial arbitraƟon, the Court has held that the requirements of efficient arbitraƟon proceedings jusƟfy the review of arbitral awards by the courts of the Member States being limited in scope, provided that the fun‐ damental provisions of EU law can be examined in the course of that review and, if necessary, be the subject of a reference to the Court for a preliminary ruling ...” “However, arbitraƟon proceedings such as those referred to in ArƟcle 8 of the BIT are different from commercial arbitra‐ Ɵon proceedings. While the laƩer originate in the freely ex‐ pressed wishes of the parƟes, the former derive from a treaty by which Member States agree to remove from the jurisdic‐ Ɵon of their own courts, and hence from the system of judicial remedies which the second subparagraph of ArƟcle 19(1) TEU requires them to establish in the fields covered by EU law … disputes which may concern the applicaƟon or interpretaƟon of EU law. In those circumstances, the consideraƟons set out in the preceding paragraph relaƟng to commercial arbitraƟon cannot be applied to arbitraƟon proceedings such as those referred to in ArƟcle 8 of the BIT.” This does not really seem to explain why commercial arbitraƟon is permissible where treaty arbitraƟon is not. A commercial arbitraƟon award can always be challenged in the courts of the seat, or enforcement resisted, on the ground that the award is contrary to public policy. If a commercial arbitraƟon tribu‐ nal were to decide a point of EU law incorrectly, a party could bring a challenge or resist enforcement, asserƟng that the award was based upon an incorrect interpretaƟon of EU law and so contrary to public policy. This, the ECJ suggests, is sufficient to make commer‐ cial arbitraƟon compaƟble with ArƟcles 267 and 344 TFEU. The problem is that the same is equally true of awards made under the arbitraƟon provisions of investment treaƟes. AdmiƩedly, if the treaty provides for ICSID arbitraƟon, that excludes the possi‐ bility of a challenge on public policy grounds, and so one can see why ICSID arbitraƟon agreements might be considered to be incom‐ paƟble with TFEU. But many investment treaƟes do not provide for ICSID arbitraƟon – the award in the Achmea case was made pursu‐ ant to the UNCITRAL Rules. The juridical seat was Germany. And the award was open to challenge on grounds of public policy. It is hard to see why that kind of award is any different from a commer‐ cial award. The ECJ aƩempts to jusƟfy treaƟng treaty arbitraƟon and com‐ mercial arbitraƟon differently on the ground that: “While the laƩer originate[s] in the freely expressed wishes of the parƟes, the former derive[s] from a treaty”. That makes no sense at all. The arbitra‐ Ɵon provision in an investment treaty is a “freely expressed wish” by the state concerned to arbitrate disputes under the treaty. This criƟcism is, however, academic – that fact is that, however unsaƟsfactory or incoherent the ECJ’s reasoning, Achmea prohibits agreements like ArƟcle 8 of the BIT considered in that case, and does not affect commercial arbitraƟon agreements which EU Mem‐ ber States may enter into, even if they concern the same subject maƩer. Does Achmea affect the ECT? Unlike the BIT which was considered in the Achmea case, the ECT is a treaty which the EU is itself a party to. The issue of whether the ECT is compaƟble with EU law has yet to be tested before the ECJ. The European Commission, however evidently considers that arbitraƟon under the ECT is equally objec‐ Ɵonable, despite the EU having itself signed up to it. In the mid‐2000s Spain encouraged investment in solar power projects by way of a series of incenƟves. These were modified in 2013/14 to impose a much less generous regime. A number of investors from other EU Member States brought claims against Spain under the ECT. The European Commission submiƩed a series of amicus curiae briefs in those arbitraƟons, asserƟng that the tribunals lacked juris‐ dicƟon. The Commission raised the same arguments as in Achmea, and also argued that the investors were not from an “Area” of “another ContracƟng Party”. Spain and the investors were all from the same “ContracƟng Party” – the EU. The arbitral tribunals re‐ jected the Commission’s arguments. On 10 November 2017, in Decision 2017/C 442, the Commission stated: “any provision that provides for investor‐State arbitraƟon between two Member States is contrary to Union law … Union law provides for a complete set of rules on investment protecƟon … Member States are hence not competent to conclude bilateral or mulƟlateral agreements between themselves” and the “ECT does not apply to investors from other Member States iniƟaƟng disputes against another Member State”. On 19 July 2018 the Commission issued CommunicaƟon COM (2018) 547/2 which includes that “EU investors … cannot have re‐ course … to arbitraƟon tribunals established under the Energy Char‐ ter Treaty”. Investors from EU Member States who are considering energy investments in other EU Member States should probably assume that the courts of EU Member States will not enforce any awards which might be made in their favour under the ECT. 18 THE ARBITER AUTUMN 2018 UK’s noƟficaƟon of withdrawal from TFEU and TEU TEU ArƟcle 50 provides: “1. Any Member State may decide to withdraw from the Union in accordance with its own consƟtuƟonal require‐ ments. 2. A Member State which decides to withdraw shall noƟfy the European Council of its intenƟon. … the Union shall nego‐ Ɵate and conclude an agreement with that State, seƫng out the arrangements for its withdrawal … 3. The TreaƟes shall cease to apply to the State in quesƟon from the date of entry into force of the withdrawal agree‐ ment or, failing that, two years aŌer the noƟficaƟon referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.” In ArƟcle 50 “the TreaƟes” means TEU and TFEU. ArƟcle 50 of TEU applies mutaƟs mutandis to the Euratom Treaty (ArƟcle 106a of the Euratom Treaty). On 29 March 2017 the UK gave noƟce in accordance with ArƟcle 50(2) of the TEU of its withdrawal from the EU and from Euratom. Therefore TEU, TFEU and the Euratom Treaty shall cease to apply to the UK on 29 March 2019. Awards in favour of UK investors against EU Mem‐ ber States will become enforceable For the moment the UK is an EU Member State. The UK’s BITs with Bulgaria, CroaƟa, the Czech Republic, Estonia, Hungary, Lat‐ via, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia are intra‐EU BITs. Pursuant to Achmea, an award which a UK investor obtained against one of those countries would be contrary to EU law and unenforceable in the UK or any other EU Member State as contrary to public policy. Once the UK ceases to be party to TFEU, those treaƟes are no longer intra‐EU treaƟes, and the reasoning in Achmea ceases to apply. There would be nothing to prevent an award made pursu‐ ant to those treaƟes in favour of a UK investor being enforced in the UK or in any EU Member State. Awards under intra EU BITs / intra‐EU ECT award may become enforceable in the UK A UK court would probably not presently enforce an award which had been made under an intra‐EU BIT (say an award against Slovakia in favour of a German investor). Such awards are contrary to public policy for so long as the UK remains bound by TFEU. Once TFEU ceases to apply, such awards would no longer be con‐ trary to (UK) public policy. There is, therefore, a possibility that such awards, though they would not be enforceable in EU Member States, would be enforceable in the UK. ImplicaƟons for prospecƟve investors in EU Mem‐ ber States Investors from EU Member States who are considering invesƟng in Bulgaria, CroaƟa, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia should consider whether to make their investment via a UK shell compa‐ ny, in order to obtain the protecƟon of the UK’s BITs with those countries. Investors from EU Member States who are considering making energy sector investments in other Member States should consider whether to make their investments via a UK shell company, in order to obtain the protecƟon of the ECT. The posiƟon is some‐ what less clear cut in respect of the ECT because the ECT contains a denial of benefits provision, but there is a good chance that such provisions only have prospecƟve effect. So, provided the host state does not disavow the protecƟons of the ECT before the shell company makes the investment, the ECT may sƟll provide a valua‐ ble protecƟon. Haynes and Boone CDG, LLP is a Limited Liability Partnership registered in England & Wales under Partnership No. OC317056 with is registered office and principal place of business at 29 Ludgate Hill, London EC4M 7JR, UK. Haynes and Boone CDG is authorised and regulated by the Solicitors RegulaƟon Authority (SRA) with VAT RegistraƟon No. GB 882645686. HAYNES BOONE OFFICES WORLDWIDE AUSTIN NEW YORK CHICAGO ORANGE COUNTY DALLAS PALO ALTO DENVER RICHARDSON FORT WORTH SAN ANTONIO HOUSTON SHANGHAI LONDON THE WOODLANDS MEXICO CITY WASHINGTON D.C. For complimentary copies or changes of address, please contact Leanne Power at email@example.com. For more informaƟon about our pracƟce, visit us at haynesboone.com. Copyright ©Melanie Willems. All rights reserved. This brochure has been prepared for informaƟonal purposes only and does not consƟtute legal counsel. This informaƟon is not intended to create (and receipt of it does not consƟtute) a lawyer‐client relaƟonship. Readers should not act on this informaƟon without seeking professional counsel. A past performance or prior result is no guarantee of a similar future result in another case or maƩer.
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The Arbiter - Autumn 2018
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