The Arbiter International Disputes Newsletter- Spring 2023

Spring 2023 Editor: Melanie Willems IN THIS ISSUE Where to keep your spare claims by Robert Blackett 03 07 11 “Am I being unreasonable?” - a refresher on mediation by Ryan Deane THE ARBITER SPRING 2023 2 The devil is in the detail: contractual notification clauses and breach of warranty claims by Markus Esly THE ARBITER SPRING 2023 3 The devil is in the detail: contractual notification clauses and breach of warranty claims by Markus Esly Contracts, in parƟcular sale and purchase agreements in corporate acquisiƟons, may provide that if a party wishes to make a claim (usually the buyer post‐ compleƟon), it must give noƟce to the other party (the seller) within a certain period of  Ɵme.    There may also be a require‐ ment that any noƟce of a claim must be reasonably detailed, or in a parƟcular form.    Such provisions, if properly draŌed, take effect as condiƟons precedent.   A failure to saƟsfy any condiƟons imposed will pre‐ clude a claim, no maƩer how valuable or meritorious.   It goes without saying that noƟces of claims to be giv‐ en pursuant to such clauses must be carefully draŌed.    One might think that a 9‐page leƩer draŌed by solic‐ itors would do the trick.  However, in Drax Smart GeneraƟon v Scoƫsh Power Retail Holdings [2023] EWHC 412 (Comm), the Commercial Court recently held that precisely such a leƩer was deficient and did not meet the requirements of the provisions governing post‐ compleƟon claims in a share purchase agreement.  As a result, the buyer’s breach of warranty claim had no prospects of success, and the defendant was enƟtled to summary judgment.  Drax v Scoƫsh Power is a Ɵme‐ ly reminder of how noƟces clauses are construed un‐ der English law, and it also illustrates the basis on which a buyer’s losses for breach of warranty claims in corporate acquisiƟons are assessed.  This arƟcle looks at both issues. Background In October 2018, Drax bought all the shares in Scoƫsh Power GeneraƟon Limited (“SPGL”).  SPGL was part of the Scoƫsh Power group, and it had a range of assets.   SPGL’s assets included valuable land adjacent to the old Kingsnorth power staƟon near Medway, Kent, owned by E.ON.  Kingsnorth was a coal and oil‐ fired power plant.  It was decommissioned and demol‐ ished in March 2018.    SPGL’s nearby piece of land, called Damhead Creek II, had long been considered as a potenƟal locaƟon for a new, more environmentally acceptable, combined cycle gas turbine power staƟon.   One advantage of Damhead Creek II was that such a new power staƟon could be connected to the UK’s na‐ Ɵonal grid relaƟvely easily by running cables across to the old Kingsnorth power plant.  Running those cables required an easement.  The Scoƫsh Power group had procured an opƟon agreement for such an easement from E.ON.    On 1 June 2016, as part of an internal reorganisa‐ Ɵon, Scoƫsh Power assigned the benefit of the opƟon agreement to SPGL, intending for SPGL to be both the owner of Damhead Creek II and be able to call for the grant of an easement by E.ON.  However, in early Oc‐ tober 2018, during the negoƟaƟons with Drax, it proved impossible to locate any copies of the deed of assignment of the opƟon agreement to SPGL from June 2016.    Scoƫsh Power therefore put in place a new deed of assignment, with retrospecƟve effect as of 1 June 2016.  In addiƟon, SPGL also executed a deed of covenant in favour of E.ON, the grantor of the ease‐ ment under the opƟon agreement.  By that deed, SPGL promised that it would perform all the obligaƟons the original grantee had under the opƟon agreement.  Un‐ fortunately, however, in October 2016, E.ON no longer owned the Kingsnorth site.  The land had been sold to a company called Uniper.    E.ON was therefore the wrong counterparty to SPGL’s deed of covenant (since E.ON could no longer grant the easement).  The deed of covenant should have been given in favour of Uniper.   Without it, Uniper was not actually required to grant the easement to SPGL if the opƟon were exer‐ cised. The transacƟon between Drax and Scoƫsh Power for the sale of SPGL was governed by a sale and pur‐ chase agreement (“SPA”) of no fewer than 224 pages, which the parƟes signed on 16 October 2018.    Drax agreed to pay Scoƫsh Power £702 million for SPGL.  In the thick of the negoƟaƟons, the full extent of the problem with Uniper was overlooked.  Drax knew that Uniper now owned Kingsnorth, but did not know or appreciate that Uniper was not bound by the opƟon agreement due to the missing deed of covenant.  How‐ ever, Drax had secured warranƟes and indemniƟes from Scoƫsh Power.  By the SPA, Scoƫsh Power war‐ ranted to Drax that the benefit of the Damhead Creek II opƟon agreement would be or had been effecƟvely assigned to SPGL prior to compleƟon.  Scoƫsh Power also agreed to indemnify Drax for all losses suffered in relaƟon to the opƟon agreement. The deadline for exercising the opƟon was 12 March 4 THE ARBITER SPRING 2023 2019.   On 8 March 2019, four days before the dead‐ line, Drax’s solicitors gave noƟce to Uniper under the opƟon agreement.   On 11 April 2019, aŌer expiry of the opƟon, Uniper’s solicitors replied back, staƟng that absent any deed of covenant in their client’s favour, the exercise of the opƟon was ineffecƟve, and any rights that SPGL might have had had since expired any‐ way.  That leŌ SPGL without an easement, unless new commercial terms could be agreed with Uniper.  Drax and Scoƫsh Power exchanged correspondence about this problem.  On 22 May 2019, Drax gave noƟce of a maƩer which, its solicitors said, may give rise to a claim under the SPA.    Over the following year, Drax and Scoƫsh Power negoƟated amendments to the SPA.  On 30 June 2020, they reached agreement.  The newly amended SPA defined a specific type of claim, called the “Damhead Creek II OpƟon Agreement Claim”.  If Drax wanted to pursue that claim, it had to give noƟce of this by no later than 30 June 2021.  That effecƟvely gave Drax a year to try and come to terms with Uniper, and thus work out what the addiƟonal costs or losses it might want to claim from Scoƫsh Power under the SPA were going to be.    Drax then decided to sell SPGL to a third party, with that sale compleƟng on 15 December 2020.  As part of the sale, Drax had to indemnify the new purchaser of SPGL for any losses relaƟng to the opƟon agreement.   Drax thus remained able to claim against Scoƫsh Pow‐ er under the SPA.  Meanwhile, the new purchaser con‐ Ɵnued the negoƟaƟons with Uniper, but in the expec‐ taƟon of passing any costs back to Drax.   On the last day of the extended period for making such a claim against Scoƫsh Power, Drax’s solicitors then gave no‐ Ɵce of a claim that was (they said) squarely within the definiƟon of a “Damhead Creek II OpƟon Agreement Claim”.    Drax’s noƟce of claim Over the nine pages of Drax’s noƟce, its solicitors set out the factual background to the issue and the negoƟ‐ aƟons with Uniper over the grant of a new easement.   Uniper was in principle willing to grant an easement at current market rates, but insisted on a different route which meant increased costs for making the connec‐ Ɵon with the naƟonal grid.  Drax also reserved its right to apply for a compulsory purchase order in respect of the interest sought.  NoƟng that the opƟon could not be exercised as expected because Scoƫsh Power had failed properly to complete an internal “ReorganisaƟon” (including the assignment to SPGL), Drax stated that: “Drax remains liable for any and all losses suffered by [SPGL] in relaƟon to the ReorganisaƟon.” The noƟce then turned to the losses that Drax was claiming.  The leƩer said: “In the circumstances, the loss suffered is yet to crystallise. As such, we set out below the details of the likely heads of loss (in relaƟon to both the potenƟal terms that may be agreed with Uniper and in the event that such agreement is not reached and a compulsory acquisiƟon is required) and where possible an esƟmate of the potenƟal loss that is likely to be suffered. Given the unique circumstances of this maƩer, this is of course an esƟmate and Drax reserves the right to update the loss suffered as maƩers develop and the loss is crystallised. As the losses are yet to crystallise, Drax shall seek an indemnity from Scoƫsh Power in relaƟon to any future losses that may arise.” Below that, Drax’s solicitors listed potenƟal fees and payments that Uniper was likely to ask for in return for granƟng any easement (based on Uniper’s posiƟon in the negoƟaƟons at the  Ɵme), and further expected costs if an agreement could be reached, but with the easement relaƟng to a route across Uniper’s land that was less advantageous for the connecƟon.  The noƟce also raised the cost that would be incurred as a result of a compulsory purchase process. Drax’s claim in the Commercial Court Scoƫsh Power denied liability, and Drax commenced proceedings in the Commercial Court.    Drax claimed for breach of warranty, relying on two specific warran‐ Ɵes:  firstly, that the ReorganisaƟon had been properly carried out as required by the relevant agreement and that all “… transfers or other acƟons envisaged …” had occurred, and secondly that “All material licences, registraƟons, consents, permits, concessions, cerƟficaƟons, approvals and other authorisaƟons (public and private) that are necessary for the compleƟon of the ReorganisaƟon have been obtained.”    Drax also claimed an indemnity for all the costs that would be incurred by SPGL in implemenƟng the ReorganisaƟon properly. Drax’s ParƟculars of Claim reflected the losses de‐ scribed in the noƟce of claim.   Drax included an esƟ‐ mate of the quantum claimed, based on Uniper asking for £2.8 million in fees for the new easement, and rais‐ THE ARBITER SPRING 2023 5 ing a further £5.2 million in addiƟonal contractor costs ‐ a total of about £8.1 million in costs that SPGL itself was expected to suffer.  Drax then sought to amend its claim, removing all references to loss that SPGL would suffer, and instead referred to loss that Drax itself had (already) suffered.    Drax’s new claim was that SPGL, when it was acquired by Drax, was worth less than it should have been.    The measure of damages claimed was the difference between the warranted value of SPGL (with the benefit of the opƟon) and the true or actual value of SPGL (without the opƟon rights).  That was to be assessed at the Ɵme when Scoƫsh Power’s breaches of the SPA were discovered.    The amended pleading assessed the diminuƟon in the value of SPGL in the same amount of £8.1 million – so Drax’s assump‐ Ɵon was that the addiƟonal cost of acquiring the (less convenient) easement from Uniper was the same as the diminuƟon in value.    Scoƫsh Power resisted the amendments, applying for summary judgment on the basis that Drax had not properly noƟfied the claims under the SPA, because the basis on which the losses were claimed had changed completely. DiminuƟon in value claims – a closer look Before turning to whether Drax’s noƟce of claim was sufficiently specific, we look at Drax’s newly‐alleged basis of claim in a liƩle more detail.  Under English law, diminuƟon in value is the basis for assessing damages in claims for breaches of warranƟes under sale and purchase agreements.    This was seƩled by the Privy Council in Lion Nathan Ltd v C-C BoƩlers Ltd [1996] 1 WLR 1438.   Going back to first principles, Lord Black‐ burn famously said in Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, at 39 that: “… where any injury is to be compensated by damages, in seƩling the sum of money to be given for reparaƟon of damages you should as nearly as possible get at that sum of money which will put the party who has been injured, or who has suffered, in the same posiƟon as he would have been in if he had not sustained the wrong for which he is now geƫng his compensaƟon or reparaƟon”. Applying that rule of the law of damages to a breach of warranty situaƟon requires a comparison between the actual value of the company (or the shares) with the value they would have had if the warranty had been true.  In Lion Nathan, their Lordship drew an anal‐ ogy between the sale and purchase of a company, and the sale and purchase of goods.  In each case, the pur‐ chaser was enƟtled to assume that what it stood to receive would be of the warranted quality, which means that the purchaser could claim damages to com‐ pensate them for having received something that was worth less than what they contracted for.   As we will come on to see, a claim for diminuƟon in value is not always easy to quanƟfy.  This may have been the rea‐ son why Drax iniƟally sought to claim the (expected) losses that SPGL would suffer – because those would be actual costs incurred, without the need for a valua‐ Ɵon exercise. No duty to miƟgate A few points are worth bearing in mind when it comes to diminuƟon in value claims.    The first is that the loss crystallises on compleƟon, when the warranty is breached.  It follows that, aŌer compleƟon, the pur‐ chaser does not actually have to take whatever steps are needed to restore the company to the ‘quality’ or condiƟon it should have been in (so Drax or the new owner of SPGL would not have to pay Uniper and lay the cables).  Instead, the purchaser can apply damages for diminuƟon in value as it sees fit, and the usual com‐ mon law duty to miƟgate does not apply.    In EquiƟx EEEF Biomass 2 Ltd v Fox [2021] EWHC 2531, Mr JusƟce Kerr confirmed that in such cases: “… there is no room for the common law doctrine of miƟgaƟon of loss to operate. As the defendants rightly point out, the doctrine is not, as it is oŌen described, a “duty” to miƟgate loss in a strict sense. It is a rule that avoidable losses are irrecoverable if a claimant acts unreasonably by not avoiding them. In a normal share valuaƟon case such as this, where the measure of damages is the ordinary one for breaches of warranƟes of quality, steps taken or not taken by the buyer to miƟgate its loss aŌer the purchase are simply irrelevant and of concern only to the buyer, not the seller The loss has already crystallised at the point of purchase.” Playing by your own rules In some sale and purchase agreements, including the contract before the court in EquiƟx, the parƟes had agreed to introduce a contractual duty to miƟgate.  As Mr JusƟce Kerr found in EquiƟx, even in the case of a diminuƟon for value claim, a contractual provision re‐ quiring the buyer to take reasonable steps to miƟgate aŌer compleƟon will be given effect.    The parƟes can therefore alter the common law rules for the assess‐ ment of damages by agreement.  However, there is sƟll 6 THE ARBITER SPRING 2023 a presumpƟon that they did not intend to depart greatly from those rules.   The common law duty to miƟgate places the burden of proof on the defendant, who has to establish that what the claimant did was unreasonable and led to avoidable loss being suffered.  It is not enough for the defendant to allege that there were some reasonable steps that could have been taken by the claimant to miƟgate the loss.  In EquiƟx, the argument was made that the post‐compleƟon miƟgaƟon provision in the contract reversed the burden of proof, by staƟng that the buyer would take “… all reasonable steps to miƟgate its loss.”    Mr JusƟce Kerr found that the clause had been draŌed against the background of the com‐ mon law duty, and the wording was insufficiently clear to put the onus on the buyer to show that all reasona‐ ble steps had indeed been taken: “… the onus is on the defendant to show an unreasonable failure to miƟgate; the threshold is low (because the criƟcism comes from the party at fault); the vicƟm need not embark on expensive and uncertain liƟgaƟon; and it is not enough to show that the steps the seller proposes would be reasonable. In their commercial context, I think the words “all reasonable acƟon” mean acƟon it would be unreasonable not to take.” He noted that the buyer of the company was not obligated to embark on expensive and uncertain liƟga‐ Ɵon against third parƟes in order to put right any maƩers that amounted to a breach of warranty – in other words, you do not have to liƟgate to miƟgate.  In Drax’s case, therefore, it would not have been open to Scoƫsh Power to argue (for example) that Drax should have challenged Uniper through formal proceedings under the opƟon agreement.   Assessing the diminuƟon in value DiminuƟon in value is oŌen assessed by reference to the parƟes’ agreed method of valuaƟon which is either set out in, or underlies, their sale and purchase agree‐ ment.  In Lion Nathan, the parƟes based the purchase price on an agreed mulƟple – 20 Ɵmes – of the compa‐ ny’s expected profits for a parƟcular tax year.    There were two warranƟes.  One was that this fore‐ cast was calculated on a proper basis, and the second that the forecast was achievable based on current trends and performance.  The seller’s forecast was for earnings of NZ$ 2.3 million.    There was a substanƟal shorƞall aŌer the sale.  The buyer brought a claim for breach of warranty.    In the Privy Council, Lord Hoff‐ mann confirmed that applying the parƟes’ own mulƟ‐ ple of earnings was the proper basis for assessing the diminuƟon in value, but found that on a true construc‐ Ɵon of the warranƟes, they were not warranƟes of quality.  The seller had not warranted that the compa‐ ny was capable of generaƟng earnings of NZ$ 2.3 mil‐ lion, but rather only that the forecast had been pre‐ pared by the seller with reasonable skill and care.    There was no single basis for properly preparing a forecast.    Different forecasters could reasonably take different views.  The Privy Council thus found that the diminuƟon in value had to be assessed by reference to the figure which the court considered a forecast made with reasonable care would most likely have produced.   The Privy Council did not have to determined that on appeal, but Lord Hoffmann raised a number of issues for the lower courts (who would have to decide what a reasonable forecast was) to grapple with.  For instance, it would have to be invesƟgated whether the subse‐ quent drop in earnings was caused by something which a reasonable forecaster could not have predicted.  The seller might not be liable for unforeseeable events which caused lower profits, absent a warranty that nothing of the sort would happen aŌer compleƟon.  If the warranty had been one of quality, on the other hand, none of this would have maƩered.  The damages would simply have been assessed by taking the differ‐ ence between the company’s actual (lower) profits mulƟplied by 20, and the forecast of NZ$ 2.3 million mulƟplied by 20.    QuesƟons of evidence   The decision in Lion Nathan illustrates that it is not always straighƞorward to assess the diminuƟon in val‐ ue, unless the warranty in quesƟon is truly aimed at a quality (or condiƟon) of the company.    The valuaƟon methodology adopted for the transacƟon (which is usually the starƟng point) can be complex, and there may be components of any applicable formulae that might need to be adjusted or revisited.  Damages will ulƟmately be assessed by the court based on expert evidence.    In The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842, the High Court noted that:   “… This involves a valuaƟon, and as with any valuaƟon the process involves establishing (as the defendants’ expert put it), “The esƟmated amount for which an asset or liability should exchange on the valuaƟon date between a willing buyer and a willing seller in arm’s length transacƟon, aŌer proper markeƟng where the parƟes had each act- THE ARBITER SPRING 2023 7 ed knowledgeably, prudently, and without compulsion”. … However, there is no one methodology to be applied in a valuaƟon (Sycamore Bidco Ltd v Breslin [2012) EWHC 3443 (Ch) at [405], Mann J). … As with any valuaƟon it is necessary, as both experts agreed, to appraise the number in quesƟon in the light of the circumstances. As THG's expert aptly put it, “ ... you always have to stand back and say, does the answer give you a sensible result and not get too worked up in the model itself”.” A pracƟcal illustraƟon The Court of Appeal’s decision in Karim v Wemyss [2016] EWCA Civ 27 is a good example of how the courts approach a situaƟon where the evidence of diminuƟon in value is unsaƟsfactory or missing in the first place.    The seller had warranted that the business, a firm of solicitors, was capable of generaƟng annual profits of £120,000.    It turned out that the company’s actual profit earning capacity was only £92,000.  The Court of Appeal had no difficulty in accepƟng that the buyer had suffered a substanƟal loss.  The capacity of a busi‐ ness to generate profits is generally reflected in its goodwill, which (as in Lion Nathan) is frequently valued by applying a mulƟplier to the annual profits.  Before the judge, the parƟes had not adduced expert evi‐ dence as to what the appropriate mulƟplier might be, and no such figure was apparent or could be derived from the sale and purchase agreement.   Lord JusƟce Lewison noted that if there had been expert evidence, this would have addressed the appro‐ priate mulƟplier for a business such as the firm of so‐ licitors in quesƟon in the marketplace which buyers and sellers might agree.  However, the best compara‐ ble was the business itself.  The agreed purchase price had been £100,000, paid in consideraƟon for all the goodwill, the fixed and moveable assets, the intellectu‐ al property and the firm’s IT system.  The sale and pur‐ chase agreement had envisaged that the parƟes would apporƟon the price to all those elements, but they had not done that.    The Court of Appeal thus looked at the firm’s ac‐ counts and its balance sheet, which showed fixed as‐ sets of £31,860.  That leŌ £68,140, which the Court of Appeal allocated enƟrely to goodwill (to the buyer’s benefit).    If the buyer had paid £68,140 for goodwill capable of generaƟng £120,000 in annual profits, then how much should they have paid if the profits were only £92,000 a year?  The answer, Lord JusƟce Lewison held, was to take the raƟo of price / goodwill (120,000/68,140 =1.76) and apply that as a divisor to the shorƞall in profits of £28,000.  That gave a sum of £15,909, which the Court of Appeal discounted by £909 for inherent uncertainƟes.    Karim v Wemyss shows that while damages are oŌen assessed on the basis of a mulƟplier, that does not always have to be the case.  To avoid any difficul‐ Ɵes in assessing the quantum, the buyer (the likely claimant) will want to ensure that the way in which the price has actually been calculated is reflected in the sale and purchase agreement.    Neither party should have much to complain about if the effect of a breach of warranty is assessed based on a valuaƟon that they both agreed to.   Where to keep your spare claims by Robert Blackett The Civil Procedure Rules give courts the power to strike out a statement of case on certain grounds, effecƟvely allowing the other party’s claim or defence to succeed without a trial.  Grounds on which a court can strike out a statement of case include CPR 3.4(2)(b): if “the statement of case is an abuse of the court’s process or is otherwise likely to obstruct the just disposal of the proceedings”. In the very recent case of Morgan Sindall ConstrucƟon and Infrastructure Ltd v Capita Property and Infrastructure (Structures) Ltd & Anor [2023] EWHC 166 (TCC) a defendant sought to have a claim against it struck out under this rule, alleging that so‐called “warehousing” of the claim by the claimant had ren‐ dered the claim an abuse of process. “warehousing” is not a term of art, but a shorthand expression used to describe a situaƟon where a claim‐ ant starts proceedings (oŌen to preserve a claim in the face of an impending limitaƟon period) but then does not pursue the claim.    The relevant law In the pre‐CPR case Grovit v Doctor [1997] 1 WLR 640 the House of Lords upheld a decision to strike out a libel acƟon because the claimant had failed to pursue it for two years.  Lord Woolf said:   8 THE ARBITER SPRING 2023 “This conduct on the part of the appellant consƟtuted an abuse of process. The courts exist to enable parƟes to have their disputes resolved. To commence and to conƟnue liƟgaƟon which you have no intenƟon to bring to conclusion can amount to an abuse of process. Where this is the situaƟon the party against whom the proceedings is brought is enƟtled to apply to have the acƟon struck out and if jusƟce so requires (which will frequently be the case) the courts will dismiss the acƟon. … once the conclusion was reached that the reason for the delay was one which involved abusing the process of the court in maintaining proceedings when there was no intenƟon of carrying the case to trial the court was enƟtled to dismiss the proceedings.”    Lord Woolf revisited the issue a few months later in Arbuthnot Latham Bank v Trafalgar Holdings Ltd [1998] 1 WLR 1426.  A 1437B he said: “It has been the unofficial pracƟce of banks and others who are faced with a mulƟtude of debtors from whom they are seeking to recover moneys to iniƟate a great many acƟons and then select which of those proceedings to pursue at any parƟcular Ɵme. This pracƟce should cease in so far as it is taking place without the consent of the court or other parƟes. If there is good reason for doing so the court can make the appropriate direcƟons. Whereas hitherto it may have been arguable that for a party on its own iniƟaƟve to, in effect, ‘warehouse’ proceedings unƟl it is convenient to pursue them does not consƟtute an abuse of process, when hereaŌer this happens this will no longer be the pracƟce. It leads to stale proceedings which bring the liƟgaƟon process into disrespect.” “If, subject to any direcƟons of the court, proceedings are not intended to be pursued in accordance with the rules they should not be brought.” In another recent case Alfozan v Quastel Midgen [2022] EWHC (Comm) 66, HHJ Pearce siƫng as a judge of the high court summed up what is now the law in this area as follows: “This type of case was considered by Arnold LJ in two cases from which the following principles can be drawn: (a) It may be an abuse of process for the claimant to ‘warehouse’ a claim by taking a decision not to pursue it for a substanƟal period of Ɵme, even if the claimant subsequently decides to pursue it (Solland InternaƟonal Limited v Clifford Harris [2015] EWHC 3295 or even is intent on pursuing the claim, albeit at some later Ɵme (Asturion FondaƟon v Alibrahim [2021] 1 WLR 617); (b) However, mere delay in pursuing a claim, however inordinate and inexcusable, does not, without more, consƟtute an abuse of process (Asturion FondaƟon v Alibrahim); (c) In deciding whether to strike out a claim for ‘warehousing’ as an abuse of the court’s process, it is necessary for the court to undertake a twostage analysis, considering first whether the conduct is an abuse of process and second whether, if it is, it is proporƟonate to strike out on the basis (Asturion FondaƟon v Alibrahim).” In the Morgan Sindall case, Eyre J adopted this, also observing at [30]: “a disƟncƟon is drawn between the two kinds of abuse: starƟng proceedings with no intenƟon of conƟnuing them; and starƟng with an intenƟon of conƟnuing but then puƫng the case on hold in the course of proceedings. The former is the graver abuse. That does not, of course, mean that puƫng proceedings on hold in the course of proceedings is not an abuse: the authoriƟes are clear that it can be. The disƟncƟon between the two categories can be relevant to sancƟon and in parƟcular to whether the proporƟonate response is striking out.” And at [35]‐[36]: “The court must be on guard against making undue assumpƟons. It is necessary for the court to remember that what might appear, with hindsight, to be a deliberate course of conduct can be, and oŌen will be, the result of a combinaƟon of unrelated decisions or omissions with a different intent or with no combined intent at all. The dividing line between puƫng proceedings on hold in such a way as to be warehousing them and failing to progress a claim with proper expediƟon will oŌen be a narrow one but there is a disƟncƟon and the disƟncƟon lies in the intenƟon with which the acƟons are done.” THE ARBITER SPRING 2023 9 The underlying claims C was a design and build contractor which was re‐ tained to build two new cricket stadia at Old Trafford.   C retained D1 as consulƟng engineer.  C subcontracted part of the design and build work to D2 (“Sabre”) a steelwork contractor.  Sabre’s design allegedly proved defecƟve, and C claimed to have spent around £10 mil‐ lion fixing these defects. C brought a claim against Sabre and D1 seeking to recover these costs.    Sabre did not contest the claim and C obtained default judgment against Sabre.  Sabre, however, was insolvent so C pursued a claim against Sabre’s insurer under the Third ParƟes (Rights Against Insurers) Act 1930.  The insurer denied liability, saying it had validly avoided Sabre's policy, puƫng C to proof of Sabre’s liability and also claiming the liability under the policy was limited to £5 million.  It was clear there was going to be a shorƞall in recovery as against Sabre. C thus also claimed against D1 that D1 had failed properly to review Sabre’s design and/or to warn C in strong enough terms / quickly enough that it was de‐ fecƟve.  D1’s defence is that it had, in fact, itself pre‐ pared a perfectly suitable design for C, but C had then instructed Sabre to change it in an aƩempt to ‘value engineer’ it (i.e. make it cheaper to execute) and that was the cause of all the problems.   D1 also claims it did, in any case, warn C about the problems with Sa‐ bre’s design. The delay  2011.  The alleged breaches by D1 occurred in 2011.    2014‐2016.    In February 2014 C1 sent D1 a claim leƩer. There ensued correspondence, marked by long delays on the part of C1.     2017.  Proceedings were issued on 6 July 2017, near‐ ly six years aŌer the alleged breaches. In December 2017 C obtained default judgment against Sabre.  C and D1 agreed a stay of the proceedings.  D1 sought to express its agreement to that stay as being condi‐ Ɵonal upon C pursuing a claim against Sabre’s insur‐ er.    2018.    In February 2018 D1 proposed a mediaƟon but C declined saying the posiƟon was not yet suffi‐ ciently clear.  In April 2018 D1 served its defence.  In May C began Part 8 proceedings against the insurer for disclosure of documents.  In September 2018 the insurer provided the documents.     2019.  In 2019 there was a part 18 request by D1 for further informaƟon regarding C’s Reply to D1’s De‐ fence, and some correspondence about a possible mediaƟon and about the CMC but no mediaƟon or CMC was fixed and none took place.  2020.  In November 2020 C launched a claim against the insurer.    2021.  On 17 December 2021 C proposed a triparƟte mediaƟon between C, D1 and the insurer.  That was the first correspondence D1 had from C since March 2020.  2022.    In February 2022 the parƟes agreed there should be a mediaƟon.  In May 2022 the mediaƟon was fixed for 1 September 2022.  On 6 June 2022 C first wrote to the court seeking a date for a CMC.  A CMC was fixed for 21 February 2023.  The mediaƟon did not result in a seƩlement.  On 5 December 2022 D1 applied to strike out C’s claim. There were evidently long periods of delay and inac‐ Ɵon by C.    From the first noƟficaƟon of a potenƟal claim to the CMC was ten years and five months.  From the first noƟficaƟon of a potenƟal claim to the conclu‐ sion of the pre‐acƟon protocol process was four years and three months.    From issue to the first CMC was five years seven months. Eyre J’s analysis Eyre J had no difficulty in concluding that the acƟon had been deliberately put on hold by C.  He described C as having put the claim on hold to tread water while C pursued Aviva. On the quesƟon of whether puƫng the claim on hold in this way was an abuse Eyre J weighed up fac‐ tors poinƟng each way.    C’s periods of inacƟon were lengthy and there was more than one such period (“the length of Ɵme for which an acƟon is put on hold is highly relevant to whether doing so is an abuse”). Eyre J thought it germane that C had acted unilaterally – not seeking formal or express consent from D1 or a court order to regularise the posiƟon.  The claim against D1 was different to the claim against Sabre and the insur‐ er.    Eyre J accepted the claim against D1 was “ambiƟous” and saw some force in the argument that C had chosen to pursue the potenƟally cheaper claim against Sabre and the insurer keeping the more expen‐ sive professional negligence claim against D1 as a fallback posiƟon.    Eyre J also noted that, if the claim was struck out, D1 was likely to have a limitaƟon de‐ fence. In terms of factors poinƟng the other way, Eyre J idenƟfied the following: (a) It was commercially sensible to pursue the claims against D1 and the insurer together because they did cover some common ground.    D1 had itself urged C to pursue the claim against the insurer, 10 THE ARBITER SPRING 2023 and had consented to the original stay for that pur‐ pose. (b) There was eventually a triparƟte mediaƟon.  Some of the delay in reaching that point was down to the insurer’s uncooperaƟveness.    (c) D1 could itself have sought a CMC.  Eyre J accepted this should only have “limited weight” (why should a defendant hasten the claim against them?) but does seem to have given it some weight.   (d) “It is also relevant to note the reacƟon of the First Defendant in December 2021 when the maƩer came to life. It is right that the First Defendant was highly criƟcal of the “radio silence” (in my term not its) that there had been and of the acƟons of the Claimant. However, it did not at that stage say that the conduct had been abusive and at that stage it agreed to move to a mediaƟon”. (e) A CMC was imminent.  Again Eyre J described this as a factor on limited weight “because in almost every case of this kind where there is an allegaƟon of abuse there will be a response by the claimant of seeking to move maƩers forward. That cannot be a sound answer if a strike out applicaƟon is otherwise meritorious. It is, however, relevant to note that the movement forward here on the part of the Claimant did not come in response to a strike out applicaƟon or even to the threat of such an applicaƟon”. Eyre J’s conclusion was:   “No single factor is conclusive but I am saƟsfied that it was not abuse here to put this acƟon on hold for significant periods of Ɵme to await the clarificaƟon of the posiƟon vis-à-vis Aviva and/or to bring into line with the Aviva acƟon. The key is that the reason for puƫng maƩers on hold was to line up with the Aviva claim and to get all the parƟes, including Aviva, to the stage of a mediaƟon together or of being able to combine the proceedings. That was a sensible course and it was, moreover, one which the First Defendant had, at the Ɵme a stay was imposed, indicated in clear terms that it believed it to be appropriate. In addiƟon the First Defendant’s conƟnued acceptance of that appropriateness was indicated at least to some extent by its parƟcipaƟon in the triparƟte mediaƟon when the acƟon was revived.” The quesƟon of what sancƟon would have been ap‐ propriate thus did not arise.  But Eyre J said:   “Even if I had concluded that the Claimant’s acƟons were such as to amount to abuse I would not have imposed a sancƟon on the Claimant in the circumstances here let alone the sancƟon of striking out the claim. That, in part, is because the factors which led me to the conclusion that the Claimant’s conduct was not abuse of process would operate, if the balance Ɵpped the other way and the behaviour was found to be abusive, to reduce the gravity of that abuse. More significantly, it is because of the delay on the part of the First Defendant in making this applicaƟon.” Analysis The decision seems rather magnanimous and illus‐ trates the difficulty one faces when advising a client how to deal with a languid opponent.  Those advising a D1 evidently walk a Ɵghtrope.  They face an unlooked for claim, which C has chosen to commence and then not to pursue.    The longer the delay goes on, the stronger the argument that the delay amounts to an abuse and should be struck out.    And yet, delay too long before seeking to have the claim struck out, and the delay begins to count against you, not the apa‐ theƟc claimant.    The fact D1 parƟcipated in a media‐ Ɵon when offered seems to have counted against them too – when the claim came back to life they should, it seems, have complained that the claim was an abuse at that point, rather than first trying to resolve the maƩer amicably by mediaƟon, waiƟng unƟl aŌer the mediaƟon had failed before making the applicaƟon.   D1 is also criƟcised, albeit mildly, for not itself having sought a CMC, and tried to hurry along the claim that was being made against ‐ which seems a counterintui‐ Ɵve criƟque.    D1 must have thought, going into this applicaƟon, that they had a preƩy good chance of geƫng rid of this decade old claim (a claim which the judge accepted was “ambiƟous” – oŌen a euphemism for a miscon‐ ceived try‐on).  Yet the end result was a failed applica‐ Ɵon, an order to pay nearly £100,000 in costs and probably a similar amount of costs incurred itself.   It is not obvious why the court set so much store by its having been sensible / commercial for C to have tried to coordinate the acƟon against D1 and the ac‐ Ɵon against the insurer.    It is undoubtedly true that, given the overlap, liƟgaƟng the claims together is more efficient.  But the idea that the insurer’s failure to en‐ gage with the claim against it excuses C’s delay in pur‐ suing D1 seems suspect.    Why is that D1’s problem?   THE ARBITER SPRING 2023 11 Surely, if the insurer does not accept liability within a reasonable  Ɵme, it is incumbent on C to pursue the insurer and D1 more quickly, not to warehouse the claim against D1.    One view might be that warehousing is relaƟvely vic‐ Ɵmless – the end result, if the defendant is liable, is that jusƟce is served later than would otherwise have been the case.  At first glance, this is to the defendant’s advantage – D1 has the benefit of going longer before paying than if C had pursued the claim more diligently.   That is only true, however, if: (i) the court can be per‐ suaded not to award interest for the period of the claimant’s delay; and (ii) the defendant hasn’t other‐ wise been prejudiced by the delay – i.e. no crucial wit‐ ness has died, no key fact forgoƩen, no salient evi‐ dence lost.  And it is oŌen overlooked that even while a warehoused claim lies dormant it is generally inflicƟng some kind of cost on D.   D has to consider the claim each year in its accounts and write leƩers about it to its auditors.  Someone has to keep an eye on the maƩer and be ready to deal with it if it is resurrected.    Long gaps in the correspondence magnify costs because ad‐ visors asked about the maƩer are constantly having to refresh their memory regarding what the case is about and what has happened.    Documents and records which could otherwise have been safely disposed of once limitaƟon expired must be retained indefinitely.   In a sense, it is the defendant who is paying the rent on the claimant’s warehouse. What is the best way to deal with the issue?  These strike out acƟons are evidently risky, expensive and hard to predict so it is important to advise the client about that.    With hindsight, one might say that D1 would have been beƩer off  not agreeing the original stay, and not agreeing to the mediaƟon, but that will not have been obvious at the Ɵme.  D1 could also have laid something more of a paper trail – wriƟng to C reg‐ ularly to chide them for not progressing the claim and threatening to apply to strike it out, to try to make D1 appear less complicit.    What difference any of these things might have made is not clear, though.    One strategy which probably does improve the de‐ fendant’s posiƟon would be to avoid making the strike out applicaƟon on an ‘all or nothing’ basis.  Rather than just applying to strike out the claim, apply for some other relief in the alternaƟve which a court might be prepared to award, even if they are not prepared to go so far as to strike out the whole claim.    The obvious alternaƟve is to apply, in the alternaƟve, for an order striking out C’s claim to interest for the period of delay.   A defendant who fails to get the claim struck out alto‐ gether might have the consolaƟon of winning on that alternaƟve applicaƟon, and potenƟally avoiding having to pay C’s costs.  On the other hand, presenƟng a judge with a more palatable middle ground posiƟon rather than a dichotomy might make them less likely than they otherwise would have been to grasp the neƩle and take the conclusive step of striking out a claim.   “Am I being unreasonable?” - a refresher on mediation by Ryan Deane IntroducƟon The courts have long desired to di‐ rect more parƟes towards media‐ Ɵon, which they believe is an un‐ deruƟlised resource for the resolu‐ Ɵon of disputes.    In the ebb and flow of judicial decisions over the years, judges swing from posiƟve encouragement of mediaƟon to imposing sancƟons for unreasonable fail‐ ure to mediate.  The recent case of Richards and others v Speechly Bircham LLP and others [2022] EWHC 1512 provides a useful indicaƟon of the current judicial ap‐ proach.    MediaƟon under English law The starƟng point under English law is that parƟes cannot be forced to mediate against their will.  In Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576, the Court of Appeal concluded that the court has no jurisdicƟon to force the parƟes to mediate, rely‐ ing on ArƟcle 6 of the European ConvenƟon on Human Rights: “It is one thing to encourage the parƟes to agree to mediaƟon, even to encourage them in the strongest terms. It is another to order them to do so. It seems to us that to oblige truly unwilling parƟes to refer their disputes to mediaƟon would be to impose an unacceptable obstrucƟon on their right of access to the court … it seems to us likely that compulsion of ADR would be regarded as an unacceptable constraint on the right of access to the court and, therefore, a violaƟon of ArƟcle 6.” The courts’ aƩempts at encouraging mediaƟon have met with liƩle success.   Despite repeated aƩempts at extolling the virtues of mediaƟon, in terms of the po‐ tenƟal  Ɵme and costs saved compared to liƟgaƟon, 12 THE ARBITER SPRING 2023 mediaƟon remains unpopular, at least between com‐ mercial parƟes.  This judicial frustraƟon was vocalised by Sir Alan Ward, giving the judgment of the Court of Appeal in Colin Wright v Michael Wright Supplies Ltd [2013] EWCA Civ 234: “[The first instance judge] aƩempted valiantly and persistently, Ɵme aŌer Ɵme, to persuade these parƟes to put themselves in the hands of a skilled mediator, but they refused. What, if anything, can be done about that? You may be able to drag the horse (a mule offers a beƩer metaphor) to water, but you cannot force the wretched animal to drink if it stubbornly resists. I suppose you can make it run around the liƟgaƟon course so vigorously that in a muck sweat it will find the mediaƟon trough more friendly and desirable. But none of that provides the real answer.” The modern judicial trend has therefore been to im‐ pose costs sancƟons on parƟes for unreasonably failing to mediate.    The court in Halsey idenƟfied a non‐ exhausƟve list of consideraƟons when determining whether a party acted unreasonably in refusing to me‐ diate.  These are commonly known as the ‘Halsey prin‐ ciples’. These principles include consideraƟon of the merits of the case.    If a party reasonably believes he has a strong case (for example, where he believes he would have succeeded in an applicaƟon for summary judg‐ ment) he may act reasonably in refusing mediaƟon.   The nature of the dispute must also be taken into ac‐ count, such as whether the parƟes require the court to determine issues of law or construcƟon of a contract.    The costs of the mediaƟon must also be taken into account.  Even if the costs of the mediaƟon would be small compared to the costs involved in liƟgaƟng a dis‐ pute, the courts must sƟll weigh up whether those costs would be usefully incurred, taking into account all the other factors. Richards v Speechly This brings us to the Richards decision, and the Com‐ mercial Court’s most recent applicaƟon of the Halsey principles.  The Claimants, the founders of a communi‐ caƟon company, had commenced proceedings against the Defendant solicitors for providing negligent advice.   The Defendants lost at trial and were ordered to pay the Claimants approximately £1.5m in damages.    Ordinarily this would mean that the Defendants (the unsuccessful party) would pay the Claimants’ (the suc‐ cessful party) costs on the ‘standard basis’, meaning that their legal costs could only be recovered if they were proporƟonate and reasonably incurred.    However, the Claimants argued that due to the De‐ fendants’ unreasonable refusal to mediate, the De‐ fendants should pay the Claimants’ legal costs on the ‘indemnity basis’, meaning that there would be no re‐ quirement that the costs incurred be proporƟonate in order to be recovered.    In pracƟce, parƟes will oŌen recover 60‐70% of their costs on the standard basis, and close to 100% of their costs on the indemnity ba‐ sis. In support of this argument the Claimants relied on four separate offers to mediate they had made to the Defendants, three of which were made before the claim was issued.    The Defendants’ responses to the Claimants’ offers to mediate, or parƟcipate in some other form of alter‐ naƟve dispute resoluƟon (“ADR”) process, were as fol‐ lows: 1. First offer:   the Defendants did not consider that a mediaƟon would be producƟve or cost effecƟve at that stage.    They set out that they would keep the merits of some form of ADR under review once full disclosure of documents had been given. 2. Second offer:  the Defendants responded that there was no point in engaging in mediaƟon as the claim was doomed to fail. 3. Third offer:  the Defendants reiterated their posiƟon that there was no point in a mediaƟon because the claim was enƟrely without merit. 4. Fourth offer:  the Defendants again responded that there was liƩle point in having a mediaƟon over an unmeritorious claim.  That response also referred to the expense of a mediaƟon and indicated that the Defendants would be prepared to have a short with‐ out prejudice call between solicitors to explain why a seƩlement offer of £500,000 made by them the pre‐ vious month would not be increased. The Defendants resisted an order for costs on the indemnity basis by saying their approach to mediaƟon was not unreasonable and that, in any event, an unrea‐ sonable refusal to mediate is only one facet of a party's conduct to be taken into account when determining costs. Mr JusƟce Russen, giving the judgment of the court, was quick to find that the Defendants’ refusal to medi‐ ate was unreasonable.    It was clear the Defendants’ jusƟficaƟons for failing to mediate, such as that the claim was doomed to fail and had no merit, were un‐ reasonable, given that the Claimants were successful at trial.    Neither was the Defendants’ proposal to wait unƟl THE ARBITER SPRING 2023 13 aŌer disclosure of documents had been made, reason‐ able.    The parƟes could cooperate to disclose im‐ portant documents in preparaƟon of a mediaƟon.    Fi‐ nally, the Defendants had been wrong to use the costs of the mediaƟon as a reason to refuse to parƟcipate.   Their legal costs of going to trial were over ten  Ɵmes what it would have cost to prepare for a mediaƟon.    Having concluded that the Defendants had unrea‐ sonably refused to mediate one might have thought that cost sancƟons were sure to follow, but the judge moved on to consider the Defendants’ second argu‐ ment.  Their contenƟon was that even if they had un‐ reasonably refused to mediate, that was only one fac‐ tor to be taken into account in determining the appro‐ priate order for costs, and that, overall, the Defend‐ ants’ behaviour was undeserving of costs sancƟons.    In support of this argument they cited the Court of Appeal decision in Gore v Naheed [2017] EWCA Civ 369, which states   “… a failure to engage, even if unreasonable, does not automaƟcally result in a costs penalty. It is simply a factor to be taken into account by the judge when exercising his costs discreƟon …” The judge considered this to be binding authority and considered other relevant factors in the case.  The most important of these was that the Claimants had not been completely successful at trial.  Their claim was for approximately £4.3m, of which £1.5m had been awarded.    Further, the seƩlement offers made by the Claimants were for amounts greater than the £1.5m awarded at trial.    In Russen J’s view this  Ɵpped the balance against awarding indemnity costs to the Claimants.    He con‐ cluded: “the Defendants’ unreasonable conduct in relaƟon to mediaƟon is in my judgment sufficiently marked by an order that they pay the Claimants’ costs down to and including trial on the standard basis. That is an appropriate “sancƟon” for them not engaging in a process of ADR which might have curtailed those costs in a significantly lower sum at an earlier stage of the proceedings.” The judge placing the word ‘sancƟon’ in quotaƟon marks is appropriate, as this was no sancƟon at all.  The Claimants were enƟtled to recover their costs “down to and including trial” on the standard basis in any event, and that posiƟon remained unchanged despite the court’s finding that the Defendants had unreasonably refused to mediate. Comment The efficacy of using costs sancƟons to persuade par‐ Ɵes to mediate is sƟll up for debate.  In October 2021, the Civil MediaƟon Council responded to the Ministry of JusƟce’s call for evidence on dispute resoluƟon in England and Wales, staƟng: “The CMC is not aware of any staƟsƟcal evidence of the threat of costs sancƟons as a driver of parƟes to mediaƟon. The majority of CMC members do believe that the threat of costs sancƟons pushes people to mediate, although this view was not universal.” Whatever the true posiƟon, the decision in Richards will only serve to further undermine the threat of costs sancƟons as an effecƟve tool to persuade parƟes to mediate.    The somewhat confusing message from the court seems to be that it is increasingly difficult to ar‐ gue that a failure to mediate is reasonable, but that any such unreasonable failure may well go unpunished depending on a wide range of other factors. On the first point, the judgment in Richards reaffirms that the courts have liƩle Ɵme for many of the reasons parƟes commonly give for refusing to mediate.    The merits of the dispute are usually less one‐sided at trial than parƟes, and their lawyers, anƟcipate.  ParƟes are encouraged to be pragmaƟc about mediaƟng before the formal, and costly, steps of disclosure have taken place.    Arguments on costs are usually dismissed, as the costs of mediaƟon usually pale in comparison to the costs of taking a dispute to trial.    There will of course be certain situaƟons where it is sƟll reasonable to refuse to mediate, such as when the dispute really is one‐sided and one party is enƟrely cor‐ rect in their arguments.  This will usually only apply to straighƞorward claims, such as claiming an unpaid debt.    MediaƟng in those circumstances would be a waste of everyone’s Ɵme and money, as one party can be confident in their enƟtlement.  Such cases will, how‐ ever, be rare.    Some form of ADR will be appropriate for most disputes.    On the other hand, a party’s unreasonable refusal to mediate is less significant if the courts are slow to im‐ pose sancƟons.  In Richards, the primary reason for not imposing a sancƟon was that part of the Claimants’ claim failed, but that will oŌen be the case in liƟgaƟon.   Indeed, the precise aim of a mediaƟon is to cut away the parƟes’ weaker claims and seƩle the dispute on the basis of each party’s strongest arguments.    A party should not be punished for retaining part of their claim at trial, which they may have abandoned, given the 14 THE ARBITER SPRING 2023 opportunity, as part of good faith negoƟaƟons during a mediaƟon.    It may be that the judge thought that the prospect of awarding indemnity costs was too harsh a punishment for the Defendants’ unreasonable refusal to mediate.   If so, the courts have wide discreƟon to award costs, and a lesser sancƟon could have been imposed.    By imposing no sancƟon at all, the courts are in danger of signalling that their protestaƟons against unreasonable refusals to mediate are simply idle threats.    Neither is the approach in Richards easy to reconcile with previous judicial statements on the topic.  In Thakkar v Patel [2017] EWCA Civ 117, for example, Jackson LJ, giving the judgment of the Court of Appeal, stated: “The message which the court sends out in this case is that in a case where bilateral negoƟaƟons fail but mediaƟon is obviously appropriate, it behoves both parƟes to get on with it. If one party frustrates the process by delaying and dragging its feet for no good reason, that will merit a costs sancƟon.” As it stands, a party cannot assume that another par‐ ty’s unreasonable refusal to mediate will result in a costs sancƟon.  For a party to protect their posiƟon on costs, the best approach remains to make a without prejudice seƩlement offer for an amount that the party is confident they will at least match if the dispute reaches trial.    Under the “Part 36” system in English courts, costs sancƟons will automaƟcally be imposed against a party that fails to beat such an offer at trial.   Although dis‐ putes in arbitraƟon do not have the same automaƟc imposiƟon of sancƟons for failure to accept a reasona‐ ble seƩlement, it remains perhaps the most important factor when arbitrators decided on whether a costs sancƟon should be imposed.    Deciding on the precise terms of the seƩlement offer is of course the difficult part (which the Claimants got wrong in Richards to their cost) and is an area where experienced lawyers will be able to assist parƟes in achieving the desired outcome.   For complimentary copies or changes of address, please contact Leanne Power at [email protected] For more informaƟon about our pracƟce, visit us at haynesboone.com. Haynes and Boone CDG, LLP is a Limited Liability Partnership registered in England & Wales under Partnership No. OC317056 with its registered office and principal place of business at 2nd Floor, One New FeƩer Lane, London EC4A 1AN, UK.  Haynes and Boone CDG is authorised and regulated by the Solicitors RegulaƟon Authority (SRA) with VAT Registra‐ Ɵon No. GB882645686.  Copyright © Melanie Willems.  All rights reserved.  This brochure has been prepared for informa‐ Ɵonal 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.