UK: Commercial Dispute Resolution Briefing, July 2011

Last Updated: 28 July 2011
Article by Barlow Lyde & Gilbert LLP

Arbitration

Paris Court of Appeal rules in favour of enforcing Paris ICC arbitral award, despite contrary UK Supreme Court ruling

Dallah Real Estate v Government of Pakistan (2011)

In stark contrast to the decision by the UK Supreme Court last year not to enforce a French arbitration award granted against the Government of Pakistan, the French Court of Appeal recently ruled in favour of enforcing it. This has resulted in the unusual situation that the same arbitration award is now enforceable in France, but not in the UK. This will encourage parties wishing to arbitrate to consider carefully the likelihood of an arbitration award being enforced in their favoured jurisdiction.

The dispute arose out of a memorandum of understanding between a Saudi conglomerate, Dallah and the Government of Pakistan for the provision of housing for pilgrims in Mecca. After negotiations, an agreement was entered into between Dallah and a trust vehicle (rather than the Government itself). This provided that disputes arising out of the agreement would be settled by ICC arbitration in Paris. After a change in political power resulted in the trust ceasing to exist, Dallah commenced arbitration proceedings against the Government claiming damages for breaches of the agreement. The tribunal awarded Dallah damages of over US$20 million and Dallah applied to enforce the award in the English High Court. All of the High Court, the Court of Appeal and the Supreme Court rejected Dallah's application to enforce the award.

The key issue was whether the arbitration clause in the agreement was valid and binding on the Government of Pakistan. This obliged the Supreme Court to consider French law, specifically whether there was the requisite "common intention" by all the parties (including the Pakistani Government) to be bound by the agreement to arbitrate. The Supreme Court decided that this was not the case and that the award was not binding on the Pakistani Government. In light of its conclusion that the award had therefore been made without jurisdiction, it refused to enforce it.

In direct contrast, the Paris Court of Appeal then ruled that the arbitrators were correct to assume jurisdiction over the Pakistani Government. It also considered the "common intention" test and came to the opposite conclusion, namely that the actions of the Pakistani Government showed that it was a party to the arbitration agreement even though it was not a signatory to it. It noted that: (i) the Pakistani Government civil servants had participated in the performance of the agreement; (ii) after the trust ceased to exist, a Government official terminated the agreement; and (iii) the Government's actions during the contract formation stage confirmed that the creation of the trust was a purely formal matter. For these reasons, it found that the Pakistani Government was bound by the agreement and rejected its request to set aside the award.

Anti-suit injunction granted in support of London arbitration agreement

Aes-Ust Kamenogorsk Hydropower Plant LLP v UST-Kamenogorsk Hydropower Plant JSC (2011)

In a decision that showcases the courts' determination to enforce parties' arbitration agreements, the Court of Appeal upheld the High Court's decision to grant an anti-suit injunction restraining Kazakhstan court proceedings and issue a declaration requiring proceedings to be brought via arbitration in London.

The appellant Kazakhstani company owned a hydroelectric concession in Kazakhstan. The respondent, another Kazakhstan company, operated the concession by virtue of an agreement with the appellant. The agreement was governed by the law of Kazakhstan but contained an arbitration agreement governed by English law and providing for arbitration in London under the ICC rules. After a dispute arose, the appellant brought proceedings in the Kazakhstan courts but the respondent applied to dismiss that claim on the basis of the parties' agreement to arbitrate in London. The Kazakhstan court rejected the respondent's application, relying on a previous decision of the Kazakhstan Supreme Court that the arbitration clause was void. The English High Court declared that the appellant was bound to submit disputes, including disputes as to the effectiveness of the arbitration clause, to arbitration and issued an anti-suit injunction restraining the appellant from litigating in the courts of Kazakhstan.

The Court of Appeal agreed with the High Court. It decided that even where no arbitration proceedings had been commenced and no proceedings were intended but a party had asked the Court to protect its right to arbitrate, the Court may use section 37 of the Supreme Court Act 1981 to grant this relief, commenting that "it would seem ... to be the antithesis of the principles of ... [the Arbitration] Act for this court, in such circumstances, to refuse, as a matter of jurisdiction or principle, a request for assistance in the form of an anti-suit injunction". It confirmed that there is no jurisdiction to grant such relief under section 44 of the Arbitration Act 1996 which is concerned only with ongoing or prospective arbitral proceedings. Furthermore, the relevant Civil Procedure Rules regarding the granting of permission to serve proceedings out of the jurisdiction were satisfied even where the proceedings in question related to a claim for an anti-suit injunction under section 37. Regarding the Kazakhstan Supreme Court decision that the arbitration agreement was void or contrary to public policy, the Court of Appeal concluded that the English courts were not bound to recognise or enforce this decision and that in any event, the Kazakstan Supreme Court had misconstrued its terms.

Click here for the judgment on Bailii

Civil procedure

Expert witness immunity from civil suit abolished

Jones v Kaney (2011)

In a landmark judgment, the Supreme Court has abolished the longstanding rule of civil immunity for expert witnesses such that (save in defamation cases) they are now exposed to being sued and held liable for negligence in relation to the performance of all of their duties in their capacity as an expert witness, rather than in respect of just their initial advice.

The expert retained in this case was a consultant clinical psychologist instructed to report on the psychological effects of a road traffic accident. Although her reports suggested the claimant was suffering from post-traumatic stress disorder or depression, a joint statement she signed expressed the view that the claimant's psychological reaction to the accident was no more than an adjustment reaction and that he had been deceitful when reporting his symptoms. The expert witness admitted she had signed the joint statement even though she did not agree with the contents. The court refused to permit any amendments to be made to the joint statement. After he had settled his claim for a sum allegedly lower than he would have received but for the expert's error, the claimant brought a claim for negligence against the expert. The key question was whether the expert could claim immunity from the claimant's suit in light of established case law that provides immunity in respect of work carried out in anticipation of giving evidence at trial.

The Supreme Court refused to presume that because the immunity existed, it should be maintained unless it could be shown to be unjustified. Rather, Lord Philips explained that "the onus lies fairly and squarely on the [expert] to justify the immunity behind which she seeks to shelter". After considering and dismissing the various arguments in favour of keeping the immunity, the Supreme Court decided that an expert witness should no longer enjoy immunity from suit in respect of the evidence they give in court or the views they express in anticipation of court proceedings.

The Court considered whether removing this immunity may mean that experts become reluctant to testify. However, the Court noted that professionals providing services customarily insure against the risk of being sued and removing the immunity from suit does not drastically alter the current state of play as the risk of disciplinary proceedings or wasted costs orders already provides a disincentive to experts to testify. Regarding whether experts will remain objective, the Court concluded that there is no conflict between an expert's duty to the court and the proper performance of the expert's duty to the client when giving evidence. Lord Phillips expressed the view that witnesses of integrity will always act accordingly and saw no reason why, in the proper performance of that duty, an expert witness should be concerned about a negligence claim. Finally, the Court held that the risk of vexatious and multiple claims against experts did not justify keeping the immunity.

NB: Although ground-breaking at first sight, the decision's practical effect may be limited given that even before this case, expert witnesses did not have immunity from suit in respect of their initial advice to clients and it is often this early advice that forms the basis of litigants' decisions whether to commence and pursue litigation.

Click here for the judgment on Bailii

Lamentable and unacceptable delay in handing down judgment

Grahame Henry Bond v Dunster Properties Limited & Ors (2011)

Where a judgment is handed down several months after the conclusion of a hearing, this may increase the chance that an appeal against it will be successful.

This case concerned an appeal against a judgment that had not been handed down until some 22 months after the conclusion of the hearing. The appellant claimed that the judge's findings of fact in relation to a contractual dispute between father and son were against the weight of the evidence.

The Court of Appeal commented that delays of this order were lamentable and unacceptable, and that they reflected adversely on the reputation and credibility of the civil justice system as a whole. The Court explained that, as a general rule, findings of fact are not automatically to be set aside because a judgment was seriously delayed. The Court will ask whether the judge was plainly wrong, a high test which takes account of the fact that trial judges normally have a special advantage in fact-finding, derived from their having seen the witnesses give their evidence. However in the case of a seriously delayed judgment, if the reviewing court finds that the judge's recollection of the evidence is at fault on any material point, then (unless the error could not be due to the delay in the delivery of judgment) it will order a retrial if, having regard to the diminished importance in those circumstances of the special advantage of the trial judge in the interpretation of evidence, it cannot be satisfied that the judge came to the right conclusion.

That said, the delay in this case in delivering the judgment did not render the judge's conclusions on the issues under appeal unsafe. The judge had made full and clear notes, and other than the delay there was no other basis to challenge his conclusions.

Click here for the judgment on Bailii

Construction law

Should builders be held liable for latent defects giving rise to pure economic loss?

James Andrew Robinson v PE Jones (2011)

This decision by the Court of Appeal clarifies that, in general, builders should not be held liable for defects of this sort unless they have specifically assumed responsibility for tortuous liability for pure economic loss. The decision also highlights that clauses excluding liability for such losses are to be regarded as "reasonable" under the Unfair Contract Terms Act 1977.

The appellant homeowner discovered a latent defect 12 years after the builder had built his house, in the form of a defective flue for a gas fire. He claimed in tort for economic loss and the question the court had to determine was whether or not a duty of care in tort was owed by the builder to the homeowner in these circumstances. The parties had entered a contract that expressly limited the builder's liability to that set out in the National House-Building Council (NHBC) standard form of agreement.

The Court of Appeal held that the existence of a building contract does not automatically give rise to tortious liability in relation to latent defects giving rise to pure economic loss, nor does its existence automatically prevent such a duty from arising. The key question is whether or not there was an assumption of responsibility by the builder towards the homeowner such as to give rise to such a liability. In this case there was no such assumption of responsibility because: (i) the NHBC contract set out a full specification, contained warranties as to the quality of the work and set out the homeowner's remedies in the case of breach. Accordingly, the contract provided the claimant with substantial, although not total, protection against defects and represented "a perfectly sensible allocation of risk between the parties"; (ii) there was no professional relationship between the parties (whereby, for example, the claimant was paying the defendant to give advice or to prepare reports or plans upon which the claimant would act, as might be the case with an architect or engineer); (iii) the contract contained an exclusion clause that excluded tortious liability for a defect causing economic loss, which was reasonable under the terms of the Unfair Contract Terms Act 1977.

Although reasons (i) and (ii) militated against there being a tortious liability for economic loss, the judge stated that the existence of the exclusion clause put the matter "beyond doubt", finding that the only sensible interpretation of this clause was that it excluded liability in negligence. Finally, at the time of contracting, both parties were represented by solicitors and "they must have known where they stood". In summary, the judge commented: "In my judgment it is not possible for the claimant to invoke the law of tort in order to impose liabilities upon the defendant which are inconsistent with the contract." 

Click here for the judgment on Bailii

Contract law

Court cannot amend contract simply because the parties failed to anticipate its consequences

ING Bank NV v Ros Roca SA (2011)

The Court of Appeal found that nothing had "gone wrong with the language" in a contract between two parties. Hence, it could not be retrospectively amended simply because the parties had failed to anticipate the consequences of the language they had chosen.

In this matter, the claimant bank provided financial services to the defendant company in connection with its negotiations for the purchase of another company. According to the contract between claimant and defendant, the bank's fees for its services were to be calculated by reference to "Enterprise Value/EBITDA 2006". "EBITDA" referred to the purchasing and target companies' earnings before interest, tax, depreciation and amortisation. The transaction took place towards the end of 2007, so the defendant argued that the EBITDA for 2007 should be used for the calculation, rather than the EBITDA for 2006. If the EBTDA for 2006 was used, fees of 7.3 million Euros were due to the claimant bank, as opposed to the much lower figure of 1.5 million Euros if the 2007 figure was used. The High Court agreed with the defendant that it was appropriate to use the 2007 EBITDA figure.

On appeal, Lord Justice Carnwath noted that the leading case on contractual interpretation, Chartbrook v Persimmon, provides that in order to retrospectively amend a contract, it should be clear that something has gone wrong with the language. Secondly, it should be clear what a reasonable person would have understood the parties to have meant. In this case, nothing had gone wrong with the language, as the reference in the contract to EBITDA 2006 was intentional. The mistake had been in the parties failing to anticipate the consequences of the contract. Hence the claimant's construction of the document was correct. The second part of the Chartbrook test was also not satisfied as it was not possible to say that using the 2007 EBITDA was a clear alternative interpretation.

Nonetheless, the Court of Appeal held that the claimant was estopped from relying on the clause because, in November 2007, it had provided the defendant with an estimate of 4 million Euros for the costs of the transaction and there was in fact a shared assumption between them that the claimant's fees would not be calculated in accordance with EBITDA 2006.

Click here for the judgment on Bailii

Entire agreement clauses must be drafted clearly and unambiguously to exclude liability for pre-contract misrepresentations

Axa Sun Life Services Plc v Campbell Martin Ltd and others (2011)

Parties wishing effectively to exclude liability for pre-contractual representations cannot assume that their entire agreement clause will work. Clear and unambiguous drafting is needed to avoid the court subsequently finding that the clause is not effective. This case is a warning to parties to ensure that they give their entire agreement clause proper consideration at the drafting stage to ensure that it has the desired effect. Any ambiguity is likely to be resolved in favour of the representee rather than representor.

AXA Sun Life Services (AXA) entered into a standard form contract with its appointed representatives. The contract contained an entire agreement clause stating that: "this Agreement ... constitute[s] the entire agreement and understanding between you and us in relation to the subject matter thereof. ... this Agreement shall supersede any prior promises, agreements, representations, undertakings or implications whether made orally or in writing between you and us relating to the subject matter of this Agreement but this will not affect any obligations in any such prior agreement which are expressed to continue after termination."

When the contract was terminated, AXA claimed for the reimbursement of sums allegedly owed by the representatives under the contract. In defence, the representatives alleged that AXA had made a number of misrepresentations inducing them to enter into the contract and that AXA had also breached alleged collateral warranties. In response, AXA relied on the entire agreement clause.

The Court of Appeal unanimously held that although the clause was effective to exclude the alleged collateral warranties, it did not exclude liability for misrepresentations of any kind. As a whole the clause was concerned with agreements rather than misrepresentations. Although the word "representations" did appear in the entire agreement clause it was surrounded by the words "promises, agreements ... undertaking or implications" which equate to forms of agreement, rather than misrepresentations. Therefore, "representations" referred to words of contractual obligation rather than a mere statement from one party to another. Moreover, the clause did not use traditional wording to avoid liability for misrepresentation, ie, it did not state that no representations had been made, that no reliance had been placed on any representations or that liability for misrepresentations was excluded. Hence, it could not be inferred that the parties intended to exclude liability for misrepresentation.

NB: The Court concluded that, although not strictly an exclusion/limitation of liability clause, an entire agreement clause could nevertheless be subject to the UCTA reasonableness test, although it will not automatically be deemed unreasonable as this is always a question of fact and degree. Here the clause was reasonable.

Click here for the judgment on Bailii

Retention of title clause rendered ineffective by implied authority to deal with the goods

Singh Sandhu v Jet Star Retail Ltd and others (2011)

This Court of Appeal decision demonstrates clearly that retention of title clauses in supply contracts may be rendered ineffective if there are other implied terms giving ongoing authority to the buyer to deal in the goods.

The claimant (Sandhu) supplied fashionable garments to the defendant retailer (Jet Star). The contracts between the parties contained a retention of title (ROT) clause providing that the claimant would retain ownership of the garments until it had received payment in full. The parties' agreement also provided that upon Jet Star's insolvency, Sandhu could require Jet Star not to sell the goods before it had paid Sandhu for them.

The defendant went into administration and its business, including the garments supplied by the claimant, was later sold as a going concern. The claimant admitted that, although the defendant had implied authority to sell and dispose of the goods in the ordinary course of business, this authority ceased once it became insolvent and entered administration. Hence it could claim damages for the value of the goods sold in the course of the sale of the business.

The Court of Appeal upheld the High Court's decision to reject Sandhu's claim. In reaching its decision it paid considerable attention to the background to the parties' contract. It noted that that the payment terms for the goods were generous. Only 5 per cent of their value had to be paid within 60 days of invoicing. The Court also noted that it is common in the fashion industry for stock to be sold by the retailer to make space for new lines of clothing. These were some of the background factors leading the Court to conclude that there was an ongoing implied authority from Sandhu permitting Jet Star to dispose of the garments supplied before paying for them, unless the claimant requested that it cease to do so. The Court concluded that this implied authority to deal in the goods continued even if the goods were supplied outside the "normal course of business" and even after Jet Star had become insolvent or gone into administration.

The Court rejected the notion that the ROT clause operated in the same way as a floating charge such that it was triggered upon insolvency so as to restrict dealings in the goods. The Court pointed out that unlike a floating charge, which crystallises upon the insolvency of the debtor and thereby provides the protection sought by it, here the protection provided by the ROT clause was contingent on a decision by the claimant to withdraw Jet Star's implied authority to deal with the goods. However, crucially, no steps had been taken by the claimant to require Jet Star to cease disposing of the goods, even after Sandhu had become aware of the appointment of the administrators.

Click here for the judgment on Bailii

What information is a creditor obliged to disclose to a guarantor?

North Shore Ventures Ltd v Anstead Holdings Inc and others (2011)

The Court of Appeal has answered this question and has helpfully clarified that whilst a creditor must disclose certain matters to the guarantors, unlike an insurance contract, this obligation does not extend to disclosing every matter which is material to the guarantee contract.

In this matter the creditor, North Shore Ventures Ltd (North Shore), loaned money to Anstead Holdings Inc (Anstead). Anstead's obligations under the loan were guaranteed. Anstead paid some of the loan monies into a Swiss bank account. However, due to an investigation by the Swiss authorities into possible embezzlement by Anstead's executives, the Swiss authorities successfully froze the account. Anstead then failed to make full repayment pursuant to the loan agreement and North Shore claimed against the guarantors. The guarantors argued that the guarantee should be set aside because North Shore had not disclosed that Anstead's executives were being investigated by Swiss authorities for embezzlement and that the executives' accounts had been frozen, leading to a risk that monies paid to Anstead would also be frozen.

The Court of Appeal decided that a creditor is obliged to disclose to guarantors any contract or other dealing between the creditor and the debtor which may change the position of the debtor from what the surety might naturally expect. However, the creditor is not obliged to disclose other matters relating to the debtor that might be material for the debtor to know. There was no duty to disclose facts or matters which were not unusual features of the contractual relationship. Unlike an insurance contract, a guarantee is not normally a contract of the utmost good faith.

The matters the guarantors alleged should have been disclosed in this case were not unusual features of the relationship between the creditor and the debtor and North Shore was not under a duty to disclose them. The Court rejected North Shore's argument that if a duty of disclosure did arise, the creditor is absolved from a duty to disclose if he reasonably believes that the surety already knows of the matter to be disclosed. The Court explained that if the creditor's belief turns out not to be well founded, the creditor, rather than the guarantor, should suffer the consequences of his failure to disclose.

Click here for the judgment on Bailii

Illegality

A company may be tainted by illegality even if it hasn't acted dishonestly or criminally

Les Laboratoires Servier and others v Apotex Inc and others (2011)

The High Court has held that a company may be prevented under the ex turpi causa or illegality rule from bringing a claim where it has acted wrongfully, even if its actions only amounted to a tort, rather than a crime or dishonest behaviour.

Here certain companies (the Patent Holders) were importing and marketing a drug in the UK under the umbrella of a Europe-wide patent. They also had a Canadian patent for the drug. Certain other companies (the Manufacturers) manufactured a generic version of the same drug in Canada and imported it into the UK. The Patent Holders commenced patent infringement proceedings against the Manufacturers and successfully obtained an injunction restraining the Manufacturers from importing and marketing the drug into the UK and gave a cross-undertaking in damages. The European patent was subsequently held invalid, although the Canadian patent was held to be valid. The Manufacturers claimed damages for profits they lost as a result of the injunction by reference to the cross-undertaking in damages given by the Patent Holders.

The High Court held that when considering the cross-undertaking it was entitled to look at wider considerations than just whether the injunction had been wrongly granted. The key factor was the Manufacturers' state of mind. If they knew the material facts and committed an unlawful act intentionally, the ex turpi causa rule was likely to apply such that they were not permitted to claim compensation for being wrongly prevented from infringing one patent (the European one) given that but for the injunction, they would have infringed another patent (the Canadian one). The unlawful act did not have to involve criminal or moral turpitude amounting to dishonesty.

NB: The Court added that there would be situations where a tort was insufficiently serious to engage the rule, but the degree of seriousness required would depend on the circumstances of the case.

Click here for the judgment on Bailii

Insolvency

A company's assets v liabilities position must have reached the point of "no return" before it is deemed insolvent

BNY Corporate Trustee Services Ltd v Eurosail-UK (2011)

The Court of Appeal considered when a company may be deemed insolvent as a result of being "unable to pay its debts" under section 123(2) of the Insolvency Act 1986. It concluded that this does not depend solely on whether the liabilities of a company exceed its assets.

A respondent (Eurosail) had issued interest-bearing notes to fund its acquisition of non-conforming mortgage loans. Eurosail used the loan interest to pay the interest due and as the mortgages were redeemed, it used the proceeds to pay off the notes. Under the terms of the notes, an enforcement notice could be served if an "event of default" occurred, which included Eurosail being unable to pay its debts within the meaning of section 123(2) of the Insolvency Act 1986 which states: "A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities." Certain of the note-holders brought proceedings alleging that an event of default had arisen and the question was whether Eurosail should be deemed unable to pay its debts within the meaning of section 123(2).

The Court of Appeal held that whether section 123(2) applied did not simply turn on whether the liabilities of a company exceeded its assets. A company's assets and liabilities, including contingent and future liabilities, had to have reached the point of no return. Although a company's audited balance sheet had force, it rarely represented the only true and fair view given that the figures are historic, conservative and based on accounting convention. The court had to form its own view as to whether the company had reached the point of no return. The asset and liability position revealed by Eurosail's most recent accounts was the appropriate starting position. However, even though Eurosail's liabilities exceeded its assets, considering that: (i) its assets were substantial; (ii) the relatively long period over which its liabilities had to be met; and (iii) and the potential for significant change in the differences between the value of Eurosail's assets and liabilities, the note-holders had not established that it had reached the point of no return.

NB: The existence of an option agreement, permitting note-holders to acquire the notes in the event that security for the notes was enforced (and which ensured that in the event of assets not being sufficient, the noteholders would not take steps to wind up Eurosail), would not have reversed any conclusion that the company was unable to pay its debts.

Click here for the judgment on Bailii

International law

Commercial Court enforces arbitral award in anticipation of contradictory judgment by Italian courts

West Tankers v Allianz SpA and Anor (2011)

The Commercial Court has held that it has the power to grant enforcement of an arbitral award under section 66 of the Arbitration Act 1996 in order to "trump" a potentially inconsistent judgment arising out of parallel court proceedings in Italy. This case follows on from an earlier decision of the European Court of Justice that the English High Court's anti-suit injunction ordering the discontinuance of the Italian Court proceedings, flew in the face of the provisions and "spirit" of the Brussels Regulation.

In brief, West Tankers' vessel had collided with a pier at a refinery while being chartered. The charterparty provided that all disputes were to be referred to arbitration in London and that English law was to apply. An arbitration was commenced and the arbitral tribunal declared that West Tankers was under no liability to the defendants in respect of the collision. After the arbitration had begun, the defendants brought proceedings against West Tankers in the Italian courts in respect of the incident. West Tankers was concerned that the defendants might obtain a judgment in their favour from the Italian court and seek to have that judgment recognised and enforced in England under the Brussels Regulation. It therefore applied to have the arbitration award enforced as a judgment, so that any subsequent Italian judgment in favour of the defendants would not, under the terms of the Regulation, be recognised in England.

West Tankers wished to enforce the declaration that West Tankers was under no liability to the defendants (whether in contract or tort or otherwise) in respect of the collision. The defendants applied to set aside the order granting leave to enforce the award and entering judgment in terms of the award, arguing that such leave could only be given under section 66(1) and (2) of the Arbitration Act 1996 if the judgment in terms of the award could be "enforced" by use of one or more of the available means of execution, such as a writ of fieri facias, a charging order or a third party debt order. This, they argued, was not the case with a declaratory judgment.

The Commercial Court found that the judge could make the section 66 order that he made. The purpose of section 66(1) and (2) was to provide a means by which the victorious party in an arbitration could obtain the material benefit of the award other than by suing on it. Where the award was in the nature of a declaration and there was no appreciable risk of the losing party obtaining an inconsistent judgment in a Member State which he might try to enforce within the jurisdiction, leave would not generally be granted, because the victorious party would not thereby obtain any benefit that he did not already have by virtue of the award. Where, however, the victorious party's objective in obtaining an order under section 66(1) and (2) was to establish the primacy of a declaratory award over an inconsistent judgment, the court would have jurisdiction to make a section 66 order, because to do so would be to make a positive contribution to the securing of the material benefit of the award. It was enough for the party seeking to enforce the award to show that he had a real prospect of establishing the primacy of the award over an inconsistent judgment.

Click here for the judgment on Bailii

High Court grants "anti-arbitration" injunction in support of UK court proceedings

Claxton Engineering Services Ltd v TXM Ola-J-Es Gazkutato KFT (2011)

An unusual decision in which the High Court saw fit to grant an injunction against the continuation of arbitration proceedings in Hungary, on the ground that the circumstances were sufficiently exceptional to justify such an order.

The applicant (Claxton), applied for an injunction restraining a Hungarian company (TXM), from pursuing an arbitration in Hungary. Claxton had sold engineering equipment to TXM. When Claxton issued English court proceedings following TXM's non-payment, TXM applied for a stay of these proceedings on the basis that the parties' contract contained a Hungarian arbitration clause or that, pursuant to article 2 of the Brussels Regulation, it had to be sued in Hungary. TXM commenced arbitration proceedings in Hungary and Claxton claimed that these proceedings were brought in breach of the English exclusive jurisdiction clause in the parties' contract.

The High Court decided that it had jurisdiction to issue an "anti-arbitration" injunction restraining the pursuit of the Hungarian arbitration proceedings. It clarified that the ECJ's judgment in the West Tankers (2010) case which disallows anti-suit injunctions against other Member States, under the terms of the Brussels Regulation did not apply here given that the injunction was not directed at the courts of another Member State, but at arbitration proceedings which fell outside the remit of the Brussels Regulation. However, the Court emphasised that it would not grant such injunctions lightly and the circumstances needed to be sufficiently exceptional before it would be prepared to do so, especially where the proceedings against which the injunction was directed were foreign.

In order to establish exceptional circumstances, it would usually be necessary to establish that the applicant's legal or equitable rights were infringed or threatened by a continuation of the arbitration or that its continuation would be "vexatious, oppressive or unconscionable". This test was satisfied here since there was no arbitration agreement between the parties and secondly, the parties had clearly already agreed upon the English courts having exclusive jurisdiction. The Court was supportive of the parties' agreement to have their disputes resolved in the courts of England & Wales (and not to arbitrate) and went so far as to state that even if the circumstances were not sufficiently "exceptional" a "broader approach was justified" here making it appropriate to enforce that agreement by way of injunctive relief.

Settlement

Court of Appeal deems a "time-limited" settlement offer to be a Part 36 settlement offer

C v D (2011)

Adopting a pragmatic approach, the Court of Appeal has reversed the High Court's ruling earlier this year that a Part 36 offer which is expressed to be limited in time but otherwise intended to comply with the formal requirements of Part 36, may be construed such that it is an effective "Part 36" offer. This signals a shift away from interpreting Part 36 strictly and will offer litigants comfort that the courts have a degree of discretion to deem an offer compliant with Part 36, even if its wording fails to comply perfectly with the provisions of Part 36.

The claimant and defendant had entered into an agreement for the sale and purchase of land. The defendant subsequently withdrew from the agreement and the claimant sought specific performance of the contract or alternatively, damages for breach of contract. The claimant sent an offer of settlement to the defendant labelled "Offer to Settle under CPR Part 36". The letter stated that it was open for 21 days and that it was intended to have the consequences set out in Part 36 of the CPR and settle all matters raised in the proceedings. The offer was not accepted within the 21-day period and litigation continued. A few weeks before the scheduled trial date, the defendant purported to accept the offer on the basis that it was still open for acceptance as there had been no formal withdrawal of it. The claimant applied for a declaration that the offer was no longer open for acceptance.

The Court of Appeal commented that for a Part 36 offer to have effect in terms of costs consequences after trial, it had to be an offer which had not been withdrawn, ie, one that "remained on the table". There was no room for an offer that was neither withdrawn before/after the relevant period but which lapsed as a matter of its own terms. Hence the Court confirmed that a time-limited offer and a Part 36 offer were inconsistent.

However, nevertheless, it was entirely feasible and reasonable to read the words "open for 21 days" to mean that there would be no attempt to withdraw the offer within those 21 days and operated as a warning that after those 21 days, the offer may be withdrawn. Lord Justice Rix stated that: "It is not ... blindingly obvious that an offer which is ... open for a certain period cannot be accepted after that period has expired."

The Court held that such a construction would save the Part 36 offer as a Part 36 offer and give the clarity and certainty that both Part 36 and the offer letter aspired to. It would leave the offeror free to withdraw the offer immediately upon expiry of the stated period, or to let it roll on for as long as it wished. At the same time it would assure the offeree that it had 21 days to consider what it wanted to do, but was at risk if it had not accepted within that period. The Court was influenced by the policy objective of understanding the words used in such a way that the offer was effective rather than ineffective.

Despite interpreting the offer in this way, the Court emphasised that if a claimant actually wished to make a genuinely time-limited offer in the sense that the offer was to lapse of its own accord at the end of a stipulated period, such an offer could not be made as a Part 36 offer. However, where an offer is presented as a Part 36 offer and otherwise complies with its form it would not readily be interpreted in a way that would prevent it from being a Part 36 offer. Finally, the Court reminded that if an offeror wanted to bring his Part 36 offer to an end, so that it could not be accepted, he must serve a formal notice of withdrawal.  

Click here for the judgment on Bailii

Settlement agreement offended the anti-deprivation principle

Folgate London Market Ltd v Chaucer Insurance PLC (2011)

Parties seeking to agree that an obligation to make a payment will disappear in the event of the payee's insolvency may find the relevant clause struck down by the courts, on the basis that such an agreement effectively deprives the insolvent entity's creditors of the benefit of the payment.

A Mr Mayhew made a claim for personal injury against Milbank Trucks Ltd (Milbank). When Milbank's insurers declined to indemnify Milbank in respect of the claim, Milbank sued its brokers, alleging negligence. The brokers entered into a settlement agreement with Milbank on the basis that they would provide it with an indemnity in respect of some of Mr Mayhew's claim.

Clause 11 read: "In the event that Milbank is placed in liquidation, administration [etc] ... prior to the date upon which any payment by [the brokers] under clause 4 is due to be made, Milbank's right to an indemnity from [the brokers] will cease with immediate effect ..."

After Milbank was placed in administration, the brokers relied on this clause to avoid providing the promised indemnity. The insurers to whom Milbank's interest in the settlement agreement was transferred, sought to enforce it on the basis that the clause offended the "anti-deprivation principle", ie, the principle that a company cannot enter into a contract if its effect is to deprive the company's creditors of the benefit of an asset of the company upon the company's insolvency. The High Court agreed with this argument, deciding that clause 11 was invalid.

On appeal, the Court of Appeal supported the High Court's decision, holding that the clause 11 did indeed infringe this principle since the condition for non-payment was insolvency rather than something unrelated to the insolvency of the asset holder. The Court rejected the argument that the agreement was not an asset available to creditors but a chose in action in respect of which the creditors never had a right. After close examination, the Court commented that such a clause had no commercial purpose but rather was a "collateral device to avoid the consequences of the insolvency legislation". Moreover, contracting out of insolvency legislation in this way was contrary to public policy.

Click here for the judgment on Bailii

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