UK: Commercial Dispute Resolution Newsletter - December 2014


Dislike and mistrust between parties should not prevent them mediating

Garritt-Critchley & Ors v Ronnan & Anor (2014)

This High Court decision penalising a party in costs for refusing to mediate, demonstrates that refusing mediation is a high risk strategy. Although not compulsory, the courts remain keen on mediation and other ADR and parties should always bear this in mind when litigating.

The dispute was over whether or not a binding agreement had been reached. In the letter before claim, the claimant (Garritt-Critchley) indicated that it would be prepared to resolve the dispute via ADR. The defendants (Ronnan) indicated that they did not wish to engage in mediation and subsequently, that they were aware of the possible penalties for unreasonably refusing mediation, but that they were extremely confident of their position. They continued to refuse to mediate, even following directions to trial which encouraged the parties to do so. Just before judgment, following a four day trial, Ronnan decided to accept, out of time, the claimant's Part 36 offer requiring Ronnan to pay GBP 10,000 and standard costs. The claimants then applied for their costs (of the whole action) to be paid by Ronnan on the indemnity basis rather than the standard basis, given its unreasonable failure to mediate.

The High Court ordered Ronnan to pay Garritt-Critchley's costs on the indemnity basis, finding that its consistent refusal of mediation was wrong. The leading case, Halsey v Milton Keynes General NHS Trust (2004) stated that "most cases are not by their very nature unsuitable for ADR". The sort of case where mediation might, exceptionally, be inappropriate, was where it concerned the resolution of a point of law, where a binding precedent would be useful or where injunctive or other relief was required.

Here, however, the claim was suitable for mediation. It essentially involved a question of fact and Ronnan could not be sure that their position on the facts would be accepted. It was also a case with a wide range of possible quantum scenarios if Ronnan lost and therefore mediation should have been considered as it would have given them room to manoeuvre. The Court remarked that: "Parties don't know whether in truth they are too far apart unless they sit down and explore settlement. If they are irreconcilably too far apart, then the mediator will say as much within the first hour of mediation. That happens very rarely in my experience."

The fact that there might be considerable dislike and mistrust between parties did not prevent them mediating. The Court stated: " is precisely where there may be distrust or emotion between the parties ...where the skills of a mediator come in most usefully. They are well trained to diffuse emotion, feelings of distrust and other matters in order that the parties can see their way to a commercial settlement." In any event, the costs of mediation would have been far less than the costs of the trial. Had the parties met for sensible negotiations or mediation at the last time that Ronnan was invited to do so by the claimants, the claimants' costs were around GBP 65,000. Those costs grew to around GBP 161,000.

Agreement to negotiate in good faith within a limited period held enforceable

Emirates Trading Agency v Prime Minerals (2014)

This case is significant because it creates an exception to the general principle that an agreement to negotiate is unenforceable. The High Court decided that it could enforce a clause in the parties' agreement requiring them to negotiate in good faith for four weeks before commencing arbitration proceedings.

The dispute resolution clause in the agreement entered into between the parties contained the following wording: "In case of any dispute....the Parties shall first seek to resolve the dispute... by friendly discussion... If no solution can be arrived at between the Parties for a continuous period of 4 (four) weeks, then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration".

The parties did have a dispute and arbitration proceedings were commenced. The claimant applied to court for an order under section 67 of the Arbitration Act 1996 that the tribunal lacked jurisdiction to determine the claim because the condition precedent set out in the clause above (i.e. a requirement to engage in time limited negotiations) had not been fulfilled and hence arbitration could not take place.

The High Court reviewed prior case-law to the effect that an agreement to negotiate is unenforceable on the basis that it lacks certainty, but concluded that prior case-law could be distinguished because of the time-limited nature of the provision here. The Court held that: (i) the provision was complete as no essential term was lacking; (ii) an obligation to seek to resolve disputes by friendly discussions imports an obligation to do so in good faith; (iii) a time limited obligation to seek to resolve a dispute in good faith should be enforceable; (iv) an agreement to seek to resolve a dispute by discussion or negotiation does not prevent the parties considering their wider commercial interests; and (v) an argument that a party has not acted in good faith is not too uncertain. It may be difficult to establish, but an example would include a party refusing to negotiate at all.

The High Court remarked that: "good faith connoted both honesty and the observance of reasonable commercial standards of fair dealing. Where a party clearly fails to honour such standards of conduct judges and commercial arbitrators will have no particular difficulty in recognising and identifying such failures".

The High Court went on to distinguish this case from the Court of Appeal decision in Sulamerica v Enesa Engenharis: "Since the obligation in that case was to seek to have the dispute resolved amicably through mediation rather than by friendly discussions in good faith I have considered whether this is a material distinction given that mediation is merely a supervised form of discussion or negotiation with a view to resolving a dispute. However, I consider that it is a material distinction because in the absence of a named mediator or an agreed process whereby a mediator could be appointed the agreement was incomplete. An agreement to seek to resolve a dispute by friendly discussions in good faith is not incomplete".

The Court went on to find that the condition precedent had been satisfied here. The Court did not believe it was necessary to show that the friendly discussions lasted for four continuous weeks but even if this was necessary, it held that that condition had been met: "Although no meetings lasted for four continuous weeks, the discussions can fairly be regarded as doing so".


Refusal of anti-suit injunction as the target of the injunction was not bound by UK arbitration clause

(1) Rochester Resources Ltd (2) Viktor F Vekselberg (3) Leaonard v Blavatnik v (1) Leonid L Lebedev (2) Coral Petroleum Ltd

This decision is a helpful reminder that parties should draft arbitration clauses as clearly as possible. Here, the arbitration clause was not drafted clearly enough, resulting in a key party not being bound by it.

Messrs Vekselberg, Blavatnik and Lebedev all held shares in OGIP, which in turn held shares in an oil company, TNK. OGIP issued a promissory note to Coral Petroleum Ltd, for USD 200 million which Mr Lebedev claimed was security for his 15% interest in OGIP. Messrs Blavatnik and Vekselberg sought to buy out his 15% interest in OGIP (and thereby his indirect interest in TNK). In light of this, OGIP's subsidiary, Rochester Resources Ltd, entered an agreement in 2003 with Coral that Rochester would buy the promissory note and pay USD 600 million to Mr Lebedev. This agreement required the arbitration of disputes in England.

A dispute subsequently arose between the parties. Mr Lebedev commenced proceedings in the Supreme Court of New York against Mr Vekselberg and Mr Blavatnik, who applied to the Commercial Court for an injunction to prevent Mr. Lebedev from pursuing those proceedings on the basis that he was bound by the arbitration clause in the 2003 agreement. Their application was under section 37 of the Senior Courts Act 1981 or section 44 of the Arbitration Act 1996.

The Commercial Court declined their application for an anti-suit injunction, deciding that Mr Lebedev was not bound by the arbitration agreement since he was not a party to it. The Court found that the parties had made it clear that the arbitration clause covered disputes arising "between the parties" and held that had they not included these words, it might have been easier to conclude that the arbitration clause was also intended to apply to Mr Lebedev."

The Court remarked that it would have been much neater if the arbitration clause had been drafted to include disputes arising between Mr Lebedev, Mr Vekselberg and Mr Blavatnik. Although the promissory note at the core of the agreement was clearly Mr Lebedev's property and the 2003 agreement was clearly negotiated by Mr Lebedev, the Court stated that "there are limits as to what a Court can properly do to improve a carefully drafted and (at least in this respect) reasonably clear written agreement". In light of this, the Court concluded that the defendants had failed to establish with the requisite high degree of probability that Mr Lebedev was bound by the arbitration clause.


The Court of Appeal clarifies Mitchell and signals an end to "zero tolerance"

Denton & Ors v White & Ors; Decadent Vapours Ltd v Bevan & Ors; Utilise TDS Ltd v Cranstoun Davies & Ors (2014)

In this landmark decision on three conjoined appeals, the Court of Appeal took the opportunity to clarify the guidance it gave at the end of 2013 in Mitchell regarding applications for relief from sanction. It highlighted that, even with serious or significant breaches committed for no good reason, relief is not automatically to be denied. Instead, courts must consider "all the circumstances of the case" when deciding whether or not to grant relief. The more serious or significant the breach, the less likely it is that relief will be granted (unless there is a good reason for it). Whilst making their judgment, courts must give factors (a) and (b) in CPR 3.9(1) particular weight.

In each of the appeals, one or other party had sought relief from sanctions pursuant to CPR 3.9. The respective judges had purported to apply the Mitchell guidance, but in each case the parties had been treated inconsistently. Allowing all three appeals, the Court held that the guidance given in Mitchell remained substantially sound, but needed to be clarified. It decided that, in future, judges should adopt a three-stage approach. Firstly, they must identify and assess the seriousness or significance of the relevant failure. If a breach is not serious or significant, relief should usually be granted and there is no need to spend much time on the second and third stages. The second stage involves considering why the failure or default occurred. Thirdly, the court should consider all the circumstances of the case in order to deal justly with the application.

If the breach was not serious or significant i.e. it was trivial, then relief is likely to be granted. If however, the breach was serious or significant, the burden falls on the breaching party to persuade the court to grant relief. If the reason for the serious breach is good e.g. the party or solicitor were in an accident, the court will be likely to grant relief. If there is no good reason for a serious or significant breach, it is not automatically prevented from attracting relief. Rather, the more serious or significant the breach the less likely it is that relief will be granted (unless there is a good reason for it). Factors (a) and (b) in CPR 3.9 must be given particular weight at this stage. Relevant factors vary per case and the Court commented that "the promptness of the application will be a relevant circumstance to be weighed in the balance along with all the circumstances. Likewise, other past or current breaches of the rules, practice directions and court orders by the parties may also be taken into account as a relevant circumstance."

The Court of Appeal disapproved of uncooperative behaviour between litigants, explaining that litigants should not waste money on satellite litigation where the failure is not serious or significant or where a good reason is demonstrated, or where it is otherwise obvious that relief from sanctions is appropriate. It stated: "It is as unacceptable for a party to try to take advantage of a minor inadvertent error, as it is for rules, orders and practice directions to be breached in the first place."

The Court emphasised that obstructive behaviour could result in the offending party not only paying the costs of the application for relief from sanctions but also suffering a reduction in its costs recovery when the court considers this under CPR 44.11 at the end of the case (assuming it wins). If it ultimately loses, its conduct could mean that it could be ordered to pay indemnity costs.

Applications for extensions of time before time limit expires are not applications for relief from sanctions

Hallam Estates & Anor v Baker (2014)

This Court of Appeal decision helpfully clarifies that applications for extensions of time made before the relevant deadline expires, even if the hearing of the application occurs after the deadline expires, need not be treated as though they are applications for relief from sanctions. The decision also emphasises that legal representatives have a duty to agree to reasonable extensions of time which neither imperil future hearing dates nor otherwise disrupt the conduct of the litigation. Moreover, courts are advised not to refuse to grant reasonable extensions of time.

The claimants (Hallam) applied for a time extension following the defendant (Baker) refusing to agree one. The application was made on the day the deadline expired, but was not stamped by court staff until a day later. The extension was granted and Baker unsuccessfully applied for that order to be set aside. On appeal, the court found that Hallam's application had been out of time and was effectively an application for relief from sanctions, which should have been refused.

The Court of Appeal (led by Lord Justice Jackson) allowed Hallam's appeal. It found that Hallam's application for an extension was made before the expiry of the relevant deadline. Lord Justice Jackson stated, "....the costs judge was dealing with an in-time application. This was a straightforward application to extend time under rule 3.1(2)(a). The principles concerning relief from sanctions which the Court of Appeal enunciated in Mitchell v News Group Newspapers Ltd are not applicable".

The Court held that Hallam had made a reasonable application for an extension of time, which did not imperil any future hearing dates or otherwise disrupt the proceedings. The lower court's rejection of Baker's application to set aside the extension, for which the court gave sensible reasons, was a proper exercise of the court's case management powers. When Hallam asked Baker to agree an extension of time, Hallam had given sensible reasons and Baker should have agreed. Given Baker's own delays, Baker should not have objected to granting a modest extension.

The Court of Appeal observed that under newly amended CPR 3.8, parties may agree a time extension of up to 28 days without seeking court permission, provided that it did not put at risk any hearing date. Therefore legal representatives are not in breach of any duty to their client if they agree to a reasonable extension of time which neither imperils future hearing dates nor otherwise disrupts the conduct of litigation. On the contrary, by avoiding the need for a contested application they were furthering the overriding objective and also saving costs. Similarly, the Court of Appeal held that the courts should not refuse, and CPR 1.1(2)(f) did not require them to refuse, to grant reasonable extensions of time in such circumstances.

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