Case Review: Final Quarter of 2006 (Dispute Resolution)

Welcome to our final Case Review of 2006. Once again we have selected a few of the recent cases that may have a practical impact on the way in which our clients conduct their businesses.

The Court of Appeal set out guidelines in the Dadourian case concerning worldwide freezing orders (mentioned below). We also cover some interesting decisions on directors' liability, pre-action admissions and the scope of claims to privilege. In addition we refer to the House of Lords decision in Freakley concerning priority in an insolvency. Finally we report on the latest development in the ongoing Ansol case (in which the firm is acting) relating to jurisdiction and computer hacking.

If you have any comments on the contents of our newsletter, or if there are any other issues that you would like to raise, please do let me know.

ABB sought to challenge an arbitration award on several grounds for serious irregularity under s68 of the Arbitration Act 1996, i.e that the arbitrators had reached a decision on an issue which had never formed part of Hochtief's case, that the arbitrators had failed to deal with an allegation of bad faith and that a decision that ABB had acted in bad faith had been reached unfairly. The court rejected ABB's application. Tomlinson J there said that there was serious irregularity only if what had occurred was too far removed from what could reasonably be expected from the arbitral process to be justified. It is not enough for the court to consider that it would have done things differently or provided greater explanation for its decision.

England and India are signatories of the New York Convention 1958 which provides for reciprocal enforcement of arbitration awards. The general principle in the Convention is that, unless there are exceptional circumstances, the enforcing court must treat an award as valid and binding. The Arbitration Act 1996 implements the Convention in England and s103 sets out grounds for a court refusing to enforce an award. In this case, the Court of Appeal concluded that one of the grounds had been made out as the party against whom the arbitration was made had never been given an opportunity to present his case and this breached the rules of natural justice. The Court of Appeal went on to say that the discretion to refuse to enforce an award is strictly limited (see Dardana v Yukos Oil [2002] EWCA Civ 543 [2002] 2 Lloyd's Rep.261), although this case was exceptional enough for the order refusing to enforce an award to be upheld.

The parties agreed there would be an appeal from an arbitrator's award under s69 of the Arbitration Act 1996. Although there is a line of authority that usually the only admissible evidence in an appeal is the award itself, Jackson J concluded that the court should also receive any document referred to in the award which the court needs to see to determine a question of law arising out of the award (in this case, correspondence between the parties which the arbitrator did not reproduce in his award). He also held that the general principle of non-intervention in the Act did not apply to consensual appeals. With regard to deference to the arbitrator's decision on questions of law: 1) the court should read an arbitral award as a whole and in a fair and reasonable way; and 2) where the arbitrator's experience assists him in determining a question of law, some deference will be accorded to the arbitrator's decision, unless the court is satisfied the arbitrator has come to the wrong answer. Jackson J concluded that the arbitrator had come to the right conclusion and he denied he had jurisdiction to review factual questions which are dressed up as questions of law.

S57 of the Arbitration Act 1996 allows a party to apply to the arbitrator to correct an award (or make an additional award) if there has been an error. There is a 28 day deadline laid down in s57. After that deadline, an application can be made under s79 for an extension of time, where the court is satisfied that "a substantial injustice would otherwise be done". In this case, Gloster J discussed the correct approach to the extension of time under s79. Relevant factors included: the length of the delay and whether the applicant had acted reasonably; whether the respondent or arbitrator contributed to the delay; whether the respondent suffered irremediable prejudice; whether the arbitration had continued during the period of delay and if so what impact that might have on e.g. costs; and the strength of the application. On the facts of the case, time for making an s57 application was extended retrospectively.

S44 of the Arbitration Act 1996 permits an English court to grant interim relief in support of an arbitration and is one of the few sections which applies to any arbitration, regardless of its seat (most of the Act is confined to arbitration with a seat in England). In this case an injunction preventing a sale share had been granted by Langley J in aid of an ongoing arbitration in Nigeria. Morison J discharged the injunction and held it should never have been granted. One of the reasons for his decision was that although s44 applied to arbitrations with a seat either inside or outside England, the court would not exercise its power in support of a foreign arbitration unless there was some connection between this jurisdiction and the arbitration – in the present case there was no basis for intervention.

The Appellant appealed against the Judge's decision ordering him to pay a sum to the Respondent builder in respect of work done at the Appellant's premises. The disagreement centred on the contents of a partly oral and partly written agreement. The court considered that the principals of construction set out in Whitworth Street Estates Limited v Miller [1970] AC 583 do not apply to oral contracts. The scope of an oral or partly oral contract is a question of fact. The court can therefore consider evidence of the circumstances subsequent to the making of the contract as this may help to determine the parties' intention. In this case, the judge was wrong to exclude subsequent evidence and the order was set aside and the case remitted for rehearing, with the court suggesting that the parties should attempt to resolve the dispute without further intervention of the court.

The Defendant applied to strike out the claim of the Claimant, or alternatively, sought summary judgment. The Claimant alleged that the Defendant, as a director of a company called CRL procured CRL to breach a collaboration agreement with the Claimant and that in doing so the Defendant had been acting in his own interests and in that of CRL's holding company (of which he was a substantial shareholder). The Defendant submitted that he was, at all times, acting in his capacity as director of CRL and therefore could have no liability for the alleged breach of contract between CRL and the Claimant.

The court held that where a director was acting bona fide and within the ambit of his authority it would be contrary to the principal of limited liability, if the director was held liable for inducing a breach of contract on the part of the company in the absence of additional features such as conspiracy or dishonesty. Where a director acted outside the scope of his authority or ceased to act bona fide he could be liable for procuring his company to commit a breach of contract. However, on the facts of this case there was no reasonable prospect of the Claimant successfully establishing such a case at trial.

The courts have power to grant injunctions in support of arbitration proceedings as well as judicial proceedings, under s44(2)(e) of the Arbitration Act 1996, in circumstances where the arbitrators do not themselves have the power to make the necessary order (whether arbitrators can themselves issue freezing injunctions is a matter of debate, but the Act does not expressly provide for this). This case laid down the following guidelines for the exercise of the court's discretion to enforce a worldwide freezing order: the grant of permission should be just and convenient, all the relevant circumstances and options needed to be considered; the interests of the applicant should be balanced against the interests of other parties; permission should not normally be given in terms that would enable the applicant to obtain relief in the foreign proceedings that was superior to the relief given by the worldwide freezing order; the evidence in support of the application for permission should be all the information necessary for the judge to reach an informed decision; the standard of proof as to the existence of assets was a real prospect; there must be evidence of a risk of dissipation of the assets in question; and normally the application should be made on notice to the respondent.

Whether demand under a guarantee constituted a demand under the Mortgage
Angeli Kotonou and Deborah Kotonou v National Westminster Bank Plc [2006] EWHC 1021 (Ch)

The First Claimant guaranteed indebtedness of a group of companies to the Defendant. The maximum amount recoverable under the guarantee was £425,000 plus any interest on amounts demanded under the guarantee from demand until payment. As security for obligations under the guarantee the Claimants had executed a legal mortgage of their matrimonial home. The Defendant made a formal demand for repayment, but claimed that previous correspondence amounted to demands and therefore interest had already begun to run.

The court held that a demand to the first Claimant under the guarantee did not also constitute a demand under the mortgage. The correspondence did not amount to a demand at all, neither under the guarantee nor the mortgage.

As to costs, the fact that the Defendant had to incur costs in relation to the guarantee before it could proceed with enforcement under the mortgage did not make them costs incurred in relation to the mortgage. They were costs incurred in relation to enforcement of the guarantee.

Insolvency Whether right to reimbursement of claims handling expenses incurred post administration has statutory priority under the Insolvency Act 1986
Freakley & Anor v Centre Reinsurance International Co & Ors [2006] UKHL 45

In 2001, administrators were appointed over T&N Ltd for purposes including the approval of a scheme of arrangement under s425 of the Companies Act 1985. The company had the benefit of an asbestos liability policy which provided that on an "insolvency event" (including the presentation of an administration petition), insurers had the exclusive right to handle and defend claims. It is accepted that in handling claims the insurers act as agents of the company and are entitled to reimbursement of their expenses.

The issue to be determined by the House of Lords here was whether that right to reimbursement of expenses took priority, by virtue of s19(5) of the Insolvency Act 1986, over other costs of the administration, the floating charge and the unsecured creditors of the company. S19(5) relates to "any sums payable in respect of debts or liabilities incurred, while he was administrator, under contracts entered into...in the carrying out of his...functions". The issue was therefore whether liabilities for claims handling expenses incurred by the insurer are properly to be treated as liabilities incurred by the administrator "in carrying out his functions". The House of Lords, restoring the decision of Blackburne J and overturning the Court of Appeal, ruled that, although the insurers were pursuing sensible business objectives, the expenses of claims handling "have little to do with the purposes of the administration". There was no need to extend the priority set out in s19(5) "to expenditure which neither the administrator nor the court specifically approved". Hence the insurers' right to reimbursement did not take priority over the rights of other unsecured creditors etc.

The Claimant appealed against a decision ordering him to give security for the Defendant's costs in a libel action. The order had been obtained in part on the basis that the trial judge had accepted that the Sudanese judiciary was not independent and would not enforce any order for costs made after trial in England against the Claimant because of his connection with the Sudanese government and because the subject matter of the case would offend the Sudanese government.

It was submitted by the Claimant that evidence from a Sudanese lawyer amounted to a general attack on a foreign country's judiciary and, on the grounds of international comity, could not be entertained by the English courts. The Court of Appeal said that, although it accepted that any court is always reluctant to pass judgment on the judiciary of a foreign country in the context of jurisdictional disputes, it doubted if there was any general principle that the English courts could never do so. Properly attested examples of ineffectiveness or partiality should however be given (in this case, the Sudanese lawyer's advice, although probably insufficient in itself to prove an order for costs would be unenforceable, went unchallenged). Accordingly, the appeal was dismissed.

The question raised in this case was whether the court had jurisdiction to enter judgment for a Claimant in reliance on an admission made by a Defendant before the commencement of the action, which the Defendant subsequently withdrew.

The correct way of bringing this matter before the court was under CPR 3.4, to strike-out the Defence or part of it as an abuse of process or as being otherwise likely to obstruct the just disposal of the case. For a Claimant to show that the withdrawal of an admission would amount to an abuse of the process of the court, it would usually be necessary to show that the Defendant acted in bad faith. There was before the court a statement from Stoke-on-Trent City Council providing a full explanation as to why it had decided to withdraw the pre-action admission. There was no evidence of acting in bad faith. In order to show that the withdrawal of a pre-action admission is likely to obstruct the just disposal of the case, it will usually be necessary for the Claimant to show that he will suffer some prejudice which will affect the fairness of the trial. The only prejudice that the applicant could demonstrate was disappointment, the court held that such feelings could not be said to obstruct the just disposal of the case.

The Applicant applied for the pre-action disclosure of certain documents relating to a building project undertaken by the Respondent construction company. The court found that pre-action disclosure is more likely to be appropriate in some cases than in others. The court must also consider whether pre-action disclosure will facilitate fairness, for example, if it will enable the statements of case to be better focused, therefore avoiding any delay and costs which may be caused by amendment following normal disclosure. In this case there was a real prospect that pre-action disclosure might enable the Applicant to focus his case on two critical issues. However, the order sought would cause cost and delay greater than any time or cost likely to be saved by an amended pleading following such pre-action disclosure. As a matter of discretion the order as sought was not made. However, a lesser order limited to hard copy documents in the Respondent's solicitor's hands was made as that lesser order would offer a real prospect of achieving the objective of more focused proceedings.

This case involved a refinancing by NatWest (the Defendant) of a debt owed in part to the Claimant. The Defendant argued that the Claimant had withheld information which, had it known, it would not have entered into the refinancing. The Claimant alleged this information was privileged. The dispute here concerned the scope of legal professional privilege. The Claimant argued that the Defendant had failed to apply the right test for legal advice privilege, which did not apply to preparatory work not constituting communications between lawyer and client. The Defendant responded that the privilege would cover documentation which was directed "at the production of a report which was designed to provide legal advice to the Defendant".

Simon J of the Commercial Court agreed with the Claimant - in order to attract legal advice privilege, a document must pass between the client and its legal advisors (note that the document in question was produced before proceedings were commenced or contemplated). However, the court stopped short of inspecting the documents itself (that was to be a measure of last resort only) - instead the Defendant's solicitors were ordered to make an affidavit verifying the claim for privilege.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.