July 2015

Litigation and Dispute Resolution Review EDITORIAL Readers may recall that in 2013 Leggatt J’s decision in Yam Seng v ITC that good faith applies to “relational” contracts caused a stir in legal circles. Since then however, good faith arguments advanced before the English courts have been largely unsuccessful. In this edition of the Litigation Review, we cover MSC Mediterranean Shipping Company SA v Cottonex Anstalt, where Mr Justice Leggatt held that the right of an innocent party to elect whether to terminate a contract for repudiatory breach or affirm it and claim damages is not unfettered. His Lordship held that this right must be exercised in good faith, the test being Sarah Garvey “essentially the same” as that used when exercising a contractual discretion. Any party Counsel faced with a repudiatory breach of contract should be alive to this decision (see Contract). Litigation – London Also in the field of contract, we cover Saint Gobain Building Distribution v Hillmead Joinery (Swindon) Ltd where the court found that extensive and significant exclusion clauses in a standard terms agreement between businesses were not reasonable and thus contrary to the Unfair Contract Terms Act 1977 (see Contract). As Rainer Evers notes (at page 14 of the Review), this decision serves as a warning to those transacting on standard terms. Extensive exclusion wording may have unintended consequences – excluding nothing.

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Contact Tel +44 20 3088 3710 [email protected] Contributing Editor: Amy Edwards Senior Professional Support Lawyer Contact [email protected]

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Contents Arbitration

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Arbitral award published after “inordinate delay” upheld: B.V. Scheepswerf Damen Gorinchem v Marine Institute sub nom The Celtic Explorer

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Effect of non-exclusive English jurisdiction clause and forum non conveniens waiver on application to stay English proceedings: Standard Chartered Bank (Hong Kong) Ltd & anr v Independent Power Tanzania Ltd & ors

Follow-on damages competition claim: jurisdiction issues: Cartel Damage Claims Hydrogen Peroxide v Akzo Nobel NV Case C-352/13

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Exclusion clauses ineffective in commercial contract: Saint Gobain Building Distribution v Hillmead Joinery (Swindon) Ltd

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Action for proprietary estoppel extended to intellectual property rights: Motivate Publishing FZ LLC v Hello Ltd

Public law

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Iranian bank entitled to recover damages for losses suffered as a result of unlawful Treasury restrictions: Mellat v HM Treasury

Right to affirm a contract after repudiatory breach fettered by good faith: MSC Mediterranean Shipping Company SA v Cottonex Anstalt

Transfer of receipts issued by commodities warehouse operator not valid delivery of goods for repo transactions: Mercuria Energy Trading Pte Ltd & anr v Citibank NA & anr

Jurisdiction issues in insurance dispute: Mapfre Mutualidad Compania De Seguros Y Reaseguros SA, Hoteles Piñero Canarias SL v Godfrey Keefe

Intellectual Property

Competing jurisdiction clauses in finance documents: Black Diamond Offshore Ltd & ors v Fomento de Construcciones y Contratas SA

Inadequate notice of warranty claim: IPSOS SA v Dentsu Aegis Network Ltd

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Liability for mis-sold payment protection insurance remained with transferor of an insurance business: PA(GI) Ltd v GICL 2013 Ltd & anr

Conflict of laws

Contract

Insurance

Regulatory

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Allen & Overy launches new financial services investigations blog FCA rules may inform standard of the common law duty of care owed by a financial adviser to client: Anderson v Openwork Ltd Upper Tribunal criticises FCA’s approach to publicising decision notices: Bayliss & Co (Financial Services) Ltd & Clive John Rosier v The Financial Conduct Authority

Forthcoming client seminars

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Litigation Review consolidated index 2015

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Litigation and Dispute Resolution – July 2015

Arbitration ARBITRAL AWARD PUBLISHED AFTER “INORDINATE DELAY” UPHELD B. V. Scheepswerf Damen Gorinchem v Marine Institute sub nom The Celtic Explorer [2015] EWHC 1810 (Comm), 24 June 2015 Delay in publishing an award (in this case by almost a year) can amount to an “irregularity” but is not in itself enough to establish “serious irregularity” under s68 Arbitration Act 1996. To prove the additional requirement of “substantial injustice”, the applicant must also show, for example, that the tribunal failed to deal with all of the issues that were put to it. Delay is therefore likely to form the background to a s68 challenge, rather than its substance. The mere fact of delay does not permit an applicant to bend the applicable legal principles and examine how the issues were dealt with by the tribunal. Arbitration award severely delayed A dispute for breach of contract was submitted to a single arbitrator in London under the terms of the LMAA, by a claimant (T) seeking damages of approximately EUR 2 million. Following a three-day hearing, the arbitrator took one year and 11 days to publish the award (contrary to clause 20 of the LMAA Terms (2012), which suggests that the award “should normally be available within not more than six weeks ‘from the close of the proceedings’”). Despite numerous updates from the arbitrator on the status of the draft, no explanation for the delay was provided, although the pressure of other work and holiday were both alluded to. Neither party chased the award or complained about the delay.

award. An applicant has to pass the two-pronged test of “irregularity” (which must be of a kind set out in s68(2)) and “substantial injustice” (undefined, but understood to include the benefits which the other party receives as a result of the irregularity). The test was described by the House of Lords in Lesotho Highlands Development Authority v Impreglio SpA [2005] UKHL 43 as a “high threshold”. D claimed “irregularity” under the following heads: s68(2)(a) failure by the arbitrator to comply with his general duties (occasioned by the delay); s68(2)(c) failure by the arbitrator to conduct proceedings in accordance with the agreed procedure (also occasioned by the delay); s68(2)(d) failure by the arbitrator to deal with all the issues put to him.

The arbitrator found in favour of T and provided 30 pages of reasons supporting his conclusion. The respondent (D) asked the arbitrator to correct the award and provide further reasons in respect of various issues it believed had not been dealt with. The arbitrator rejected D’s criticisms and its application. D brought an application to set aside the award under s68, for “serious irregularity”.

D argued that those irregularities had caused the arbitrator to reach a conclusion, unfavourable to D, which he may not otherwise have reached – thus causing “substantial injustice” (Vee Networks Ltd v Econet Wireless International Ltd [2004] EWHC 2909 (Comm)).

Section 68 challenge – a high threshold

Court upholds award

Section 68 provides that a party to arbitral proceedings may apply to the court to challenge an award for “serious irregularity” affecting the tribunal, the proceedings or the

Acknowledging the lack of authority as to whether delay can amount to “serious irregularity” under s68, Flaux J rejected D’s challenge to the award. His reasoning was as follows:

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Right to complain: Just because D had not complained to the arbitrator or issued a s24 application (used to remove an arbitrator who has failed to use all reasonable despatch in making an award), it had not lost the right to complain about the delay after the award was produced. What was the “irregularity”? 

s68(2)(a): Inordinate delay in publishing the award was capable of amounting to an “irregularity” because it was a breach of the arbitrator’s general duty to avoid unnecessary delay (s33(1)(b)), which includes delay in publishing an award.

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s68(2)(c): It was unlikely that the delay was a failure by the arbitrator to conduct the proceedings in accordance with the agreed procedure, and thus a s68(2)(c) irregularity, but it could be seen as such.

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s68(2)(d): D had failed to demonstrate that the arbitrator had not dealt with all the issues put to him, thus no irregularity was found on this count.

Delay on its own does not amount to “serious irregularity”: The “irregularity” (here, the delay) must have caused “substantial injustice” to amount to a “serious irregularity” under s68. However, the “but for” test in Vee Networks Ltd v Econet Wireless International Ltd is “impossible” to satisfy unless there was a failure by the arbitrator to deal with all the issues put to it. Accordingly, if all issues were dealt with, delay producing the award makes no difference because D “cannot show that it has caused or will cause injustice”. Delay does not allow greater scrutiny of reasoning: Whilst the court might be more likely – in cases of delay – to subject the tribunal’s reasons to a close analysis to check that all the issues have been dealt with, how it has dealt with them is entirely irrelevant to a s68 application. There remains “no principled basis” for examining the tribunal’s findings of fact in a s68 application – even in cases of “inordinate delay” – and challenges to the arbitrator’s findings remain impermissible.

COMMENT Unfortunately this judgment does little but confirm that whilst delay is certainly considered a procedural “irregularity”, it is exceedingly difficult to elevate it to a “serious irregularity” when the Tribunal has dealt with all the issues put to it. Something more is needed to provide the required element of “substantial injustice”. Flaux J was stern in his criticism of the arbitrator’s delay, condemning it as “inexcusable” even in light of the pressures of other work. This should be of no surprise, given the expectation on both commercial and Court of Appeal judges to produce judgments in a matter of months, if not weeks. The frustration of the judiciary about the length of time in rendering awards is often shared in the arbitration community. It will be noted by users of arbitration and practitioners alike that no practical solutions were offered in this instance. In reality there is little to deter arbitrators from taking an excessive number of appointments unless there is some financial disincentive for doing so, and to date we have not seen this done successfully. It remains for the arbitration community – perhaps led by the institutions – to spur change in this regard, so as to maintain the integrity of this form of dispute resolution. Louise Fisher Associate Litigation – International Arbitration – London Contact Tel +44 20 3088 3567 [email protected]

Olivia Gare Litigation – International Arbitration – London Contact Tel +44 20 3088 2376 [email protected]

Substantial injustice: even if the arbitrator had failed to deal with an issue, it was clear that he would have reached the same ultimate conclusion such that the “but for” test would remain unsatisfied.

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Litigation and Dispute Resolution – July 2015

Conflict of laws EFFECT OF NON-EXCLUSIVE ENGLISH JURISDICTION CLAUSE AND FORUM NON CONVENIENS WAIVER ON APPLICATION TO STAY ENGLISH PROCEEDINGS Standard Chartered Bank (Hong Kong) Ltd & anr v Independent Power Tanzania Ltd & ors [2015] EWHC 1640 (Comm), 9 June 2015 Where a contract contains a non-exclusive English jurisdiction clause as well as a forum non- conveniens waiver, a stay may nevertheless be granted if there are very strong or exceptional grounds, which were unforeseen and unforeseeable when the contract was made. Standard Chartered Bank Hong Kong (SH) became a lender and Security Agent under a Facility Agreement (FA) for a secured loan to Independent Power Tanzania Limited (IPT). Standard Chartered Bank Malaysia Berhad (SM) was the Facility Agent. VIP Engineering & Marketing Limited (VIP) was a 30% shareholder of IPT, and entered into a Shareholder Support Deed (SSD). Under the SSD, VIP was to use best endeavours to procure that IPT complied with its obligations under the finance documents, and covenanted not to dispose of its shares. VIP later purported to sell its shareholding to Pan African Power Solutions (T) Limited. The FA, SSD and Security Deed (SD) were governed by English law and contained non-exclusive English jurisdiction clauses. Certain other finance documents were governed by Tanzanian law and contained non-exclusive jurisdiction clauses that were materially identical to those in the FA. Each of the finance documents contained a forum non conveniens (FNC) waiver (a waiver of any rights to argue that a particular forum is “non conveniens”), and expressly accepted the possibility of concurrent proceedings in different jurisdictions. IPT defaulted, leading to lengthy proceedings in Tanzania between the parties. In what appeared to be a tactical move, VIP brought proceedings in New York, claiming that Standard Chartered Bank (SCB) falsely claimed to

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own VIP’s interest in IPT. A New York judge dismissed the case on FNC grounds, concluding that Tanzania was the appropriate forum for this claim. VIP commenced new proceedings in Tanzania on largely the same grounds as in the New York proceedings. SCB, SH, and SM objected, contending that Tanzania was not the correct forum for determination of these issues. The claimants then commenced the English proceedings, seeking sums under the FA and SD, as well as declaratory and injunctive relief. The defendants applied for a stay of the English proceedings on the ground that Tanzania was the most appropriate forum (or alternatively, on case management grounds). Decision Flaux J acknowledged that where there is a non-exclusive English jurisdiction clause, a defendant must show strong grounds that England is not a convenient forum (which were not foreseeable when the agreement was made) before the court will say that the right to sue in the country specified should not be enforced. Flaux J then examined the case law where there is both a non-exclusive English jurisdiction clause and a FNC waiver, which is less straightforward. In UBS AG v Omni Holding AG1, the court found this combination did not prevent it from being able to grant a stay on FNC grounds (although a defendant would need to show strong reasons to obtain such a stay).

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However, in National Westminster Bank v Utrecht-America2, Clarke LJ considered that this combination prevented the defendant from obtaining a stay on FNC grounds. In Deutsche Bank AG v Sebastian Holdings Inc3, the court decided it retains the power to grant a stay on FNC grounds, even in the presence of a FNC waiver and a non-exclusive English jurisdiction clause, but subject to a heavy burden of proof (more easily met if the grounds for the stay were unforeseeable when the agreement was made). Flaux J decided that the observation of Clarke LJ in Utrecht-America referred to above was not part of the ratio. He concluded that the analysis in Sebastian Holdings was correct, and the combined presence of a FNC waiver and a non-exclusive English jurisdiction clause does not preclude a stay on FNC grounds. Proceedings may be stayed if very strong or exceptional grounds are demonstrated, which can properly be described as unforeseen and foreseeable at the time the agreement was made. Flaux J considered that a defendant who enters into a contract with a FNC waiver agrees that he will not argue that a forum is not appropriate on FNC grounds which were foreseeable at the time that the agreement was made. Flaux J held that, as in Royal Bank of Canada v Centrale Raiffeisen Boerenleenbank4, parallel proceedings in a jurisdiction other than England (and thus the possibility of inconsistent findings), were contemplated by the finance documents and clearly foreseeable at the time they were entered into. Therefore, the Tanzanian proceedings were not an unforeseen or unforeseeable ground for a stay. It did not matter that particular aspects of the Tanzanian proceedings were not foreseen, such as their convoluted course or the involvement of particular entities; it was enough that proceedings in Tanzania were foreseeable. The defendants had also argued that the Tanzanian lawyers and judges had developed knowledge and expertise that made Tanzania a more suitable forum for the determination of the proceedings. However, Flaux J found that, despite their length and expense, the Tanzanian proceedings were at an early stage and none

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of the issues in the English proceedings had yet been determined in Tanzania. Furthermore, he emphasised that if parties have agreed a FNC waiver and contemplated (or sanctioned) parallel proceedings, they cannot later rely on the advanced stage of those proceedings as a very strong or exceptional reason for a stay. As for the defendants’ application for a stay on case management grounds, Flaux J followed the approach taken in the Utrecht-America case, concluding that the combination of the FNC waiver and the non-exclusive English jurisdiction clause overwhelmingly pointed against a stay of the English proceedings on case management grounds. Flaux J considered that in the absence of a very strong or exceptional reason for a stay on FNC grounds, it would be wrong for the court to stay the proceedings on case management grounds, if this would have the effect of key issues being decided in another jurisdiction.

COMMENT This decision indicates that even if parties enter into a contract containing a FNC waiver and a non-exclusive English jurisdiction clause, the court may nevertheless grant a stay on FNC grounds in certain circumstances. If FNC grounds arise which are very strong or exceptional, unforeseen and unforeseeable at the time the parties made the contract, the effectiveness of the FNC waiver may be impaired. Furthermore, the foreseeability of an element may be determined by the terms of the agreement (even if the particular element was not foreseen by the parties). For example, if the parallel proceedings are contemplated by the agreement, then they will be deemed foreseeable for the purposes of a stay application, even if the parties did not contemplate the particular parallel proceedings that arose. This decision also indicates that if such very strong or exceptional, unforeseen and unforeseeable grounds do not arise, it is very unlikely that parties will be able to sidestep a FNC waiver by seeking a stay on case management grounds. This will particularly be the case if a stay on case management grounds would result in

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Olga Owczarek Associate Litigation – Arbitration – London

key issues being determined in the courts of another jurisdiction. In practice, parties employing a FNC waiver and a non-exclusive jurisdiction clause need to pay close attention to the wording of their contract to ensure that it correctly reflects their intentions as to the availability of certain matters as possible grounds for a stay. If parties do wish for certain matters to be available as a basis for a stay, care must be taken to ensure that the contract does not exclude these matters from being available for such purpose.

Contact Tel +44 20 3088 1824 [email protected]

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[2000] 1 WLR 916

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[2001] EWCA Civ 658

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[2009] EWHC 30369 (Comm)

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[2004] EWCA Civ 7

COMPETING JURISDICTION CLAUSES IN FINANCE DOCUMENTS Black Diamond Offshore Ltd & ors v Fomento de Construcciones y Contratas SA [2015] EWHC 1035 (Ch), 9 March 2015 Different jurisdiction clauses in two documents were not in competition as the dispute in question arose naturally under one contract (an offering circular) and not the other (a syndicated loan agreement). In refusing a case management stay, the High Court has stressed that there must be an extremely strong reason before it will decline to enforce an exclusive English jurisdiction agreement. Fomento de Construcciones y Contratas SA (FCC) is a leading Spanish company which raised finance via: (a) Unsecured convertible notes issued by an Offering Circular conferring exclusive jurisdiction on the English court (the Notes); and (b) A syndicated finance agreement conferring jurisdiction on the Madrid court (the Finance Agreement). The claimants/respondents (the Creditors) were creditors of FCC under both the Notes and the Finance Agreement. Restructuring proceedings for the Finance Agreement were underway in Barcelona (the Restructuring Proceedings). FCC sought approval from the Barcelona court to amend the terms of the Finance Agreement to impose a “haircut” on the Creditors and extend the term of the Finance Agreement. The Creditors were opposed to these Restructuring Proceedings but the only way they could successfully challenge them was to show that they would suffer a “disproportionate sacrifice” from the amendments. www.allenovery.com

The Creditors believed that a declaration from the English court that the Restructuring Proceedings had triggered an event of default under the Notes would provide useful evidence that they had suffered a “disproportionate sacrifice” under the Finance Agreement. The Declaration sought a declaration in England to that effect (the Declaration Proceedings). FCC challenged the jurisdiction of the English court to hear the Declaration Proceedings and, in the alternative, sought a case management stay of the Declaration Proceedings until the Restructuring Proceedings in Barcelona had been concluded. Jurisdiction Challenge In challenging the jurisdiction of the English court, FCC argued that, whilst the Creditors sought a declaration in respect of the Notes, their real motivation in bringing these Declaration Proceedings was to obtain a collateral benefit which they could use in the Restructuring Proceedings regarding the Finance Agreement. In so

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doing, FCC said the Creditors’ were seeking to circumvent the Finance Agreement’s jurisdiction clause. FCC submitted that the dispute could fall within the jurisdiction clauses in both the Notes and the Finance Agreement and that, in circumstances where the Creditors’ real dispute related to the Finance Agreement and not the Notes, it was the jurisdiction clause in the Finance Agreement which should prevail. FCC relied on UBS AG & UBS Securities LLC v HSH Nordbank AG [2009] EWCA Civ 585 where the Court of Appeal considered how to deal with disputes which could be said to arise out of either of two different contracts containing competing jurisdiction agreements. In this case Collins LJ stated that, in complex transactions involving competing jurisdiction clauses, it is the jurisdiction clause in the agreement at the “commercial centre” of the transaction which should apply. This judgment also referred to the case of Credit Suisse First Boston (Europe) Ltd v MLC (Bermuda) Limited [1999] LI Rep 767 in which Rix J (as he then was) said that where there were competing jurisdiction clauses the dispute should be governed by the jurisdiction clause in the contract “closer to the claim”. The Creditors submitted that FCC’s argument was hopeless as this was not a case where there were competing jurisdiction clauses at all. The event of default question clearly arose under the Notes which contained a jurisdiction agreement in favour of the English courts. In finding in favour of the Creditors, Asplin J held that the question of whether or not an event of default had arisen under the Notes was a question which arose under the Notes themselves and not the Finance Agreement. This was therefore not a case where the dispute could be said to fall within either of two different contracts and so the approach adopted in UBS and Credit Suisse did not apply. Even if one did adopt this approach, the contract closest to the event of default issue was the Notes’ Offering Circular and not the Finance Agreement. The English courts would therefore still have jurisdiction. Asplin J went on to say that the Creditors could not be said to be seeking to subvert the jurisdiction clause in the Loan because the Restructuring Proceedings, which were taking in place in Barcelona, were clearly not governed

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by the jurisdiction clause in the Finance Agreement which conferred jurisdiction on the Courts of Madrid. On the contrary, it appeared that it was FCC which was seeking to circumvent the jurisdiction clause in the Notes. On this basis, Asplin J found that the English Court did have jurisdiction to hear the Declaration Proceedings. Case Management Stay In the alternative, FCC asked the Court to exercise its discretion to grant a case management stay of the Declaration Proceedings until the Restructuring Proceedings had been concluded. FCC said that a case management stay was appropriate given that the Creditors had no real interest in pursuing the Declaration Proceedings and, accordingly, if such a stay was granted it was unlikely that the Declaration Proceedings would later be resumed following the completion of the Restructuring Proceedings. The Creditors opposed FCC’s request for a case management stay and submitted that it was clear from the relevant authorities that, in cases where there was an exclusive jurisdiction agreement in favour of the English Court, such a stay should only be granted when there were very strong reasons for doing so. In particular, the Court was referred to Equitas Limited v All State Insurance Company [2009] LI Rep 227 where Beatson J, as he then was, had held that the English court should enforce an English exclusive jurisdiction clause unless there were rare and compelling circumstances mitigating in favour of granting a case management stay. Again, Asplin J found in favour of the Creditors and, applying Equitas, held that an “extremely strong reason” was required before the Court should decline to enforce an exclusive jurisdiction agreement. Asplin J said that FCC had failed to satisfy her that such reasons existed in the present case. Granting a stay would delay the Creditors from exercising their contractual right under the Notes to have the event of default issue resolved by the English Court and would deprive them of the opportunity to raise this issue in the Restructuring Proceedings.

COMMENT This case provides a useful reminder of the principles to be applied when a dispute can arguably fall within 8

Litigation and Dispute Resolution – July 2015

a number of different contracts containing competing jurisdiction clauses. In addition, this case re-emphasises that, where a dispute is subject to an exclusive jurisdiction agreement, the English court will require extremely strong reasons before granting a case management stay.

Timothy Potts Associate Litigation – Banking, Finance & Regulatory – London Contact Tel +44 20 3088 2519 [email protected]

FOLLOW-ON DAMAGES COMPETITION CLAIM: JURISDICTION ISSUES Cartel Damage Claims Hydrogen Peroxide v Akzo Nobel NV Case C-352/13, 21 May 2015 The CJEU has ruled that, in a German follow-on damages competition claim: (i) the German court retains jurisdiction over the claim, even where the applicant has withdrawn its action against the sole co-defendant domiciled in Germany; and (ii) for a jurisdiction clause to apply in a follow-on claim it must refer to disputes concerning liability incurred as a result of an infringement of competition law (a reference to all disputes arising from contractual relationships being insufficient). The claimant sued six defendants in Germany for damages for loss allegedly suffered as a result of an infringement of European competition law in the hydrogen peroxide and sodium perborate market (the Cartel). Five of the defendants were domiciled in Member States outside Germany. The European Commission had previously found the defendants and other undertakings guilty of anti-competitive conduct under EU law (the Commission Decision). The applicant relied on this decision in support of its claim (known as a follow-on damages claim). Early in proceedings, the applicant (CDC, which was a company established for the purpose of bringing these claims by 71 undertakings who had allegedly suffered loss) withdrew its claim against the sole defendant domiciled in Germany, following a settlement. The remaining defendants then sought to challenge the jurisdiction of the German courts. This resulted in a request for a preliminary ruling from the CJEU concerning certain co-defendant provisions in the Brussels Regulation. Article 6(1) Brussels Regulation applies in cartel follow-on claims Article 6(1) provides that a person domiciled in a Member State may also be sued “where he is one of a number of defendants, in the courts for the place www.allenovery.com

where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine these applications together to avoid the risk of irreconcilable judgments resulting from separate proceedings”. The CJEU was asked whether follow-on damages cases satisfied the test in Article 6(1) and whether it was significant that the action against the sole defendant domiciled in the same State as the court seised (in this case Germany) had been withdrawn. The CJEU said that, as Article 6(1) is an exception from the normal rule that a defendant should be sued where it is domiciled, it should be strictly interpreted. However, claims against defendants (who were members of the same cartel) in follow-on damages cases generally related to the same facts and law (ie they were “closely connected”). Given the divergence of approach between Member States on liability for unlawful cartel conduct, there would be a risk of irreconcilable judgments if Article 6(1) did not apply to such cartel claims. Accordingly, Article 6(1) can apply in cartel follow-on damage cases. Settlement with anchor defendant – effect on co-defendants In relation to the issue of there no longer being any German defendant, the CJEU said that, where claims are connected under Article 6(1) and the proceedings have been started before a Member State court, that court 9

has jurisdiction. The only exception would be where it can be shown that, at the time proceedings were started, the rules of jurisdiction had been circumvented by the applicant and the “dropped” defendant colluding to artificially fulfil Article 6(1). Some of the defendants argued that CDC and the German defendant had reached settlement before proceedings were started, but had agreed to keep the German defendant in until German jurisdiction was secured. The CJEU said there would need to be “firm evidence” to support the conclusion of artificial fulfilment. Effect of jurisdiction agreements on follow-on claims Article 23(1) provides that “If the parties, one or more of whom is domiciled in a Member State, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction”. The question for the CJEU was whether, in the context of follow-on cartel damages cases, account could be taken of arbitration and jurisdiction clauses contained in agreements that would have the effect of excluding the jurisdiction of a court that might otherwise have had jurisdiction under Article 5(3) and/or 6(1). The CJEU ruled that a court seised could, in principle, be bound by jurisdiction clauses under Article 23(1), even if this would override the jurisdiction founded on Article 5(3) and/or 6(1). However, the court before which the action is brought must ensure that such a clause binds the applicant (ie, in this case, ensure that the jurisdiction clauses had been assigned to CDC) and whether such clauses did in fact create a derogation from the referring court’s jurisdiction. Importantly, the CJEU said that, in particular, a clause which abstractly refers to “all disputes arising from contractual relationships” would not extend to a dispute relating to tortious liability relating to cartel activity. The CJEU concluded that, under Article 23(1), account can be taken of jurisdiction clauses in follow-on damages cases, “provided that those clauses refer to disputes concerning liability as a result of an infringement of competition law”.

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Where did the harmful event occur? As an alternative jurisdictional ground, Article 5(3) provides that a person domiciled in a Member State may be sued in another Member State “in matters relating to tort, delict or quasi-delict, in the courts for the place where the harmful event occurred or may occur”. The question for the CJEU was, in summary, given that the defendants participated in the Cartel in different places and at different times, where was the “place where the harmful event occurred” for the purposes of Article 5(3). The CJEU decided that Article 5(3) is intended to cover both (i) the place where the damage occurred; and (ii) the place of the event giving rise to it, so that the defendant may be sued, at the option of the applicant, in the courts of either of those places. In relation to cartel cases, the CJEU said that the place where the damage occurred is identifiable only for each alleged victim taken individually and is located, in general, at that victim’s registered office. In relation to (ii), the place of the causal event was said to be, in the abstract, the place of the conclusion of the Cartel. However, the CJEU said that according to the findings of the Commission Decision, it was not possible to identify a single place where the Cartel was concluded. To use the place of the causal event to secure jurisdiction under Article 5(3), a specific event during which either the Cartel was definitively concluded or one agreement in particular was made, would have to be identified.

COMMENT Making a successful jurisdictional challenge in follow-on damages claims is generally an uphill battle for a defendant, especially if the claim has at least one anchor defendant in the jurisdiction of the court seised. Following the CDC case, it seems that not even a live claim against an anchor defendant is required. It is sufficient that there was a claim against an anchor defendant, even if that claim is quickly dropped or settled. Further, it would be for a defendant challenging jurisdiction to show that such an anchor defendant was being used only to circumvent jurisdictional rules. The case highlights the relatively high bar that has been

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set to successfully challenge jurisdiction of the court first seised. The case also shows the importance of drafting broad jurisdiction clauses into agreements, covering disputes arising out of both contractual and non-contractual agreements. In the CDC case, the court said that a jurisdiction clause that referred to disputes concerning “contractual relationships” only would not be sufficient to secure jurisdiction for a follow-on claim. On one reading, the ruling in this case means that jurisdiction clauses should contain an express reference to disputes relating to infringements of competition law. However, it seems unlikely that contractual counterparties would welcome the inclusion of such a term, given the implied suggestion that the party seeking such wording was seeking to strengthen its position in relation to any future cartel behaviour. Since a follow-on damages claim is generally based in tort, it would seem sufficient to ensure the jurisdiction clause captures both contractual and non-contractual disputes.

Brussels Regulation) and the Recast Brussels Regulation has been applied in all proceedings issued on or after 10 January 2015. The terms of Article 5(3) and 6(1) of the Brussels Regulation are unchanged (though the article numbering has changed) but there have been certain changes to Article 23 (now Article 25). However, the changes to Article 23 do not lessen the relevance of the CJEU’s ruling in the CDC case.

WHERE ON THE WEB? For more details on the changes under the Recast Brussels Regulation, please consult our article on the subject, available at: http://www.allenovery.com/publications/engb/Pages/Brussels-Regulation-recast-an-update. aspx Tadhg O’Leary Associate Litigation – Corporate – London Contact Tel +44 20 3088 2581 [email protected]

It is also worth noting that the Brussels Regulation has been replaced by Regulation 1215/2012 (the Recast

Contract RIGHT TO AFFIRM A CONTRACT AFTER REPUDIATORY BREACH FETTERED BY GOOD FAITH MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2015] EWHC 283 (Comm), 12 February 2015 In the face of a repudiatory breach, the right to elect whether to terminate the contract or affirm and claim damages is not unfettered and the test is “essentially the same” as for the exercise of a contractual discretion, which must be exercised in good faith. Referring to the “wider recognition … of the need for good faith” as appears to be the trend in other common law jurisdictions, this decision is arguably an extension of the “legitimate interest” principle which may limit a party’s election to affirm a contract in the face of a repudiatory breach in certain circumstances. The dispute arose out of a contract for the carriage of cotton (Contract) between the claimant (Carrier) and defendant (Shipper). The cotton was delivered, but a

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dispute led to it remaining in the shipping containers for over three years. The key issues before Leggatt J were whether the Shipper was in repudiatory breach of the Contract for failure to 11

re-deliver the shipping containers and, if so, whether there was any fetter on the Carrier’s right to continue the Contract and claim sizeable demurrage (liquidated damages). This in turn required consideration of whether the demurrage clause was an unenforceable penalty.

the Shipper was therefore not liable for the demurrage. Before trial, it was agreed that the replacement value of the containers was USD 114,172. The liquidated damages that had accrued since 2011 amounted to over USD 1 million plus interest.

Background

Was the Shipper in repudiatory breach?

The cotton was delivered by the Carrier in three lots using 35 containers to Chittagong, Bangladesh. The Shipper had on-sold the cotton to a local company (Consignee) pursuant to the terms of a separate sale contract, with payment backed by a letter of credit. Under the terms of the sale contract, title passed to the Consignee on payment once the cotton had arrived in Bangladesh.

Yes. As of September 2011, the Shipper no longer had title to the cotton (which had passed to the Consignee) and was therefore not in a position to arrange for any of the containers to be re-delivered to the Carrier. This amounted to a repudiatory breach of the Contract, by the Shipper, because the delay was so prolonged as to frustrate the commercial purpose of the venture.

Payment under the letter of credit was made in relation to the first two lots. However, the Consignee refused to take delivery on the basis of an alleged fraud on the part of the Shipper in relation to the letter of credit (in reality, because of a fall in the market price). The Consignee thereafter obtained an injunction from the Bangladeshi courts, restraining the issuing banks from making any further payment to the Shipper. On the basis of this injunction, the customs authority at Chittagong refused to allow any movement of the containers or unpacking of the cotton until the court proceedings were resolved (the Customs Issue). As a matter of fact, they never were and the containers therefore remained in the Chittagong port, still loaded with the cotton for a period of over three years. The Contract contained a provision requiring the Shipper to return the containers within a period of “free time” after discharge from the vessel, failing which “demurrage” (a liquidated sum) would accrue on a daily basis until performance was rendered. The Carrier also had the right to unload and sell the cotton if the Shipper refused to accept delivery. The Carrier argued that the Shipper must pay demurrage because the containers had not been re-delivered to the Carrier (and that the Carrier was unable to unload the containers itself because of the Customs Issue). The Shipper argued that since the Consignee had paid for two lots of the cotton, only the Consignee had the power to take delivery of the cotton (and had refused) and

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As with any repudiatory breach, the Carrier therefore had a right to elect between: accepting the repudiation, treating the contract as terminated and claiming damages at large; or, affirming the contract and continuing to claim demurrage. The Carrier elected for the latter. The question arose whether the Carrier was entitled to do so, referring to what is known as the “legitimate interest” principle. What is the “legitimate interest” principle? A party faced with a repudiatory breach has freedom of choice in making his election, subject to two potential limitations (White & Carter (Councils) Ltd v McGregor [1962] AC 413 (White & Carter)). One limitation is that a party with no legitimate interest in performing a contract “ought not to be allowed to penalise the other party by taking one course when another is equally advantageous to him”. This has been referred to as the “legitimate interest” principle, but its scope is uncertain and the House of Lords’ remarks were made obiter. However, it has been applied in Isabella Shipowner SA v Shagang Shipping Co Ltd [2012] EWHC 1077 (The Aquafaith) such that, according to Cooke J. in that case, an innocent party can only be said to have a legitimate interest in maintaining a contract if (a) damages are an inadequate remedy, and (b) maintaining the contract would not be “wholly unreasonable”.

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Litigation and Dispute Resolution – July 2015

Is the legitimate interest principle a matter of good faith? In his judgment in MSC v Cottonex, Leggatt J has arguably taken the “legitimate interest” principle one step further. Referring to what he described as “the need for good faith in contractual dealings” in the common law world, and “further impetus” for this view in the unanimous judgment of the Supreme Court of Canada in Bhasin v Hrynew [2014] SCC 71, Leggatt J concluded that the exercise of an option to terminate a contract is concerned with a “materially identical question” as the exercise of a contractual discretion, and the authorities establish “essentially the same test” for both. In this regard, Leggatt J observed that “a contractual discretion must be exercised in good faith” and not irrationally, unless clear words exist to the contrary (see Socimer International Bank Ltd v Standard Bank London Ltd [2008] 1 Lloyd’s Rep. 558, 575-577). Was it legitimate for the Carrier to affirm the contract? No. Leggatt J held that the Carrier’s only interest in affirming the Contract was to claim demurrage, since it had become impossible for the Shipper to perform its primary obligation to re-deliver the containers because of the Customs Issue. The judge distinguished both White & Carter and The Aquafaith, where specific performance of the primary obligations remained possible. The next question was whether that interest was legitimate. In holding that the demurrage clause was a penalty (because it provided for payment without end for so long as the Carrier chose to keep the Contract alive), Leggatt J held that it was not. Distinguishing a situation where the innocent party is suffering loss and elects to keep the contract alive to claim liquidated damages in order to provide certainty and avoid disputes, Leggatt J found as a matter of fact that the Carrier had suffered no loss of revenue at all as a result of the failure to re-deliver the containers. In these circumstances, the decision to affirm the Contract was “wholly unreasonable” because the Carrier’s sole purpose in doing so was to “generate an unending stream of free income”.

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COMMENT In 2013, Leggatt J observed in Yam Seng that the “traditional English hostility” to good faith in commercial dealings was “misplaced” and held that a long term distribution agreement was subject to an implied duty of good faith (see Litigation Review, February 2013). The case is of particular note for at least five reasons: (1) There is little doubt that the right result was achieved

in this case – the Carrier had no legitimate reason to continue the Contract, other than to carry on claiming demurrage in an amount which exceeded tenfold the value of the containers. However, in aligning the limits which apply to the exercise of contractual discretion with the exercise of an option to terminate a contract for repudiatory breach and likening those limits to a good faith obligation, Leggatt J is arguably extending the scope of the “legitimate interest” principle – a principle whose articulation by the House of Lords in White & Carter was, as Leggatt J himself accepted, at best “uncertain”. (2) On one view, this was unnecessary since the same

result could have been achieved through the finding that the demurrage clause was a penalty. In other words, the Carrier had the right to elect to continue the Contract, but was not entitled to claim demurrage (because that clause was an unenforceable penalty), in which case any damages would have been limited to the loss actually suffered, which Leggatt J found to be none. Leggatt J considered this argument, but rejected it on the basis that the right to continue the Contract was “not unfettered”. (3) Following his judgment in Yam Seng holding that

good faith applies in “relational contracts”, this is arguably another example of Leggatt J extending the “good faith” principle more widely in English law. While the majority of decisions where a “relational contract” argument has arisen have declined to follow Yam Seng, “good faith” is nevertheless an argument which appears to receive more attention than was previously the case. In other words, the seemingly expanding scope of “good faith” may give

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rise to unmeritorious claims which nevertheless require time and money to resolve. (4) However, Leggatt J accepted in his judgment that the

“legitimate interest” principle “sets some constraint, albeit a weak one, on the freedom of a party when exercising a choice whether or not to terminate a contract to consult only its own interests”. Regardless of whether the principle which applied in this case is one of “legitimate interest” or good faith, its scope and application should be seen in this light. (5) This decision must also be seen in context and as

with Leggatt J’s decision in Yam Seng, it does not establish any general principle of good faith in relation to the exercise of options. To the contrary, in Greenclose v Nat West Bank plc [2014] EWHC 1156, Andrews J rejected the argument that a bank was required to exercise an option in its favour to extend an interest rate hedging collar in good faith, an argument advanced by reference to Yam Seng. As the judge in that case observed, not only was there no

general principle of good faith in English law, but also “[t]he restrictions suggested by Greenclose would prevent the Bank from extending the Collar in the very circumstances in which it would be in its economic interests to do so, namely, when … base rates had dropped below the floor. They would also require the Bank to subordinate its own commercial and economic interests to those of its customer, even to the extent of potentially bearing a loss on its trader’s book of business.” In other words, the influence of MSC v Cottonex is limited for now to the exercise of a right to continue a contract in the face of a repudiatory breach. It remains to be seen how it will be treated in future cases. Kate Davies Counsel Litigation – Arbitration – London Contact Tel +44 20 3088 2090 [email protected]

EXCLUSION CLAUSES INEFFECTIVE IN COMMERCIAL CONTRACT Saint Gobain Building Distribution Ltd v Hillmead Joinery (Swindon) Ltd [2015] All ER (D) 226, 15 May 2015 Extensive and significant exclusion wording in a supplier’s standard terms and conditions did not meet the reasonableness requirement in the Unfair Contract Terms Act 1978. Although the contract was between two businesses, there was an inequality of bargaining power, and the exclusion clauses went too far, leaving the buyer only with the remedy of obtaining replacement goods or a refund of the purchase price. The case serves as a warning to businesses transacting on standard terms. Extensive exclusion wording may achieve the opposite effect – that of excluding nothing. Saint Gobain Building Distribution Limited, which traded as International Decorative Surfaces (IDS) is the main distributor of a type of laminate sheets in the UK. The sheets are typically bonded onto a substrate to form panels for use in, for example, fitting out shops. An intermediary company, Railston Design, placed orders for bonded panels with Hillmead Joinery (Swindon) Limited (Hillmead). The panels were ultimately to be used in Primark stores. Hillmead

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itself ordered laminate sheets from IDS to use in making the panels. The case began by IDS bringing a claim against Hillmead for the price of various goods it had delivered. Hillmead admitted IDS’ claim, but counter-claimed, such that the trial dealt with that counter-claim. The court dealt with a number of fact-specific issues between the parties, but the main point of general interest in the hearing was whether

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Litigation and Dispute Resolution – July 2015

certain exclusion clauses in the contract between IDS and Hillmead were reasonable. Extensive exclusion wording in standard terms and conditions The exclusions and limitations in IDS’ standard terms and conditions were extensive and significant: 

obliged customers “wherever possible to inspect the goods on delivery” (clause 5.8);



stated that, if a customer failed to carry out an inspection, IDS would be “under no liability” in respect of, for example, any visual defects which would have been “apparent on careful inspection” (6);



provided that IDS would “in any event” not be liable unless the customer sent it a written complaint within three days and that IDS’ only liability was to replace defective products;

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excluded all warranties in respect of the product except those in the contract (8.9);

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excluded a whole raft of liabilities relating to, for example, any loss of profit, business, goodwill and direct or consequential losses a customer might suffer (8.10); and



IDS’ liability, in all cases excepting death or personal injury due to IDS’ negligence, or where fraud was involved, could not exceed the price charged to the customer for the relevant goods (8.11).

In summary, IDS’ obligations were limited to either replacing goods, or refunding the purchase price, no matter what loss a customer might have suffered. What was reasonable to exclude? This raised issues as to whether it was reasonable to exclude: 

implied warranties as to satisfactory quality;



any liability where customers did not inspect goods on delivery;



any liability beyond replacement or refund of the purchase price; and



any liability for consequential losses etc.

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Assessing these points meant considering the Unfair Contract Terms Act 1977. In particular, the criteria in Schedule 2 which are to be taken into account when judging whether exclusion clauses are reasonable. Bargaining power One element which must be considered under Schedule 2 is the respective bargaining power of the parties. In this case, IDS had a turnover of GBP 111 million in 2012, as opposed to Hillmead’s turnover of GBP 2 million and there was no evidence that the terms of the contract had been negotiated at all – they were just IDS’ standard terms and conditions. Accordingly, HH Judge David Grant found the parties did not have equal bargaining powers. Not reasonable to exclude warranties as to fitness for purpose In terms of whether the products were fit for purpose, the judge considered a number of cases where contracts had excluded the equivalent warranties which are normally implied by virtue of the Sale of Goods Act 1979. What distinguished those cases from the current one was that the party excluding warranties of fitness had provided alternative warranties, or that there had been special features, such as a buyer having extensive powers of inspection, or goods having been produced according to detailed, bespoke, specifications. He noted a number of points relevant to the IDS contract: 

the exclusion of the normal statutory warranty implying fitness for purpose was not accompanied by any equivalent or replacement warranty;



the parties were not of equal bargaining power;

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the goods in question had not been produced pursuant to a special order by Hillmead;

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there was no agreed specification that the goods had to meet; and

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Hillmead had not told IDS of any special purposes which the goods were required for.

The judge found that this combination of factors meant that it was not reasonable for IDS to have attempted to exclude warranties as to fitness for purpose.

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Not reasonable to exclude liability for failure to inspect In terms of whether it was reasonable for IDS to exclude liability where the buyer had failed to inspect goods, the judge found that the key issue was that IDS purported to exclude all liability where there had been a failure to inspect. He said that “To my mind, this is too draconian a consequence to flow from such a default”, especially where IDS was in just as good a position as Hillmead to spot visual defects. In the circumstances, it was not reasonable for Hillmead to bear all the risks of defects. Not reasonable to limit remedy to replacement or cost of purchase As to whether it was reasonable to limit remedies to replacement or cost of purchase, the judge held that the main question was what the parties had in contemplation when the contract was made. In particular, he found that it had been clear to IDS that any loss Hillmead might suffer would be likely to go beyond the cost of just replacing the laminate sheets. This, combined with the parties’ unequal bargaining power, and the fact that there was no evidence that Hillmead could have insured itself against resultant loss, meant that the restrictions of liability under clauses 6.2 and 8.11 were not reasonable. Consequential loss Finally, the judge considered whether it was reasonable for IDS to have attempted to exclude liability for consequential loss. He said that the key issues were the parties’ bargaining power, the fact that the term had not been negotiated, the fact that liability was entirely excluded, rather than limited, the fact that he had already found that other clauses, with less severe consequences for Hillmead, were themselves unreasonable and the fact that the parties knew that the consequences to Hillmead of a breach would be greater than merely the cost of replacing the goods. This combination again meant that the purported restrictions were unreasonable. IDS not liable anyway One effect of the finding that IDS’ purported restrictions were unreasonable was that there was an implied term that the laminate sheets would be of satisfactory quality. In this context, Hillmead alleged that this meant that the sheets would be fit to be used as decorative surface in

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specific locations in shops. The judge noted that Halsbury’s Statutes recorded the relevant test as being an “objective one because it turns on what is acceptable to a reasonable person”. Thus, goods could be of reasonable quality even if the actual buyer in question did not regard them as such. As such, the test was partly contextual. In this case, relevant context included the way the products were described in the manufacturer’s guide, their price and their intended use. The judge found that the particular laminate was a relatively low-cost product and that IDS had not been told how it would be used. Railston’s, or Primark’s, rejection had been based on the appearance of the sheets, rather than their performance, and the expert evidence available did not establish a breach of the implied term as to satisfactory quality. Accordingly, IDS was not liable.

COMMENT As HH Judge David Grant said, cases dealing with the reasonableness of exclusion clauses are always highly fact-specific. As he might have added, what is commercially reasonable is also in the eye of the beholder. Courts typically face a difficulty when assessing the reasonableness of negotiated contracts in that they are very unlikely to hear evidence about negotiations leading to the final form of the contract, and so cannot assess whether, for example, a party has been able to significantly limit its potential liability in exchange for giving a concession to the other party elsewhere – if this is the case, drafters may want to record the fact in the contract itself. In this case, however, Hillmead dealt on IDS’ standard terms and conditions, and there was no evidence of the contract having been negotiated. The restrictions on liability were, on any view, severe and it was clear that IDS was a much larger company than Hillmead and so (in the court’s view) able to exercise superior bargaining power. This combination of factors had led it to impose restrictions beyond those legally enforceable. This case illustrates the dangers of relying on terms and conditions which have not been negotiated. The temptation, when drafting standard terms is, of course, to restrict liability to the utmost. However, as here, the risk

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is of scoring an own goal in the process. It is important, therefore, that drafters of standard terms consider not just how to provide legal protection, but also whether, in so doing, they have gone so far that they have removed the very protection they seek to create. This is particularly important where the party relying on its standard terms has the main performance obligation – in this case, to provide goods, rather than just pay for them. Producers and suppliers are necessarily at risk of a whole host of claims relating to quality, time of delivery etc. , rather than just money claims for non-payment. In the circumstances, sweeping exclusions as to quality and monetary liability, combined with requirements to raise any complaints almost instantly, may prompt a court to hold that a party is trying to engineer a situation where it can break a contract almost without consequence.

Drafters who produce very one-sided contracts are well advised to review them to see where concessions can be made, such that the overall package will not strike a judge as too one-sided. For example, had IDS capped liability to damages to a modest sum, rather than to the purchase price for the sheets, or had it allowed more than three days for inspection (which, presumably, would not greatly have increased IDS’ commercial risk), the judge might have been readier to find the overall package more balanced, and hence more reasonable. Rainer Evers Senior Associate Litigation – Corporate – London Contact Tel +44 203 088 3849 [email protected]

INADEQUATE NOTICE OF WARRANTY CLAIM IPSOS SA v Dentsu Aegis Network Ltd [2015] EWHC 1171, 15 June 2015 The purchaser under a Share Purchase Agreement (SPA) had failed to give adequate notice of a warranty claim. Its letter had not fulfilled the requirements set out in the notification of claims clause in the SPA. Specifically, the letter had failed to state how the facts relied upon gave rise to a warranty claim, had failed to state that there would be a claim (only that there might be such a claim) and was insufficiently detailed as to the nature of the claim (stating that it was a warranty claim was not enough). This is an area which often causes problems for warranty claimants. The defendant (Dentsu) applied for summary judgment/strike-out of the claim brought by the claimant (IPSOS), for breach of warranty under an SPA. Dentsu relied on the contractual limitations on warranty claims contained in the SPA. Specifically, it argued that IPSOS had failed to give proper notice of its claim under the notification of claims clause, which stated: “No Seller Warranty Claim, … Indemnity Claim … shall be brought against the Seller unless (and the Seller shall only have liability in respect of any such Claim if) the Purchaser shall have given to the Seller written notice of such Claim … (a “Claim Notice”) specifying in reasonable detail: (i) the matter which gives rise to the Claim; (ii) the nature of the Claim; and (iii) (so far as is reasonably practicable at the time www.allenovery.com

of notification) the amount claimed in respect thereof (comprising the Purchaser’s good faith calculation of the loss thereby alleged to have been suffered) … such Claim Notice to be given by: (A) in the case of a Seller Warranty Claim…, or an Indemnity Claim, the second anniversary of Completion. …” Notification of claims clauses – the law The overriding rule, as Simon J observed, is that every notification of claims clause turns on its own wording. 1 Nevertheless, various cases have examined the different forms of wording that typically appear in notice of claims clauses.2 Four broad principles can be derived from those cases. 17





The commercial purpose of such clauses includes ensuring that sellers know in sufficiently formal terms that a claim for breach of warranty is to be made, so that financial provision can be made for it.

(2) While it contained a description of the facts giving

In construing a notice, the question is how it would be understood by a reasonable recipient with knowledge of the context in which it was sent.

(3) It also did not specify the “nature of the claim” since



The notice must specify that a claim is actually being made, as opposed to indicating that a claim may yet be made.



The requirement of a notice of a claim is often matched by a requirement for certain matters to be “specified” in the notice. Simon J held that the use of “specifying” suggested “very strongly that it [was] not sufficient that the matter referred to in (i)-(iii) [of the notification of claims clause at issue] may be inferred. “

Simon J also noted that the scope of the specific requirements that appeared in the notification of claims clause in the IPSOS SPA had been previously examined in Laminates Acquisition Co v BTR Australia Ltd [2003] EWHC 2540 (Comm) 737. Furthermore, the requirement to give “reasonable detail” had been addressed in ROK Plc (in administration) v S Harrison Group Ltd [2011] EWHC (Comm) 270. Insufficient clarity Simon J held that the letter relied on by IPSOS as being a contractual Claim Notice was insufficiently clear. It was the second letter that had been sent by IPSOS to Dentsu relating to the same issues. The first had stated expressly that it was not to be construed as a Claim Notice. According to Simon J, the second letter did not adequately distinguish itself from that first letter and thus it was not clear that it was to be read as a Claim Notice rather than continuing correspondence. The second letter also did not meet the requirements of the notification of claims clause: (1) While it mentioned that there were “circumstances

that may give rise to a Seller Warranty Claim” (emphasis added), it did not state clearly that a claim was being made.

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rise to the claim, it did not specify “the matters giving rise to the Claim” since it did not set out explicitly how those facts entailed a warranty breach. it included nothing more on the “form and substance” of the claim than a statement that Dentsu was in breach of the relevant warranty provision. While Simon J acknowledged that it was not necessary to go into the detail which one might expect in a pleading, it is apparent from the judgment that he expected to see a summary of the claim similar to that set out in the claim form or the particulars of claim that had been submitted by IPSOS (the latter having been drafted concisely).

COMMENT This case reaffirms the importance of ensuring that a claims notice complies with the requirements of the notification of claims clause under which it is given. In construing a purported claim notice, the courts will have regard to the context of which the recipient of that notice was aware. The recipient’s awareness of the circumstances giving rise to a claim, however, is unlikely to save a notice that is patently inadequate. That is likely to be the case particularly where a notification of claims clause requires a claims notice to “specify” certain matters.

Naomi Briercliffe Associate Litigation – Arbitration – London Contact Tel +44 20 3088 4575 [email protected]

_______________________________ 1

Forrest v Glasser [2006] 2 Lloyd’s Law Rep 392 (and before that in RWE Nukem Ltd v AEA Technology plc [2005] EWHC (Comm) 78).

2

Including: Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423 and Laminates Acquisition Co v BTR Australia Ltd [2003] EWHC 2540 (Comm) 737.

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Litigation and Dispute Resolution – July 2015

TRANSFER OF RECEIPTS ISSUED BY COMMODITIES WAREHOUSE OPERATOR NOT VALID DELIVERY OF GOODS FOR REPO TRANSACTIONS Mercuria Energy Trading Pte Ltd & anr v Citibank NA & anr [2015] EWHC 1481, 22 May 2015 In a dispute concerning early repayment of commodity repo transactions, the Commercial Court has found that a seller of commodities (the lender) who transfers to a buyer (the borrower) receipts or warrants issued by the warehouse operator does not validly deliver the commodities. There must be a document which contains an acknowledgement from the warehouse operator that the commodities are held on the buyer’s behalf. The claimants (Mercuria) were members of an energy and commodities trading group which entered into two Master Agreements relating to the sale and purchase of metals with the defendants (Citi). The Master Agreements governed the terms on which Citi and Mercuria entered into repo transactions. A repo transaction consisted of a sale transaction (where Mercuria sold a certain amount of a metal to Citi) entered into at the same time as a forward sale (where Mercuria bought back the metal from Citi at a specified future date for a higher price). The metal did not leave the warehouse in which it was stored, but title and risk in relation to the metal passed to Citi. The commercial effect of the repo transactions was that Citi provided finance to Mercuria against the security of Mercuria’s metal inventory. A number of the repo transactions between Citi and Mercuria related to metal that was supposed to be stored in warehouses at two locations in China. In May 2014, evidence began to emerge of a fraud (not connected to either party) at those warehouses which meant that substantial quantities of metal were either missing or had been used as the subject matter for multiple repo transactions. Citi served notices purporting to exercise a power under the Master Agreements to bring forward the sale date of the forward sales, on the basis that Citi reasonably believed that the warehouses were no longer able to store the metal safely or satisfactorily. Mercuria subsequently served a notice declaring that a termination event had arisen under the Master Agreements, which required Citi to deliver the metal before Mercuria was obliged to pay the price. Citi purported to deliver the metal to Mercuria by tendering warehouse receipts issued to Citi. www.allenovery.com

Mercuria commenced proceedings seeking declarations that Citi’s notices were invalid or superseded by its own notice, and in any case Citi had not delivered the metal. Citi rejected Mercuria’s claims, counterclaimed for the amounts in the forward transactions (totalling about USD 271 million), and claimed that it was entitled to terminate the Master Agreements. Did Citi make valid delivery of the metal? Phillips J held that Citi had not made good delivery to Mercuria by tendering warehouse receipts promising delivery of the metal by the warehouse operator to Citi or anyone appointed by Citi. The Master Agreements were governed by English law, and the Sale of Goods Act 1979 specifically covered the situation where the goods sold were in the possession of a third party. The Act provided that there was no delivery by seller to buyer unless the third party acknowledged to the buyer that they held the goods on the buyer’s behalf. An ‘attornment’ by the warehouse operator was a necessary element in the transfer of constructive possession (and therefore delivery) from the seller to the buyer. Citi argued that its tender of warehouse receipts to Mercuria was deemed to be delivery for the purpose of the Master Agreements, relying on wording in the forward sale confirmations sent by Citi to Mercuria after each transaction that delivery could occur “without the need for any confirmations from the owner/operator of the Storage Facility”. Citi contended that this was consistent with the commercial reality of the transaction, as a lender in its position should be able to obtain repayment without having to concern itself with problems at the warehouses or having to deal with the warehouse

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operators. Phillips J did not accept Citi’s arguments, finding that the wording of the forward sale confirmations was inconsistent with the Master Agreements and had to be rejected. Did Citi hold a reasonable opinion that the metal could no longer safely or satisfactorily be stored? Phillips J found that Citi held the opinion that the metal could not safely or satisfactorily be stored, and that opinion was reasonable, so Citi’s notices were valid and effective. Mercuria argued that the Citi employee (its Global Co-Head of Commodities Inventory Management) who provided the witness statement showing that Citi held the required opinion was too junior to be the person with the operative opinion for these purposes. Mercuria also argued that the relevant personnel were senior management dealing with the matter, and they did not hold the opinion, but wished to apply pressure to Mercuria by serving the notices. Phillips J held that senior management were involved in conference calls with the Citi employee, whose witness statement evidenced the opinion of a core group at Citi. Citi’s motivations for serving the notices were a separate question from whether Citi held the relevant opinion. Further, Citi’s opinion was reasonable, since it was not an irrational opinion that no reasonable party in the position of Citi could hold. Applying Socimer International Bank Ltd v Standard Bank Ltd [2008] 1 Lloyd Rep 558 and other cases, the only restrictions on Citi’s unilateral discretion was that it should not be abused and was limited, as a matter of necessary implication, by concepts of honesty, good faith and Wednesbury unreasonableness. What was the effect of Mercuria’s notice of a termination event? Phillips J held that Mercuria’s notice did not suspend its obligations to pay the prices for the forward sales until Citi delivered the metal, which had been brought forward by Citi’s notices. Mercuria was in continuing breach of those payment obligations. However, since Citi had not delivered and could not deliver the metal, Mercuria had a defence to Citi’s claim for the price of the metal.

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Could Citi terminate the Master Agreements? Phillips J concluded that Citi had a continuing right to terminate the Master Agreements as a matter of contract (since Mercuria committed a material breach by failing to pay the price due in respect of the forward sales) and common law (since Mercuria’s failure to pay was a repudiatory breach). Citi’s right to terminate was not affected by its inability to deliver the metal, but that was relevant to the question of compensation.

COMMENT This judgment answers an initial series of legal questions and both parties might reasonably say that the result was in their favour. However, it is apparent that the dispute is far from being resolved, as investigations at the warehouses were ongoing and the court recognised the possibility of a claim by Citi against Mercuria for breach of obligations owed to Citi regarding storage of the metal, insurance claims and claims against third parties. The decision demonstrates the risks associated with financial transactions where there are underlying physical goods beyond the control of either party, as well as the need to consider and clearly protect against those risks (including fraud) when drafting the contract. It is too easy to treat commodities in the same abstract way as money – able to be bought, sold, stored and delivered automatically at the click of a button, on the assumption that it will be available when it next needs to be dealt with. In addition, the decision could have a significant effect on the kinds of repo transactions that banks are willing to undertake and how much they have to charge borrowers for the risk of entering into such transactions. It could therefore impact the cost and availability of financing for commodities traders like Mercuria. Andrew Lee Associate Litigation – Banking, Finance & Regulatory – London Contact Tel +44 20 2088 2951 [email protected]

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Litigation and Dispute Resolution – July 2015

Insurance LIABILITY FOR MIS-SOLD PAYMENT PROTECTION INSURANCE REMAINED WITH TRANSFEROR OF AN INSURANCE BUSINESS PA(GI) Ltd v GICL 2013 Ltd & anr [2015] EWHC 1556 (Ch), 5 June 2015 The Companies Court has ruled that an insurance business transfer scheme under Part VII of the Financial Services and Markets Act 2000 did not transfer mis-selling liabilities for Payment Protection Insurance (PPI). Properly construed, the terms of the scheme did not provide for such a transfer. In reaching her decision, Andrews J considered the nature of a Part VII scheme as well as the accepted principles of contractual interpretation, looking at the natural meaning of the words used in light of the context of the transaction and business common sense. The claimant challenged a provisional decision by the Financial Ombudsman Service (FOS) that liabilities for mis-selling PPI policies had not transferred to the first defendant under a business transfer scheme in 2006 (the Scheme) which transferred the claimant’s insurance business to the first defendant. The relevant PPI policies in question were those that the claimant had sold from 1990 to 2004 through clothing retailer Next PLC (Next). Next had entered into a series of master policies with the claimant, which allowed Next to bring its customers within the ambit of the policies as “insured persons” whenever they signed up to a credit agreement. Since 2012, several hundred customers of Next have complained to the FOS that PPI was mis-sold to them and, given that complaints made to the FOS are not subject to traditional statutory limitation, new complaints could continue for years to come. Unusual for Part VII scheme to transfer noncontractual obligations The court reiterated the key principles taken into account when approving a Part VII business transfer scheme, as summarised in Re Prudential Annuities Ltd & Prudential Assurance Ltd [2014] EWHC 4770 (Ch). Among them is the principle that the scheme actuary (in its capacity as independent expert, required by the court) and the court are primarily concerned with the reasonable expectation of policyholders about the ability of the

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insurer to meet its contractual obligations (as opposed to non-contractual obligations). The court recognised that although this principle would not exclude the possibility of transferring non-contractual liabilities (such as mis-selling liabilities) under a scheme, an intention to do so would qualify as an unusual feature. Andrews J therefore considered that one would expect the scheme actuary and the regulator (at the time, the FSA) to have been expressly informed of this. Similarly, given the vital role of the actuary in quantifying the liabilities, the court would expect the actuary’s report to have taken these further liabilities into account in order to provide the court with a complete picture as to the financial impact of approving the transfer. In the absence of any contemporaneous materials addressing the transfer of mis-selling liabilities, Andrews J considered it inherently unlikely that the parties had such an intention. Meaning of “Transferred Liabilities” “Transferred Liabilities” in the Scheme documentation was defined as “all liabilities […] under or attaching to the Transferred Policies”. Did this include mis-selling liabilities? Andrews J followed the principles of contractual interpretation set out in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 as amplified in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900: namely that the iterative process of construction should begin with the ordinary, natural and grammatical sense of the language 21

used, but this must be checked against the overall scheme and the commercial consequences of adopting rival interpretations. Andrews J considered it plain that mis-selling liability did not arise “under” the insurance contract, but was it “attaching to” the transferred policies? The claimant argued that it did because the entry of the assured into the contract of insurance was an essential ingredient of any claim for mis-selling. Conversely, the defendants argued that if it had been intended to transfer mis-selling liability, this could have been achieved much more simply, either by spelling it out expressly or by using a wider expression, such as “liabilities relating to”, or “liabilities in connection with”. Andrews J found that a liability “attaching to” a contract was to be understood as a liability directly connected with or emanating from the contract itself, arising after the contract had come into existence. It would not readily be understood as a liability for an actionable wrong which preceded the contract. Although it may seem that such an interpretation added nothing to the interpretation of liabilities “under” the policy, in the context of the claimant’s relationship with Next (and Next’s ability to include its customers within the scope of the policies), liabilities “attaching to” the transferred policies appeared to refer to contractual liabilities owed to Next’s customers who had been included as “insured persons”. Context and commercial setting In terms of whether the natural interpretation made sense in context and commercially, Andrews J found that it made sense in the context of the Scheme, which was primarily concerned with the passing of contractual risks and rewards. It also made commercial sense; as the liabilities in question arose long before the Scheme, the second defendant would receive no premium income in respect of the PPI policies (other than in respect of renewals of extant policies). Therefore, if it were to take on these liabilities, it would have faced the prospect of having to pay out potentially millions of pounds, most of which had been received by someone else, for that other person’s wrongdoing. The average lay person would not expect such a result unless it had been expressly spelled out.

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Business common sense The court held that it was contrary to business common sense to suppose that the parties implicitly intended, without referring to it in any document, to pass to the first an open-ended liability for mis-sold PPI, to which conventional limitation would not apply. The natural construction of the definition of “Transferred Liabilities” in the Scheme documentation did not produce that result, and nothing in the factual matrix or as a matter of commercial imperative required an alternative interpretation.

COMMENT This case is a useful reminder of the court’s efforts to ensure protection of policyholders when sanctioning an insurance business transfer scheme. By the same token, the parties to a court-approved scheme should ensure that the scheme documentation clearly and expressly documents their intentions, especially where their intentions may be construed by a court as being unusual or potentially adverse to policyholders. The decision adds to recent case law addressing the court’s consideration of commercial common sense when interpreting contractual provisions, the most notable of which being Arnold v Britton & ors [2015] UKSC 36 (see the June 2015 Litigation Review), where the Supreme Court provided guidance on the circumstances in which the court may be prepared to depart from natural meaning in favour of commercial common sense. Joanna Grant Senior Associate Litigation – Corporate – London Contact Tel +44 20 3088 4684 [email protected]

Harshil Arora Litigation – Corporate – London Contact Tel +44 20 3088 2362 [email protected]

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Litigation and Dispute Resolution – July 2015

JURISDICTION ISSUES IN INSURANCE DISPUTE Mapfre Mutualidad Compania De Seguros Y Reaseguros SA, Hoteles Piñero Canarias SL v Godfrey Keefe [2015] EWCA Civ 598, 17 June 2015 Article 11 (matters relating to insurance) of the Brussels Regulation should be given a broad interpretation. The exception, in Article 11, to the general rule that a defendant should be sued in the Member State in which it was domiciled was not limited to disputes relating to the meaning or effect of the insurance policy, but also extended to a claim against the insured for the uninsured part of a claim for damages. The claimant suffered severe injuries in an accident at a hotel owned by the second defendant. The second defendant is a company domiciled in, and incorporated under the laws of, Spain. The claimant alleged that, under Spanish law, the second defendant was liable in tort for damages for these injuries. After first pursuing the claim in Spain, the claimant sued in England directly against the second defendant’s Spanish liability insurers (the Insurer), due to the CJEU ruling in Odenbreit. It was held in Odenbreit that an injured third party could bring a direct action against the insurer in the court of his own domicile, and was not limited to the courts of the domicile of the policyholder. The value of the claim, if determined under English law, would significantly exceed the value of the claim as assessed under Spanish law principles. Although Spanish law would apply for substantive issues, such as liability and the availability of heads of loss, quantification of loss was regarded under English law as procedural so the assessment of the quantum of loss would be determined under English law. The Insurer did not challenge jurisdiction and admitted liability to the claimant. However, the Insurer had the benefit of a policy limit, which put a cap on its financial exposure to the claimant (and which may explain the Insurer’s acceptance of the jurisdiction of the English courts, even with the more generous approach to quantum of damages). The claimant recognised that any shortfall would have to be recovered against the second defendant, and applied to join the second defendant as a defendant in the English action. The second defendant challenged jurisdiction.

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Issues Articles 11 (2) and (3) of the Brussels Regulation apply to “matters relating to insurance” and read as follows: “11(2): Articles 8, 9 and 10 shall apply to actions brought by the injured party directly against the insurer, where such direct actions are permitted. 11(3): If the law governing such direct actions provides that the policyholder or the insured may be joined as a party to the action, the same court shall have jurisdiction over them. “ This case addressed three main issues: (1) Does the direct action against an insurer in

Article 11(2) have to be “permitted” by reference to the law of the court to be seised (lex fori), namely England, or the law governing the tort claim or the insurance contract (lex causae), namely Spain? If it is the former, must it be permitted by the substantive law of the lex fori, the procedural law or the law governing the tort claim or insurance contract, to which the private international law rules of the lex fori point? (2) How does the court determine whether a claim is

one made “in matters relating to insurance”? This influences whether Article 11(3) applies at all to the instant claim against the second defendant. (3) If the “same” court does have jurisdiction under

Article 11(3) against both the Insurer and the second defendant, is the court seised of the direct action against the Insurer bound to exercise such jurisdiction if the injured party seeks to join the second defendant, or does the court have a discretion 23

to decline jurisdiction? If there is a discretion, should the court in all the circumstances have exercised it in this case in favour of the second defendant? Issue 1 – “permitted” direct action – lex fori The court ruled that the relevant law governing whether a claim is “permitted” under Article 11(2) is that of the court where the action is to be brought (the lex fori). For English law, the lex fori includes its private international law rules. The direct action against the Insurer was permitted under English law because English private international law rules, in operation before Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations (Rome II), would have characterised the “permitted” question as a matter of substantive law, and hence governed by Spanish law. Although the governing law was not in dispute and both Spanish and English law would permit the joinder, the court also confirmed that “the law governing such direct actions” in Article 11(3) is the applicable law governing the direct cause of action. Issue 2 – “matters relating to insurance” given broad interpretation Article 11(3) was construed broadly in this case, and the matter was held to be one “relating to insurance”. The second defendant argued that the claim for the uninsured excess could not be characterised as “a matter relating to insurance”, on the basis that its liability, if any, was for matters not covered by the insurance policy. As such, it was a tort claim which fell outside the Article’s scope in the absence of a policy dispute. The court however found that there was no logical justification for restricting the Article narrowly to cases with policy disputes or where the joinder falls under Article 11(1) or 11(2). Moore-Bick LJ noted that the wording of Article 11(3) is quite general and that its purpose was to ensure that issues common to both defendants are decided in the same proceedings. The insurer’s liability may depend on either the terms of the policy or on the facts which give rise to the insured’s liability, and it would be anomalous if the claimant could only join the insured for the former.

the claimant was in dispute or if the joinder was necessary to avoid the risk of irreconcilable judgments. Gloster LJ found no basis for either of these limitations on Article 11(3). Even so, the court believed there would indeed have been a risk of irreconcilable judgments if jurisdiction over the second defendant was declined and proceedings were started or continued against it in Spain, as the Insurer’s liability depended, partly or wholly, on exactly the same legal and factual basis as that of the insured. Issue 3 – no discretion The court found that it did not have discretion to decline jurisdiction in this category of case. This follows from the mandatory words “shall have jurisdiction” in Article 11(3) and the policy objectives expressed in the recitals, to which this interpretation gave effect. The court held that, even if it was wrong on the interpretation of Article 11(3), and it did have discretion to decline jurisdiction in this case, it still found that, in all the circumstances, it would have exercised its discretion in the claimant’s favour.

COMMENT The accident in this case occurred before Rome II came into force. In relation to accidents occurring on or after 11 January 2009, the effect of Articles 4 and 11 of Rome II is that quantification of damage in a tort claim is no longer a matter for the procedural law of the forum. The present scenario is unlikely to arise frequently in the future, as there would not be a financial advantage, for example, in bringing a Spanish law tort claim in England. Nevertheless, this decision will still be relevant in supporting a broad interpretation of Articles 11(2) and (3) of the Brussels Regulation, and Articles 13(2) and (3) of the Recast Brussels Regulation which are in identical terms. Luke Streatfeild Senior Associate Litigation – Corporate – London Contact Tel +44 20 3088 2858 [email protected]

The second defendant also argued the matter was only one “relating to insurance” if the Insurer’s liability to pay www.allenovery.com

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Litigation and Dispute Resolution – July 2015

Intellectual Property ACTION FOR PROPRIETARY ESTOPPEL EXTENDED TO INTELLECTUAL PROPERTY RIGHTS Motivate Publishing FZ LLC & anr v Hello Ltd [2015] EWHC 1554 (Ch), 4 June 2015 Actions for proprietary estoppel can in principle extend to actions relating to licences of intellectual property rights. Whilst this case will be of particular interest to our IP clients, it will also be of broader interest as it confirms that actions for proprietary estoppel are not limited only to rights over land and that such actions can in principle extend to other forms of property rights. Motivate Publishing FZ LLC (Motivate), a UAE magazine and book publisher, sued the UK publisher of Hello! magazine for specific performance of a licence agreement and cancellation of a licence that Hello! had granted to a competitor. In 2005 Motivate entered into a five-year licence with Hello! to publish the Middle East edition of Hello! magazine in certain countries in the Middle East. The parties renewed the licence in 2010 for a further five years and it was due to expire on 31 March 2015. The parties disputed whether or not the licence was subsequently renewed. Hello! argued that the licence expired in March 2015 and was not renewed. As a result, Hello! was entitled to enter into a licence with a rival publisher. Motivate argued that: 



the parties had reached an agreement to renew the licence for a further five years, in two emails exchanged between the parties; and in any event, Hello! was estopped by the equitable principle of proprietary estoppel from denying the existence of a renewed licence.

Motivate was unsuccessful on both grounds. The second ground relating to proprietary estoppel is the focus of the remainder of this article. Proprietary estoppel Motivate argued that because Hello! stated in an email that: “we will only be renewing the licence agreement for

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the UAE” Hello! had led Motivate to believe that the licence was going to be renewed for a further five years at least in the UAE, Motivate acted to its detriment in reliance on that representation and it would be unconscionable for Hello! to now be permitted to step away from it. The parties disagreed whether the doctrine of proprietary estoppel was capable of giving a party a cause of action in respect of property other than land. Birss J considered that there was no reason in principle why a proprietary estoppel should not be available to Motivate to prevent Hello! from denying the existence of the renewed licence. The fact that the licence was a licence of intellectual property rights rather than an interest in land was irrelevant. The judge had not been shown any cases in which a proprietary estoppel had been refused on that ground. On the facts, however, Birss J found that a proprietary estoppel did not arise. The statement “we will only be renewing the licence agreement for the UAE” could not be taken out of the context of the email as a whole. It was not a statement that, no matter what, the licence would be renewed for the UAE. Although Hello!’s conduct would have encouraged Motivate to believe that Hello! was assuming the licence would be renewed, on no occasion did Hello!’s words, conduct or even silence amount to a representation that further negotiations were not required or that an agreement about terms was unnecessary.

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COMMENT Whilst the doctrine of proprietary estoppel was traditionally limited to rights in or interests over land, Birss J has confirmed that there is no reason why its application should be confined in this way. Although Birss J’s judgment focuses on proprietary estoppel in the context of a licence of intellectual property rights, the doctrine may also have broader application to other forms of property.

contractual arrangements to ensure that standards of commercial ‘fair play’ are upheld as, unlike other estoppels, it can create rights and give rise to causes of action (rather than being used only defensively as a ‘shield not a sword’). Samantha Holland Associate Litigation – Corporate – London Contact Tel +44 20 3088 3479 [email protected]

Proprietary estoppel can be a useful tool for commercial litigants who are not adequately protected by express

Public law IRANIAN BANK ENTITLED TO RECOVER DAMAGES FOR LOSSES SUFFERED AS A RESULT OF UNLAWFUL TREASURY RESTRICTIONS Mellat v HM Treasury [2015] EWHC 1258 (Comm), 6 May 2015 The High Court (Commercial Court) gave judgment on three preliminary issues of law in a claim by an Iranian bank, Bank Mellat (bank), for damages under s8 Human Rights Act 1998 (HRA) for loss and damage caused by measures taken by HM Treasury under s62 and schedule 7 of the Counter-Terrorism Act 2008 (CT Act). The Treasury measures restricted access by the bank and its UK subsidiaries to the UK financial markets on the ground that the bank allegedly posed a significant risk to national security based on allegations that it provided banking services to those involved in the development or production of nuclear weapons in Iran. The Supreme Court had previously held that these measures were arbitrary, irrational and disproportionate as well as being unlawful because of a failure to give prior notice and an opportunity to make advance representations. The bank’s claim for damages, which is estimated to be in the region of USD 4 billion, was remitted by the Supreme Court to the High Court, and gave rise to the preliminary issues of law decided in this judgment.

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First preliminary issue: whether the Supreme Court had decided that the Treasury measures were unlawful breaches of a Convention right The Treasury submitted that the Supreme Court’s finding that its measures comprised an unlawful interference was confined to a finding that the measures were unlawful under the common law rather than that they were incompatible with a Convention right and unlawful contrary to section 6(1) of the HRA. On this basis it argued that there could be no entitlement to damages under section 8 of the HRA. The Treasury’s interpretation of the Supreme Court’s decision was not accepted. The Treasury had admitted in its defence that the measures were an unjustified interference with the bank’s right to peaceful enjoyment

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Litigation and Dispute Resolution – July 2015

of its possessions under Article 1 Protocol 1 (A1P1) to the Convention. Further, the court observed that the bank’s case as determined by the Supreme Court had been expressly pleaded on the basis that the measures were incompatible with its rights under A1P1. Flaux J found that the Supreme Court clearly had in mind the bank’s case on A1P1 in reaching its decision. The Supreme Court expressly stated that the measures were amenable to judicial scrutiny because they engaged Convention rights and it applied principles of human rights law, as developed in cases concerned with Convention rights, in determining that the measures were unlawful. The Supreme Court had therefore unarguably found that the measures were incompatible with A1P1 and it was not open to the Treasury to contend otherwise. Second preliminary issue: whether a shareholder is entitled to recover reflective loss arising from breach of a Convention right The various categories of loss which the bank claimed for breach of A1P1 included losses arising by reason of diminution in the earnings before taxation of certain subsidiaries. The bank’s claim was that it had a reasonable and legitimate expectation that these earnings would increase year on year, thereby increasing the value of its shareholdings and/or dividend returns. The Treasury responded that any such loss was reflective loss, being loss suffered by the bank as a shareholder, but which only reflected loss suffered by the subsidiary company. As a matter of English law it is well established that such loss is recoverable only in the limited circumstances where the subsidiary company is unable to pursue a claim against the wrongdoer. The question for the court was therefore whether the subsidiary companies were unable to pursue claims against the Treasury and, in any case, whether the rule against reflective loss was applicable in cases concerning Convention rights. The court accepted the bank’s submission that pursuant to section 7(1) of the HRA only a “victim” is entitled to damages against a public authority for breach of Convention rights. Following the decision of the European Court of Human Rights (ECtHR) in Olczak v Poland (30417/96) the court went on to determine that only a person whose Convention rights have been www.allenovery.com

“demonstrably and directly affected” by the unlawful act can be regarded as a victim for the purpose of the HRA. Applying this test, a subsidiary of the bank could not be regarded as a victim because the unlawful measures taken by the Treasury targeted the bank as the “designated person” within the meaning of the CT Act. The bank’s subsidiaries in the UK were affected only indirectly in that any person operating in the financial sector in the UK was required not to continue to participate in any transaction or business with a designated person. Consequently, the subsidiary could not have brought a claim against the Treasury for damages under the HRA. As to whether the rule against reflective loss applies in cases involving Convention rights, the court considered the question by reference in particular to the ECtHR decision in Agrotexim v Greece (14807/89). Flaux J found that ECtHR jurisprudence recognises a rule, analogous to the rule against reflective loss under English law, that a shareholder cannot recover loss suffered by a company other than in exceptional circumstances, such as where the company cannot bring a claim against the wrongdoer. That finding was supported by Neuberger J’s similar interpretation of Agrotexim in Humberclyde Finance Group Ltd v Hicks [2001] EWHC 700 (Ch). The bank argued that, even if ECtHR jurisprudence does restrict the ability of a shareholder to bring a claim for loss suffered by a company, that should not restrict the shareholder’s claim in circumstances where the shareholder could establish that they were a victim for other, independent reasons (as would have been the case here). That argument was rejected by the court, which held that the restriction recognised by the ECtHR in Agrotexim was not merely concerned to restrict a person’s locus standi by limiting the circumstances in which A1P1 is engaged. Rather, it reflected the broader principle that only in exceptional circumstances should a shareholder be afforded rights which in effect require a piercing of the corporate veil. The court’s interpretation of the Strasbourg jurisprudence was supported by the ECtHR decision in Khamidov v Russia (72118/01) where, although the shareholder applicant was found to have victim status, he nonetheless was entitled to recover only in respect of damage to those possessions which he personally owned.

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However, given the court’s finding that the bank’s subsidiary could not have brought a claim against the Treasury for damages, the exception to the general rule applied in the circumstances of this case such that the bank was entitled (subject to the outcome of the third preliminary issue) to bring a claim in respect of the diminution in value of the shareholdings and/or dividend returns of its subsidiary. Third preliminary issue: whether the scope of damages recoverable for violation of A1P1 should be limited by reference to whether the applicable losses constitute possessions within the meaning of A1P1 The Supreme Court’s decision that the Treasury was liable under A1P1 for unjustified interference with the bank’s right to peaceful enjoyment of its possessions was based on a finding that the Treasury measures had interfered with the bank’s goodwill. It is well-established that commercial goodwill constitutes a “possession” for the purpose of A1P1. The preliminary issue for determination was whether, liability having been established by reference to goodwill, the scope of damages might extend beyond loss of goodwill to include future loss of profits and other consequential losses. Such losses constituted a substantial proportion of the bank’s claim. The bank argued that, once liability for breach of A1P1 has been established, compensation should be awarded on the basis that there should be restitutio in integrum, to put the bank in the position it would have been had the unjustified interference not occurred. If the bank could at trial prove its factual case on quantum, that approach would in principle require any award of compensation to include future loss of profits. The Treasury submitted that damages recoverable for unjustified interference under A1P1 are limited by reference to whether what is claimed constitutes a possession, and that future loss of profits is not a possession within the meaning of A1P1 and so is not recoverable. The Treasury relied on several decisions of the English and European courts, including decisions whose effect was recently summarised by Lord Dyson MR in Department for Energy and Climate Change v Breyer Group PLC & ors [2015] EWCA Civ 408. On the basis of a number of ECtHR decisions, including Papamichalopoulos v Greece (14556/89) and Centro www.allenovery.com

Europa v Italy (38433/09), Flaux J agreed with the bank that, so far as Strasbourg jurisprudence is concerned, once liability for breach of A1P1 has been established, damages are recoverable in respect of any loss or damage which is caused by unlawful interference with qualifying possessions, irrespective of whether the loss is itself of a possession within the meaning of A1P1. Dealing with the cases on which the Treasury relied in response, Flaux J likewise accepted the bank’s argument that, whilst these decisions establish that loss of future income is not a possession protected by A1P1, they are concerned only with the threshold test as to whether A1P1 is engaged by an alleged interference. None of the decisions relied on by the Treasury decided the scope of damages that would be recoverable once a violation of A1P1 has been established. Accordingly, the court decided that it would not be correct to approach the issue of the scope of damages by seeking to determine whether particular losses, such as loss of future profits, were themselves possessions for the purpose of A1P1. Rather, in accordance with the principles summarised by Coulson J in his first instance decision in the Breyer case, the court is required to determine whether any losses claimed were directly caused by the violation of A1P1 that established liability. That was a largely factual question and one of causation, to be determined on the evidence following full trial, which should not be subject to what Flaux J described as an “artificial restriction” limiting the recoverable damages by reference to whether the losses are themselves possessions for the purpose of A1P1.

COMMENT An award of damages is exceptional even amongst the scarce successful claims for violation of A1P1. This decision (and the judgment of the Court of Appeal in Breyer) therefore provides a useful exposition of circumstances in which the UK courts will award damages for a breach of A1P1 and the principles that they will apply when assessing their scope. Whether the court will, following the trial in this case, be prepared to award the very large sums claimed is unclear, but this decision nonetheless makes a number of findings of wider importance.

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First, the decision confirms that the English law rule precluding recovery of reflective loss applies to restrict claims for damages arising from a breach of Convention rights. However, the decision also recognises the exception to that rule where the subsidiary itself is not a “victim” with a right to damages under section 8 of the HRA. As a result, it appears there will often be no practical restriction on the ability of a corporate group to claim its losses, irrespective of which entity within the group directly incurred them, provided that the entity which is “demonstrably and directly affected” by the unlawful interference (and which brings a claim) is either an entity that suffered loss or a shareholder of an entity that suffered loss, but is not a qualifying “victim”. Second, the decision confirms that the scope of damages that can be awarded for breach of A1P1 is relatively wide, assessed as they are on the basis of the principle restitutio in integrum. Crucially, the basic distinction established in Strasbourg jurisprudence between a claim in respect of existing possessions, which are qualifying possessions for the purpose of A1P1, and future possessions, which are not, will be of limited significance when determining the scope of damages. Provided the applicant can establish sufficient causal relationship between the losses it seeks to recover and the unlawful interference giving rise to liability under A1P1, the fact that those losses may comprise future possessions will not in itself prevent them from being recovered.

This article first appeared on Practical Law and is published with the permission of the publishers.

James Neill Senior Associate Litigation – Corporate – London Contact Tel +44 20 3088 4633 [email protected]

Nicholas Gomes Associate Litigation – Banking Finance & Regulatory – London Contact Tel +44 20 3088 2669 [email protected]

The decision also demonstrates how human rights law provides protection not only to individuals, but also to financial institutions. It illustrates the advantages that bringing a claim for breach of a Convention right offers over and above a judicial review claim based merely on common law.

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Regulatory ALLEN & OVERY LAUNCHES NEW FINANCIAL SERVICES INVESTIGATIONS BLOG Allen & Overy has launched a new financial services investigations blog – Investigations Insight. The blog can be accessed here. In recent years, regulators and criminal prosecutors around the world have heightened their scrutiny of the activities of financial institutions and those who work for them. This increased focus has meant that it is more important than ever that lawyers and compliance officers who work for and advise financial institutions remain alive to and up-to-date with the most recent trends, risks and developments in relation to financial services investigations.

include views and commentary from members of Allen & Overy’s market-leading global regulatory investigations practice who are based in other jurisdictions. Contacts Sarah Hitchins Associate Litigation – Banking, Finance & Regulatory – London Contact Tel +44 20 3088 3948 [email protected]

With this in mind, the purpose of Allen & Overy’s Investigations Insight blog is to highlight and provide practitioner insight in relation to the latest trends, risks and developments in financial services investigations.

Joanna Hughes Senior Professional Support Lawyer Litigation – London

Investigations Insight will primarily focus on developments relating to financial services investigations from a UK perspective, but will, from time to time, also

Contact Tel +44 20 3088 3828 [email protected]

FCA RULES MAY INFORM STANDARD OF THE COMMON LAW DUTY OF CARE OWED BY A FINANCIAL ADVISER TO CLIENT Anderson v Openwork Ltd [2015] EW Misc B14, 18 June 2015 The County Court has held that where a financial adviser provides advice (rather than just information) to a client on an unregulated product, the financial adviser owes the client a common law duty of care. In considering the extent of this duty, consideration should be given to the standards imposed by the relevant regulatory regime (in this case the FSA’s Conduct of Business Rules in the FSA’s Handbook). The appellant is a network of financial advisers. One of its financial advisers advised the respondent to buy a bond in September 2015 (the Bond). The respondent then sued the appellant, claiming that he was advised to purchase the Bond by the financial adviser when it was www.allenovery.com

not in fact suitable for his needs. The respondent based his claim on a number of arguments, including that the appellant had breached its common law duty of care owed to the respondent by failing to take reasonable steps to ensure that the Bond was suitable for his needs. 30

Litigation and Dispute Resolution – July 2015

First instance: duty owed The respondent’s claim was heard by District Judge Parker. As a matter of fact, he found that the appellant’s financial adviser had provided advice to the respondent on the Bond. District Judge Parker held that the FSA’s Conduct of Business Rules (the COB Rules) did not apply to the Bond (on the basis that the Bond was a “structured deposit” as defined in the FSA Handbook and was therefore not a ‘designated investment’ for the purposes of those rules). However, the appellant did owe the respondent a common law duty of care in relation to the advice it provided about the Bond. In considering the extent of that common law duty of care, consideration should be given to the standards imposed by the COB Rules, in particular: 

the duty to ensure that relevant information about the Bond was known to the respondent;



to take reasonable steps to ensure that the Bond was suitable for the respondent; and



to take reasonable steps to ensure that the respondent understood the risks associated with the Bond.

The District Judge concluded that the appellant had satisfied these duties, with the exception of the duty to take reasonable steps to ensure that the respondent understood the risks associated with the Bond. The respondent would not have bought the Bond but for the appellant’s recommendation so the respondent was awarded damages of GBP 6,114. Appeal The appellant appealed. Did a common law duty of care arise? The appellant argued that there is no need for a common law duty of care in these circumstances, given that Parliament has already devised a remedy for such cases (namely the mechanism in s150 (now s 138D) of the Financial Services and Markets Act 2000 which gave private persons a cause of action for breach of certain FSA rules, including the COB Rules). The appellant argued that the Court of Appeal’s judgment in Green and Rowley v Royal Bank of Scotland [2013] EWCA Civ 1197 states that a common law duty of care cannot exist where there is a statutory duty of care that www.allenovery.com

has been put in place to deal with more complicated investments (namely the COB Rules) and that it is wrong to apply such a high standard of responsibility to advisers who are dealing with more basic investments, such as the Bond in this case. The appellant further argued that at first instance the District Judge misapplied Green and Rowley by applying the COB Rules to “a simple and straightforward investment” such as the Bond. Judge Raeside rejected the appellant’s arguments, holding that District Judge Parker was not wrong to find that a duty of care at common law arose in the circumstances where a financial adviser working for the appellant provided advice to the respondent in relation to the Bond (which was not covered by the COB Rules). In particular, Judge Raeside distinguished Green and Rowley, saying that it was primarily concerned with the situation where there was no pre-existing common law duty owed. In that case only information (not advice) was provided to a customer who invested in a financial product which was covered by the COB Rules. Judge Raeside contrasted this situation with the facts of the present case where, because the COB Rules did not apply to the Bond, no statutory duty of care applied and the appellant’s financial adviser had provided advice (not just information) to the respondent in relation to the Bond. As a result, the first ground of appeal was unsuccessful and Judge Raeside emphasised that Green and Rowley is not authority for excluding a common law duty of care in relation to the circumstances of this case. What was the standard of the common law duty of care that arose? The appellant objected to District Judge Parker having taken into account the standards set out in the COB Rules (specifically COB Rule 5. 2. 5R, 5. 3. 5R and 5. 4. 3R) when determining the standard of the common law duty of care that applied in this case. The appellants argued that this approach was wrong for a number of reasons, including that it misapplied Green and Rowley, imposed a wider obligation on financial advisers than Parliament and the regulatory scheme set out in the COB Rules intended and applied standards intended for complex investments to more basic financial products such as the Bond.

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The County Court rejected the appellant’s arguments: 



District Judge Parker had not used the COB Rules to define the standard of the common law duty of care that applied in this case. Rather, he “simply and understandably made reference in considering the duty to be applied”. This approach was consistent with the Court of Appeal’s judgment in Green and Rowley. In any event, the concepts in Green and Rowley that District Judge Parker had referred to (such as “know your client”, ensuring the suitability of a financial product for “a client’s needs and ensuring that a client understands the risks associated with a financial product) are ‘no more than basic duties which common sense dictates should be applied to any financial advisory situation; they are not unusual or esoteric; indeed it would be a strange toothless duty of care if advice was given, yet these obligations excluded”. Judge Raeside approved the District Judge’s observation that “[i]t is difficult to see how reasonable skill and care could be taken in giving advice about a financial product without the essence of [the COB Rules] being satisfied”.

Was there in fact a breach of the common law duty of care in this case? The appellant disputed that there was any evidence to show that it had breached its common law duty of care to the respondent by not taking reasonable care to ensure that the respondent understood the nature of the risks involved in relation to the Bond. Judge Raeside disagreed, holding that the appellant had not demonstrated that District Judge Parker was wrong in fact or in law in the way in which he assessed whether the appellant had breached its common law duty of care to the respondent. Judge Raeside commented that: “The District Judge was entitled to make the findings as to what constituted risk in this context, as to [the Respondent’s] attitude to that risk and as to the standard that could reasonably be expected of someone giving advice in those circumstances exercising reasonable skill

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and care. He was entitled to find as a fact that the breach caused the loss to occur”.

COMMENT The decision in this case appears to provide greater clarity as to the precise nature and extent of the overlap between common law principles and rules derived from statute. In particular, Judge Raeside held that District Judge Parker was not wrong to refer to various provisions of the COB Rules when determining the appropriate standard of the common law duty of care owed to the respondent in this case on the basis that the duties outlined in the COB Rules were “no more than basic duties” which “should be applied to any financial advisory situation”. Although the County Court did not consider whether or not other statutes or rules derived from statute are relevant in terms of determining the standard of a common law duty of care, it did not rule out the possibility that the standard of a common law duty of care could be supplemented in this way in other situations. As a result, financial advisers and institutions should be aware that, even if provisions in the FCA Handbook do not apply to a particular situation or to a particular product, they may nonetheless be applied by a court to determine the appropriate standard of a common law duty of care. Sarah Hitchins Associate Litigation – Banking, Finance & Regulatory – London Contact Tel +44 20 3088 3948 [email protected]

John Beechinor Litigation – Banking, Finance & Regulatory – London Contact Tel +44 20 3088 2475 [email protected]

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UPPER TRIBUNAL CRITICISES FCA’S APPROACH TO PUBLICISING DECISION NOTICES Bayliss & Co (Financial Services) Ltd & Clive John Rosier v The Financial Conduct Authority [2015] UKUT 0265 (TCC), 21 May 2015 The Upper Tribunal has labelled the inaccurate publication of decision notices relating to a firm and an individual adviser by the Financial Conduct Authority (FCA) as “deeply disappointing and troubling”. The Upper Tribunal has told the FCA that it needs to rethink the way it goes about publishing decision notices. Publication of FCA decision notices The FCA has the power to publish decision notices under s391 of the Financial Services and Markets Act 2000 (FSMA). Decision notices are issued by the FCA if the FCA still proposes to take enforcement action against a firm or an individual after considering any representations made by the subject of an investigation before the FCA’s Regulatory Decisions Committee (RDC). The FCA’s Enforcement Guide (EG) states that the FCA will consider on a case-by-case basis whether to publish a decision notice, but that it normally expects to publish a decision notice where its subject decides to refer the FCA’s proposed findings against them to the tribunal. The FCA may also publish a decision notice before the subject has decided whether to refer the matter to the tribunal if the FCA considers there is a “compelling reason to do so” (paragraph 6.8, EG). However, the FCA may not publish a decision notice if this would, in the opinion of the FCA, be unfair to the subject of the decision notice, be prejudicial to the interests of consumers or otherwise be detrimental to the stability of the UK financial system (s391, FSMA and paragraph 6.9, EG). Several subjects of FSA and FCA enforcement investigations have attempted to challenge the regulator’s decision to publish decision notices before the tribunal. In cases where the tribunal has declined to stop the FSA and FCA from publishing decision notices, its decisions have been conditional upon the FSA or FCA making it clear that the decision notice is provisional and has been referred to the tribunal which will determine the appropriate action for the FCA to take (for example,

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see Arch Financial Products LLP & ors v the Financial Services Authority [2012] FS/2012/20). Background Bayliss & Co (Financial Services) Ltd (firm), a small independent financial advisory firm and its sole director, Mr Rosier, were investigated by the FCA in connection with records relating to the sale of certain financial products to retail customers. In November 2013, the FCA issued a decision notice to the firm and a decision notice to Mr Rosier. The decision notices set out the FCA’s proposed findings that Mr Rosier had breached the FCA’s Statements of Principle and Code of Practice for Approved Persons and that the firm no longer met the FCA’s Threshold Conditions (TC). The FCA proposed to fine Mr Rosier GBP 10,000 and impose a prohibition order on him. The FCA also proposed to cancel the firm’s permission under Part 4A FSMA. The firm and Mr Rosier referred the FCA’s findings against them to the tribunal. Prior to the publication of the decision notices, the firm and Mr Rosier applied to the tribunal for a direction suspending the publication of the decision notices until the tribunal had considered the merits of the FCA’s case. The tribunal declined to make an order suspending the publication of the decision notices on the basis that it was not satisfied that there “was cogent and compelling evidence of disproportionate harm” to the firm and Mr Rosier if the decision notices were published. Publication of the decision notices On 4 November 2013, the FCA published the decision notices on its website. The decision notices prominently featured the following wording: “This decision notice has 33

been referred to the Upper Tribunal in order to determine the appropriate action for the FCA to take”. In addition, the FCA decided to publicise the decision notices by sending an email to certain media outlets (FCA press email). The wording of the FCA press email indicated that the FCA had fined and banned Mr Rosier and did not clearly explain that the decision notices reflected action that the FCA was proposing to take against the firm and Mr Rosier, pending the determination of the matter by the tribunal. The FCA press email also included a link to the decision notices which were erroneously described as “final” notices. Some of the media outlets that received the FCA press email published articles in relation to the decision notices which largely replicated the contents of the FCA press email, thereby giving the incorrect impression that the FCA’s proposed action set out in the decision notices was final. Mr Rosier heard about the FCA press email from one of the media outlets that received it from the FCA. Mr Rosier complained to the FCA about the contents of the FCA press email, claiming that its contents gave media outlets a misleading impression of the status of the FCA’s proceedings against him and the firm. The FCA initially denied that the FCA press email was inaccurate or defamatory to the firm or Mr Rosier. At this point Mr Rosier drew the FCA press email to the attention of the tribunal. The FCA then wrote to the tribunal and apologised for the FCA press email referring to Mr Rosier being “banned” by the FCA. However, the FCA still offered no explanation or apology to Mr Rosier in relation to this matter. Several weeks later, the FCA wrote to Mr Rosier, acknowledging that the FCA press email contained “omissions and inaccuracies”. The FCA apologised to Mr Rosier and offered to send a further email to the media outlets that received the FCA press email to correct these “omissions and inaccuracies”. The tribunal’s findings regarding the FCA’s publicity of the decision notices The tribunal required the FCA to explain the process that had been followed in relation to the drafting and circulation of the FCA press email. It transpired that: www.allenovery.com



The FCA’s Press Office had prepared the first draft of the FCA press email, which was drafted on the mistaken basis that final notices in respect of the firm and Mr Rosier (as opposed to decision notices) were to be publicised.



The FCA Enforcement team leading the investigation into the firm and Mr Rosier produced a revised draft of the FCA press email. The tribunal found that this draft of the FCA press email was “factually accurate in all material respects” and also made it clear from the outset that the decision notices were provisional in light of the fact that the firm and Mr Rosier had referred them to the tribunal.



The FCA’s Press Office was not content with the revised draft of the FCA press email. On the basis of contemporaneous emails involving the FCA’s Press Office that were disclosed to the tribunal, a member of the FCA’s Press Office advised that “the fine and the ban” should feature “up front” in the email sent to media outlets and that references to the decision notices being referred to the tribunal should be kept “short, undetailed and right at the bottom” of the email. The FCA Press Office’s rationale for this re-structuring of the FCA press email was that it was more likely to “grab the journalists’ attention”.



The FCA press email was circulated in largely the same form as had been proposed by the FCA’s Press Office.

Contrary to the FCA’s internal processes, the FCA press email was not circulated to or approved by the relevant FCA Enforcement Head of Department or the RDC. In addition, no one from the FCA’s Enforcement Legal Team was consulted about the FCA press email prior to it being circulated to media outlets. The FCA’s response to the tribunal’s findings regarding publicity of the decision notices In the light of the tribunal’s findings, the FCA accepted that: 

It had not adhered to the guidance set out by the tribunal in previous cases regarding how the FCA should publicise decision notices. Nor had it followed internal processes regarding publicising decision notices.

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Litigation and Dispute Resolution – July 2015



The FCA press email failed to make clear from the outset that the decision notices were provisional and did not contain the usual wording used by the FCA about matters having been referred to the tribunal.



The reference in the FCA press email to Mr Rosier having been “banned” was inaccurate given that Mr Rosier had referred the FCA’s findings against him to the tribunal and that any prohibition order imposed on Mr Rosier would only take effect if and when a final notice was issued.



The characterisation of the FCA’s findings in relation to the firm and Mr Rosier in the FCA press email did not accurately reflect the contents of the decision notices.



Mr Rosier’s initial complaint about the FCA press email was not escalated appropriately within FCA Enforcement. In addition, the FCA’s initial response to Mr Rosier’s complaint about the FCA press email was “inappropriate”. Those handling Mr Rosier’s complaint should have realised that there were errors and inaccuracies in the FCA press email for which they should have apologised promptly.

The tribunal described the FCA’s failings in relation to the FCA press email as “deeply disappointing and troubling”. The tribunal commented that the FCA’s preparation and approval of the FCA press email and handling of Mr Rosier’s complaint about it fell well below the standards that the FCA would expect of the firms it regulates in relation to public communications and complaint handling. Recommendations regarding publicity of FCA decision notices in the future Section 133A(5) of FSMA allows the tribunal to “make recommendations as to the [FCA’s]… procedures” when it considers a decision taken by the FCA. In light of the shortcomings that were identified by the tribunal in relation to the preparation, approval and circulation of the FCA press email, the tribunal made the following recommendations as to how the FCA should strengthen its procedures relating to publicity regarding decision notices: 

The FCA should implement detailed but clear written guidance as to the tone and content of material publicising decision notices. This guidance should

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adequately explain the difference between decision notices and final notices and set out the prescribed material that must be included in publicity materials relating to decision notices, as well as the prominence that should be given to this material. 

All publicity materials relating to decision notices (regardless of whether it is a full press release or communications to certain media outlets) should be prepared to the same rigorous standard.



All draft publicity materials relating to decision notices should be approved by the FCA’s Enforcement Legal Team. Following this approval, draft publicity materials should be approved by the RDC and the relevant FCA Enforcement Head of Department or the Director of FCA Enforcement.



Any complaint received from an interested party after publication should be escalated immediately to the relevant FCA Enforcement Head of Department and the tribunal (if appropriate).

In addition, the tribunal described the FCA’s practice of referring to the subjects of decision notices by their surname (for example, “Rosier” instead of “Mr Rosier”) in publicity materials as “inappropriate”, “prejudicial” and “disrespectful”, given that this is a practice often adopted by the police and is therefore associated with the criminal justice system. Accordingly, the tribunal recommended that the FCA’s practice of referring to subjects of decision notices in publicity materials by their surname only should cease.

COMMENT Once implemented by the FCA, the recommendations made by the tribunal in this case will provide subjects of FCA enforcement investigations with some degree of comfort that the FCA has appropriate systems, controls and safeguards in place to help prevent the dissemination of incomplete or inaccurate information to the press in relation to decision notices. In settled enforcement cases, the subjects of FCA enforcement investigations and their advisers spend a considerable amount of time negotiating the content and format of statutory enforcement notices and associated press releases. Firms’ corporate communications strategies then tend to be based on the contents of these 35

carefully worded documents. The events considered in this decision provide an insight into the types of other non-public communications that the FCA may have with the press to portray enforcement matters on its own terms. Subjects of enforcement investigations are unlikely ever to have sight or even knowledge of these other communications with the press. As a result, firms and individuals are left in the unsatisfactory position that the FCA may disseminate information to the press about enforcement action taken against them without their knowledge, which does not correspond with the content of negotiated statutory notices and press releases.

and all supplementary materials that the FCA proposes to provide to the press in connection with settled enforcement cases. Whether the FCA will accede to such requests in practice remains to be seen, although it is likely to be resistant. This article first appeared on Practical Law and is published with the permission of the publishers. Sarah Hitchins Associate Litigation – Banking, Finance & Regulatory – London Contact Tel +44 20 3088 3948 [email protected]

In the light of the FCA’s conduct highlighted in this case, it is possible that the subjects of enforcement action will request that the FCA provides them with copies of any

Forthcoming client seminars FORUM SELECTION – SHOULD RECENT DEVELOPMENTS CHANGE YOUR APPROACH? Wednesday 9 September 2015, 9-10am Presented by: Sarah Garvey – Counsel – Litigation Karen Birch – Counsel – Litigation There have been significant developments in the field of jurisdiction over the last few months: the Hague Convention on Choice of Court Agreement has been ratified by the EU and will enter into force on 1 October 2015, the Brussels Recast Regulation has been in force for several months, and cases are now coming to court

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where these new rules are applied, there has been a flurry of cases before the English courts on mismatching jurisdiction clauses and, unhelpfully, the French Supreme Court has ruled (again) that hybrid jurisdiction clauses are unenforceable. Sarah Garvey and Karen Birch, both Counsel in A&O’s London Litigation practice, will lead a seminar considering how these and other developments might impact litigation strategies and will explore possible risk mitigants at the drafting stage and beyond. Registration will take place from 8.30am.

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Litigation and Dispute Resolution – July 2015

Litigation Review consolidated index 2015 Arbitration Arbitral award published after “inordinate delay” upheld: B.V. Scheepswerf Damen Gorinchem v Marine Institute sub nom The Celtic Explorer (July) Is an arbitration agreement “null, void” or “inoperative” if it applies a foreign law which does not give effect to mandatory principles of EU law?: Accentuate Ltd v ASIGRA Inc.; Fern Computer Consultancy Ltd v Intergraph Cadworx & Analysis Solutions Inc (June) Third party bound by arbitration agreement which it never signed: The London Steamship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain & anr (June) CJEU potentially opens the back door to court ordered anti-suit injunctions in the EU: Gazprom OAO (May) Arbitration awards: when does an amendment amount to a new award?: Union Marine Classification Services v The Government of the Union of Comoros (May) GBP 200 million e-borders arbitration award set aside: Home Department v Raytheon Systems Ltd (Raytheon I) and (Raytheon II) (April) Company Corporate attribution, the illegality defence and dishonest directors: Jetvia SA & anr v Bilta (UK) Limited (in liquidation) & ors (June) Competition Antitrust liability and subsidiary companies: Tesco Stores v Mastercard (June) Conflict of laws Effect of non-exclusive English jurisdiction clause and forum non conveniens waiver on application to stay English proceedings: Standard Chartered Bank (Hong

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Kong) Ltd & anr v Independent Power Tanzania Ltd & ors (July) Competing jurisdiction clauses in finance documents: Black Diamond Offshore Ltd & ors v Fomento de Construcciones y Contratas SA (July) Follow-on damages competition claim: jurisdiction issues: Cartel Damage Claims Hydrogen Peroxide v Akzo Nobel NV Case C-352/13 (July) Jurisdiction clause is exclusive despite it contemplating proceedings in other jurisdictions: Compania Sud Americana de Vapores SA v Hin-Pro International Logistics Ltd (June) Resolving inconsistent jurisdiction clauses: Trust Risk Group Spa v Amtrust Europe Ltd (June) Schemes of arrangement and why loan note investors should be wary of governing law amendment mechanisms: In the matter of DTEK Finance B.V. (June) Ability to litigate in England torpedoed by foreign insolvency proceedings: Erste Group Bank AG London Branch v J ‘VMZ Red October’ & ors (June) Competing dispute resolution clauses between settlement agreement and underlying contract: Monde Petroleum SA v WesternZagros Ltd (May) Jurisdiction battle lost and Fiona Trust considered: Deutsche Bank AG London Branch v Petromena ASA (April) Applicable law for whether a contract has been validly executed by foreign company: Integral Petroleum SA v SCU-Finanz AG (April) Resolving potentially inconsistent jurisdiction and arbitration provisions in commercial contracts: Amtrust Europe Ltd v Trust Risk Group SPA (Feb/Mar)

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Third state jurisdiction clause respected – Owusu considered: Plaza BV v Law Debenture Trust Corp plc (Feb/Mar)

Effect of agent’s surreptitious dealing: Tigris International NV v China Southern Airlines Co Ltd & anr (Feb/Mar)

CJEU rules on jurisdiction in prospectus liability claim: Request for preliminary ruling: Kolassa v Barclays Bank plc (Feb/Mar)

Standard of reasonableness in contract with public body: Wednesbury not applied: David Krebs v NHS Commissioning Board (As successor body to Salford Primary Care Trust) (Jan)

Contract Right to affirm a contract after repudiatory breach fettered by good faith: MSC Mediterranean Shipping Company SA v Cottonex Anstalt (July) Exclusions clauses ineffective in commercial contract: Saint Gobain Building Distribution v Hillmead Joinery (Swindon) Ltd (July) Inadequate notice of warranty claim: IPSOS SA v Dentsu Aegis Network Ltd (July) Transfer of receipts issued by commodities warehouse operator not valid delivery of goods for repo transactionsL: Mercuria Energy Trading Pte Ltd & anr v Citibank NA & anr (July) Court of Appeal applies modern approach to penalty clauses: ParkingEye Ltd v Beavis (June) Issuer liability to secondary market investor: disclaimers ineffective: Taberna Europe CDO II plc v Selskabet (formerly Roskilde Bank A/S) (In Bankruptcy) (May) Contractual discretion: how to get it right: Braganza v BP Shipping Ltd & anr sub nom The British Unity (May) Forced sale of security: court considers duties owed by bank: Rosserlane Consultants Ltd & anr v Credit Suisse International (May) Changes to loan notes: good faith not implied: Dennis Edward Myers & anr v Kestrel Acquisitions Ltd & ors (May) Meaning of “material” and “material adverse effect” in termination provision: Decura IM Investments LLP & ors v UBS AG, London Branch (April) Netting and set-off under the 1992 ISDA Master Agreement: MHB-Bank AG v Shanpark Ltd (April) Access to target’s documents post-sale: Alfa Finance Holding AD v Quarzwerke GmbH (April)

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Costs Part 36 offer taken into account on costs even though beaten at trial: Sugar Hut Group Ltd & ors v AJ Insurance (Jan) Criminal Supreme Court considers the constituent elements of an offence under s328 of POCA: R v GH (June) Money laundering offences apply to conduct occurring entirely outside the UK: R v Rogers & ors (April) Disclosure Application too late for disclosure of bank’s regulatory benchmark documentation and training materials in mis-selling claim: Peniuk & ors v Barclays Bank plc (May) Employment Employer investigations: James-Bowen and others v The Commissioner of Police for the Metropolis (June) Gender pay gap reporting (April) Claim which was time-barred from continuing in the Employment Tribunal may still be pursued in the High Court: Nayif v The High Commission of Brunei Darussalam (Jan) Injunctions Full and frank disclosure obligation breached but injunction upheld: JSC Mezhdunarodniy Promyshlenniy Bank & anr v Sergei Viktorovich Pugachev (Feb/Mar) Insolvency Lehman Brothers “Waterfall Application” in the Court of Appeal: Lehman Brothers International Europe (in administration) (June)

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Litigation and Dispute Resolution – July 2015

Insurance

Regulatory

Liability for mis-sold payment protection insurance remained with transferor of aninsurance business: PA(GI) Limited v GICL 2013 Ltd & anr (July)

Allen & Overy has launched a new financial services investigations blog – Investigations Insight.

Jurisdiction issues in insurance dispute: Mapfre Mutualidad Compania De Seguros Y Reaseguros SA, Hoteles Piñero Canarias SL v Godfrey Keefe (July) Intellectual Property Actions for proprietary estoppel not limited to rights over land: Motivate Publishing FZ LLC & anr v Hello Ltd (July) Limitation Investor’s knowledge bars mis-selling claim: Susan Jacobs v Sesame Ltd (May) Contractual warranty claims: when does time begin to run? The Hut Group Ltd v Oliver Nobahar-Cookson & anr (Jan) Effect of cross-border insolvency on contractual time bar: Bank of Tokyo-Mitsubishi UFJ Ltd v Owners of the MV Sanko Mineral (Jan) Procedure Supreme Court confirms that merits of a party’s case are generally irrelevant to enforcement of case management decisions: Prince Abdulaziz v Apex Global Management Ltd & anr (Jan) Public law Iranian bank entitled to recover damages for losses suffered as a result of unlawful treasury restrictions: Mellat v HM Treasury (July) Public procurement Public procurement: automatic suspensions to the award of contracts: Bristol Missing Link Ltd v Bristol City Council (May) Review of authority’s decision to cancel tender process: Croce Amica One Italia Srl v Azienda Regionale Emergenza Urgenza (Jan)

FCA rules may inform standard of the common law duty of care owed by a financial adviser to client: Anderson v Openwork Ltd (July) Upper Tribunal criticises FCA’s approach to publicising decision notices: Bayliss & Co (Financial Services) Limited & Clive John Rosier v The Financial Conduct Authority (July) Upper Tribunal refuses to grant an extension of time to allow challenge of a settled FSA enforcement matter: Mohammed Suba Miah v Financial Conduct Authority (June) SFO section 2 interview: When can lawyers be excluded?: R on the application of Lord Reynolds and Mayger v Director of the Serious Fraud Office (June) What due diligence should fund managers undertake before making an investment?: Alberto Micalizzi v The Financial Conduct Authority (May) FCA fines retired accountant for committing market abuse: Final Notice issued against Kenneth George Carver (May) FCA Business Plan 2015/16: Key messages for litigators (April) FCA decision on market abuse overturned: Tariq Carrimjee v the Financial Conduct Authority (April) FCA takes enforcement action against compliance officer for being knowingly concerned in a breach of regulatory requirements committed by the firms he worked for (April) New Senior Insurance Managers Regime (Jan) Service Commercial Court clarifies test for retrospective alternative service of claim form: Michael Norcross v Christos Georgallides (Feb/Mar) Settlement Fraud will not always unravel a settlement agreement: Hayward v Zurich Insurance Co plc (May)

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Inter-solicitor email exchange held to amount to a binding settlement of a complex litigation: Raymond Bieber & ors v Teathers Ltd (in liquidation) (Feb/Mar) State Aid State aid recovery rates ordered against Irish airlines: Case T-473/12 Aer Lingus Ltd v Commission and Case T-500/12 Ryanair Ltd v Commission (April)

Tort Disclaimer precludes third-party reliance on auditor reports: Barclays Bank PLC v Grant Thornton UK LLP (April) THIS REVIEW IS AVAILABLE BY EMAIL Receive it today by emailing your request to: [email protected]

Key contacts If you require advice on any of the matters raised in this document, please call any of our Litigation partners and Dispute Resolution partners, your usual contact at Allen & Overy, or Sarah Garvey.

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Litigation and Dispute Resolution – July 2015

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