UK: Commercial Dispute Resolution Briefing | January 2011

Last Updated: 3 February 2011
Article by Barlow Lyde & Gilbert LLP


Supreme Court refuses to enforce foreign arbitral award

Dallah Real Estate and Tourism Company (Dallah) v The Government of Pakistan (2010)

This case constitutes a rare refusal by the English courts to enforce an international arbitration award and confirms that the English courts will consider afresh the validity of the arbitration agreement at the point of enforcement. It stands as a reminder of the importance of ensuring that arbitration agreements are clear and binding on all relevant parties.

The appellant, Dallah, was part of a Saudi conglomerate. It concluded a Memorandum of Understanding with the Government of Pakistan for the provision of housing for pilgrims in Mecca. Subsequently, the Government established the Awami Hajj Trust as a vehicle for the project. Dallah put forward revised proposals for the project and, after negotiations with the Government, the Trust rather than the Government, entered into an agreement with Dallah. The agreement contained an arbitration clause providing that: "(a)ny dispute or difference of any kind whatsoever between the Trust and Dallah arising out of or in connection with this agreement shall be settled by arbitration held under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, by three arbitrators appointed under such rules".

Following a change in political power in Pakistan, the Trust ceased to exist as a legal entity and Dallah commenced arbitral proceedings against the Government of Pakistan in order to claim damages for breach of the agreement. In those proceedings, the arbitral tribunal made an award in Dallah's favour. Dallah then applied to the High Court to enforce the award in England. The Supreme Court considered whether the arbitration agreement was valid and binding on the Government of Pakistan. The law applicable to decide this issue was French law and the key issue was whether there was a common intention on the part of all parties to the arbitration proceedings (including the non-named party) to be bound by the agreement in question. The arbitral tribunal had considered this issue and had decided that this test was satisfied.

However, the Supreme Court found the opposite, ie, that there was no common intention for the Pakistani Government to be bound by the arbitration clause and, therefore, the award was not in fact, valid. The Court questioned the tribunal's approach to this issue of whether or not there was the requisite common intention, and rejected the argument that the wording of the relevant provisions of the New York Convention (Article v(i)) and the Arbitration Act 1996 (section 103(2)) which provided that "recognition or enforcement of the award may be refused" enabled the enforcement of an award made without jurisdiction.

This decision confirms the willingness of the English courts to examine decisions of arbitral tribunals regarding their own jurisdiction. Parties should now be aware that such decisions, particularly where a tribunal assumes jurisdiction over a party who is not party to the relevant arbitration agreement, may be vulnerable to challenge at enforcement stage.

Click here for the judgment.

Arbitration agreement found void for discriminating on grounds of arbitrators' religious belief

Nurdin Jivraj v Sadruddin Hashwani: Sadruddin Hashwani v Nurdin Jivraj (2010)

In a surprising ruling, the Court of Appeal has declared void an arbitration agreement that required that the three arbitrators to be appointed should be respected members of and holders of high office within the Ismaili community. The Court held that such a clause was discriminatory and fell foul of the Employment Equality (Religion or Belief) Regulations 2003 (the Regulations) which give effect to EC Directive 2000/78 on equal treatment in employment (the Directive). Parties to arbitration agreements must therefore now check that their agreements are worded in a non-discriminatory manner to ensure that they are not vulnerable to attack under these regulations.

The parties (Jivraj and Hashwani) had entered into a joint venture agreement. Article 8 of the agreement provided for disputes to be referred to three arbitrators, all of which had to be respected members of the Ismaili community and holders of high office within the community. After the parties decided to terminate their venture and divide the assets, Hashwani put forward a substantial claim and notified Jivraj of the appointment of his arbitrator (who was not a member of the Ismaili community) under article 8 of the agreement. Jivraj sought a declaration that this appointment was invalid under the parties' arbitration agreement because he was not a member of the Ismaili community. Hashwani sought an order that his arbitrator should be appointed sole arbitrator under section 18(2) Arbitration Act 1996 on the basis that the requirement that the arbitrators be members of the Ismaili community, although lawful when the agreement was made, had been rendered unlawful and void under the Regulations.

The Court of Appeal decided that the Regulations applied. Regulation 6(1) provides that "it is unlawful for an employer, in relation to employment by him at an establishment in Great Britain, to discriminate against a person: (a) in the arrangements he makes for the purpose of determining to whom he should offer employment; or (b) in the terms on which he offers that person employment; or (c) by refusing to offer, or deliberately not offering, him employment".

The Court observed that "employment" as referred to above, was defined as including any contract personally to do any work and held that "work" covered the provision of services by an arbitrator. Hence the arbitrator is an employee for the purpose of the Regulation. The arbitration agreement fell within regulation 6(1)(a) since an arbitration agreement constituted "arrangements", and the stipulation that the arbitrator be from the Ismaili community meant that regulation 6(1)(c) also applied since this amounted to refusing, or deliberately omitting, to offer employment as arbitrator to any person who was not a member of the Ismaili community.

As a matter of policy, the Court held that the Regulations and the Directive should be given a broad interpretation and rejected the argument that the Regulations should not apply to those (such as arbitrators) who were self-employed. Finally, the Court considered whether the exception in regulation 7 of the Regulations applied to validate the agreement where the particular religion or belief stipulated is a genuine occupational requirement for the job. However, the Court found that this exception did not apply as membership of the Ismaili community was clearly not necessary for the discharge of the arbitrator's functions under the agreement. Finally, the Court held that it was not possible to sever the requirement that the arbitrators be members of the Ismaili community from the rest of the arbitration agreement and hence the entire arbitration agreement was rendered void.

NB: The parties have been given leave to appeal against this decision by the Supreme Court. We will report on the Supreme Court's ruling in due course.

Click here for the judgment.

Civil Procedure Rules

Time-limited offer not a valid Part 36 offer

C v D and D2 (2010)

A Part 36 settlement offer which was clearly intended to be a "Part 36" offer and attract all the costs consequences that flow from making such an offer, may not be regarded as such if its wording fails to follow the strict requirements of Part 36 of the Civil Procedure Rules (CPR). Accordingly, when making (and receiving) offers, parties should be alert to drafting mistakes that may mean that the offer is invalid under Part 36.

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

The key issues the High Court considered were whether the offer was limited in time and, if so, whether such a time-limited offer may be a valid Part 36 offer. The judge concluded that the offer's wording stating that "the offer will be open for 21 days from the date of the Offer Letter" made it a time-limited offer and that this was not capable of constituting a valid Part 36 offer. This was because Part 36.9(2) provides that an offer must be capable of acceptance unless and until withdrawn by service of a notice. Accordingly, the offer was not a Part 36 offer and did not attract Part 36 costs consequences, although it was of course capable of acceptance within the period stated in the same way as any non-Part 36 offer of settlement. In light of this decision, which demonstrates a strict application of the Part 36 provisions, parties must take utmost care to ensure that offers do not fall foul of its provisions if they wish for their offers to have "Part 36 offer" status.

NB: Leave to appeal from this decision has been granted and we will report on the outcome in due course.

Click here for the judgment.


High Court permits rectification of contract despite entire agreement clause

Surgicraft Ltd v Paradigm Biovices Inc (2010)

Continuing the flexible, common-sense approach adopted in recent case law the High Court has permitted rectification of a contract's terms where they did not accurately reflect the parties' common intentions. The Court made this ruling despite the existence of an entire agreement clause.

The claimant, Surgicraft, was an English company that manufactured medical devices and had appointed the defendant, Paradigm, to distribute a particular product, a spinal implant, in the United States. The parties had entered into a written agreement, which was subsequently amended and restated in a second written agreement (the Final Agreement). This agreement contained an entire agreement clause. Upon a change of control of Surgicraft, it terminated the Final Agreement as was permitted under clause 14. However, a dispute arose between the parties as to whether Paradigm was entitled to compensation as a result of Surgicraft's termination on the basis that a mistake was made in the drafting of the original agreement as well as the Final Agreement, in that compensation was not provided for, when in fact this was the parties' common intention. Surgicraft sought a declaration that no such compensation was due and Paradigm counter-claimed for rectification of the contract and compensation.

The High Court held that, on the evidence, there was "convincing proof" that the parties did in fact have a common intention at all material times that Paradigm would receive compensation in the event of termination upon a change in control in Surgicraft. Furthermore, that common intention continued to and beyond the signing of the original agreement. It was never reconsidered or renegotiated by either party before the date of the Final Agreement, but it remained their intention nonetheless. Accordingly, the termination clause in the Final Agreement contained a mistake in expressing the parties' intentions. It was important to note that the Final Agreement was not intended to be a variation or renegotiation of the parties' earlier agreement but was meant to restate what the parties had actually agreed. The parties' mistake was therefore carried into the later agreement without the parties' common intention having changed.

As for the entire agreement clause, that was not a bar to the Court rectifying the agreement as the purpose of such a clause was to limit possible contractual claims arising from dealings between the parties outside the contract. The parties' mistake "infected" that clause as much as the others and the fact that the parties had included it in the Final Agreement was not an indication of what their common intention was. There was no evidence that either party specifically turned its mind to the meaning or effect of the entire agreement clause or that it played any part in the development of their common intention in relation to termination.

Court interprets agreement strictly, despite the flexible approach adopted in recent cases

Kookmin Bank v Rainy Sky Sa & 6 Ors (2010)

This Court of Appeal ruling demonstrates that, despite the current trend away from interpreting contract terms strictly (see the Surgicraft case above), there are limits to the extent that the courts are prepared to re-write parties' agreements.

Kookmin Bank (the Bank) issued advance payment bonds (the Bonds) to secure the obligations of a ship-builder under its contracts with various customers. Each ship-building contract required the buyer to pay the contract price in pre-delivery instalments and entitled the buyer to repayment of these instalments in the event of the ship-builder's insolvency. The Bonds, in paragraph 2, entitled the buyer "on rejection of the ship" to repayment of any instalments paid. Paragraph 3 of the Bonds stated that the Bank guaranteed "all such sums due to you under the contract". The ship-builder encountered financial difficulties and entered a "debt work out procedure". It failed to repay instalments to its buyers. The buyers contended that in these circumstances they were entitled, under the terms of the Bonds, to be reimbursed the instalments they had paid, by the Bank.

The key issue for the Court of Appeal was whether or not the wording of paragraphs 2 and 3 of the Bonds permitted or prevented the buyers from being repaid the instalments by the Bank. Adopting a strict interpretive approach, with Lord Justice Tuckey dissenting, the Court of Appeal held that the word "such" in paragraph 3 could not be ignored and had to be taken to refer to the circumstances in paragraph 2. This meant, in effect, that the buyers were only entitled to be repaid instalments by the Bank where they had rejected the ship which they had contracted to buy, rather than in circumstances such as here, where the ship builder was insolvent. Lord Justice Tuckey objected to this decision on the basis that this construction produced the "surprising and uncommercial" result of making the guarantee unavailable to meet the shipbuilder's obligations in the event of its insolvency.

However, in its leading judgment, the Court commented that unless the natural meaning of the words used produced an extreme result that cannot have been intended, the Court had to respect the terms of the parties' agreement and had to give the words used the meaning that the contract would convey to a reasonable person having all the background knowledge available to the parties at the time of the contract. It held that problems of interpretation could largely be overcome by construing the disputed terms in light of what the parties knew at the time and what the subject matter of the contract was, although in this case the Court did not have access to the parties' pre-contract negotiations nor information about commercial or other pressures that might have dictated the balance of interests struck by the contract. The judge stated that the "starting point had to be that commercial parties could look after themselves and were able to ensure that the contract accurately reflected their intentions". The Court could not reformulate clear contractual provisions simply because they balanced the interests and obligations of the parties in a way that the judge considered to be one-sided or unfair.

Click here for the judgment.

Statement that terms and conditions were "available on request" incorporated those terms into the parties' contract

Rooney & Another v CSE Bournemouth Ltd (2010)

Parties on the receiving end of order forms or similar documents that refer to "terms and conditions being available on request" should now be aware that these terms and conditions are likely to form part of the parties' agreement and bind both parties, even if they are not in fact, requested.

An aircraft maintenance company (CSE) entered into a maintenance support contract and a continuing airworthiness management support contract with the lessee of an aircraft. Under the contracts, CSE's usual practice was for the scope of maintenance works to be carried out to be defined on a work order form. This was a short document that identified the name of the customer, the aircraft, the place where the work was to be carried out and the items of work to be done. At its foot were words in large capital letters stating that no work would commence until the order was signed and returned, below which appeared in smaller but legible capital letters "terms and conditions available upon request". CSE's standard conditions of trading contained a raft of terms dealing with matters that included CSE's price lists, payment, delivery, passing of title, warranties, limitation of damages, force majeure, governing law and jurisdiction.

On a particular occasion, CSE carried out its maintenance works negligently with the result that the aircraft sustained damage on a flight. The lessor of the aircraft and its parent company then brought a claim against CSE for the losses incurred by them as well as the lessee as a result of the damage suffered by the aircraft. In its defence, CSE relied on a number of conditions set out in its detailed terms and conditions. The key issue for the Court of Appeal to decide was whether or not it was arguable that the work order form incorporated the detailed terms and conditions.

The Court of Appeal held that the appropriate test to be applied was whether reasonable people would have understood the words used as referring to contractual terms upon which CSE had agreed to do the work. Here, the Court held in a unanimous judgment, the most likely interpretation of the words used was that they did incorporate CSE's standard terms and conditions of trading. The Court rejected the High Court's conclusion that the words used did not incorporate the terms and conditions and commented that that construction was not one which the Court "would expect to occur to a businessman in the position of the parties". The Court held that the work order form was intended to be sent to the customer for signature as a contractually binding order rather than a form of pre-contractual negotiation. The Court stated that "it would also be commercially most odd to have a contract for the performance of services where, instead of it containing any detailed commercial terms, eg, as to payment, the contractor devised such terms but left them for inclusion only at the customer's request".

Court of Appeal confirms principle of contractual estoppel

Springwell Navigation Corp v JP Morgan Chase Bank (formerly Chase Manhatten Bank) & Ors (2010)

If parties have contractually agreed that no representations were made, (even if they are aware that this is false), they are bound by their agreement and are precluded from bringing a claim based on a representation that was actually made. So the Court of Appeal confirmed in a recent judgment.

The appellant, Springwell, an investment vehicle for a group of shipping companies, invested in loan notes. They were issued by a bank, Chase, and referred to underlying bonds issued by the Russian Federation known as "GKOs". Following the Russian financial crisis in 1998, the value of these investments fell substantially and Springwell's investment portfolio collapsed. Springwell claimed $700 million in damages on the basis that Chase had breached various contractual, tortious and fiduciary duties in advising Springwell on the nature and content of its investment portfolio. The High Court dismissed these claims as well as the claims that Chase had made negligent misstatements and/or misrepresentations to Springwell regarding the risks relating to the investments. The Court of Appeal agreed with the High Court's decision. It also considered the question whether, if there had been any actionable misrepresentations, the parties' contract precluded such a claim given that the contract stated that Chase had not made any representations.

The Court of Appeal decided that there was no legal principle that prevented such statements in the contract from being contractual obligations, so long as (given that such clauses are effectively exclusion clauses) they are reasonable as required by the Unfair Contract Terms Act 1977. By signing the contractual documentation, the Court held that Springwell must be taken to have read and understood it. It was therefore contractually bound by its acknowledgment that no representation or warranty had been made by Chase in relation to the purchase of the loan notes. Accordingly, Springwell was contractually estopped from claiming that the bank had made any actionable mispresentations.

Click here for the judgment.

Directors' liability

Person who was the "guiding spirit" not to be regarded as a de facto director

Holland v Revenue & Customs Commissioners & Another (2010)

By a slim majority of three to two, the Supreme Court has ruled that even though a director of company (1) (which is itself a director of company (2)), may be company 1's "guiding mind", that was not sufficient to treat him as a "de-facto director" of company 2, so long as everything he does may be regarded as normal within his role as a director of company 1. This decision is a strict application of the rule that companies have separate legal personalities and lowers the likelihood that creditors'/claimants' claims against individuals in effective control of a company's actions, will be successful.

The respondent, Mr Holland, had set up 42 companies (the Companies) that took contractors on as employees. Although the aim was that each company would pay corporation tax at the small companies rate, their share structure meant that they were associated for tax purposes. As a result, each company was liable for higher rate corporation tax and they became insolvent. Their sole director was another company (Paycheck), of which Mr Holland was director. The Inland Revenue (the appellant) was the only creditor of the Companies and it alleged that Mr Holland was liable under section 212 Insolvency Act 1986 to account for dividends paid out by the Companies on the basis that the dividends had been misapplied by him or he had been guilty of misfeasance or breach of any fiduciary or other duty in relation to the funds. The key issue was therefore whether Mr Holland was a de-facto director of the composite companies, such as to impose fiduciary duties upon him.

The Supreme Court held that he was not a de-facto director. Central to the Court's decision was the fact that Paycheck and Holland had separate legal personalities. The mere fact that Holland was a director of Paycheck, a corporate director, was not enough for him to become a de facto director of the companies. The Court highlighted that liability under section 212 Insolvency Act was imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests.

However, Mr Holland had done no more than discharging his duties as the director of the corporate director of the composite companies. Lord Collins commented: "If he was a de facto director of the composite companies simply because he was the guiding mind behind their sole corporate director, then that would be so in the case of every company with a sole corporate director."

Furthermore, a company was at law a different person from its directors and it was the intention of the 1986 Act that that distinction should be recognised. The Court stated that this distinction could not be overcome by simply pointing to the quality of the acts done by the director and asking whether he was the guiding spirit of the subject company or had a real influence over its affairs. The Court stated that such a test would create far too much uncertainty.

NB: two judges dissented from the majority opinion. They found that if Holland had deliberately procured the payment of the dividends by the directors of Paycheck and had the de facto power to do so, he was a de facto director and as such, owed a fiduciary duty to the company and was liable to restore the unlawful dividends. They were of the contrary view that the precise capacity in which he was acting was irrelevant to the question of whether he was a de facto director.

Click here for the judgment.

Objective bystander test appropriate when deciding whether director is dishonest

Starglade Properties Ltd v Nash (2010)

The Court of Appeal has confirmed that a director will not escape being regarded as dishonest (and thereby liable for dishonest assistance of breach of trust) simply because his own standards are different from those of the objective bystander. The Court concluded that the correct test to be applied was that laid down in Twinsectra Ltd v Yardley (2002), as interpreted in Barlow Clowes International Ltd v Eurotrust International Ltd (2005), to the effect that an enquiry into a defendant's views on what the normal standards of honesty are, is not appropriate.

Under the terms of an agreement entered into by the defendant director, (Nash) and the company of which he was sole member and director, (Larkstore), Larkstore agreed to pay Starglade Properties Ltd (Starglade) half of the monies received from litigation brought against a third party, and to hold all monies on trust to be divided between them. The proceedings against the third party were settled and Larkstore received approximately £300,000. Under the terms of parties' agreement, half of this amount was held on trust for Starglade. Despite Larkstore being insolvent, Mr Nash failed to take steps to put it into administration and instead distributed the money amongst six creditors (including himself), but not including Starglade. Four of the six creditors were connected with Mr Nash. The parties accepted that there had been a breach of trust and that Nash had assisted in it. Accordingly, the key issue for the Court of Appeal was whether Mr Nash's actions had been dishonest.

The Court of Appeal concluded that Mr Nash had acted dishonestly. The Court held that an enquiry into a defendant's views as regards what the normal standards of honesty are, is not part of the test to be applied when determining whether the defendant had acted dishonestly. Although the Court will look at what a defendant knew about the transactions or other matters in question (the subjective element of the test), it is sufficient for a defendant's conduct to be dishonest judged objectively by the ordinary standards of honest people. Accordingly, a defendant will not escape a finding of dishonesty simply because his own standards are different. The Court held that the relevant standard is the ordinary standard of honest behaviour and the fact that some might regard the standard as set too high is irrelevant. Here, Mr Nash's clear purpose had been to frustrate Starglade and he had achieved this by his actions. The Court decided that Mr Nash's deliberate removal of assets from an insolvent company specifically for the purpose of defeating the just claim of a creditor should not and does not accord with honest standards of commercial behaviour.

Click here for the judgment.


National courts to strike down exclusive jurisdiction clauses in consumer contracts where they are unfair

VB Penzugyi Lizing v Ferenc Schneider (Case 137/08) (2010)

A recent ECJ ruling means that national courts are now obliged to consider, when presented with a consumer contract, whether a term conferring exclusive jurisdiction on the courts of a particular state, falls foul of the Unfair Terms Directive (93/13/EEC) (the Directive). This is the case even if the term has not been challenged by the consumer. If the court does conclude that such a clause is unfair, it will not be enforceable. Parties accustomed to resolving consumer disputes in their chosen jurisdiction now face the risk of having to resolve disputes in the courts in the jurisdiction where the consumer is based.

The parties had entered a loan agreement to finance the purchase of a car. When the borrower, Mr Schneider, ceased to fulfil his contractual obligations under the agreement, the lender (Lizing) terminated it and brought an action before the courts of Hungary claiming repayment of the debt plus interest and costs. Relying on the exclusive jurisdiction clause in the parties' loan agreement, Lizing's action was not brought in the courts of the place where Mr Scheider lived but in the Hungarian courts. The Hungarian court made an order for payment in favour of Lizing. Following Mr Scheider's appeal, the Hungarian court referred the following question (amongst others) to the European Court of Justice: Does the consumer protection guaranteed by the Directive require that the national courts are to assess of their own motion, the unfair nature of a contractual term before them if not specifically requested to do so?

The ECJ held that it did. It referred to another ECJ decision in which the ECJ noted that: (i) article 3 of the Directive defines the factors that render unfair a contractual term that has not been individually negotiated; (ii) the annex to which article 3(3) of the Directive refers, contains only an indicative and non-exhaustive list of terms that may be regarded as unfair; and (iii) article 4 of the Directive provides that the unfairness of a contractual term is to be assessed taking into account the nature of the goods or services provided for under the contract and all the circumstances attending the conclusion of the contract.

The ECJ held that the national court must determine whether or not the contested term was individually negotiated between a supplier and consumer. If it was not individually negotiated, the next question is whether the term provides for the exclusive territorial jurisdiction of a court that is not the court in whose jurisdiction the consumer lives, or provides for the place (or a place close to) where the supplier has its registered office. If so, then the Court held that such a term must be regarded as unfair within the meaning of article 3 of the Directive and not binding on the consumer, as required under article 6(1). The Court observed that a term obliging the consumer to submit to the exclusive jurisdiction of a court a long way from his domicile may make it difficult for him to enter an appearance. Where the dispute is over a small amount, the costs of entering an appearance could deter the consumer from pursuing any legal remedy or defence. In addition, such exclusive jurisdiction clauses operate in favour of sellers/suppliers as they enable them to deal with disputes relating to their business in one court, making it easier for them to enter an appearance. The Court commented that the Directive is based on the idea that the consumer is in a weak position vis-à-vis the seller or supplier, in terms of both his bargaining power and his level of knowledge and stated: "this leads to the consumer agreeing to terms drawn up in advance by the seller or supplier without being able to influence the content of those terms".

Click here for the judgment.


Advice given by non-lawyers not privileged even if competent to give legal advice

R (on the application of (1) Prudential Plc (2) Prudential (Gibraltar) Ltd) (Appellants) v (1) Special Commissioner Of Income Tax (2) Philip Pandolfo (Inspector Of Taxes) (Respondents) & (1) Institute Of Chartered Accountants In England & Wales (2) General Council Of The Bar (3) Law Society (Interveners) (2010)

The Court of Appeal has ruled that legal professional privilege does not extend to advice given by non-lawyers, even if they are competent to give legal advice. The Court emphasised that any decision to extend the privilege to this sort of advice is a decision that must be taken by Parliament, rather than the courts.

The appellant companies (Prudential) appealed against a decision by the High Court that legal advice given by accountants in respect of tax matters was not covered by legal professional privilege. The Inland Revenue had served notices under the Taxes Management Act 1970 section 20 requiring the production of documents with a view to investigating a commercially marketed tax avoidance scheme. Prudential asserted that the notices required production of documents by which they had sought or received legal advice on tax matters. In some cases such advice was from counsel and foreign lawyers, and in others it was advice sought and received from accountants. Prudential asserted that a section 20 notice did not require a person to disclose documents to which legal professional privilege applied, which included documents relating to obtaining advice from their accountants.

The Court of Appeal disagreed. It held that, subject to limited exceptions, legal professional privilege was an absolute rule entitling the client (and his advisers) to refuse to disclose documents or answer questions. The rule needed to be certain in its nature and content and the Court was bound by previous authority to hold that the privilege only applied to advice by members of the legal profession, ie, a solicitor or barrister, including appropriately qualified foreign lawyers, so long as they are consulted in their professional capacity. It does not extend to advice by non-lawyers, even if the advice they were giving was legal advice which they were competent to give.

The Court concluded that this was compatible with article 8 of the European Convention on Human Rights 1950 which guarantees protection for correspondence with a lawyer. In further support of its decision the Court noted that the Taxes Management Act 1970 made specific provision as to what a tax accountant/adviser could and could not be asked to produce. Hence, Parliament had already considered and addressed what documents these professionals should be obliged to produce. Moreover, Parliament had chosen not to extend the privilege even after production of reports with diverging conclusions on this point (by the Law Reform Committee, the Committee on Enforcement Powers of the Revenue Departments and the Director-General of Fair Trading). The Court of Appeal observed that there was a powerful public interest in disclosure of evidence to resolve legal proceedings and that it was "manifestly a matter of public policy what the bounds of legal professional privilege should be". It also commented that "Parliament's failure to change the law in this respect is not an accident" and concluded that it was not appropriate for the courts to step in and extend the privilege where Parliament had deliberately chosen not to
do so.

Click here for the judgment.

In-house lawyers are not protected by legal professional privilege (LPP) in the course of competition investigations by the European Commission

Nobel Chemicals Ltd and Akcros Chemicals Ltd v Commission (Case C-550/07 P) (2010)

The ECJ's decision in Akzo firmly re-establishes the principle of EU law that in-house lawyers do not have the required level of independence from their employment in order to claim LPP protection. The decision follows the opinion issued in April of this year by the Advocate-General and is an unwelcome end to this long running case for in-house lawyers, who will now have to instruct external counsel to be sure that communications will be protected. However, the judgment does not affect the operation of LPP in domestic proceedings in England and Wales (or other Member States that recognise LPP for in-house lawyers). This means that in-house lawyers will therefore continue to be covered by LPP in the context of UK competition investigations.

In 2003, the European Commission issued a decision requiring Akzo and Akcros (the appellants) to submit to an investigation into alleged anti-competitive practices. The Commission "dawn-raided" their respective premises in order to gather evidence. During the raids, there was a dispute between the appellants and the Commission's officials as to whether certain documents, including emails exchanged between the general manager of a subsidiary and an in-house lawyer at the parent company, benefited from LPP. Applying a previous ECJ decision which held that for LPP in communications to be protected at an EU level the communication must be with an independent lawyer, the Court of First Instance upheld the Commission's decision that LPP did not apply to these documents.

The ECJ dismissed the argument that the term "independent lawyer" included in-house lawyers and held that such independence necessitated the "absence of any employment relationship between lawyer and client". Accordingly, LPP does not cover exchanges within a company or group with in-house lawyers. The Court explained that the in-house lawyer's status as employee means that he cannot ignore the commercial strategies pursued by his employer which affects his ability to exercise professional independence. The Court stated: "it follows, both from the in-house lawyer's economic dependence and the close ties with his employer, that he does not enjoy a level of professional independence comparable to that of an external lawyer". The Court also dismissed the appellants' argument that this decision amounted to unequal treatment as between external and in-house lawyers and was a breach of the general principle of equality enshrined in European law. Finally, it also rejected the appellants' contention that the national laws of Member States of the EU have evolved in favour of a trend towards affording LPP protection to communications within a company or group and in-house lawyers, such as to justify this protection being extended at European level.

NB: Where an investigation is by a national competition authority only or where communications are made with in-house lawyers outside a competition law context, LPP will continue to apply to protect communications made between a company or group and its in-house lawyers, subject to relevant conditions being met. This decision means it is now critical for in-house lawyers to identify what sort of investigation the company is subject to, before making assumptions as to the level of LPP available to protect their communications.

Click here for judgment.


Without prejudice communications discloseable in order to determine meaning of settlement terms

Oceanbulk Shipping & Trading Sa v Tmt Asia Ltd & Ors (2010)

The Supreme Court has confirmed that the courts are prepared to scrutinise without-prejudice communications made between parties whilst negotiating a settlement agreement if they are helpful to interpret the meaning of the settlement terms. Thus, parties are mistaken if they think that labelling communications "without prejudice" means they are protected from subsequent disclosure.

The parties, Oceanbulk and TMT, entered into a series of freight forward agreements with each other. After TMT failed to pay under the agreements and sought an extension of time for payment, the parties conducted negotiations and entered into a written settlement agreement but there was a dispute over the true meaning of one of its terms. The issue that the Court had to consider was whether, by way of an exception to the without prejudice rule, one party could rely on facts that were communicated between the parties in the course of without prejudice negotiations (and that would, but for the without prejudice rule, be admissible as part of the factual matrix or surrounding circumstances) as an aid to the construction of an agreement that resulted from the negotiations.

In an interesting judgment which summarised the various exceptions to the without prejudice rule, the Supreme Court found that without prejudice communications could be admitted in order to properly construe the terms of a settlement agreement. This decision overturns the previous decision of the Court of Appeal, which we reported on in issue 25 of this newsletter.

The Court held that the appropriate question to be asked when interpreting the terms of a settlement agreement is: "What would a reasonable person having all the background knowledge which would have been available to the parties have understood them to be using the language in the contract to mean?" The Court clarified that that background knowledge may include objective facts communicated by one party to the other in the course of the negotiations and the process of interpretation should in principle be the same whether or not the negotiations were without prejudice. The Court found it difficult to draw a line between, on the one hand, admitting without prejudice communications to determine whether parties have concluded a settlement and, on the other hand, admitting them in order to resolve what that agreement was. The Court commented that "if a party to negotiations knew that, in the event of a dispute about what a settlement contract meant, objective facts which emerged during negotiations would be admitted to assist the court to interpret the agreement in accordance with the parties' true intentions, settlement was likely to be encouraged, not discouraged".

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