UK: Commercial Dispute Resolution Briefing - July 2006

Acceptance of FA rules submitting disputes to arbitration constitutes a waiver of rights under Article 6 of the European Convention of Human Rights

In a case in which the disciplinary procedure of the English Football Association ("FA") was upheld, football fever has even hit arbitration. The FA sought to stay legal proceedings brought against them by Mr Stretford, agent to Wayne Rooney, relying on their rules to which an agent is required to adhere as a condition of his licence; these rules refer disputes relating to the playing or administration of football to arbitration. Mr Stretford argued that the FA’s private disciplinary panel, which would arbitrate the dispute, did not comply with Article 6 of the European Convention on Human Rights (relating to the right to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law). Finding that the FA rules were implied terms of the licence, the High Court held that by accepting the licence Mr Stretford had waived his rights under Article 6 in favour of the arbitral process. In any event, the Court noted that a private arbitration hearing and confidential arbitration award were far from onerous or unusual in the context of an arbitration agreement.

In exceptional circumstances the English courts will exercise discretion to refuse to enforce a foreign arbitral award. Contesting the enforcement in England of an arbitral award made by a Mumbai-based tribunal, Mr Guinness argued that the English court should not enforce the award as he had not been given notice of allegations of fraud made against him in the arbitration proceedings. Notice had not been given by the appellants prior to the arbitration (which Mr Guinness did not attend due to illness) or at the High Court, until the appellants produced to the Court of Appeal transcripts of oral submissions made to the tribunal containing allegations of fraud. As a result, Mr Guinness had thought that he only faced a claim of liability for the debt of a third party company, which he had contested in a letter to the tribunal. As Mr Guinness had not been given the opportunity to meet the case put against him, there were good grounds for refusing to enforce the award.

The restriction of the transfer of a loan from a syndicate of banks to a "bank or other financial institution" under a standard London Market Association loan agreement includes a transfer to an investment fund. The court held that the institution referred to in the loan agreement did not have to be a bank or even "akin to a bank". The transferee did not have to undertake activities such as those carried on by a bank, such as lending, which was held by the court to be outside what the parties could reasonably have intended or expected of the agreement. The court held that a "financial institution" was simply a legal entity which carried on business concerning commercial finance in accordance with the laws of the country of its incorporation.

This case indicates the extent of unfairness needed to require or justify the court’s intervention to assist a minority shareholder. Two partners Mr Hale and Mr Waldock incorporated a company, with shares allotted in the same proportion as their partnership shares. Later, with Mr Hale a silent partner, they agreed to transfer the partnership assets into their new company. However, shortly after signing the transfer agreement Mr Hale realised the poor state of the finances of the business. Mr Hale’s drawings soon ceased whilst Mr Waldock continued to run the business and draw a salary from the new company. Mr Hale, the minority shareholder, claimed unfair prejudice under section 459 of the Companies Act 1985. The High Court agreed that there was a degree of unfairness, but concluded that it was insufficient to warrant the Court’s intervention: there was some unfairness in the timing of the transfer, but it only impacted Mr Hale’s negotiating position; although Mr Hale could argue that he had been prejudiced in not receiving the benefits of a profit share, that was not in itself unfair; and although the failure of Mr Waldock to consult him had been to an extent unfair, in the circumstances it was not appropriate to make the onerous order of requiring Mr Waldock to buy out Mr Hale.

Unless there is a quasi-partnership or some other exceptional circumstance, a minority shareholding, however slight, is to be valued as such and not on the basis of a pro-rata share of the overall company. In this case a buy-out order had required the first respondent to purchase the petitioners’ 49.96 per cent shareholding in the second respondent company. The petitioners acknowledged that the company had not been run as a quasi-partnership, but argued that their shareholding should be valued on a prorata, non-discounted basis as the company had operated as a family business, the company’s articles restricted the sale of and market for company shares, and the buy-out was caused by the first respondent’s behaviour. The High Court disagreed, finding that there was no reason to give to the shareholding a quality it lacked. There was no quasi-partnership and there were no exceptional circumstances to justify departing from the normal basis for valuing a minority shareholding. Consequently, the valuation would be based on a shareholding of less than 50 per cent of the issued share capital of the company, and the extent of the discount to be applied was a question for the valuers.

In a dispute relating to an agreement which included an English governing law and jurisdiction clause, the Columbian defendants opposed the claimant’s application for an anti-suit injunction to restrain proceedings commenced in Columbia. The defendants argued that the clause offended Columbian public policy but the High Court found that this was not in itself a good reason for holding that the parties’ consent to the clause was not truly given or that it would be unfair or unreasonable to hold them to their agreement. The defendants contended that the Court should determine the validity of the governing law and jurisdiction clause by reference to Columbian law, relying on Article 8(2) of the Rome Convention. The Court held that in the circumstances it could not be unreasonable to determine the effect of the defendants’ express choice of English law by reference to English law. The defendants had had the opportunity to negotiate a different governing law clause but had not done so. Consequently, there was no basis for an argument that their consent was not real or genuine.

This case provides a rare example of circumstances in which the court will allow details of pre-contractual communications between the parties to be admitted to assist the court’s interpretation of terms of an agreement. The usual rule is that evidence of pre-contractual negotiations is excluded. Here, the agreement provided that one party would hold "preferred supplier status", which was undefined. The claimant argued that the meaning of those words was that used when the parties were negotiating the agreement. The Court of Appeal held that as the parties had used a very unusual combination of words, without the benefit of introductory or explanatory words in the agreement, it was reasonably arguable that those words bore the meaning given to them by the parties during negotiations.

When does a standard contractual term amount to a penalty clause which is unenforceable? Under the terms of an agreement between the claimant employment agency and the defendant company, the claimant required payment of fees within seven days of the date of invoice. Responding to the defendant’s claim for setoff, the claimant denied that it was obliged to pay a refund to the defendant (applicable in circumstances where an employee placed by the agency left the position within a short period) when the defendant had not met the deadline for payment of fees. The defendant contended that this qualification amounted to a penalty: it was triggered on the breach of a payment obligation; it did not reflect a genuine pre-estimate of the loss suffered by the claimant; and in any event there was already another contractual term imposing interest on unpaid fees. The Court of Appeal, noting that the rule against penalty clauses is an exception to the general principle of English law that a contract should be enforced in accordance with its terms, held that the qualification did not amount to a penalty. It amounted to nothing more than a condition precedent, which imposed no obligation on the defendant and did not require the payment of money.

In considering the terms of an oral licence agreement between a landowner and the lessee of the famous motorbike racing circuit, the High Court indicated the circumstances in which the court will imply terms into a contract to ensure that the parties’ common intention to be bound is met. The Court emphasised that it will always try to avoid a conclusion which would leave parties who had intended to contract without a legally binding agreement, particularly where the parties had already acted as though they were bound. Furthermore, the court would put in place a mechanism to make agreements work where the parties’ own efforts to do so had failed or where they had intended to include such a mechanism in their own agreements but had mistakenly neglected to do so. In applying this mechanism, the court will imply a term that is reasonable and equitable, so obvious that it "goes without saying", and capable of clear expression. However, the implied term should not contradict an express term of the contract.

Where a director carries out preparatory work to divert a corporate opportunity away from the company of which he is a director, and then takes that opportunity for himself having resigned, he is liable to account to the company for the profits arising from that opportunity. In this case, the first defendant (the "Director") had been one of two directors of the claimant company. Whilst still a director of the claimant, the Director formed another company. Before an agreement was in place to govern his departure from the claimant, a third party, which had recently entered into two contracts with the claimant, approached the Director with regard to a potential third contract. The Director suggested that the third party put this contract in the name of his new company, before resigning from his position as a director of the claimant. The High Court emphasised the Director’s duty not to divert an opportunity from the company of which he was at that time a director. A director could not set the ground work for a commercial opportunity then take it for himself following resignation.

Expert evidence given honestly and in good faith in a court of law will not normally merit a referral to the witness's relevant professional body. The High Court allowed Professor Meadows’ appeal against the finding of serious professional misconduct by the General Medical Council (GMC) and its decision to strike him from the register (on account of the expert evidence he gave in court on 'shaken baby syndrome'). In doing so, the Court extended the principle of immunity from suit of an expert in respect of evidence given in court to prevent the bringing of subsequent disciplinary proceedings against him based on his actions as an expert. However, the Court added that there was no reason why the judge before whom the expert gave evidence should not refer an expert to the relevant disciplinary body if satisfied that his conduct had fallen 'so far below what was expected of him as to merit some disciplinary action'. Normally, evidence given honestly and in good faith (albeit mistaken) would not merit a referral. The GMC’s appeal commenced at the Court of Appeal on 10 July 2006.

Applying legislation intended to deal with terrorists to white-collar crime, in this highprofile test case of the Extradition Act 2003 ("the Act"), the Divisional Court found that a prosecutor applying for extradition of individuals to the United States (a "Category II territory" for the purposes of the Act) is not required to disclose evidential material beyond that contained in the request itself. Here, the US federal authorities sought to extradite three former NatWest bankers facing allegations of wire-fraud relating to Enron investments. Having established that the alleged offences constituted "extradition offences" relating to a Category II territory under the Act, the Court held that neither the judge nor the Home Secretary had a discretion as to whether to further the extradition process or not. Furthermore, as the statutory requirements had been fulfilled, there was no abuse of process in the prosecutor’s refusal to go beyond the evidence contained in the extradition request. The prosecutor acted in good faith, and the defendants had failed to demonstrate an ulterior motive or that the prosecutor had deliberately delayed the extradition process to take advantage of the Act.

For the first time the Court of Appeal has set out guidelines (eight so-called "Dadourian Guidelines") on how the court should exercise its discretion in permitting a party to enforce a Worldwide Freezing Order ("WFO") abroad. The court should grant permission where it is required to ensure that the WFO is effective, but should not be oppressive to the parties to English proceedings or third parties. The court should consider all relevant circumstances and come to a decision having balanced the interests of the parties and any third parties. The applicant should notify the respondent of the application, although in urgent cases the court may give permission in a without-notice hearing. To support its application, the applicant should produce sufficient supporting evidence for the judge to make an informed decision, including evidence of assets against which they are seeking to enforce the WFO. The applicant should also demonstrate that there is a "real prospect" that those assets are in fact within the country in which it is seeking to enforce the WFO. Furthermore, the applicant must show that there is a risk that the respondent will attempt to move those assets beyond the applicant’s reach. However, the court should not grant permission where doing so would mean that a party may obtain greater benefit abroad by enforcing the WFO than in the UK.

The High Court found that Apple Computer did not breach a 1991 trade mark agreement ("TMA") with Apple Corps by displaying its apple logo on the iTunes Music Store. Apple Corps, owned by Sir Paul McCartney, Ringo Starr and the families of George Harrison and John Lennon, claimed that the appearance of the apple logo while iTunes Music Store is onscreen and being accessed amounted to use of the logo "on or in connection with musical content", in breach of the terms of the TMA. However, the Court found that Apple Computer had not associated its logo with the creative works stored on and transmitted by iTunes Music Store. Mr Justice Mann considered that a "reasonable and sensible user" of iTunes Music Store would not take the presence of the apple logo as an indication of a trade association with the musical content. In addition, Apple Computer’s use of the logo in the context of the iTunes Music Store was genuine, reasonable and fair. However, the Fab Four will not "Let It Be" - on 8 May 2006, Apple Corps filed an application to appeal.

While a professional connection between a Recorder and the Counsel appearing before him does not in itself create a risk of bias or any appearance of bias, nor put a fair trial at risk, a party does not waive his right to make a complaint of alleged bias if he has not been made aware of all of the facts. Shortly before the hearing, it was disclosed to the appellant that the Recorder was head of chambers to which each of the parties’ barristers belonged. The Recorder had also acted and was currently acting in separate proceedings for companies in the same group as the respondent. The appellant agreed to proceed with the Recorder hearing the case, but following judgment raised an allegation of bias. The respondents argued that he had waived his right to make such a complaint by his lack of objection at the time of disclosure. Concluding that the advice given to the appellant by Counsel (to proceed without complaint) had been inappropriate in the circumstances, the Court of Appeal held that the appellant’s decision not to object had not been made freely. The appellant had not been properly advised of the options open to him if he had raised an objection, or of all relevant information including when proceedings under a replacement Recorder might take place.

To what extent must a tenant "materially comply" with covenants under a lease before exercising a break clause? Having given notice to break the lease, the tenant in this case undertook substantial repairs to the property in order to materially comply with covenants contained in the lease as required by the break clause. The tenant then left the property. The landlord claimed that the lease still subsisted as the tenant had failed to materially comply with repairing and other obligations. Dismissing the landlord’s appeal, the Court of Appeal held that materiality was an objective test to be assessed by reference to the ability of the landlord to re-let or sell the property without delay or additional expenditure. The question in this case was whether, notwithstanding certain breaches found by the judge, the tenant had, nevertheless, materially complied with its obligations. That was a matter of fact and the question of whether a tenant may have taken ‘reasonable steps’ when faced by an uncooperative landlord was irrelevant.

This judgment represents the second important House of Lords decision on limitation in recent months, following shortly after Haward v Fawcetts (2006). Their Lordships had to consider when the Law Society suffered actual damage as a result of the actions of accountants Sephton & Co. who had failed to identify and report on a fraud perpetrated by a sole practitioner, Mr Payne, when preparing their "accountants' reports" on his practice submitted to the Law Society for regulatory purposes in respect of the years 1988 to 1995. The Law Society sought to recover from Sephtons the funds paid out of the Solicitors' Compensation Fund to defrauded clients, contending that those payments represented the damage caused by Sephtons’ negligent reports. The reports (which, by failing to identify that Mr Payne had been misappropriating client money, allowed the misappropriations to continue) exposed the Law Society to the risk of compensation claims. The House of Lords concluded that the exposure was a pure contingency and did not amount to actionable damage until the contingency occurred, and therefore, the Law Society only suffered damage when it actually received a claim that it could not reject. Consequently, the Law Society’s claim, issued some 14 years after the first of Sephtons’ reports, was not time-barred.

On 20 July 2006, the Government finally introduced to Parliament the Corporate Manslaughter and Corporate Homicide Bill. The Bill provides for a new offence of corporate manslaughter (to be called corporate homicide in Scotland) and for this to apply to companies and other incorporated bodies, government departments and similar bodies and police forces. As the law currently stands, before a company can be convicted of manslaughter, a "directing mind" of the organisation (that is, a senior individual who can be said to embody the company in his actions and decisions) must also be guilty of the offence. Despite strong criticism of the draft Bill by the Home Affairs and Work and Pensions Joint Committee, the Government has retained their proposed "senior management" test - the new Bill attributes liability to the organisation only for failures in the way an organisation's senior managers managed or organised an activity. More junior failings will not in themselves be sufficient to amount to an offence, but may provide evidence of senior management failures. However, the Government notes that it is continuing to consider whether this part of the Bill can be improved. The Bill also proposes to remove Crown immunity from such prosecution. A copy of the Bill is available via the parliament website at www.parliament.uk.

The Commercial Court heard 67 per cent more trials in 2005 than in the previous year, according to the Commercial Court and Admiralty Court Report 2004-2005. 65 per cent of cases given trial dates settled, which the Report considers is a result of tight case management and "very reasonable" lead times before trial. The figures are all the more remarkable given the "out-dated technology and very poor accommodation" at the Commercial Court. A new Commercial Court building is planned to open in 2011.

On 17 May 2006, PwC published the results of a survey of nearly 150 general counsel on their attitudes towards and practice in international arbitration. PwC report that 73 per cent of corporations prefer international arbitration over litigation. General counsel favour arbitration on the grounds of flexibility of procedure, enforceability of awards, privacy, and the opportunity to choose the arbitrators to suit the case or dispute.

The Department for Constitutional Affairs has recently published advance notice of a change to the Civil Procedure Rules which could impact heavily on litigants, particularly in cases of media interest. From 2 October 2006, non-parties, such as the press, will be entitled to copies of statements of case (including particulars of claim and defences) from the court file as a matter of course, without needing to apply to the court. It is also proposed that this rule change will have retrospective effect. Parties will be able to make applications to protect the confidentiality of documents on the file, but this may present practical difficulties. The question remains whether this concession to the press is a step too far in favour of open justice.

In April 2006 the Bank of England was awarded indemnity costs of approximately £80m from liquidators Deloitte in relation to costs incurred in the long-running BCCI litigation. Deloitte, as liquidators of BCCI, had brought a £1billion claim against the Bank of England alleging ‘misfeasance in public office’ in relation to the Bank’s supervision of BCCI. In November 2005, after 13 years, 30 preliminary hearings and 256 days of a trial in the High Court, the liquidators dropped the case. In a damning costs judgment, Mr Justice Tomlinson described the litigation as "a farce" and "bearing little or no relation to the case which the House of Lords had seen fit to authorise to proceed to trial".

The LCIA Director General's Annual Review 2005 (available in full at http://www.lciaarbitration.com/) has revealed a sharp increase in the case load of the London institution. The main findings of the Review are summarised as follows:

• LCIA arbitrations increased by more than 35 per cent in 2005.

• 20 per cent of LCIA arbitrations were valued in excess of US$20million.

• US parties increased to 13 per cent (from 8 per cent in 2004), parties from the Asia Pacific region (including India) increased from 12 per cent to 16.5 per cent and UK parties increased to 21 per cent of the total (up from 16.5 per cent in 2004).

• 81 of 152 arbitrators (53 per cent) approved by the LCIA Court were appointed by the parties or partynominated arbitrators.

• 70 per cent of those 81 party-appointed arbitrators were from the UK, whereas just over 50 per cent of the 71 LCIAselected arbitrators were from the UK.

The Company Law Reform Bill, nearly 1,000 clauses long, continues its progress through parliament. The Bill has undergone scrutiny by a Standing Committee of MPs. Whilst originally intending to leave certain provisions in the Companies Act 1985, the Government announced recently that it now intends to produce a consolidated Bill to include those parts of the 1985 Act. According to the DTi, the Bill is expected to gain Royal Assent in October 2006.

Having listened to the parties’ lawyers bickering for two weeks, on 6 June 2006 U.S. District Court Judge Gregory A. Presnell ordered that they settle arguments as to the location for a deposition with a single game of "Paper, Scissors, Stone" (or "Rock, Paper, Scissors", to give its US name) to take place on the courtroom steps. The winner of this game would have the sole discretion to select the location of the deposition. It is unclear whether a refusal to play the game would have had cost consequences...!

Whilst the power of the court to intervene in arbitration proceedings alleged to have been conducted unfairly is narrowly confined by the Arbitration Act 1996, the recent case of Norbrook Laboratories Ltd v Tank (2006) provides a rare example of the circumstances in which the High Court will exercise that power.

Intervention by the court is now only possible under section 24 of the Act to remove an arbitrator who has failed to conduct the arbitration properly which gives rise to substantial injustice. In effect, the complainant party must satisfy the court that the arbitrator’s behaviour is wholly outside what the parties could reasonably have expected from the arbitral process.

Here, the parties agreed to arbitrate construction disputes before a single arbitrator using the Short Procedure Rules of the Institute of Chemical Engineers, following which a number of complaints were made against the arbitrator. The arbitrator’s unilateral decision to make direct contact with three individuals, each of whom was a potential witness in the arbitration, in order to obtain their views on particular aspects of the dispute, proved fatal. Although none of the witnesses co-operated with the arbitrator, the court found that this conduct gave rise to apparent bias, which automatically led to a finding of substantial injustice.

A further serious complaint related to a series of telephone calls by the arbitrator to the parties individually, but although the court regarded this behaviour as seriously irregular, it did not justify removal of the arbitrator - nothing of significance had passed between the arbitrator and the parties and the contact had ultimately been disclosed.

The applicant also asserted that the arbitrator had sought to overcompensate for the fact that the respondent was unrepresented by expressing a low opinion of the applicant’s solicitors, bypassing the solicitors and making direct contact with the applicant, and threatening to restrict legal representation. However, the Court held that the arbitrator had not by his conduct demonstrated any bias in favour of the weaker party, and that expression of disapproval of a party’s legal representatives was not of itself enough to justify the arbitrator’s removal.

Clearly, the threshold for a section 24 complaint remains high, if not altogether unachievable. However, this case provides useful lessons for both parties and arbitrators to avoid unilateral contact, to keep opinions to oneself and, most importantly, to stick to the evidence presented by the parties.

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