UK: Commercial Dispute Resolution Briefing, December 2006

Court has discretion to decide whether or not to determine a question of law referred to it under section 45 of the Arbitration Act

Section 45 of the Arbitration Act 1996 provides the court with a discretionary power to determine questions of law. The court can, therefore, refuse an application if it is not persuaded that it should make a determination at that stage. Here, the parties' construction agreement provided that either party could apply to the court to determine any question of law. A dispute arose as to whether a question on the retention of risk in unforeseen structural works amounted to a question of law which the court should determine or whether the court retained a discretion and the question was more suited to a specialist construction law arbitrator chosen by the parties. The High Court confirmed that the power was discretionary, explaining that the section 45 procedure was designed to cause as little delay to the arbitration as possible. However, the Court noted that great weight would be attached to an agreement to refer questions of law to the court. In this case, given the existence of such an agreement and that facts were not in dispute, the Court considered it appropriate to exercise its discretion and determine the question of law.

A state which agrees to submit disputes to arbitration is not immune from proceedings to enforce the resulting arbitration award

The Court of Appeal found that the Lithuanian government was bound by the terms of a joint venture agreement which referred disputes to arbitration. Although not named in or described as a party to a joint venture agreement between a Swedish company and a Lithuanian state-owned entity, the Court held that, in accordance with Lithuanian law, it had been the parties' clear intention that the Lithuanian government would be bound by the terms of the agreement. The inclusion of reference to the Lithuanian government in subsequent drafts of the joint venture agreement supported this. Having determined that the Lithuanian government was a party to the joint venture agreement, the Court then held that the Lithuanian government could not claim state immunity under the State Immunity Act 1978 from the enforcement of the arbitration award.

Is a parent company liable under a guarantee for a subsidiary's liabilities created after the sale of that subsidiary? In this case, the defendant had entered into the "Guarantee" in favour of the claimant, with whom the defendant's subsidiary had contracted for civil works. Five months later, the defendant sold its interest in the subsidiary but the Guarantee remained effective. The subsidiary and the claimant entered into a further and substantially different agreement for additional work, but within a short time the subsidiary was insolvent. The claimant sought to recover under the Guarantee: (i) over-payments made for work done by the subsidiary; and (ii) the additional costs incurred in completing work that the subsidiary had left unfinished. The defendant submitted that the later contract did not fall within the scope of the Guarantee. The High Court agreed. There would be "obvious unfairness" if the Court held that the defendant had guaranteed the subsidiary's performance of an agreement executed some seven months after it had ceased to have any control over the company and of which it had no knowledge. The later contract amounted to a substantial variation of the original. Consequently, the claimant was liable under the Guarantee only for losses arising in relation to the original works.

Evidence of subsequent conduct is admissible in determining parties' intentions in relation to partly written and partly oral agreement

This case provides an exception to the general rule that evidence of the parties' subsequent conduct is inadmissible in determining the original intentions of contracting parties. Here, it was common ground that an agreement for the refurbishment of a townhouse was partly written, in the form of an estimate of costs, and partly oral, in the form of instructions for work to go ahead. In due course, the defendant gave the claimant further oral instructions to undertake additional works, in respect of which the defendant submitted lists of work and interim invoices. The claimant disputed the final bill, arguing that much of the additional work had formed part of the original agreement. The judge at first instance refused to consider the subsequent conduct of the parties in ascertaining their original intentions as to additional works. However, the Court of Appeal held that determining the terms of an oral contract was a question of fact. In this respect, the court may be assisted in ascertaining the parties' original intentions by examining what the parties had said and done after the original agreement had been concluded.

The Court will refuse to create an agreement which the parties have not made themselves

Here, the parties asked the High Court to rectify the formula contained in a deed (the "Deed Formula"), by which the number of share warrants to be granted annually to the defendant was to be calculated, on the grounds that the Deed Formula failed to accommodate the possibility of changes in share capital in the claimant company. The Court confirmed that to succeed in a claim to rectify an agreement, it must be shown that: (i) the document that the parties seek to rectify does not match the common intention of the parties at the time they executed the agreement; and (ii) the document in its proposed form accords with the contemporary intentions of the parties, albeit that there was no pre-existing enforceable contract in the sense in which it is sought to rectify the document. The Court held that in this case, the Deed Formula was in accordance with the parties' intentions at that time. The parties had agreed that the Deed Formula reflected the objective set out in the claimant's prospectus and also that this might not always be the case (in which case the parties had agreed that they could consent to further alterations). The fact that the deed contained certain imperfections did not justify rectification.

Disqualification proceedings can catch non-directors in fact in control of a company

The Secretary of State can base successful disqualification proceedings on the conduct of individuals in relation to the management of a company, whether or not those individuals are formally appointed as directors. The Secretary of State submitted in this case that the first and second respondents (the "Respondents") had been directors or shadow directors of three companies which had collapsed with debts of nearly £20million. The first Respondent argued that he had never been formally appointed as a director of two of the three companies and the second Respondent claimed not to be a director of any of the companies. However, the High Court held that by their conduct the Respondents had been directors or shadow directors of each company. The Respondents had controlled the application of trading income and the payment of trade creditors, which the Court considered to be a critical aspect of corporate affairs. The Court also held that the Respondents had acted unreasonably in failing to respect the fundamental principle that each company had a separate legal personality, which had led to increased deficiency in each company and further detriment to creditors. The Court disqualified the Respondents from being concerned in the management of a company for a combined 18 years.

Assumption of responsibility established despite deliberate lack of contractual link

The Court of Appeal has found a duty of care in tort in circumstances in which the parties had chosen deliberately to avoid a contractual relationship. The Kuwait-based defendant ("UBK") had set up an income fund to invest in operating leases of equipment. The second claimant, the London branch of a Saudi-based bank ("RBE"), rejected UBK's approach to market this fund, as it was a Kuwaiti competitor's product, but agreed to co-operate with UBK in establishing a new leasing fund (the "Fund"). Given the Kuwaiti connection, the parties agreed that the Fund was to have no contractual relationship with UBK. Two years later, it became apparent that the value of the Fund's assets, purchased on the back of UBK's advice to RBE and passed to the Fund, had been over-estimated. RBE suspended the Fund and purchased all of the shares at a cost of around US$75million, which it then sought to recover from UBK on the grounds that UBK owed a duty of care in tort to the Fund. UBK argued that where parties deliberately choose not to create a contractual duty of care, a tortious duty should not be invoked between them. However, the Court held that by its conduct, including holding itself out as experienced and an expert in the field in which it was giving advice and in which it knew RBE had no experience, UBK had assumed responsibility in respect of the advice it provided and therefore owed a duty of care to the Fund which was not excluded by the parties' contractual arrangements.

UK controlled foreign company tax rules are contrary to the principle of freedom of establishment

The European Court of Justice ("ECJ") has found the UK tax regime for controlled foreign companies ("CFCs") to be in contravention of the EU principle of freedom of establishment. Under the UK regime, the profits of a foreign company in which a UK resident company owns a holding of more than 50 per cent (the CFC) are attributed to the UK resident company and subject to tax in the UK, if the corporation tax in the foreign country is less than three quarters of the rate applicable in the UK. The resident company receives a tax credit for the tax paid by the CFC. The ECJ held that the CFC regime created a tax disadvantage for the resident company to which the rules applied. However, the ECJ also held that exceptions in the CFC regime, which apply if a resident sets up a "wholly artificial arrangement", were not incompatible with European law if the UK Special Commissioners, who investigate whether such an arrangement exists, apply objective criteria such as whether a CFC is carrying on genuine business with premises, staff and equipment. In his Pre-Budget Report on 6 December 2006, the Chancellor of the Exchequer announced the publication of draft legislation, for inclusion in the next Finance Bill, to amend the CFC rules in response to the ECJ's judgment in this case. The proposed legislation will allow UK resident companies to apply to the Revenue to disregard CFC profits made from genuine economic activity across the EU.

Conflict of interest does not automatically disqualify expert’s evidence if opinion remains independent

This case has provided important guidance for parties instructing an expert faced with a potential conflict. Here, the expert instructed by the defendant faced a potential conflict of interest by virtue of his membership of the Cases Committee of the Medical Defence Union. Upholding the authority set out in the 1993 case of The Ikarian Reefer, the Court of Appeal held that the presence of a conflict of interest does not automatically disqualify that expert's evidence - the key question is whether the expert's opinion is independent. It is sufficient that the expert's opinion is independent of the parties and the 'pressures of litigation'. As a matter of practice, the Court held that if an expert has a material or significant conflict the Court will be likely to decline to act on his evidence or to permit the use of his evidence. However, it is important that any conflict is disclosed as early as possible so that the court can decide for itself whether to rely on the expert's evidence. The Court indicated that the time for disclosure of any potential conflicts was at the time of service of the expert's report or, should the conflict come to light later, as soon as practicable after that date.

Expert has no immunity from disciplinary proceedings in relation to evidence given by him in legal proceedings

In a much publicised case arising out of the evidence given by Professor Roy Meadow on "shaken baby syndrome" in the Sally Clark murder trial, the Court of Appeal has allowed in part the appeal of the General Medical Council ("GMC") concerning the immunity from suit afforded to experts giving evidence in legal proceedings. The Court held that if the conduct or evidence of an expert witness at or in connection with a trial, in both civil and criminal cases, questioned whether that expert was fit to practise in his particular field, the regulatory authorities, such as the GMC, should be entitled and might be bound to investigate the matter for the protection of the public. The Court rejected the proposal of the judge at first instance that a trial judge should be charged with the responsibility for deciding whose conduct should be referred to a fitness to practise panel and whose conduct should not. Noting that the courts have shown a marked reluctance to extend the immunity from civil suit at all, the Court held that there is no principled basis for extending immunity to all disciplinary proceedings.

Power to grant freezing order can extend to circumstances in which there is no cause of action against the respondent

The High Court has demonstrated that it may be willing to grant freezing orders where the applicant has no direct claim against the respondent. Set in the context of this £35million "carousel fraud" case, the Court granted a freezing order to Revenue & Customs (the "Revenue") against the respondents, against whom the Revenue had no direct cause of action. The Revenue was seeking the compulsory winding up of a company ("C&E") controlled by the first respondent so that it could then claim as a creditor in C&E's liquidation. The Revenue's difficulty was that only C&E had a cause of action against the respondents and it could not compel C&E or its liquidators to bring an action. Nevertheless, in granting the freezing order, the Court noted several factors in the Revenue's favour: (i) C&E had negligible assets, the fraud having been structured so as to leave the respondents with the assets; (ii) C&E and the respondents acted together in the fraud and there was a danger that the respondents might dispose of the relevant assets; and (iii) the Revenue was the intended victim of the fraud, providing a sufficiently close connection between its claim against C&E and C&E/the liquidator's claim against the respondents. Although the Court noted that the usual approach would be for the liquidator, and not the creditor, to apply for freezing orders, the Court's power to grant a freezing order extended to these circumstances.

A bank does not owe a duty of care to a third party to take reasonable care to comply with the terms of a freezing order

A bank notified by a third party of a freezing order granted to the third party, affecting an account held by the bank, does not owe a duty to the third party to take reasonable care to comply with the terms of the order. Here, Customs & Excise, who sought to recover unpaid VAT from two companies, obtained freezing orders to restrict the companies' use of certain accounts held with Barclays. Customs & Excise notified Barclays of the freezing orders, but due to an error Barclays authorised payments of around £2.3million out of the companies' accounts. Customs & Excise claimed damages in the amount paid out of the accounts, alleging that Barclays owed them a duty of care to comply with the terms of the freezing orders, and that Barclays was negligent in allowing payments to be made. Barclays contended that in a case of economic loss the test for a duty of care was whether there had been an "assumption of responsibility". The House of Lords held that in this case there had been no such assumption of responsibility. Furthermore, their Lordships held that a party ordered to carry out an act, such as under the terms of a freezing order, cannot make a "voluntary" assumption of responsibility. The bank's duty to the court to comply with the terms of the freezing order, together with the sanctions that the court can apply if there is a breach of such an order, were sufficient.

Freakley and others v Centre Reinsurance International Company and others*

Insurer's claims handling expenses incurred after the appointment of an administrator do not attract statutory priority

A claim by insurers to recover claims handling expenses incurred after the appointment of administrators does not have priority over other costs of the administration, floating charges or unsecured creditors of the company. The House of Lords explained that the statutory regime for administration simply establishes a moratorium to allow time to save the business or realise its assets better than in liquidation. Accordingly, the legal framework allows the administrator to decide which expenditure is necessary and how that expenditure is prioritised. Their Lordships could see no reason why agreements made on behalf of the company, and not on behalf of the administrators or specifically approved by the court, such as the instruction to claims handlers in this case, should be given priority. The court has the power to direct administrators to approve or authorise such expenditure in order that it may be given priority. However, in this case their Lordships held that it would be unusual to make such a direction which in essence amounted to a business judgment that would be contrary to the opinion of experienced administrators.

House of Lords finds in favour of investment bank over ACT payments made under 'mistake of law'

The House of Lords has affirmed a party's general right to recover payments made under mistake of law, allowing the claimant investment bank to recover Advanced Corporation Tax ("ACT") payments made in respect of dividends paid to its German parent company between 1993 and 1996. Their Lordships (Lord Brown dissenting on this point) held that a mistake of law is "discovered" on the date that an appeal court (in this case the European Court of Justice) holds legislation unlawful or, by possible extension, overrules existing case law. Consequently, the claimant's claim was not time-barred. Here, the claimant had issued its claim following the judgment of the ECJ in Mitallgesellschaft Ltd v Inland Revenue Commissioners (2001) that the UK tax regime, which prevented group income election in respect of ACT where a parent company was resident in a member state other than the UK, was unlawful under European law. In this case, the Revenue unsuccessfully argued that there was no cause of action under common law for the recovery of tax paid under mistake of law and that, in any event, the claimant's claim was statute-barred on the grounds that the Limitation Act 1980 provides a six-year period for the claimant to issue a claim for mistake, from the time he discovered the mistake or could with reasonable diligence have discovered it. The Revenue submitted that this discovery took place when the claimant realised that group income election rules were the subject of a serious legal challenge at the ECJ. The House of Lords disagreed.

Court will not compel a bank to act where transferring funds would be an offence under POCA 2002

A bank was right to refuse to comply with the claimant's mandate to transfer funds in circumstances where it suspected that the money in its customer's account was criminal property. The claimant had received into its account at the defendant bank £215,200 from a Swiss company's Netherlands Antillesheld account in return for the sale of a consignment of mobile phones. On the same day, the claimant asked the bank to transfer £235,000 from its account to a third party company for the purchase of the same consignment. Under these arrangements the claimant would profit from reclaimed VAT, amounting to some £20,000. The bank, suspicious of the source of the money in the claimant's account, refused to comply with the claimant's mandate. The Court of Appeal held that the bank's refusal did not amount to a breach of contract - permitting the transfer would have amounted to an offence under the Proceeds of Crime Act 2002. In addition, the Court, applying R v Da Silva (Hilda Grove) (2006), confirmed that the definition of suspicion in criminal cases applied also to civil cases such as this case - the person concerned must think that there is a possibility, which is more than fanciful, that the relevant facts exist. The existence of suspicion was subjective fact, and there was no requirement that there should be reasonable grounds for such suspicion.

Withdrawal of pre-action admissions does not require court approval

The Court of Appeal has provided useful procedural guidance in relation to admissions made before proceedings have formally started. First, the Court held that a party wishing to withdraw a pre-action admission does not need the court's permission to withdraw it. Secondly, the fact that a preaction admission has been made is not enough to satisfy the test for a summary judgment. Thirdly, when faced with a defendant seeking to withdraw a pre-action admission, the claimant should ask the court to use its case management powers to strike out all or part of a defence, on the grounds that the proposed withdrawal amounts to an abuse of the process of the court or is otherwise likely to obstruct the just disposal of the proceedings. In order to show that there had been an abuse of the process of the court, the claimant will usually need to show that in withdrawing the pre-action admission the defendant acted in bad faith. To demonstrate that the withdrawal would obstruct the just disposal of a case, the Court indicated that a claimant would need to show that the withdrawal would cause him real prejudice that would affect the fairness of the trial, for example if, on the basis of the admission, the claimant had agreed to destroy an item of real evidence.

Discussions regarding the repayment of a debt are not without prejudice communications

This House of Lords decision, set in the context of a claim by the claimant bank to recover outstanding mortgage payments owed by the defendant borrower, illustrates the limits of the without prejudice rule. If correspondence between the parties was written on a without prejudice basis, it would not have been admissible in court and the claimant's claim would have been timebarred. However, if the correspondence did not fall within the rule, it could amount to an admission of liability by the defendant, which would re-start the limitation clock under section 29(5) of the Limitation Act 1980 and allow the claimant to pursue its claim. The House of Lords accepted that in this case the statements in the correspondence constituted an express and unequivocal admission of the existence of debt. The correspondence was not without prejudice and so was admissible. Discussions as to the mechanism for the repayment of an admitted debt, rather than to genuinely negotiate a disputed liability do not fall within the without prejudice rule. The rule covers negotiations genuinely aimed at settlement, not apparently open communications designed only to discuss the method and timing of repayment.

The Companies Act 2006 (at 1,300 sections reputedly the longest piece of legislation to pass through Parliament) received Royal Assent on 8 November 2006. Amongst the key provisions are:

• Directors' duties: the Companies Act provides a statutory framework setting out directors' duties which were formerly left to the common law.

• Directors' narrative reporting: directors are now required to produce a "business review" including both a review of the company's performance and, in the case of quoted companies, analysis of the trends likely to affect the future development of the company, including the company's impact on the environment.
• Derivative actions: the Act includes a procedure by which shareholders may bring an action on behalf of the company against its directors for breach of duty.

It is expected that the provisions giving effect to the EU Takeovers Directive and EU Transparency Directive, and provisions on company communications, will come into force in January 2007. Consultation on secondary legislation which will provide for the detailed implementation of the Act is expected to start in February 2007, with all parts of the Act to be in force by October 2008. Further details of how the Act will be applied to existing companies will be produced for consultation early next year. A copy of the Act is now available at www.opsi.gov.uk.

Please do not hesitate to contact us if you require any specific advice relating to the Companies Act 2006.

An October 2006 report by International Financial Services, a private sector organisation which promotes the international activities of UK-based financial institutions and professional and business services, records that in 2005 a total of 8,800 arbitrations and mediations took place in London. The London Maritime Arbitrators' Association heard the highest number of disputes (3,027). Fifty ICC arbitrations took place in London (behind Paris (85) and Geneva (58)). The London Court of International Arbitration recorded 118 claims/disputes, compared to only 36 a decade ago. A copy of the IFS survey is available at www.ifsl.org.uk.

In June 2006, the LCIA announced that it is to publish the LCIA Court's decisions on challenges to arbitrators. This follows a comprehensive review of LCIA challenge decisions since 1995 and of the policies adopted by other leading international arbitration institutions. Whilst the review found that the ICC has periodically published a survey of the key themes of its challenge decisions, the LCIA intends to publish abstracts of all such decisions. The LCIA is now preparing introductory text and abstracts for review by the full LCIA Court. Further information is available at www.lcia-arbitration.com.

One year on from the coming into force of the Freedom of Information Act, the DCA has published an independent report on the costs of delivering freedom of information across central government and the public sector. 2005 saw an initial surge in requests, but the report expects the annual number of requests to settle at around 34,000. Dealing with such requests costs central government £24.4million per year. A copy of the report is available at www.foi.gov.uk.

On 6 April 2006, the Register of County Court judgments was extended to include High Court judgments dated on or after that date. Prior to 6 April, only County Court judgments were included on the Register. The Register is now known as the Register of Judgments, Orders and Fines (for England and Wales) and is available at www.registry-trust.org.uk.

On 30 September 2006, three years after it came into force in the UK, the US Senate ratified the US/UK Extradition Treaty. The Treaty, agreed in 2003 as a follow up to the 9/11 attacks, has since been used by the US authorities in a number of high-profile extradition cases, such as the "NatWest Three" case. However, under the terms of the Treaty, the UK authorities are required to produce prima facie evidence to the US courts to secure the extradition of a US citizen, whereas the US authorities are not required to produce the same evidence to extradite UK nationals or others located here.

Published on 9 November 2006, the Fraud Act 2006 provides for: fraud by misrepresentation (section 2); fraud by failing to disclose information (section 3); and fraud by abuse of position (section 4). Worthy of note is that the penalty for participating in fraudulent business carried on by a company is increased from seven to 10 years’ imprisonment (section 10). A copy of the Act is available at www.opsi.gov.uk.

An October 2006 survey by The Lawyer revealed Mr Justices Aikens, Jackson, Kitchin, Langley and Mann to be the Champions League hopefuls of the judicial bench. Each had only one judgment overruled by the Court of Appeal from 15 decisions appealed in 2006. Relegation candidates, according to The Lawyer, include Mr Justices Blackburne, Christopher Clarke, Evans-Lombe, Hodge, Keith and Warren - all six found themselves consistently overturned by the Court of Appeal during the 2005/2006 court year.

The latest update to the Civil Procedure Rules provides that from 2 October 2006 non-parties, including the press, are entitled, on payment of a fee, to copies of Statements of Case filed at court after that date. Documents up for grabs include Particulars of Claim, Defences and Replies. This rule change could impact heavily on litigants, particularly in cases of media interest.

In line with a general trend towards greater openness and transparency in dispute resolution, Civil Procedure Rule (CPR) 5.4C, which came into effect on 2 October 2006, gives non-parties an automatic right to access to Statements of Case (but not documents filed with or attached to those Statements of Case) in prescribed circumstances.

"Statements of Case" includes Particulars of Claim, Defences and Replies. A non-party (which might include the press or a competitor) may obtain a copy of a Statement of Case on request from the court and payment of a prescribed fee. This regime represents a progression from the previous rule, pursuant to which a non-party was only entitled to a copy of the claim form and order/judgment (subject to any specific restrictions) and had to make an application to court to obtain copies of other documents on the court file.

Responding to concerns raised by the Law Society, the Department for Constitutional Affairs (DCA) belatedly laid before Parliament a Statutory Instrument which clarifies the position relating to Statements of Case filed before 2 October 2006. The SI, which will come into force on 18 December 2006, confirms that the old rule will continue to apply to documents filed at court before 2 October 2006. In practice, therefore, only the claim form, judgments and orders filed before 2 October will be available to nonparties without the court's permission.

However, and in any event, it is important to bear in mind that CPR 5.4C does apply to all Statements of Case filed on or after 2 October.

The new rule provides that the court may, upon application by any party or person identified in a Statement of Case: (a) order that a non-party may not obtain a copy; (b) restrict the classes of person able to obtain a copy; (c) order specified redaction of the Statement of Case; or (d) make such order as it thinks fit. However, to date the DCA has not released any guidance as to how the court will assess such an application.

CPR 32 provides some guidance relating to the protection of witness statements, and in the absence of any further guidance this is the best guide to follow - under CPR 32 the court has to be satisfied that it should not release a witness statement while the trial is going on because: (i) it is in the interest of justice not to do so; (ii) it is in the public interest not to do so; (iii) due to medical evidence contained therein; (iv) due to confidential information contained therein; or (v) to protect a child/patient.

However, the fact that Statements of Case may contain confidential information, or the fact that the defendants wish to keep their litigation out of the public eye, may not be sufficient.

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