An overview of important cases and developments in 2017
- Supreme Court decision on contractual interpretation (Wood v Capita Insurance Services Ltd  UKSC 24)
- Judges continue to take a hard line on privilege (Director of the Serious Fraud Office v Eurasian Natural Resource Corporation Ltd  EWHC 1017)
- When will documents be privileged on the ground that they “evidence” legal advice? (Re Edwardian Group  EWHC 2805 (Ch))
- Formation of contracts (Blue v Ashley  EWHC 1928 (Comm))
- “Reasonable endeavours” obligations (Astor Management AG v Atalaya Mining plc  EWHC 425 (Comm))
- Rolls Royce DPA
- Claimants use UK holding company as an “anchor defendant” to bring claims in England (Lungowe v Vedanta  EWCA Civ 1528)
- Exercise of veto in share option agreement subject to an implied obligation not to act capriciously, arbitrarily or irrationally (Watson and others v Watchfinder.co.uk Ltd  EWHC 1275 (Comm))
- Calculating damages – what does the claimant have to give credit for? (Two Supreme Court cases)
- Shareholders of losing party ordered to pay costs of proceedings (Montpelier Business Reorganisation v Armitage Jones  EWHC 2273 (QB))
Supreme Court decision on contractual interpretation (Wood v Capita Insurance Services Ltd  UKSC 24)
An issue that often arises in contractual disputes is whether a contract should be interpreted literally, or whether a court should focus on the context in which a contract was made and apply business common sense to identify what the parties (objectively) intended.
In Wood v Capita, Lord Hodge sought to bring an end to this debate. He denied (as some commentators have suggested) that there was any inconsistency in recent decisions of the Supreme Court on this issue and said that “the recent history of the common law of contractual interpretation is one of continuity rather than change”.
Lord Hodge said that "contextualism” (applying business common sense) and “textualism” (adopting a literal approach) are both valid tools. The one approach does not trump the other. The extent to which each “tool” is adopted will depend on the circumstances of each particular case. For example, a textual analysis / literal approach might be more appropriate where there is a sophisticated and complicated contract, which has been drafted with the help of legal advisers. On the other hand, where a contract is short, informal or drafted without professional assistance, the court may place a greater emphasis on commercial common sense.
Lord Hodge described contractual interpretation as a “unitary exercise”, which involves checking rival meanings against the words used and investigating the commercial consequences of those meanings. In Lord Hodge’s view, it does not matter whether the analysis begins with the factual background or the words used, provided that the court “balances the indications given by both”. In conducting this exercise, the court should be aware that one of the parties may simply have entered into a bad bargain or that the language may deliberately have been kept vague because the parties could not agree on more precise wording.
The claim in this case was made under an indemnity contained in an SPA. The claim failed because, on the facts, Lord Hodge construed the indemnity narrowly and held that the losses claimed were not covered by the indemnity.
This conclusion was based mainly on an analysis of the relevant provisions in the SPA. However, Lord Hodge also looked at those provisions in the context of the contract as a whole. He noted that the SPA also contained warranties, which would have covered the losses, but required the claimant to make a claim within two years of completion (which it failed to do). The fact that the claims were covered by the warranties pointed (in this case) to the conclusion that they were not covered by the indemnity. This was because, in Lord Hodge’s view, it made business sense for the parties to have agreed warranties, which were wide-ranging but time-limited, and a further indemnity, which was narrower in scope but not subject to a time limit. If the SPA had contained only the indemnity, and not the warranties, the analysis might have been different.
This demonstrates that parties that are negotiating warranties and indemnities should consider how the two sets of provisions tie in with one another because the scope and meaning of one type of provision can have an impact on the meaning and scope of the other.
Judges continue to take a hard line on privilege (Director of the Serious Fraud Office v Eurasian Natural Resource Corporation Ltd  EWHC 1017)
In 2016, there were two important decisions on the scope of legal advice privilege, namely Astex Therapeutics Ltd v AstraZeneca  EWHC 2759 (Ch) and The RBS Rights Issue Litigation  EWHC 3161 (Ch). In both cases, it was held that communications between lawyers and the employees of a corporate client were not privileged. This was because legal advice privilege only attaches to communications between lawyers and their clients. Where a corporate entity is seeking legal advice, the “client” will only be those employees who have been specifically charged with seeking and receiving that advice. Other employees will be in the same position as third parties and their communications with the company’s lawyers will not be covered by privilege.
This issue arose again in the 2017 case of Director of the Serious Fraud Office v Eurasian Natural Resource Corporation Ltd (SFO v ENRC), with similar results. The judge also provided some headline-grabbing guidance on the scope of litigation privilege in the context of a criminal investigation by the SFO.
In this case, the SFO was conducting a criminal investigation into ENRC in connection with allegations of fraud, bribery and corruption in Kazakhstan and Africa. ENRC conducted its own investigation into those allegations. The SFO sought to use its statutory powers to compel ENRC to produce various categories of documents generated during the course of that investigation (the disputed documents), including notes of interviews with employees conducted by external lawyers. ENRC sought to resist production of the disputed documents on the grounds that they were protected by legal advice privilege and / or litigation privilege.
The judge rejected the claim to legal advice privilege in the external lawyers’ notes of interviews with employees (the notes), on the grounds that employees were not the client unless they were one of the individuals authorised to seek legal advice. The court also rejected a submission that the notes attracted privilege as “lawyers’ working papers”. It was held that documents would only be privileged on that basis if they betrayed (or risked betraying) the tenor of legal advice given by lawyers. The mere fact that interviews were conducted (or that notes of interviews were drafted) by lawyers was not sufficient to attract legal advice privilege.
An issue also arose in relation to an email sent by a senior person at ENRC to a certain Mr Ehrensberger, asking him comment on a document (which Mr Ehrensberger duly did). Although Mr Ehrensberger was a qualified lawyer and former General Counsel at ENRC, he had subsequently been appointed Head of Merger and Acquisitions at ENRC. This led the judge to the conclusion that Mr Ehrensberger had ceased to be a legal adviser and had instead become a “man of business”. According to the judge, this meant that his advice could not be privileged. The judge added that, if the sender of the email wanted privileged advice, he should have sent the email to the General Counsel.
There was also a dispute concerning slides and meeting notes (the documents), which had been prepared in connection with meetings between ENRC’s board and its external lawyers. The SFO argued that these documents were not privileged, at least insofar as they referred to the factual findings of ENRC’s investigations.
The judge disagreed and held that the documents were privileged notwithstanding the fact that underlying materials (e.g. interview notes and factual reports), which had informed the presentations made by ENRC’s lawyers, were not privileged. This was because the presentations were made following requests by the board to provide legal advice on certain specific issues arising out of the investigation. In that context, the documents could be characterised as “a record of the confidential solicitor-client dialogue for the purpose of giving and receiving legal advice”. The position would have been different if the purpose of the presentations had been purely to convey factual findings from an investigation, without providing any legal advice.
Perhaps most strikingly of all, the judge held that litigation privilege also did not attach to the lawyers’ interview notes on the basis that they were not created in contemplation, or for the dominant purpose, of adversarial litigation. In the judge’s view, an SFO investigation is not adversarial litigation; it is a preliminary step taken, and generally completed, before a decision has been taken whether to bring a prosecution (which would constitute adversarial litigation). For litigation privilege to apply, there would need to be circumstances which rendered a prosecution likely and the documents would need to be created for the purposes of defending that prosecution (as opposed, for example, to them being created to ward off an investigation).
In reaching this conclusion, the judge drew a distinction between civil litigation and criminal prosecutions. Criminal proceedings cannot be started unless and until the prosecutor is satisfied that there is a sufficient evidential basis for a prosecution and the public interest test is also met. There is no such inhibition on the bringing of civil proceedings and therefore a commercial entity might reasonably expect that it is going to be sued even if the threat of litigation has not yet been articulated. Depending on the facts, therefore, litigation privilege may be available at an earlier stage in a civil dispute than in a criminal investigation.
The Court of Appeal is due to hear an appeal in this case in July 2018. It is to be hoped that this will result in a more business friendly interpretation of litigation privilege. It may take an appeal to the Supreme Court to resolve the issues surrounding legal advice privilege as the Court of Appeal will be bound by its own previous decision in Three Rivers.
When will documents be privileged on the ground that they “evidence” legal advice? (Re Edwardian Group  EWHC 2805 (Ch))
In this unfair prejudice claim, the petitioners disclosed documents relating to their attempts to secure funding from third party litigation funders (the litigation funding documents). The litigation funding documents were heavily redacted and the respondents applied for an order requiring the petitioners to allow inspection of the litigation funding documents with fewer redactions.
The petitioners resisted this application on the basis that the redacted parts of the litigation funding documents would “tend to reveal the advice which the Petitioners have received in relation to the merits of the case, in relation to strategy and tactics, and in relation to the funding itself” and were, therefore, protected by legal advice privilege.
As explained above, legal advice privilege arises in the context of communications between lawyer and client. However the protection also extends to documents which “evidence” those communications. In other words, the privilege covers not only the (for example) letter or email which passes between lawyer and client but also other confidential documents which repeat that advice.
The respondents argued that this rule did not help the petitioners. Their case was that the rule only applies to documents which directly reveal the substance of legal advice (e.g. by summarising or paraphrasing that advice).
The judge rejected that submission. He said that a document would be privileged if the substance of legal advice could be inferred from that document. By contrast a document would not be privileged if it merely allowed the reader “to wonder or speculate whether legal advice had been obtained and as to the substance of that advice”. On the facts of the case, the judge found that the litigation funding documents fell on the right side of this line and were privileged.
As well as providing helpful guidance on privilege generally, this case will provide comfort to parties who wish to provide litigation funders with information about their claim in order to secure funding.
Formation of contracts (Blue v Ashley  EWHC 1928 (Comm))
This case generated a large amount of publicity in 2017 because it involved Mike Ashley, the founder and majority shareholder of Sports Direct, and the issue in dispute was whether the parties had entered into a binding contract whilst drinking in a pub. The claimant, Mr Blue, alleged that, at a meeting at the Horse & Groom in Portland Street, Mr Ashley promised that he would pay Mr Blue £15m if he could get the share price of Sports Direct to reach £8 per share. Sports Direct’s share price subsequently rose above £8. Mr Ashley paid Mr Blue £1m (which he claimed was for other reasons not connected with the alleged agreement) but no more. Mr Blue brought a claim for the balance of £14m.
The judge dismissed the claim. Although he found that the parties did have a conversation along the lines suggested by Mr Blue, the conversation was “banter”, rather than a serious business conversation. There was no intention to create legal relations and, therefore, no binding contract was formed.
In principle, it is possible (for most types of contract) to create a binding contract without a written agreement and in an informal environment. However, the absence of a written record will make it harder to prove that a contract was made and to identify the terms of that contract. Furthermore a judge may start from the position that it is intrinsically less likely that a contract was created if it is not recorded in writing. In this case, Leggatt J said that “…because the value of a written record is understood by anyone with business experience, its absence may – depending on the circumstances – tend to suggest that no contract was in fact concluded.”
The judge also expressed some interesting views on the role of witness evidence in commercial litigation. He referred to scientific research, which shows that human memories are “fluid and malleable”. In other words, memories do not “fade”; they change as a result of what people subsequently believe and discover. Furthermore, the fact that a recollection is vivid or strong is not a reliable indicator of its accuracy. According to the judge, this is particularly the case in the context of litigation, which subjects the memories of witnesses to “powerful biases” and can change the way honest witnesses recall past events. This led Leggatt J to the conclusion that, in commercial cases, judges should place little or no reliance on witnesses’ recollections and that judges should instead base their factual findings on what can be drawn from contemporaneous documents and known facts.
“Reasonable endeavours” obligations (Astor Management AG v Atalaya Mining plc  EWHC 425 (Comm))
An agreement (relating to the ownership and exploitation of a mining project) required the defendants to pay deferred consideration to the claimants once they had obtained senior debt finance sufficient to enable it to restart mining operations. In the event no senior debt finance was obtained and the project was financed by other means (issuing new shares in the parent company and using the money to make intra-group loans to the operating company).
The agreement required the defendants “to use all reasonable endeavours to obtain the Senior Debt Facility” on or before 31 December 2010. The claimants argued that the defendants were in breach of this obligation. The judge rejected that argument. In so doing, he made the following points of general interest:
- The obligation to use all reasonable endeavours to obtain a senior debt facility was a legally enforceable obligation. The obligation was not void for uncertainty notwithstanding the fact that it required the defendants to negotiate an agreement with a third party. The judge said that obligations to use reasonable (or best) endeavours to enter into an agreement with a third party will “almost always” be enforceable. In expressing this view, the judge (Leggatt J) disagreed with the reasoning in Dany Lions Ltd v Bristol Cars Ltd  EWHC 817 (QB), where the judge suggested that such obligations would only be enforceable in “exceptional” cases. However, Leggatt J did accept that it may difficult to prove breach of such an obligation because this may require the court to “second-guess” a commercial party on matters of commercial judgment.
- The obligation to use all reasonable endeavours to obtain the senior debt facility continued beyond 31 December 2010. This was the earliest date on which a breach could occur, rather than the date on which the obligation came to an end. In this case the obligation was to use all reasonable endeavours to obtain the senior debt facility and procure the restart of mining activities on or before 31 December 2010 provided that was practicable and, if not, as soon as practicable thereafter.
- The question whether, and if so to what extent, a person who has undertaken to use reasonable endeavours can have regard to his own financial interests depends on the nature and terms of the contract in question. In this case, the defendants were not entitled to avoid obtaining a senior debt facility just because this would be in their financial interests (in that it would avoid or delay the obligation to pay the deferred consideration). However, financial considerations were not irrelevant and the defendants were not required to obtain senior debt finance at any cost. On the facts, the claimants were unable to prove that the defendants could have obtained senior debt finance on terms that would have rendered the project commercially viable. In that context, the defendants were entitled to finance the project by other means.
The claimants also argued that the defendants were in breach of an implied term of a good faith by securing funding in a way that avoided payment of the deferred consideration. The judge rejected this argument too. He described a duty to act in good faith as “a modest requirement” and said that it does no more than reflect the expectation that a contracting party will act honestly towards the other party and will not conduct itself in a way which is calculated to frustrate the purpose of the contract or which would be regarded as commercially unacceptable by reasonable and honest people. It is a lesser duty than an obligation to use all reasonable endeavours. It followed that, even if an obligation to act in good faith was implied in the agreement (on which he expressed no view), it had not been breached.
Rolls Royce DPA
On 17 January the court approved a Deferred Prosecution Agreement (DPA) between Rolls Royce and the Serious Fraud Office (SFO). The DPA was the third and largest of its kind and was the result of the largest single investigation carried out by the SFO. The DPA, combined with similar agreements reached in the US and Brazil, will result in Rolls Royce making payments of approximately £671m, Of that amount, the UK element was by far the largest: £497.25m plus interest and the SFO’s costs (£13m). In addition, Rolls Royce was required to continue to cooperate with prosecuting authorities’ investigations and, at its own expense, to complete a compliance programme in accordance with the recommendations of an independent expert.
The conduct which led to the DPA consisted, in the judge’s words, of “the most serious breaches of the criminal law in the areas of bribery and corruption (some of which implicated senior management and, on the face of it, controlling minds of the company)”. The relevant conduct included numerous offences of corporate failure to prevent bribery, conspiracy to corrupt and false accounting, and spanned three decades and multiple jurisdictions. Examples included (i) agreements to make corrupt payments to agents in connection with the sale of aircraft engines in Indonesia and Thailand between 1989 and 2006; and (ii) an agreement to make corrupt payments to agents in connection with the supply of gas compression equipment in Russia between January 2008 and December 2009.
The SFO first became aware of these issues as a result of a posting on the internet, rather than a report by Rolls Royce itself. However, Rolls Royce cooperated with the SFO throughout their investigation and this was an important factor in the SFO agreeing to enter into a DPA. The judge noted that this cooperation led to the uncovering of more wrongdoing than would otherwise have been possible. He said that he was satisfied that "the company could not have done more to expose its own misconduct, limited neither by time, jurisdiction or area of business."
Claimants use UK holding company as an “anchor defendant” to bring claims in England (Lungowe v Vedanta  EWCA Civ 1528)
In this case, a group of Zambian claimants were bringing a claim against two defendants in the same group of companies. The second defendant (KCM) was a Zambian company which owned and operated a copper mine in Zambia. The first defendant (Vedanta) was the UK domiciled holding company for the group. The claim was for losses caused by alleged pollution from the copper mine.
The key findings in this case were as follows:
- It was arguable that Vedanta owed a duty of care to the claimants even though it was KCM which owned and operated the mine.
- Where a claim was brought against an English defendant (in this case Vedanta), an English court had no discretion to decline to hear the dispute on the basis that another country (in this case, Zambia) would be a more appropriate forum in which to bring the action.
- Despite the fact that the claimants and the second defendant were Zambian, and the relevant events all took place in Zambia, England was the proper place to bring the claim against KCM. Broadly, this was because the proceedings in England (against Vedanta) would proceed in any event and it was appropriate for both claims to be heard in the same forum. It was also held that the claimants would not get access to justice in Zambia, mainly because they would be unable to secure funding or legal representation to bring their claim.
The case is a reminder that a parent company can be liable for the activities of a subsidiary if, on the facts, the parent owes a duty of care to the claimants. The question of whether a duty of care exists will turn on usual tortious principles (foreseeability, proximity and reasonableness) and has nothing to do with piercing the corporate veil. The case also shows how English parties can sometimes be used as “anchor defendants” to bring claims against foreign parties in the English courts, even where the claim has no other connection with England and the claim against the English defendant is no more than arguable.
Exercise of veto in share option agreement subject to an implied obligation not to act capriciously, arbitrarily or irrationally (Watson and others v Watchfinder.co.uk Ltd  EWHC 1275 (Comm))
Where a contract gives one party the right to take a decision or form an opinion, which will have an impact on the other contracting party, the court will not normally treat this as an unfettered discretion. Rather, a term will often be implied that the discretion must not be exercised capriciously, arbitrarily or irrationally. The purpose of the implied term is to prevent abuse of a contractual right.
In Watson v Watchfinder, the parties had entered into a share option agreement, which entitled the claimants to purchase a percentage of the defendant’s issued share capital at a specified price. The agreement stipulated that the option could not be exercised without the consent of a majority of the defendant’s board. The claimants later sought to exercise the option, but the defendant’s board refused to give consent. The claimants brought proceedings for specific performance of the share option agreement.
The court upheld the claim and granted specific performance of the share option agreement. It held that, when considering whether to consent to the exercise of the option, the defendant was under an obligation not to act in a way that was capricious, arbitrary or irrational. This included (i) following a proper process for taking the decision and (ii) taking into account the material points and not taking into account irrelevant considerations. On the facts, the defendant had failed to comply with the obligation because, in the judge’s words, “[t]here was no real discussion, it did not focus on the correct matters, it proceeded on a mistaken view of what it was about and it was arbitrary.”
Calculating damages – what does the claimant have to give credit for? (Two Supreme Court cases)
In Globalia Business Travel v Fulton Shipping  UKSC 43, the defendant had breached a charterparty by indicating that it intended to return a ship to the claimant owners two years before the contractually agreed date. The claimant treated this anticipatory breach as repudiatory, terminated the charterparty and brought a claim for loss of profits suffered as a result of the breach.
Shortly before the ship was actually returned, the claimant agreed to sell the ship to a third party for US$23,765,000. Then, as a result of changes in the market, the value of the ship fell dramatically. This meant that the ship would only have been worth US$7m on the date that it should have been returned. The defendant argued that the claimant had obtained a benefit (by avoiding a drop in value of the ship), which should be brought into account when assessing damages. The defendant argued, therefore, that the claimant’s damages should be reduced to reflect the change in value of the ship (US$16,765,000). This would have resulted in the claimant’s damages being reduced to zero.
The Supreme Court rejected this argument. It distinguished the claimant’s interest in the capital value of the ship from its interest in obtaining an income stream from hiring the ship out. The interest in receiving an income was the one that had been injured by the breach; the interest in the capital value of the ship was irrelevant. In that context, the benefit (avoiding a loss caused by the fall in value of the ship) obtained by the claimant was not caused by the breach of the charterparty or by a successful act of mitigation (for example, by hiring the ship out under shorter charterparties). Rather, the benefit was caused by the claimant’s own commercial decision to sell the ship. This decision could have been taken at any time, was at the claimant’s own risk and had nothing to do with the charterparty. Whilst the breach of the charterparty may have provided the “occasion” for the sale, it was not the legal cause of it.
In Globalia, therefore, the defendants were given no credit for the claimant’s decision to sell the ship. However, businesses should consider the impact that their decisions may have on any claims that they are intending to bring. In Lowick Rose LLP v Swynson Ltd  UKSC 32 (another Supreme Court case), Swynson Ltd (Swynson) lent money to Evo Medical Solutions Ltd (EMSL) to buy a company which traded under the name “Evo”. In lending the money, Swynson relied on negligent advice from an accountancy firm. The loan was subsequently repaid, very broadly, as part of a group refinancing (whereby EMSL was put in funds by a shareholder to repay the loan). The effect of the loan being repaid was that Swynson had not suffered a loss and its negligence claim against the accountants was extinguished.
Shareholders of losing party ordered to pay costs of proceedings (Montpelier Business Reorganisation v Armitage Jones  EWHC 2273 (QB))
Section 51 of the Senior Courts Act gives the court the power to make a third party costs order (i.e. an order against people who were not a party in the litigation). This is a broad discretion but, in general terms, the court is likely to make a third party costs order against a third party that has funded and controlled the litigation, and will benefit from it.
Special considerations may apply to directors because they have a duty to protect the interests of the company (which may necessitate bringing or defending litigation). This means that third party costs orders are less likely to be made against a director unless that director has acted improperly in the conduct of the litigation (for example, if the claim is not for the benefit of the company or the director has fabricated evidence).
In this case, the claimant was unsuccessful in the main claim and was ordered to pay the defendants’ costs of the proceedings. The claimant was insolvent and it was unable to meet its costs’ liability. The defendants successfully applied for a third party costs order against Montpelier Professional Limited (MPL), which was a 50 per cent shareholder in the claimant.
The judge’s reasons for granting the order included the following:
- MPL had funded the litigation by providing the claimant with a loan on non-commercial terms (it was unsecured and interest-free).
- MPL stood to gain from a successful outcome to the litigation in that it would have avoided liability under a guarantee and other funds would have become available to it.
- There was clear evidence of MPL exercising control over the litigation.
- The special rules that apply to directors do not apply to shareholders (because directors have duties to act in the best interests of a company; shareholders do not).