Managing risk: a disputes perspective (2017)

Herbert Smith Freehills recently held its annual disputes client conference exploring some key legal and compliance risks facing major corporates. The event was attended by close to 100 clients. After opening remarks by Mark Shillito, head of dispute resolution for the UK and US, there were presentations on cyber security, Brexit, insurance, class actions, decision analysis, privilege and internal investigations.

A summary of the conference is below – if reading the full version of this post, you can jump down to read more detail on any of the sessions by clicking on the relevant heading.

Cyber security – keeping pace with emerging technologies: Andrew Moir explored the new threats facing organisations with the proliferation of new technologies and trends, focusing in particular on the "Internet of Things", connected vehicles and big data analytics, and looking at how organisations should respond to minimise the risks.

Brexit – how it affects your disputes risk: Andrew Cannon and Gary Milner-Moore considered the impact of Brexit from a disputes perspective, including the disputes that are likely to arise, the impact on the dispute resolution options parties may wish to choose, and the steps parties can take to protect themselves.

Insurance – do you have hidden assets that could assist in a dispute? Paul Lewis and Sarah McNally outlined some of the key policies and developing coverages which clients might not be aware of but which might assist in the event of a dispute or investigation, and looked at practical steps to maximise recoveries.

Competition class actions in the UK – where are we now? Kim Dietzel outlined developments relating to the controversial new collective redress regime for competition claims which was introduced in October 2015, including the first two attempts to launch "opt-out" class actions under the new regime, and their implications for businesses.

Decision analysis for disputes – helping you evaluate risk: Alex Oddy and Donny Surtani outlined how a quantitative approach, combining legal analysis with an evaluation of probabilities and other financial factors, can help clients to evaluate the risk inherent in each dispute, and to weigh their options accordingly.

Privileged (or not) – why the risk to business has just increased: James Norris-Jones outlined the recent High Court decision in the RBS Rights Issue Litigation, which has applied a very narrow interpretation of which communications are protected by privilege, and looked at how businesses can put themselves in the best position to obtain the protection of privilege.

Internal Investigations: Karen Anderson, Andrew Procter and Jenny Stainsby outlined some of the key challenges that arise in internal investigations including: putting in place proper governance; dealing with witness interviews; and preserving and retrieving evidence.

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Court of Appeal decision reiterates need for care when settling with one of a number of defendants

The Court of Appeal has held that a claimant who settled a conspiracy claim against one defendant by recording the terms in a consent order, which was satisfied, could not continue its claim against another defendant who was liable for the same damage. However, the settlement did not prevent the claimant pursuing claims against the other defendant in relation to separate losses or for remedies other than damages, such as injunctive relief: Vanden Recycling Limited v Kras Recycling BV [2017] EWCA Civ 354

The decision underlines that where a claimant settles a claim against only one or more of multiple defendants the settlement needs to be carefully structured. In particular, where the terms of settlement are recorded in a consent order, this is likely to be treated as a judgment by consent which fixes the full amount of the claimant's loss, whether or not that was the parties' intention. Where such a judgment has been satisfied, this will prevent the claimant from pursuing other defendants who are liable for the same damage.

If the claimant wishes to preserve its right to sue other defendants who are liable for the same loss, the settlement terms should not be recorded in the body of a consent order. Instead the parties should enter into a freestanding settlement agreement, or alternatively a Tomlin order – ie a consent order staying the proceedings on agreed terms and granting the parties permission to apply to the court for the purpose of enforcing those terms, which are set out in a schedule or separate agreement referred to in the order. The agreement should expressly reserve the claimant's right to sue the other defendants, which will be particularly important where the liability is joint (see this blog post for further detail).

Gary Horlock, an associate in our dispute resolution team, considers the decision further below.

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Singapore Court of Appeal upholds claim to privilege over hacked documents

In a recent decision, the Singapore Court of Appeal concluded that evidence which had been made available on WikiLeaks as a result of the respondent's computer systems being hacked had not lost its confidential and legally privileged status: Wee Shuo Woon v HT S.R.L [2017] SGCA 23.

Although the emails in question had become potentially accessible by the public carrying out an "intense search", they constituted a minute fraction of approximately 500GB of data that had been pilfered from the respondent's systems. The court noted that merely making confidential information technically available to the public at large does not necessarily destroy its confidential character.  On the facts of this case, it could not be said that the evidence was public knowledge or in the public domain, and therefore it was still protected by the law of confidence.

Although this is a Singaporean decision, it is based in large part on English case law. Assuming the same approach is taken here, it suggests that privileged and confidential information will not necessarily lose that status merely because it becomes technically available to the public, for example by unauthorised publication on the internet, if in fact it has not been accessed and is unlikely to be widely accessible or (if accessed) easily identified and understood; all the more so if the information had been obtained by stealth, trickery or by otherwise improperly. 

The decision is particularly relevant and important in light of recent cyber attacks on political parties and others, resulting in mass releases of confidential information on the internet. Click here to read more about the decision on our Asia Disputes Notes blog.

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High Court finds obligation to use “all reasonable endeavours” to reach agreement with third party was enforceable

The High Court has upheld a contractual provision requiring a party to use "all reasonable endeavours" to obtain a senior debt facility agreement, rejecting arguments that the clause was too uncertain to be enforced: Astor Management AG v Atalaya Mining Plc [2017] EWHC 425 (Comm).

It is a well-established principle that English law will not enforce a mere “agreement to agree” since, in the absence of objective criteria regarding the agreement to be reached, there is no way to determine what the parties are obliged to do. In Dany Lions Ltd v Bristol Cars Ltd [2014] EWHC 817 (QB), for example, the court declined to enforce an obligation in a settlement agreement to use reasonable endeavours to enter into a third party contract (for the restoration of a classic car), as the court could not evaluate whether it was reasonable to refuse to agree to any particular terms on offer.

The present case suggests a greater willingness to enforce an endeavours obligation where the object of the endeavours is a contract with a third party. It does however suggest that the courts will be slow to find that such an obligation has been breached.

Given the uncertainty surrounding these issues, commercial parties negotiating a clause of this sort would be well advised to ensure that the object of the endeavours is clearly defined – so that, so far as possible, there are agreed parameters as to what any agreement should look like – and there is also clarity as to the steps that are (or are not) required to comply with the obligation.   

James Farrell and Michael Barron, a partner and associate in our disputes team, consider the decision further below. For more on endeavours obligations, see the sixth in our series of contract disputes practical guides, Endeavours obligations: How hard do you have to try?

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High Court decision takes restrictive approach to both litigation privilege and legal advice privilege

A High Court decision earlier this week has applied a strict approach to litigation privilege in the context of criminal proceedings, finding that litigation was not in reasonable contemplation (so the first limb of the test for litigation privilege was not met) even though a criminal investigation by the SFO was reasonably contemplated: SFO v Eurasian Natural Resources Corporation Ltd [2017] EWHC 1017 (QB). 

The decision suggests it is likely to be easier to establish that litigation is in reasonable contemplation in the context of civil proceedings than criminal proceedings. However, the decision contains unhelpful comments regarding the second limb of the test for litigation privilege – whether a document has been prepared for the dominant purpose of litigation – which would appear to apply equally to civil proceedings. The decision also endorses a restrictive view of who is the "client" for legal advice privilege, as recently applied by the High Court in the RBS Rights Issue Litigation (see our blog post on that decision here):

Key points of interest arising from the present decision include:

  • The court found that the test of whether litigation is in reasonable contemplation is not met just because a criminal investigation is contemplated. Only a prosecution, not an investigation, amounts to "litigation" for these purposes, and the contemplation of a criminal investigation does not necessarily equate to the contemplation of a prosecution. Prosecution only becomes a real prospect once it is discovered there is some truth in the allegations, or at least some material to support them.
  • The court commented that the situation is different for civil proceedings. There may be reasonable grounds to contemplate that litigation will be commenced by (say) a commercial counterparty even where there is no proper foundation for a claim. In contrast, criminal proceedings cannot be brought unless the prosecutor is satisfied that there is a sufficient evidential basis for prosecution. It is therefore likely to be easier to establish the first limb of the test for litigation privilege in the civil context.
  • The decision takes a strict approach to whether documents have been prepared for the dominant purpose of litigation, finding that even if litigation was in reasonable contemplation at the time the documents in question in this case were prepared, they were not prepared for the purpose of that litigation. The court found that the primary purpose here was to find out if there was any truth in allegations made by a whistleblower and (if there was) to decide what to do about it, and this was not sufficient.
  • Even if the purpose was to obtain advice in relation to a criminal investigation and minimise the risk of it happening, the court said this would not mean the documents were covered by litigation privilege. The court accepted that the purpose of conducting litigation includes the settlement of litigation once it is in train. However, it rejected the submission that litigation privilege extends to documents created to obtain legal advice as to how best to avoid contemplated litigation, even if that entailed seeking to settle the dispute before proceedings were issued. This seems a fine distinction, and an arbitrary one, which may give rise to significant problems in practice.
  • The court rejected an alternative claim for legal advice privilege over certain of the documents, which comprised lawyers' notes of interviews with their clients' employees, on the basis that there was no evidence that the interviewees were authorised to seek and receive legal advice on behalf of the client company. The decision strongly endorses the narrow approach to the question of who is the "client" for the purposes of legal advice privilege (as applied in the RBS case) which excludes those who are authorised only to communicate relevant facts to the lawyers, rather than seeking and obtaining advice on the company's behalf. The court comments that the decision in RBS is "plainly right" and there is no justification for departing from it. It does not however endorse the judge's obiter suggestion in RBS that the "client" may be restricted even further to comprise only those who are the "directing mind and will" of the organisation.
  • The court also rejected an argument that the lawyers' notes were privileged on the basis that they were lawyers' working papers, endorsing the decision in RBS that lawyers' working papers are privileged only if they would betray the trend of the legal advice.
  • The court accepted that a lawyer's summary of the facts, including information in the public domain, will be privileged if it is part of the continuum of communications between solicitor and client for the purpose of giving or receiving legal advice. This is consistent with the High Court's decision in PAG v RBS [2015] EWHC 3187 (Ch) (considered here).
  • The decision suggests that privilege is unlikely to attach to communications with individuals who are qualified lawyers but are not employed in a legal role, even if they are in fact giving legal advice. Here privilege was denied to advice given by ENRC's Head of Mergers and Acquisitions, even though he was a qualified lawyer, had previously been ENRC's General Counsel, and subsequently reverted to that role.   

According to press reports, ENRC has said it will appeal against the decision. James Norris-Jones, Rod Fletcher and Maura McIntosh consider the decision further below.

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New Global Construction & Infrastructure Disputes publication

The Herbert Smith Freehills Global Construction and Infrastructure Disputes Practice has published the inaugural issue of its new publication "Inside Construction and Infra". This showcases the expertise of our leading construction and infrastructure disputes lawyers, giving our clients the benefit of their experience drawn from cases taking place around the world. The publication offers fresh perspectives on this rapidly changing industry, identifying current market trends and providing personal insights from our practitioners across the globe. Click here to access issue #1 of Inside Construction and Infra.

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Article published – Contractual interpretation: continuity rather than change?

The past few years have provided an abundance of case law on contractual interpretation, including cases at the highest levels. These have sometimes appeared to pull in different directions, particularly on the respective roles of natural meaning and "business common sense" in interpreting contracts.

Maura McIntosh has published a post on Practical Law’s Dispute Resolution blog which considers the key decisions and outlines her view that the more balanced approach promoted in the most recent Supreme Court decision, Wood v Capita Insurance [2017] UKSC 24, is to be welcomed. Click here to read the post (or here for the Practical Law Dispute Resolution blog homepage).

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Court of Appeal sends further message on mediation: Don’t drag your heels in arranging it

A recent Court of Appeal decision is the latest instance of the court expressly sending a message to litigants confirming what it expects of them regarding mediation within the court process: Thakkar v Patel [2017] EWCA Civ 117.

Upholding a first instance decision which it described as "severe, but not so severe that this court should intervene", the court refused to overturn a costs sanction on a party who had agreed to mediate but then "dragged its heels" in the discussions over the arrangement of the mediation, to the point where the other party ultimately abandoned the process.

The Court of Appeal has in recent years made clear to litigants that it now expects them to be proactive and engage constructively with each other during proceedings to fully explore the potential for the dispute to be mediated – to the point where ignoring a mediation proposal will usually warrant a costs sanction even if the circumstances were such that an outright refusal to mediate would have been justified (PGF II SA v OMFS [2013] EWCA (Civ) 1288).

The present case confirms that, where mediation is appropriate, the constructive engagement expected by the court also requires that the parties cooperate and act proactively in the arrangement of the mediation: "It behoves both parties to get on with it. If one party frustrates the process by delaying and dragging its feet for no good reason, that will merit a costs sanction". To read more, please see this post on our ADR Notes blog.

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Supreme Court finds lender could not recover damages from negligent accountants where loss avoided by borrower’s repayment

The Supreme Court has held that the loss suffered by a lender due to its accountants' breach of duty was extinguished when the loan was repaid by the borrower. It unanimously allowed an appeal against the majority judgment of the Court of Appeal, which had held that the repayment did not need to be taken into account on the basis that it was collateral to the loss, as it was not made in the ordinary course of business: Lowick Rose LLP (in liquidation) v Swynson Ltd and another [2017] UKSC 32.

The repayment was funded by the lender’s indirect owner, who had acquired an interest in the borrower. The Court of Appeal and Supreme Court agreed that if the owner had provided funds directly to the lender, to make up the shortfall caused by the borrower's failure to repay the loan, this would have been a collateral payment that should be ignored in assessing damages. The majority of the Court of Appeal considered that to hold differently because the payment was made through the borrower would be a triumph of form over substance (see our blog post on the Court of Appeal decision here).

The Supreme Court disagreed, finding that the repayment could not be regarded as collateral, because it discharged the very liability whose existence represented the lender's loss. The fact that the funds came from the owner was not relevant. The court also rejected alternative arguments based on transferred loss and equitable subrogation. 

The decision indicates that the Supreme Court will adopt a strict approach to applying the legal principles involved in the assessment of loss, even in circumstances where this may result in a windfall to the defendant. As a practical matter, where a claimant is considering taking any steps that could potentially affect its loss, the decision highlights the importance of considering the consequences of how any transaction is structured and the distinct legal identities of the parties involved. 

Tamsin Baird, a senior associate in our dispute resolution team, considers the decision further below.

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Subject access request may be used to obtain information for purposes of litigation

The Court of Appeal has recently ordered an English law firm which acted for trusts governed by Bahamian law to comply with a subject access request made by certain trust beneficiaries under section 7 of the Data Protection Act 1998: Dawson-Damer v Taylor Wessing LLP [2017] EWCA Civ 74.

The decision clarifies a number of issues relating to subject access requests, including that the court is not prevented from ordering compliance with a subject access request simply because the applicant proposes to use the information for some purpose other than verifying or correcting the data held about him. It follows that a subject access request may be used to obtain information for the purposes of litigation, whether or not the information would be disclosable in the litigation in question. The court does however retain a broad discretion, and may refuse an order if for example the application is found to be an abuse of the court's process.

The decision also confirms that the exception from section 7 for information which is subject to legal professional privilege (under paragraph 10 of schedule 7 to the Act) should be interpreted narrowly, so that it applies only to legal professional privilege recognised in proceedings in any part of the UK. Accordingly, it was irrelevant whether the documents in question were privileged or exempt from disclosure under Bahamian law.

Richard Norridge, Gary Horlock and Sophie Jaggard outline the decision below.

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