High Court decision underlines importance of knowing who you are contracting with

The High Court has recently found that a group of waste removal companies which provided services to a company that went into liquidation shortly afterwards was not entitled to recover outstanding sums from the company's founder. The agreement for works had been entered into with the company itself, and the founder had given no guarantee or indemnity in his personal capacity. Even if a guarantee had been given, it was merely oral and therefore unenforceable: Erith Holdings Ltd and Others v Ronald William Murphy [2017] EWHC 1364 (TCC).

This decision serves as a cautionary tale which underlines the importance of knowing who you are contracting with and of recording the terms of your agreement formally in writing rather than relying on oral discussions. Where you have concerns regarding the financial standing of a company you are dealing with, and want to ensure that an individual who stands behind a company takes on personal liability, it will be particularly important to ensure that the individual is a party to the agreement or that any guarantee is properly documented.   

Kerrie Barrett, an associate in our disputes team, considers the decision further below.

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Brexit Blog launches with Brexit Q&A

As formal Brexit negotiations have now started, Herbert Smith Freehills is pleased to announce the launch of its new Brexit Notes blog, where you will find articles and updates on the latest Brexit developments. 

As well as reporting on new developments going forward, Brexit Notes has been pre-populated with a selection of articles and posts. You can subscribe to the blog to receive notifications by e-mail as soon as items are posted, or you can visit the site whenever you choose. Continue reading

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Voluntary pilot of capped costs scheme for claims up to £250,000

A two-year pilot is to be introduced to test the use of a capped costs scheme in High Court claims valued at up to £250,000 which are proceeding in the London Mercantile Court or the Mercantile, Chancery or Technology and Construction (TCC) courts in Manchester and Leeds (excluding personal injury cases). The pilot was approved in principle at the May meeting of the Civil Procedure Rule Committee (CPRC), subject to a number of drafting points to be addressed in relation to the pilot rules. No start date has been announced.

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Financial Markets Test Case pilot scheme to be extended for three years and expanded

The Financial Markets Test Case pilot scheme, which was due to end in September this year, is to be extended for a further three years. The scheme will also be expanded so that it applies to any Financial List claims which raise issues of general importance in relation to which immediately relevant authoritative English law guidance is needed. It will no longer be necessary for claims to raise issues of general importance to the financial markets specifically.

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High Court orders security for costs against third party funder supporting group litigation

The High Court has granted an application for security for costs against a commercial litigation funder supporting the then remaining claimants in the RBS Rights Issue Litigation. It declined to order security against another third party which was not in litigation funding as a business and was not primarily motivated by a wish to profit from the provision of funding: The RBS Rights Issue Litigation [2017] EWHC 1217 (Ch).

Although each case will turn on its facts, the decision suggests that the court may be well disposed to ordering security for costs against third parties who fund litigation on a commercial basis, particularly in the context of a group litigation order (GLO) where the claimants have the benefit of an order providing that (if the claim fails) they will be liable only for a proportion of the defendant's costs on a several, rather than joint, basis. It may be more difficult to obtain an order where a third party has funded litigation primarily for some other motive, even if the third party is charging a commercial return on the funding provided. 

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Court of Appeal considers implied variation and good faith in relation to contractual rights of termination

The Court of Appeal has upheld a decision granting summary judgment to a defendant in relation to an allegation that it had wrongfully terminated a distribution agreement. The court rejected arguments based on contractual construction, implied variation and implied duties of good faith : Ilkerler Otomotiv Sanayai ve Ticaret Anonim v Perkins Engines Co Ltd [2017] EWCA Civ 183.

The decision provides useful guidance on when an express variation of a contract may result in the implied variation of other terms, a point on which there appears to have been no direct authority. The test is whether the express variation is consistent only with the existence of the alleged implied term. When agreeing variations to a contract, parties should be careful to consider whether the proposed changes have any knock-on effects on the rest of the contractual framework, which may need to be addressed by way of additional express amendments. It seems the courts are likely to assist a party in implying a variation only in relatively clear-cut cases.

The decision is also of interest in adding to a growing body of authorities rejecting a role for good faith in relation to contractual termination. 

Gregg Rowan and Andrew Hillam, a partner and an associate in our dispute resolute team, consider the decision further below.

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Court of Appeal decision casts doubt on principles requiring narrow interpretation of exclusion clauses

The Court of Appeal has found that an exclusion clause in an engineering services contract was effective to exclude any liability on the part of the defendant engineers for identifying and reporting on asbestos on a development site. This was based on the clear wording of the clause and commercial common sense. The traditional principles or canons of construction relating to exclusion clauses had no part to play: Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373.

In interpreting exclusion clauses, the courts have traditionally applied certain principles which tend toward a narrow construction, in particular: (i) the contra proferentem rule, which provides that any ambiguity should be resolved against the party who put the clause forward and relies upon it; and (ii) the so-called Canada Steamship guidelines, which essentially provide that clear words are required to exclude liability for negligence, and that the court will not interpret a clause to cover negligence if there is some other head of damage it might realistically have been intended to cover (eg strict liability in relation to a statutory duty).

In recent years, however, the courts have tended to cast doubt on the extent to which these principles remain applicable, at least where the clause is clear and unambiguous. This latest decision continues that trend, emphasising that the words used, the relevant context, and commercial common sense should normally be sufficient in determining the meaning of a contract term. The decision suggests that the tendency to assume exclusion clauses must be construed narrowly may be seen by the courts as outdated. As the Court of Appeal commented: 

"In major construction contracts the parties commonly agree how they will allocate the risks between themselves and who will insure against what. Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down." 

However, for those who want to ensure their clause is effective, the practical advice remains to use clear and unambiguous drafting, rather than seeking to rely on general wording. Rachel Lidgate and Maura McIntosh, a partner and a professional support consultant in our disputes team, outline the decision below. For more on exclusion clauses, see Defining your liability in advance: Liquidated damages, limitation and exclusion clauses, the sixth edition in our contract disputes practical guides series.

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High Court decision potentially extends exceptions to without prejudice protection

In a recent decision, the High Court has found that documents relating to negotiations in respect of the costs that were recoverable in litigation had to be disclosed to a third party (the claimant in the present action) who had an interest in the outcome of the negotiations: EMW Law LLP v Halborg [2017] EWHC 1014.

The documents could normally have been withheld on the basis of the without prejudice ("WP") rule, which (in general) prevents negotiations genuinely aimed at settlement from being admitted in evidence in proceedings. However, the judge found that exceptions to the WP rule applied in this case, essentially on the basis that justice clearly demanded that an exception be made as there was a live issue as to whether the negotiations had led to a concluded settlement and that issue could not be determined without access to the documents.

The decision may be seen to expand existing exceptions to the WP rule. Although there is a recognised exception where documents are relevant to whether a concluded agreement has been reached, in previous cases it had been one of the parties to the litigation who alleged that an agreement had been reached. Here that question was put in issue by a stranger to the negotiations. The judge was also prepared to craft a new exception by analogy to the (much-criticised) exception established in Muller v Linsley & Mortimer [1996] 1 PNLR 74, where the WP communications were relevant to whether a party had reasonably mitigated his loss in negotiating a compromise of separate proceedings.

Interestingly, the judge in the present case also considered whether a party to WP correspondence can properly show that correspondence to a third party without the consent of the counterparty. The judge confirmed that there is nothing to prevent him doing so. The fact that WP protection can only be waived with the consent of both parties does not mean one party cannot voluntarily provide it to someone else if he so chooses, at least if there is a legitimate reason for doing so. This is an issue that sometimes arises in practice, and so it is helpful to have this clarification.

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US Supreme Court finds that Hague Service Convention does not prohibit service of process by mail in US lawsuits

In Water Splash, Inc v Menon, the US Supreme Court examined the question of whether the Hague Service Convention prohibits service of process by mail on non-US parties sued in US cases. The US Supreme Court unanimously found that service by mail is permissible where: (1) the receiving state has not objected to service by mail; and (2) service by mail is authorised under other applicable legislation in the receiving state.

Key points

  • The US Supreme Court judgment has made it easier for US plaintiffs to serve non-US corporations in many non-US jurisdictions.
  • Companies located outside the US should be mindful of whether their jurisdiction has objected to service by mail during the negotiation of the Hague Service Convention, or whether such service is authorised under legislation or court rules in their jurisdiction.

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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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