High Court finds clause allowing landlord to terminate side letter and insist on payment of higher rent in lease falls foul of rule on penalties

In a recent decision, the High Court has held that a clause in a side letter, which allowed a landlord to terminate the side letter and insist on payment of the higher rent set out in the lease, was a penalty and therefore unenforceable: Vivienne Westwood Limited v Conduit Street Development Limited [2017] EWHC 350 (Ch).

This is one of the few decisions to have struck down a clause as penal since the Supreme Court substantially rewrote the law on penalties in its decision in Cavendish v Makdessi [2015] UKSC 67 (see our blog post on that decision here and our contract disputes practical guide which considers liquidated damages here). That decision replaced the traditional test of whether a clause is (or is not) a “genuine pre-estimate of loss” with a test of whether it is out of all proportion to the innocent party's legitimate interest in enforcing the counterparty's obligations. 

The latest decision is of particular interest for its discussion of whether a clause is in substance a secondary obligation which takes effect on breach of a primary obligation, so that the rule on penalties is engaged, or whether it is a conditional primary obligation and therefore falls outside the rule. In Makdessi itself, a number of the Justices found that a clause depriving the seller of a business of deferred consideration in circumstances where he breached a non-compete provision was, in reality, a price adjustment clause – ie a primary rather than a secondary provision, which was not susceptible to the rule on penalties. (In any event, the Supreme Court found that the clause was not out of proportion to the seller's legitimate interest in enforcing the non-compete provisions, and was therefore enforceable.)

The present decision gives a further illustration that the distinction between a conditional primary obligation and a secondary obligation is a rather fine one. The practical message is that, whenever a clause takes effect on breach, it would be prudent to assume that the rule on penalties may be engaged. The question of whether it is enforceable will then come down to whether the clause is out of all proportion to the innocent party's legitimate interest in performance of the contract.

The decision also suggests that the question of whether a clause provides for the same consequences irrespective of whether a breach is minor or serious, which the judge said had long been a hallmark of a penalty clause, remains an important consideration post-Makdessi.

The case is also of interest for its discussion of the meaning of a clause allowing termination for "any breach" of contract. In a number of cases, such a clause has been interpreted as requiring a breach that is repudiatory at common law, on the basis that a broader interpretation would flout business common sense (see our contract disputes practical guide on termination here). Here, however, the judge was not prepared to imply even a term requiring a "material" breach, commenting that the test of materiality is "fraught with conceptual uncertainty" – which may come as a surprise to many, given the frequency with which commercial parties agree provisions allowing termination for "material" breach.

David Nitek and Maura McIntosh, a partner and professional support consultant in the disputes team, consider the decision further below.

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The Marathon decision – is it right that employees can unlawfully remove confidential documents and not pay damages?

The High Court has recently considered the approach to assessing "licence fee damages" in a claim against two former employees of Marathon Asset Management, James Seddon and Luke Bridgeman, who breached their duties of confidence by unlawfully removing approximately 40,000 documents when they resigned to set up a competing business: Marathon Asset Management LLP and another v Seddon and another [2017] EWHC 300 (Comm).

This decision is part of a suite of related claims against Jeremy Hosking (one of Marathon's founding partners), Mr Seddon and Mr Bridgeman in which a series of serious breaches of duty has been established and collectively resulted in the payment of significant amounts to Marathon (see also Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch)).

Although the defendants to the present claim had breached their duties of confidence, and lied about doing so, the High Court held that Marathon should only be entitled to nominal damages.

Marathon does however have the comfort of knowing that the conduct of its past employees (and present competitors) will now be the subject of intense scrutiny by their regulators and investors.

Nevertheless, the judgment not only challenges established legal principles, it also causes serious practical concerns for asset managers and other businesses. Peter Frost, partner, Chris Bushell, partner, and Gary Horlock, associate, consider the decision further below.

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High Court finds tweets caused “serious harm” for purposes of claim in defamation

On 10 March 2017, the High Court held that two tweets written by Katie Hopkins (a well-known columnist for The Sun with 570,000 Twitter followers at the time) caused real and substantial distress to Jack Monroe (a food blogger and writer) as well as serious harm to her reputation: Jack Monroe v Katie Hopkins [2017] EWHC 433 (QB).

Ms Monroe was awarded £24,000 damages plus costs. With regards to costs, Ms Hopkins has been ordered to pay an initial £107,000 with a final figure to be assessed.

The decision is of particular interest as it is one of the few cases in which the court has examined the "serious harm" threshold at Section 1 of the Defamation Act 2013. This case provides guidance, in the context of a claim by an individual claimant, that reputation does not need to suffer gravely; serious harm with substantial distress is enough to meet the threshold. The decision leaves open the question of what amounts to serious harm for a corporate.

Alan Watts, Rebecca Murtha and Sara Scott in our media disputes team consider the case and its implications for Twitter libel cases further below.

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Rolls Building courts to be re-styled as the Business and Property Courts of England and Wales

The judiciary has today announced that, from June of this year, the “Business and Property Courts of England and Wales” will be the new name for England and Wales’ international dispute resolution jurisdictions and will act as a single umbrella for business specialist courts across England and Wales.

The new court will encompass the following specialist courts and lists of the High Court:

  • the Commercial Court (including the Admiralty Court)
  • the Technology and Construction Court (“TCC”)
  • the courts of the Chancery Division (including those dealing with financial services, intellectual property, competition, and insolvency)

The judiciary's press release states that the new arrangements will "preserve the familiar practices and procedures of these courts, whilst allowing for more flexible cross-deployment of judges with suitable expertise and experience to sit on appropriate business and property cases".

We presume, therefore, that there will not be immediate changes in practice, including for example the existence of separate court guides for the different courts and lists within the new court, but it will be interesting to see what impact this closer working ultimately has on the differences in procedure that currently exist.

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Supreme Court refuses to apply a special jurisdiction rule to the tort of inducing breach of a jurisdiction clause

The Supreme Court has refused to craft a special rule for the tort of inducing a breach of contract where the contractual term which has been breached is an exclusive jurisdiction clause. It held that, where proceedings were commenced in Germany in breach of an English exclusive jurisdiction clause, damage was suffered in Germany, as that was where costs were incurred in contesting the proceedings. The English court therefore had no jurisdiction over a claim against German lawyers alleging that they had induced their clients' breach of contract in bringing the German proceedings: AMT Futures Limited v Marzillier, Dr Meier and Dr Guntner Rechtsanwaltsgesellschaft mbH [2017] UKSC 13.

The refusal to apply a special rule means there may have to be proceedings in more than one member state where it is alleged that a third party has induced the breach of a jurisdiction clause: proceedings against the contractual counterparty must be brought in the jurisdiction agreed in the contract, whereas proceedings against the third party will generally have to be brought either where it is domiciled, or where the offending proceedings were brought.

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Upcoming webinar – Litigation update

On Wednesday 15 March (12.45 – 1.45pm GMT), Anna Pertoldi, Maura McIntosh and Jan O’Neill will deliver a webinar for Herbert Smith Freehills clients and contacts looking at developments in commercial litigation since our update webinar in November last year. We will discuss the implications of the High Court's significant decision on privilege in the RBS Rights Issue Litigation in December, in particular on the question of who is the "client" for privilege purposes. We will also look at lessons learned from other recent decisions including in relation to settlement, expert evidence, use of disclosed documents and costs.

The webinar is part of our series of “Soundbite” webinars, which are designed to update clients and contacts on the latest developments without having to leave their desks. The webinars can be accessed “live”, with a facility to send in questions by e-mail, or can be downloaded as podcasts after the event. If you would like to register for a webinar, or to obtain a link to the archived version, please contact Jane Webber.

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Another successful challenge to jurisdiction of English court to hear claims against English domiciled parent companies in relation to acts of subsidiaries abroad

The High Court has struck out a claim against a UK incorporated parent company and set aside permission to serve a claim form out of the jurisdiction on its Kenyan domiciled subsidiary: AAA & Ors v Unilever Plc & Anor [2017] EWHC 371 (QB). The court held that there was no real issue to be tried between the claimants and the parent company, and so there was no basis on which to establish jurisdiction over the claim against the subsidiary (which the court considered had no reasonable prospect of success in any event). We understand that the court's decision is subject to appeal.

This is the second decision from the High Court in 2017 in which a UK incorporated company and its overseas subsidiary have successfully challenged the jurisdiction of the English court to hear the claim. Our discussion of the first decision, Okpabi and others v Royal Dutch Shell plc and another [2017] EWHC 89 (TCC) can be found here.

This decision is also one of the first cases to apply the recent Supreme Court decision Belhaj v Straw [2017] UKSC 3 concerning the application of the principles of adjudication by the English court of foreign acts of state ("FAS").

John Ogilvie and Daniel Hudson, partners, Claire Stirrup, a senior associate, and Angela Liu, an associate, in our disputes team consider the decision further below, in particular with regard to the duty of care analysis.

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Costs falling within court-approved budget were recoverable in full, unless good reason shown to depart from budget

The High Court has recently considered an important point regarding the interplay between the costs budgeting regime and the court's approach to assessing the costs a successful party can recover at the end of a case: Merrix v Heart of England NHS Foundation Trust [2017] EWHC 346 (QB).

CPR 3.18 provides that where the court is assessing costs on the standard basis in a case where a costs management order has been made, it will have regard to the receiving party's last approved or agreed budget for each phase of the proceedings and will not depart from that budget unless satisfied that there is good reason to do so.

The question under consideration, which has been a matter of some debate, was whether this applies where a party's costs are less than the amount budgeted, as well as more. The High Court in this case found that it does.

The practical impact of the court's approach is that, where a successful party's costs are within an approved or agreed budget for each phase of the litigation, it should be easier to recover the costs in full than it would otherwise have been. As noted in the judgment, however, this decision is unlikely to end the debate. Whether or not there is an appeal against the present decision (for which the judge has given permission), the Court of Appeal is due to hear another appeal on the issue in May this year.

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High Court takes strict approach to when permission needed for collateral use of documents disclosed in proceedings

The High Court has recently considered the restrictions on collateral use of documents and witness statements disclosed in proceedings, and has provided guidance on what constitutes "use" in this context: Robert Tchenguiz and Another v Grant Thornton UK LLP and Others [2017] EWHC 310 (Comm).

The position under CPR 31.22 (in relation to documents generally) and 32.12 (in relation to witness statements) is that a party may only use a document for the purpose of the proceedings in which it is disclosed, subject to certain exceptions including where the court gives permission.

In the current case, the defendants submitted that a document is "used" in subsequent proceedings only when a party actually seeks to rely on it, for example by referring to the document in a statement of case or by including it in the trial bundle. The High Court disagreed, instead favouring a broad interpretation of "use", which would encompass anything from the review of previously disclosed documents for relevance to other proceedings to the actual deployment of those documents in the subsequent proceedings.

The decision suggests that parties and their advisers may not even review disclosed documents for the purpose of considering or advising on whether other proceedings would be possible, or whether the documents might be useful for other proceedings, without first obtaining the court's permission. This is a very restrictive approach and contrasts with suggestions in previous High Court decisions (though without deciding the point) that it might not involve a breach of the rules to pass disclosed documents to a separate team of lawyers to advise on their possible relevance to separate proceedings. 

Thomas Jennings, an associate in our disputes team, considers the decision further below.

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Court of Appeal confirms importance of frankly disclosing factors that could affect expert’s independence

The Court of Appeal has dismissed an appeal against a finding of clinical negligence based, in part, on the trial judge's approach to evaluating expert evidence where a close connection between the defendant and his expert witness had not been disclosed: EXP v Dr Charles Simon Barker [2017] EWCA Civ 63.

The Court of Appeal held that the trial judge had been fully entitled to take the view that the expert had so compromised his approach that the weight to be accorded to his views must be considerably diminished. It went so far as to say that, had the trial judge taken the decision to exclude the expert's evidence entirely, the Court of Appeal would have supported that decision.  

The decision reaffirms the importance of parties and their expert witnesses frankly disclosing any connection which might affect an expert's independence.

Rachel Lidgate, a senior associate in our disputes team in London, considers the decision further below.

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