Court of Appeal considers when a person may be a de facto or shadow director

In a recent decision, the Court of Appeal upheld a finding that a director of a holding company had not become a de facto or shadow director of its subsidiary: Smithton Ltd v Naggar and others [2014] EWCA Civ 939.

A person may take on the duties of a company director, and therefore be liable for their breach, without ever having been formally appointed to the role. This may be because he has acted as a director, so as to become a de facto director (or director “in fact”), or because he has persuaded the directors to act in a particular way, so as to become a “shadow” director.

As the Court of Appeal noted in Smithton, the question of whether a director of a holding company has become a director of its subsidiary is one which often arises in practice. It is therefore important for group companies and their directors to understand when liability as a de facto or shadow director may arise. Although the assessment is a question of fact and degree in every case, the Smithton decision provides some insights as to the factors the court will take into account. Gregg Rowan and Emily Russell consider the decision below. Continue reading

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Court of Appeal finds parent company had no duty of care to its subsidiary’s employee

The Court of Appeal has reversed a first instance decision that a parent company had assumed a duty of care to an employee of its subsidiary company in respect of his exposure to asbestos dust: Thompson v The Renwick Group plc [2014] EWCA Civ 635.

When the Court of Appeal decision in Chandler v Cape plc [2012] 1 WLR 3111 was handed down in 2012, there was a degree of concern that it might herald a widening of the circumstances in which parent companies could be held liable for the health and safety of their subsidiaries’ employees and thereby open the floodgates to parent company claims (see our energy and environment e-bulletin and our health and safety e-bulletin on the decision).

Whilst Thompson v The Renwick Group plc largely turns on its facts, it goes some way to clarifying the decision in Chandler and illustrates that it will not be straightforward to establish parent company liability in most cases. In particular, it will not be sufficient to show that:

  • a parent company has appointed a director to the subsidiary;
  • a subsidiary is run purely as a division of the parent company;
  • there is uniform branding or merging of the activities of parent and subsidiary.

However, parent companies should consider carefully the extent to which they take a role in the operations of their subsidiaries and whether it might be said that they have assumed responsibility for any aspect of the business of the subsidiaries. Further, individuals who are directors of both a parent and a subsidiary should be mindful of the need for a clear separation between decisions made in their capacity as a director of each separate entity. Joanne Keillor and Laurence Terret comment on the decision below. Continue reading

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Court of Appeal finds waiver where privileged document provided for inspection and mistake not obvious

The Court of Appeal has granted claimants permission to use privileged documents which had been disclosed inadvertently by the defendant (the SFO) in the course of litigation, reversing the decision of the Commercial Court: Rawlinson and Hunter Trustees SA v SFO [2014] EWCA Civ 1129. It held that any privilege that existed in the documents had been waived when they were inspected by the claimants, as it was not obvious that a mistake had been made.

The first instance decision had suggested it might be easier to preserve privilege where inadvertent disclosure took place in the context of a very large or particularly complex disclosure exercise, since in that context it is more likely that mistakes might be made. That reasoning was however rejected by the Court of Appeal.

The present judgment emphasises that to prevent an opponent relying on privileged documents where there has been inadvertent disclosure, it will not be enough just to show that the documents were obviously privileged; the question is whether it is obvious that they were disclosed by mistake. The two are not the same, since a party can always choose not to assert privilege. The latter may well be more difficult to establish than the former, though in some cases the sensitive nature of a document may be enough to show it was an obvious mistake. Merely flagging to your opponent that some of the documents you are providing for inspection may be privileged will not be enough to prevent privilege being waived, if the error is not obvious.

The Court of Appeal’s approach in this case underlines the importance of ensuring that a thorough privilege review has been conducted in respect of any documents provided for inspection to ensure nothing is missed.

The decision also establishes that the above approach to waiver of privilege does not apply to public interest immunity (PII). Where a document to which PII properly attaches has been disclosed by mistake, regardless of whether or not the mistake was obvious, the court must weigh the public interest in maintaining confidentiality against the public interest in the due administration of justice. The below focuses on the court’s approach relating to privilege.  Continue reading

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High Court implies duty of good faith into “relational” contract

In a recent case, the High Court has implied a duty of good faith into a long-term agreement between two commercial parties: Bristol Groundschool Limited v Intelligent Data Capture Limited [2014] EWHC 2145 (Ch).

In doing so, the court endorsed the analysis of Mr Justice Leggatt in the 2013 case of Yam Seng Pte Ltd v International Trade Corpn [2013] EWHC 111 (see post), which has been seen as the high water mark in recognising such duties, though subsequent first instance decisions have appeared to beat something of a retreat from it (see for example this post).

In Yam Seng, Leggatt J found that a duty of good faith could be implied into ordinary commercial contracts based on the presumed intentions of the parties, though he doubted that English law was ready to recognise a requirement of good faith implied by law into all commercial contracts, even as a default rule. Such a clause was more likely to be implied into so-called “relational” contracts – contracts which involve a longer term relationship, and a high degree of communication and cooperation, between the parties.

Although only first instance, the present decision is of interest in showing that the courts may be prepared to imply a duty of good faith into contracts which require a high degree of cooperation and communication between the parties. From a claimant’s perspective an allegation of an implied duty of good faith may, in the right circumstances, be a useful tool in the armoury. Examples of “relational” contracts given in Yam Seng were joint venture agreements, franchise agreements and long term distributorship agreements. The agreement in the present case did not fall squarely within these categories (counsel for the defendant described it as a “hybrid”) but the judge nevertheless found that there was an implied duty of good faith.

Parties negotiating longer term agreements which may be considered “relational” should be aware of the possibility of broader duties of good faith being imposed. It may be advisable to seek to limit or exclude such duties, where possible, or incorporate more specific terms seeking to define their nature and extent. James Robson, an associate in our dispute resolution division, considers the decision further below. Continue reading

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UK Supreme Court to consider whether recoverable success fees / ATE premiums breach Article 6 rights

In a judgment handed down last Wednesday, 23 July, the Supreme Court said it was open to the Court to reconsider whether a claimant’s right to recover a conditional fee agreement (CFA) success fee and after-the-event (ATE) insurance premium from an unsuccessful defendant breached the defendant’s right to a fair trial under Article 6 of the European Convention on Human Rights: Coventry and others (Respondents) v Lawrence and another (Appellants) (No 2) [2014] UKSC 46. However, it would be wrong to decide the point without the government having had the opportunity to make submissions.

A Supreme Court finding of infringement could have very serious consequences. Although recoverability was abolished from 1 April 2013 as a result of the Jackson reforms, it still applies to CFAs and ATE policies entered into before that date, as well as certain other excepted cases such as claims brought by insolvent companies. In any event, such a decision could give rise to claims for compensation against the government by litigants who had been “victims” of recoverable success fees and ATE premiums in historic cases.

The Court noted that the case for an infringement gained some support from Strasbourg jurisprudence including MGN v UK (2011) 53 EHRR 5 (see post) in which the European Court of Human Rights held that the requirement for MGN to pay CFA success fees due to Naomi Campbell’s lawyers was incompatible with MGN’s right to freedom of expression under Article 10. It noted however that the present case differed in that Article 10 did not apply (the underlying claim was for nuisance arising from use of a racetrack near the appellants’ property) and, unlike Naomi Campbell, the appellants needed the protection of a CFA and ATE premium in order to be able to bring their claim.

The appeal is to be re-listed for a further hearing after notice has been given to the Attorney-General and the Secretary of State for Justice. It is not clear whether the point will be decided at that hearing or whether the issue will be remitted to the Court of Appeal or a first instance judge. Once all the interveners are identified, they will be expected to try to agree an appropriate procedure and then contact the Court for directions.

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Article published considering rights and remedies for breach of pre-emption clause

Pre-emption clauses, as commonly found in shareholder, investment and joint venture agreements, are designed to prevent a shareholder selling his shares to a third party without first offering them to the other shareholders. A number of recent judgments highlight the importance of ensuring that such clauses are clearly drafted to reflect the parties’ intentions as to the rights and remedies available on breach.

Andrew Cooke, an associate in our dispute resolution division, has published a briefing in the August edition of PLC Magazine which considers the issues: “Pre-emption on transfer of shares: rights and remedies”. Click here to download a PDF.

 

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Filed under Announcements, Contract

Court of Appeal upholds award of damages for breach of English jurisdiction agreement

The Court of Appeal has held that it did not infringe EU law to bring a claim for damages for breach of a settlement agreement, and the jurisdiction provisions in that agreement, against a party who had wrongfully commenced proceedings in Greece. The court also gave immediate effect to a contractual indemnity by upholding the setting up of a fund to reimburse costs on an ongoing basis: In the matter of the Alexandros T [2014] EWCA Civ 1010.

The potential abuses of the lis pendens provisions in the Brussels I Regulation are well documented. Where proceedings are commenced in an EU Member State which is not the chosen country under a jurisdiction agreement, no anti-suit injunction restraining those proceedings can be granted (as established by the European Court of Justice decision in Turner v Grovit [2004] 2 Lloyds Rep 169). This is because an injunction is considered an unwarranted interference in the proceedings of the foreign court and contrary to the scheme of the Regulation. Moreover, if the non-chosen court’s proceedings were commenced first, the chosen court must stay its own proceedings until the jurisdiction of the first court is established; this is the so-called “Italian torpedo”.

The present case confirms that those on the receiving end of a torpedo action can at least claim damages for breach of contract and, if the contract so provides, an indemnity. This may deter to some extent the launching of torpedoes. Proceedings brought in breach of a jurisdiction agreement should in any event become less common when the recast Brussels Regulation comes into effect on 10 January 2015 (see post). Under new article 31(2) the chosen court can take jurisdiction even if proceedings are commenced first in another EU Member State: it is for the other court to stay its proceedings and await the decision of the chosen court as to whether it has jurisdiction.

In the meantime, however, this decision is a welcome confirmation that damages for a breach are available and an indemnity is effective, at least before the English courts. Continue reading

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High Court restrains use of privileged documents disclosed by solicitor in breach of confidence

The High Court has held that a party retained the benefit of legal advice privilege in information provided to her solicitor which the solicitor had disclosed to her opponent in breach of confidence after the retainer had come to an end: Kousouros v O’Halloran & anor [2014] EWHC 2294 (Ch).

The decision acts as a reminder that privilege will not always be lost where privileged documents have found their way into an opponent’s hands. In some circumstances the court will intervene to prevent further use or disclosure of the documents. All will depend on the facts, but such circumstances may include where the recipient has acted unconscionably or where the material has been disclosed in breach of an obligation of confidence (as in the present case) or inadvertently (as in London Borough of Redbridge v Johnson, here). Parties seeking to prevent use of the documents must act promptly, as otherwise relief may be refused on that basis.

This case does not deal with the (perhaps more common) situation where privileged material is inadvertently disclosed on a party’s behalf as part of the disclosure/inspection process in litigation. In those circumstances, questions of waiver of privilege can come into play, and the crucial issue is whether there has been an obvious mistake (see Tchenguiz v SFO [2014] EWHC 1102 (Comm)). Continue reading

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Article published on recent clarification of Mitchell guidance on relief from sanctions

The Court of Appeal’s decision in the high-profile Mitchell “plebgate” case last November introduced tough new guidance on the approach the court should follow in granting relief from sanctions for breach of a rule or court order. The case generated a storm of controversy as well as huge amounts of satellite litigation, with litigants seeking to hold their opponents to account for minor failures in the hopes of gaining tactical advantage in the litigation.

In an effort to ease these difficulties, the Court of Appeal replaced the Mitchell guidance with a new, more flexible three-stage test in a decision handed down on 4 July in three appeals (Denton v TH White Ltd, Decadent Vapours Ltd v Bevan, Utilise TDS Ltd v Davies [2014] EWCA Civ 906). James Farrell and Maura McIntosh have published an article in PLC Magazine which considers the new test and its practical implications: “Mitchell guidance clarified: an end to the roller coaster ride?” Click here to download a PDF.

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Supreme Court corrects “wrong turn” in English law, holding that bribes received by an agent are held on trust for the principal

Who is the rightful owner of a bribe? Is a bribe or secret commission received by an agent “held on trust” for his principal? Or is the principal’s claim against the agent a personal one for equitable compensation equal to the value of the bribe or commission?

The issue is of critical importance. It affects everything in litigation against dishonest agents, from the nature of the injunctive relief available at the outset to the rights in his insolvency. Perhaps most importantly of all, it affects whether the bribe can be “traced” into the hands of third parties and recovered as “trust” property.

After over 100 years of judicial wrangling and academic debate, the Supreme Court decided last week that bribes and secret commissions are held on trust by an agent for his principal: FHR European Ventures LLP and others (Respondents) v Cedar Capital Partners LLC (Appellant) [2014] UKSC 45. In doing so, the Supreme Court overturned various well-known authorities (including Lister v Stubbs and Sinclair v Versailles – see post) and aligned English law with several jurisdictions which long ago broadened the availability of proprietary remedies.

The implications are significant. Most importantly, the principal can claim a proprietary remedy against the bribe/secret commission itself, rather than a personal one against the defaulting agent. Robert Hunter and Tom Wood consider the decision below. Continue reading

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