English court restrains expert from acting in arbitration due to breach of fiduciary duty of loyalty – A Company v X, Y and Z [2020] EWHC 809 (TCC).

 

Summary

Earlier this month, the English High Court extended an interim injunction restraining a global expert consultancy firm from acting as independent experts in separate, although related, arbitration proceedings against the claimant.[i]

In granting the claimant’s application to extend the interim injunction, the court held that:

  1. Not only did the expert firm’s subsidiary engaged by the claimant owe a fiduciary duty of loyalty to its client, that fiduciary duty extended to the defendant group (i.e. the second and third defendants) as a whole.
  2. The defendant group’s fiduciary duty of loyalty was not satisfied by putting in place information barriers. Measures such as this seek to preserve confidentiality and privilege. A fiduciary with a duty of loyalty must not place himself in a position where his duty and his interest may conflict.
  3. The defendant group breached its fiduciary duty by accepting instructions to provide expert services in connection with the second arbitration without first obtaining the claimant’s consent. The court’s finding that the two arbitrations are concerned with the same delays, and that there is a sufficiently significant overlap in the issues, underpinned its conclusion that the defendants breached their duty to the claimant.

While expert consultancy firms will no doubt be concerned about this judgment, there are a number of factors in this case that mean that the result was justified in the circumstances. While experts’ overriding duty is to the tribunal, that it is not their sole duty. As was recorded in the engagement terms in question here, experts are often engaged to provide ongoing support during the course of an arbitration and the reality is that many clients view experts as part of their “team” and often include them, even if informally, in discussions of wider strategy.

Nonetheless, this case is a salutary reminder for lawyers and experts to deal with conflict issues conclusively as they arise. While the outcome might be considered a “win” for the claimant, the situation that remains will no doubt be an unsatisfactory one for all parties. In our experience, even where there is not a clear or “strict” conflict of interest, more often than not a sensible discussion regarding the full implications of an expert firm taking more than one role on disputes arising on a project will end up with an agreement that everyone can live with.

The present application was brought in connection with two ongoing arbitrations. Accordingly, the hearing of the application was held in private and the parties’ names were anonymised in the judgment.

Background

 

The Works Package Arbitration

The claimant is the developer of a petrochemical plant. In 2012 and 2013, the claimant engaged a third party group to provide EPCM services (EPCM Contractor) and a contractor (Contractor) for two works packages for the construction of facilities for the plant.

Disputes arose between the Contractor and the claimant and the Contractor commenced an ICC arbitration (Works Package Arbitration) for costs incurred by reason of delays to its works, including the late release of issued for construction (IFC) drawings prepared by the EPCM Contractor.

In March 2019, the claimant approached the first defendant, an Asian subsidiary of a global consultancy firm, with a view to engaging it to provide delay expert services in connection with the Works Package Arbitration. The first defendant signed a confidentiality agreement. In May 2019, the parties executed a formal letter of engagement. This letter contained a number of matters key to the issues in this case:

  1. it was addressed to the first defendant (i.e. the Asian entity) and identified the individual expert that would lead the team, be responsible for the report and testify at the hearing “K”;
  2. the scope of the engagement included providing ad-hoc support to the claimant and its professional team in the arbitration; and
  3. that the first defendant confirmed it had no conflict of interest and would maintain that position for the duration of the engagement.

The EPCM Arbitration

In the summer of 2019, the EPCM Contractor commenced ICC arbitration proceedings in London, against the claimant (EPCM Arbitration). The claimant’s counterclaims in the EPCM Arbitration include claims for any additional sums payable by the claimant to the Contractor caused by the EPCM Contractor’s alleged failure to manage and supervise the contractor

The first conflict discussions – October 2019

In about October 2019, the EPCM Contractor’s lawyers approached the defendants requesting them to provide quantum and delay expert services in connection with the EPCM Arbitration.

K emailed instructing counsel for the claimant in the Works Package Arbitration to notify them of the EPCM Contractor’s approach. K noted that they had advised the EPCM Contractor that the Asian consultant entity had been engaged on a separate dispute about the same project, without revealing details, and stated that the EPCM Contractor’s lawyers did not consider there to be a conflict. K went on to explain why the defendants had also formed the view that working on the two matters, from different offices, did not amount to a “strict” legal conflict and pointed out that their firm had the ability to set up requisite information barriers between the relevant teams.

At K’s invitation, K and the claimant’s counsel discussed the matter on the telephone that same day, and the solicitor stated that his view was that there would be a conflict.

The following day, K emailed the solicitor stating that they had discussed the matter internally and did not consider there to be a “true conflict”. The expert offered a further phone call if necessary.

However, it would appear that there were no further discussions or correspondence on the issue until late February 2020.

The defendants’ engagement by the EPCM Contractor – February 2020

On 24 February 2020, following discussions between counsel for the claimant and for the EPCM Contractor regarding the scope of issues in the EPCM Arbitration, counsel for the EPCM Contractor sent an email to the claimant’s counsel indicating that it was in the process of instructing a named expert from the defendants as a quantum expert, “M”. On 1 March 2020, counsel for the claimant responded by noting that the claimant had already engaged K, who had “been actively investigating certain delay claims [the claimant] may have”.[ii]

A few days later, counsel for the claimant sent an email to K stating that it wanted to expand the scope of K’s instructions to include expert witness services in respect of the EPCM Arbitration. The email noted: “we believe that the knowledge you and your team have acquired on this project will be invaluable for the delay analyses that will be required in the [EPCM Arbitration]”.[iii]

On receiving confirmation by the EPCM Contractor’s counsel on 10 March 2020 that M had been appointed as the EPCM Contractor’s quantum expert and was already working on the matter, the claimant responded, setting out the scope of the work done by K to date. The claimant noted that K’s work product would likely form part of the evidence in the EPCM Arbitration, and reserved its right to challenge M’s appointment.

The claimant’s solicitors wrote to the first defendant on 12 March 2020, advising that its engagement by the EPCM Contractor created a conflict of interest, thereby breaching the terms of its engagement by the claimant. The third defendant responded on 19 March 2020, denying the allegation and setting out measures that had been taken to ensure compliance with confidentiality obligations.

Injunctive relief

On 20 March 2020, the claimant applied for urgent injunctive relief. Interim relief was granted until 31 March 2020. The application determined by the present judgment was brought to continue the interim injunction. The basis for this application was that the provision by the defendants of services to the third party in connection with the EPCM Arbitration was a breach of the rule that a party owing a fiduciary duty of loyalty to a client must not, without informed consent, agree to act (or actually act) for a second client in a manner which is inconsistent with the interests of the first.

Did the first defendant (i.e. the Asian entity) owe the claimant a fiduciary duty?

The defendants submitted that an expert witness does not owe a fiduciary obligation of loyalty to his or her client, as such a duty of loyalty is excluded by the expert’s overriding duty to the tribunal.

The court distilled the following general principles from the authorities referred to by the defendants:

  1. In principle, an expert can be compelled to give expert evidence in arbitration or legal proceedings by any party, even in circumstances where that expert has provided an opinion to another party.
  2. When providing expert witness services, the expert has a paramount duty to the court or tribunal, which may require the expert to act in a way which does not advance the client’s case.
  3. Where no fiduciary relationship arises, having regard to the nature and circumstances of an expert’s appointment, or where the expert’s appointment has been terminated, the ongoing obligation to preserve confidential and privileged information does not necessarily apply to preclude an expert from acting or giving evidence for another party.

However, the court noted that the authorities referred to by the defendant were not unified by an overarching principle of law that an independent expert does not owe a fiduciary duty of loyalty to his or her client. Indeed, no fiduciary duty of loyalty existed in those cases because either there was no retainer (at all, or because the retainer had been terminated), or the particular facts of any retainer did not give rise to such a relationship.

As for the defendants’ reliance on their independent role, the court noted that merely because experts owe duties to the court or tribunal that may not align with their client’s interests, this does not provide a principled basis to support the general rule contended for by the defendants. As the court observed, solicitors and counsel navigate these duties as a matter of course, but, crucially, “the paramount duty owed to the court is not inconsistent with an additional duty of loyalty to the client”.[iv]

Having explained and distinguished the defendants’ authorities, the court held that the first defendant owed the claimant a fiduciary duty of loyalty because “a clear relationship of trust and confidence arose” as a result of the following circumstances:[v]

  1. The first defendant was engaged to provide expert services for the claimant in connection with the Works Package Arbitration.
  2. The first defendant was instructed to provide an independent expert report and to comply with the duties set out in the CIArb Expert Witness Protocol as part of the engagement.
  3. The first defendant was also engaged to provide extensive advice and support for the claimant throughout the arbitration proceedings.

Did the individual expert’s fiduciary duty extend to the whole defendant group?

The court referred to previous cases that establish that where a fiduciary duty of loyalty arises it is not limited to the individual concerned, but rather it extends to the firm or company, and may extend to the wider group.[vi] The court considered the organisational structure of the defendant group, noting the common financial interest of the parent company and its shareholders in the defendants, that the defendant group is managed and marketed as one global firm, and that there is a common way in which conflicts are identified and managed.

The court dismissed the defendants’ submission that the defendant group was analogous to barristers, who “act on opposing sides in litigation as a matter of course”.[vii] For example, unlike an firm of experts, barristers do not share profits and do not have the “luxury of considering a case and then deciding not to accept instructions because the client or case does not fit their corporate image”.[viii]

The court also opined that it is “common knowledge” that barristers are self-employed individuals and that counsel from the same chambers may, and often do, act on opposing sides of the same case. The implication of this seemed to be that there is no such “common knowledge” in respect of expert witnesses, and informed consent is required in circumstances such as the present. The defendants did not inform the claimant at the time of accepting the engagement that they might take instructions to act both for and against the claimant in respect of the dispute. If they had done, the court reasoned, the claimant would not have instructed the defendants (as evidenced by the fact that when the defendants asked whether the claimant objected to them acting for the third party, the claimant objected).

Accordingly, the court held that the fiduciary duty of loyalty was not limited to the first defendant; it extended to and was “owed by the whole defendant group”.[ix]

Did the defendants breach their fiduciary duty to the claimant?

The defendants relied on the fact that they had certain information barriers in place to protect against the risk that confidential information might be shared inappropriately. However, the court held that this was not determinative of whether there had been a breach of the defendants’ duty of loyalty. A fiduciary with a duty of loyalty “must not place himself in a position where his duty and his interest may conflict”.[x]

The court found that there was “plainly a conflict of interest for the defendants in acting for the claimant in the Works Package Arbitration and against the claimant in the EPCM Arbitration”.[xi] The court reached this conclusion because, in the EPCM Arbitration, the claimant is seeking to pass on to the EPCM Contractor any claims arising from the late provision of the IFC drawings. Moreover, the arbitrations are concerned with the same delays and have a “significant overlap in the issues”.[xii]

Having found that the defendants breached their fiduciary duty to the claimant, the court ordered the extension of the interim injunction so as to restrain the defendants from providing expert services to the EPCM Contractor in connection with the EPCM Arbitration.

Observations and key practice points

  1. This case highlights the importance of thorough investigation of conflicts of interest at the outset of any expert appointment and careful consideration of the terms on which parties appoint their experts.
  2. Expert firms will no doubt be reviewing their standard terms and conditions to tighten up their conflicts provisions and may be looking to exclude any fiduciary duty of loyalty. The courts will have regard to the entire contract when determining whether a relationship is fiduciary, so in order to be effective such exclusion clauses will need to withstand scrutiny in the context of the scope of the engagement.
  3. Where an expert owes a fiduciary duty of loyalty, this duty will not be satisfied merely by putting in place measures such as information barriers, which are aimed at preserving confidentiality and privilege. If such a duty is owed, and an expert is considering acting for a party which may give rise to a conflict between his duty and his interest, the expert must obtain the informed consent of both parties before agreeing to act.
  4. Expert firms should carefully consider the degree of overlap between related, although independent, arbitrations before accepting instructions in a related matter when they already act for one relevant party.

 

Emma Schaafsma

Emma Schaafsma
Partner, Dispute Resolution
+44 20 7466 2597

Jake Reynolds

Jake Reynolds
Associate, London
+44 20 7466 2370

 

 

 

 

 

 

 

 

[i] A Company v X, Y and Z [2020] EWHC 809 (TCC).
[ii] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [18].
[iii] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [19].
[iv] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [53].
[v] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [54].
[vi] Prince Jefri Bolkiah v KPMG [1999] 2 AC 222 (HL); Marks & Spencer Group plc v Freshfields Bruckhaus Deringer [2004] EWCA Civ 741; Georgian American Alloys v White & Case [2014] EWHC 94 (Comm).
[vii] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [58].
[viii] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [58].
[ix] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [59].
[x] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [60].
[xi] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [61].
[xii] A Company v X, Y and Z [2020] EWHC 809 (TCC) at [61].