Dispute Resolution Update

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• The end of anti-suit injunctions in Europe? 
• Investment Arbitration 
• Beating a defendant's offer of settlement is no longer enough 
• You have been warned! 
• Ex turpi causa 
• Procedural update Autumn 2008 
• Bribery and corruption investigations 

The end of anti-suit injunctions in Europe? by Michael Polonsky 

Michael Polonsky considers the likely impact on English practice of a recent Advocate-General's Opinion

For many years, English courts have granted injunctions to restrain the continuation of foreign court proceedings brought in breach of an agreement to arbitrate disputes in England.  However anti-suit injunctions are looked on with great suspicion by civil lawyers.  In Gasser GmbH v MISAT (Case C-116/02) the European Court of Justice decided that a court of a Member State of the EU might not issue an injunction to restrain a party from prosecuting proceedings before a court of another Member State if the latter court was first seised of the dispute, even if the parties had agreed to confer exclusive jurisdiction on the former court.  Gasser (and the case of Turner v Grovit (Case C-159/02), in which the ECJ decided that a court of Member State might not issue an injunction to restrain a party from pursuing proceedings in another Member State having jurisdiction under EC Regulation 44/2001, was based upon the proposition that the courts of each Member State must trust the courts of other Member States to apply correctly the uniform rules for the allocation of jurisdiction.

The Opinion of Advocate-General Kokott in Allianz SpA v West Tankers Inc (Case C-185/07) has just been published.  The House of Lords had referred to the ECJ for a preliminary ruling, the question of whether it was consistent with the Regulation for a court of a Member State to issue an anti-suit injunction to restrain proceedings in another Member State on the ground that those proceedings had been brought in breach of an arbitration agreement.

The facts arose out of a collision of a vessel with a jetty owned by an Italian company.  The charterparty provided for arbitration in London.  The insured company claimed upon its insurers up to the limit of its insurance cover and commenced arbitration in London for the excess.  The insurers commenced proceedings in the Italian courts, seeking reimbursement of the amounts which they had paid under the policies.  The Italian courts had jurisdiction to entertain that claim under Article 5(3) of the Regulation.

In making the reference to the ECJ, Lord Hoffmann set out his own views on the question in the hope that this “would assist” the ECJ.  His view was that arbitration was excluded altogether from the scope of the Regulation by virtue of Article 1(2)(d), and that anti-suit injunction proceedings to protect a contractual right to have a dispute determined by arbitration fell outside the Regulation and could thus not be inconsistent with its provisions.  Lord Hoffmann expressed the fear that a different view would adversely affect the efficacy of international arbitration.

Perhaps unsurprisingly (but disappointingly from the viewpoint of those who agree to arbitration in England), the AG concluded that the Regulation precludes a court of a Member State from granting an anti-suit injunction to restrain proceedings pending before the courts of another Member State on the ground that such proceedings are in breach of an arbitration agreement.

Two strands form the basis of the AG's Opinion.

The first strand relies on the New York Convention, to which all Member States of the European Community are parties.  Article 6 obliges a court of a Contracting State, when seised of an action in a matter in respect of which the parties have made an agreement to submit to arbitration, to “refer the parties to arbitration” at the request of one of the parties (and dismiss court proceedings) unless it finds that the arbitration agreement is “null and void, inoperative, or incapable of being performed”.

The AG concluded that it was consistent with the New York Convention for a court having jurisdiction over the subject-matter of proceedings under the Regulation itself to examine the existence and scope of the arbitration clause itself as a preliminary issue.  Before it stays or dismisses proceedings and requires parties to arbitrate their disputes, that court was entitled under the Convention to examine the validity of the arbitration agreement.

The second strand focuses on the nature of the proceedings that a party begins in the courts of a Member State.  The relevant question is then to ask whether those proceedings are within the scope and subject-matter of the Regulation.  If they are, it is then for that court to determine its own jurisdiction and to assess the effectiveness and applicability of the arbitration clause.  In the view of the AG “the decisive question is not whether the application for an anti-suit injunction falls within the scope of application of the Regulation, but whether the proceedings against which the anti-suit injunction is directed do so”. 

Accordingly, the AG concluded that the principle of mutual trust obliges an English court not to grant an anti-suit injunction.  That court must instead rely on the court of another Member State to decline jurisdiction.  The Continental European approach looked at whether the substantive subject-matter of the claim for damages by the insurers fell within the scope of the Regulation.  As it did, the Italian court was entitled to examine whether the arbitration clause was valid and effective and thus obliged it to decline jurisdiction, or whether it was free to determine the litigation on its merits.

It remains to be seen whether the ECJ will follow the AG's Opinion.  The Opinion will reinforce the fears of many English lawyers that it is likely that the ECJ will declare anti-suit injunctions to prevent the breach of arbitration agreements to be contrary to the Regulation.

If this were to happen, there would then be no remedy in the English courts to prevent a party from commencing proceedings in another Member State for tactical reasons although in breach of an arbitration agreement.  The possibility would then exist of inconsistent judgments resulting.

The approach of the AG would also introduce an additional step in the proceedings.  The applicant in arbitration proceedings would (as Lord Hoffmann observed) be obliged to participate in foreign court proceedings and have “to steer a course between so much involvement as will amount to a submission to the jurisdiction and so little as to lead to a default judgment.  That is just the kind of thing that the parties meant to avoid by having an arbitration agreement”.

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Investment Arbitration by Carol Mulcahy 

Carol Mulcahy takes a look at the role of international arbitration in the protection of foreign business ventures

A recent study directed at general counsel and heads of legal departments found that participating corporations displayed a strong preference for international arbitration as a means of resolving international disputes.  The perceived advantages are well rehearsed: neutrality, confidentiality, procedural flexibility and a greater level of control.  In addition to these factors is the benefit that arbitration can bring in relation to enforcement of awards. The pyrrhic victory of a court judgment that cannot be enforced in the country where the other party's assets are held is something that all corporations will wish to avoid. More than 142 countries are parties to the New York Convention on the Recognition and Enforcement of Arbitration Awards 1958 (the “NYC”) which provides a global regime for enforcement of arbitration awards.  This can offer significant advantages over regional regimes for enforcement of foreign judgments. 

Growth in international arbitration has taken place in tandem with an increase in international trade and the demands of both have been well served by the various arbitration institutions and infrastructure available to parties who incorporate an arbitration clause in their contract. However, the more recent increase in business ventures involving foreign investment has generated a parallel growth in investment arbitration, around which an air of mystery appears to have developed that renders it less than user friendly for business people with no direct experience of how it works and, more importantly, no real understanding of the risk management dividends it can offer.  A brief look at the basic principles and distinguishing features of investment arbitration may help to highlight these issues.

A useful starting point is to consider the nature of “ordinary” international commercial arbitration in which parties provide in their contract that all disputes will be determined by arbitration under the auspices of an arbitral institution such as the ICC or LCIA, or in accordance with one of the internationally used rules of arbitration such as the UNCITRAL rules.  Arbitration clauses such as this are private contractual arrangements.  Their usefulness is underpinned by the willingness of local courts to support (but not interfere with) the arbitral proceedings and by the NYC which provides the mechanism by which the fruits of such clauses may be enforced through the courts of the country where the losing party has its assets.  A potential vulnerability of this infrastructure is exposed where one of the parties to the dispute is a state or state agency.

Where an investor (usually a corporate) makes an investment into a foreign country, such investment is often part of a transaction entered into directly with the host state or local corporate vehicle in which the state has a substantial interest.  The risks associated with such ventures are well known, particularly where the investment is made into an emerging economy or politically volatile environment, and can include expropriation, administrative interference, difficulties in relation to foreign currency transfer and unilateral “renegotiation” of terms.  Against this background the investing party will need to give careful thought to the most effective form of dispute resolution.

Litigation before the home courts of the host state is not an attractive option.  Litigation before the courts of another state is unlikely to appeal to the state party.  Arbitration under the auspices of one of the major arbitral institutions will undoubtedly have many benefits over litigation.  However, such procedure will still have a number of shortcomings.  The proceedings will be subject to supervision by the courts of the place of arbitration, and any award will be subject to any process of review or appeal available in that jurisdiction.  Given the involvement of a state party, and the probable legally complex nature of the transaction and acts complained of, there will inevitably be the potential for tactical challenge by the state party.  In addition, an award in favour of the investor will be open to review in the country of enforcement on the grounds set out in the NYC-although limited in nature, these grounds include a finding by the court that it would be contrary to public policy to recognise or enforce the award.  There may also be a basis for argument that the transaction was not a commercial one and that enforcement is not in any event within the scope of the NYC.  Even where the place of enforcement is not the host state itself, there is ample scope for  obstruction by the state party.  

In contrast, investment arbitration offers a significantly more robust legal framework.  In 1965 the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “Convention”), established the International Centre for Settlement of Investment Disputes (the “ICSID”) to deal with investment disputes between an investor and host state.  As at January 2006, 155 states had signed the Convention.  ICSID arbitration has a number of special features that differentiate it from other forms of international arbitration:

• the arbitration and the resulting award are insulated from and independent of judicial control or review in the country where the proceedings take place;
  
  
• every contracting state has an obligation to enforce the award as a matter of international obligation.  Reliance on the NYC is unnecessary;
  
  
• a reduced risk in relation to claims of sovereign immunity; and
  
  
• references to arbitration are published on the ICSID website-this can provide useful leverage for a claimant as a multiplicity of claims against a particular state will inevitably colour potential investors' perception of its merits as a host state.

So far so good, but the critical factor in securing the additional protections afforded by ICSID arbitration is to ensure that the transaction falls within the very strict jurisdictional requirements laid down in the Convention.  Investors must remember that those jurisdictional requirements are best addressed at the time that the transaction is completed-if they fail to consider the matter until after the dispute has arisen the opportunity to take ICSID protection may have been lost.  A further trap for the unwary is not to realise that the Additional Facility available under the ICSID Convention (by which parties agree to ICSID administered arbitration in circumstances where the jurisdictional requirements of ICSID “proper” cannot be met) will not produce an award that attracts the same protections and privileges as an ICSID award.

There is insufficient space here to provide details of the ICSID jurisdictional requirements but in summary:

• the dispute must arise out of an investment-there is a wealth of case law as to what investment means but it is wide enough to embrace the building and operation of hotels, the mining of minerals, the manufacture of bottles, the operation of a cotton mill and the construction of a cable TV system;
  
  
• the parties to the dispute must be (a) a state that has signed the ICSID Convention and (b) a national (in most cases a corporate) of a different state signatory to the ICSID Convention-fortunately (given that foreign investment is often implemented by means of a local joint venture company), (c) may be satisfied by means of a foreign shareholding in a local company;
  
  
• the two parties must have consented to ICSID arbitration-they can do this by (a) incorporating an ICSID arbitration clause in the contractual documents or (b) if the host country has, in a bilateral or multilateral investment treaty entered into with other countries, agreed to offer recourse to ICSID arbitration in relation to investment disputes it may have with nationals of those countries, by the investing party accepting that offer of ICSID arbitration.  

To the experienced eye, the above factors give rise to a whole host of issues to be considered at the time of negotiating the transaction of which the following are just a few:

• has the host state ratified the Convention?
  
  
• has the home state of the investing party ratified the Convention?  If not, is it possible to structure the investment so that the investment is made by means of a corporate vehicle incorporated in a country which is party to the Convention and in a country which has a favourable bilateral investment treaty with the host country?
  
  
• will the host state agree to the inclusion of an ICSID arbitration clause in the investment documentation?  
  
  
• if there is room for doubt on whether the Convention requirements on the nature of the investment are met, can the state party be persuaded to include an acknowledgement in the contract confirming its understanding that this is the case.

Resolution of an investment dispute will never be easy, but ICSID arbitration has a lot going for it in circumstances where the stakes may be extremely high and where other avenues of dispute resolution may prove sterile.

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Beating a defendant's offer of settlement is no longer enough by Richard Power and Adam Knee

Richard Power and Adam Knee consider the implications on Part 36 offers of the recent judgment
                                                                      in Carver v BAA

Until recently, a claimant with a money claim could confidently reject a defendant's offer to settle under Civil Procedure Rules (“CPR”) Part 36, safe in the knowledge that, provided they obtained judgment for a sum greater than that offer, the defendant would be ordered to pay their costs.  However, in the recent case of Carver v BAA plc [2008] EWCA Civ 412, the Court of Appeal confirmed that the new wording of CPR Part 36 means that the Court will take a broader view, and just because a claimant beats a payment in, it will not necessarily mean that he has obtained a judgment which is at least “as advantageous” as the offer of settlement.

Part 36 offers-the new wording

Part 36 was introduced to encourage parties to settle their disputes without the need for a trial.  In the context of a defendant's offer of settlement, the idea was to penalise a claimant who obtains judgment but fails to do better than the defendant's offer by departing from the usual rule that the claimant would also be able to recover his costs from the defendant.

Part 36 used to provide that, for money claims, if a claimant “failed to better” a defendant's Part 36 payment into court, the court would (unless it considered it unjust) order the claimant to pay the defendant's costs from the last date for acceptance of the offer.  So, provided that the claimant obtained judgment which exceeded the payment into court, even by just £1, the presumption would be that the defendant's payment in would have no effect at all and costs would follow the event.

In April 2007, however, the wording of Part 36 was amended so that (a) defendants can make an offer to settle without making a payment into court, and (b), the successful claimant with a money claim has to pay the defendant's costs from the last date for acceptance of the defendant's offer if the claimant “fails to obtain a judgment more advantageous than the defendant's Part 36 offer”.

This brought the test into line with that for non-money claims.  However, until Carver, it was not clear how this rule would be interpreted given the availability of a simple mechanism to compare the defendant's offer with an actual money judgment.

The facts in Carver

Miss Carver was an air hostess who injured her ankle in a fall at Gatwick Airport in March 2003.  BAA admitted liability and indicated that they would be prepared to pay a reasonable sum in settlement of Miss Carver's claim. 

In November 2003 Miss Carver served a schedule of loss estimating her damages at £2,170.  In February 2004, BAA made a payment into court of £520, which was followed in November 2005 by a Part 36 offer to pay £4,006.  On 6 June 2006 BAA made a further Part 36 offer to pay £4,520 in settlement of Miss Carver's claims.  Miss Carver rejected this offer on 18 September 2006, and served a schedule of loss indicating damages of over £19,000.  In April 2007, however, a revised schedule of damages was served, claiming only £2,700.  Further offers were discussed but nothing agreed, and the matter proceeded to trial.

Mr Justice Knight awarded Miss Carver damages of £4,686.26 inclusive of interest.  Taking into account interest on the payment into court, this beat BAA's Part 36 offer by £51; however, Knight J held that it was not “more advantageous” than the Part 36 offer.  Knight J held that in practical terms, BAA was the successful party for the purposes of CPR Part 36.  Consequently, Knight J ordered Miss Carver to pay BAA's costs incurred after the last date for acceptance of BAA's Part 36 offer.  Commenting adversely on the conduct of Miss Carver's claim, the Judge also ordered that there be no order as to costs between November 2005 and June 2006.  BAA was ordered to pay Miss Carver's costs up to November 2005.

Miss Carver appealed the costs order.

The Court of Appeal Ruling 

Lord Justice Ward held that the changed wording of CPR Part 36 had to be interpreted in light of the “modern approach to litigation”, especially the encouragement given to parties to settle disputes.  Ward LJ held that the courts should adopt a new approach when considering whether a judgment was more advantageous than a defendant's Part 36 offer, and held that money would not be the sole governing criterion.  Factors such as the time and cost (monetary and emotional) of litigating a dispute to trial would be relevant. 

Ward LJ therefore confirmed that Knight J had adopted the correct approach regarding whether Miss Carver's judgment had been more advantageous than BAA's Part 36 offer, commenting that “no reasonable litigant would have embarked upon this campaign for a gain of £51”, incurring costs of around £80,000 in the process.  Ward LJ also held with regard to the costs up to June 2006, Knight J was correct to take account of the manner in which the litigation had been pursued, and in particular, Miss Carver's failure to make a counter-offer to BAA's offers and the exaggeration of her claim.  Consequently, the appeal was dismissed.

Comment and implications

Before Carver, although the court was always able to deviate from the consequences prescribed in CPR Part 36 on the grounds of justice, claimants could be reasonably certain that in the absence of misconduct, if a money judgment in their favour exceeded a defendant's Part 36 offer, they would not be penalised as to costs.

The new approach makes matters much more uncertain and increases the risks inherent in litigation.  Claimants will now be under much more pressure to consider accepting a defendant's Part 36 offer even if it is appreciably below their estimate of their likely recovery.

While this might achieve the laudable goal of increasing the number of cases settled without the need for trial, the uncertainty created is somewhat unsatisfactory.  If the court takes into account the emotional cost of litigating, where is the line drawn?  Should the court take into account the value of establishing a precedent or sending a message to other potential defendants?  Perhaps the only thing that can be said for certain is that a claimant can no longer safely dismiss a defendant's Part 36 offer without considering factors other than what he is likely to recover at trial.

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You have been warned! by Sharon Kennedy 

Sharon Kennedy looks at the recent action taken by the FSA against Merchant Securities Group Limited and warns of the lessons it teaches about protection of customer information 

If you are a firm which is regulated by the FSA, you must have risk management systems and controls in place to maintain the security of your customers' information.  This is, of course, quite right and has been the case since the FSA regulation began.  What has recently changed is that it is clear that the FSA will now penalise any firm which it identifies as having failed in this respect, regardless of whether that failure led to customers' information being compromised or not. 

And beware!  If any regulated firm fails to monitor the FSA's speeches and publications, including the FSA's final notices, relating to this issue, or has monitored them but simply has not learnt from them (and from others' mistakes), this will be taken into account by the FSA when deciding on the level of disciplinary sanction. 

In short, firms need to be fully up-to-date with the FSA's expectations.  And if they fail to live up to those expectations, they will be disciplined-even in cases where customers' information remains uncompromised. 

The securities broker, Merchant Securities Group Limited (“Merchant”) was found by the FSA, in June, not to have taken reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems, by reason of failings in the protection of customer information.

Merchant's failings were:

• its method of verifying the identity of its customers (some 850 of them) was inadequate.  Merchant relied on its staff being able to identify customers by recognising their voices and by talking to them informally about personal matters such as holidays or hobbies;
  
  
• its customers' personal account numbers, which could be used with a customer's name to access account information, were included in routine letters;
  
  
• back-up tapes containing unencrypted customer information were stored overnight in a staff member's bag at home; and
  
  
• the risk involved in its staff being able to use instant messaging and web-based e-mail was not addressed by Merchant.

There was, however, no evidence of any actual compromise of customer information-just a lack of effective systems and controls. 

Merchant's failings had come to light in September 2007 during a visit by the FSA as part of its wider thematic work to gather information on how firms identified and managed their security data.  The failings had not come to light because Merchant's systems and controls (to the extent that they existed) had failed. 

Furthermore, Merchant had co-operated fully with the FSA in its investigations and had subsequently taken steps to improve its systems and controls.

Merchant was nevertheless fined £77,000 by the FSA.  A 30% discount was applied because Merchant agreed to settle at an early stage of the FSA's investigation.  Without the discount, the fine would have been £110,000-significant, given the size of Merchant.

Margaret Cole, Director of Enforcement at the FSA summarised the FSA's views as follows:

“It is unacceptable that despite increased awareness of data security issues, a firm should be so careless about its systems for protecting customers' personal details.  People have a right to expect their details to be kept secure and firms should be committed to treating their customers fairly in all aspects of their business.  Reducing financial crime in the UK is a priority for the FSA … We will not wait until information has been lost or stolen before taking action against a firm”.

Ms Cole gave the warning that the FSA's investigations showed that many firms still needed to do more to “get it right”.  She added that the level of Merchant's fine should serve as a warning to others to take data security seriously. 

The FSA took the view that Merchant had failed to pay proper heed to warning signals (i.e. its speeches, publications and final notices on the issue-which were all publicly available). 

When considering the level of disciplinary sanction to impose, the fact that the breaches were identified by the FSA and not Merchant was held against the firm.  This is, perhaps, curious when the most likely circumstance in which Merchant would have identified the breaches for itself would have been if its customers' data had actually been compromised.

Unsurprisingly, the FSA considered the nature, seriousness and impact of the breach, including the risk of loss to the consumer. 

However, the FSA also said that it considered that a penalty would act as a deterrent to Merchant and other regulated firms and its final notice in this case says that the size, financial resources and circumstances of a firm are relevant to the level of the fine to be imposed by the FSA.  We can therefore expect larger regulated firms to receive higher fines, because they have more money and resources, and less well-resourced firms to receive higher fines for the deterrent effect.  In short, whatever the size of the firm, levels of fines in this area are likely to be more punitive going forward.

The fact that there was no evidence of any actual compromise of customer data and that Merchant had, by the time the FSA's final notice in this case was published, taken steps to review and improve its systems and controls in relation to information security, was said by the FSA to have weighed in Merchant's favour, when it decided upon the level of disciplinary sanction.  However, the extent to which these factors were taken into account is questionable, given the FSA's concern with holding Merchant out as a deterrent to others, particularly in a time of heightened public awareness of information security. 

Merchant was certainly not meeting its obligations as regards its customers' security, but the FSA appears to have punished it more harshly than it might have done previously because of the FSA's wish to send out a strong message to the market and to deter other regulated firms from similar failings.  This mirrors the historical approach it has taken in relation to anti- money laundering procedures and treatment of client money.

In summary, the FSA has made it clear to all regulated firms that:

• they must monitor FSA final notices and other publications to understand the FSA's views on topical issues such as data security, and review their systems and controls in light of these;
  
  
• fines will be imposed even when there is no evidence of loss (and they are likely to be higher for a well-resourced firm); and
  
  
• fines will be used as deterrents (which is likely to mean comparatively higher fines for smaller firms as well).

The landscape is changing and that the FSA intends no longer to act only when data has been lost.  Regulated firms are required to have adequate systems and controls in place to prevent any such loss, and the FSA is intent on ensuring they have, to minimise the risk of any such loss ever taking place. 

The Merchant case contains warnings for all regulated firms and it is important that they are heeded in this new FSA landscape.  The Merchant case related only to securing customer information, but the warnings it contains are likely to be equally applicable to all the obligations of regulated firms in the future.

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Ex turpi causa by Edward Coulson and Emi Dagogo

Edward Coulson and Emi Dagogo look at the principle that you cannot found a claim against another on your own illegal act

Auditors will be pleased with the recent Court of Appeal decision of Moore Stephens v Stone & Rolls Limited (in liquidation) [2008] EWCA Civ 644 in which it was ruled that a company could not claim against its auditors for losses arising from failures to detect and expose fraudulent transactions perpetrated by the company's own director on behalf of the company.  The claim was accordingly struck out.

The case concerned an appeal from Moore Stephens, Chartered Accountants (the “Auditors”), against a High Court decision not to strike out a claim brought against them by the liquidator of Stone & Rolls Limited (the “Company”).

The liquidator brought a claim against the Auditors for negligence as they had failed to detect and expose the fraud carried out by Mr. Zvonko Stojevic, who solely owned and controlled the Company.  Mr. Stojevic had caused the Company to engage in a letter of credit fraud against banks.  One bank that suffered loss brought a successful claim against both the Company and Mr. Stojevic.  The Company was unable to pay the substantial damages award and therefore went into liquidation.

A distinction was made by the court between the scenario in this case whereby the fraud was committed against a third party (a bank) and a scenario whereby the fraud is committed by a director against his own company.  In the former case, the Court of Appeal stated that the company is deemed to be the perpetrator of the fraud (even though the fraud is committed by its director).  In the latter case, the company is deemed to be the victim of the fraud.  Where the company is a victim, the fraudulent acts of its directors are not attributed to the company itself such that the company is not prevented from bringing claims which arise from that fraud.

The arguments put forward by the liquidator were not accepted by the courts.  They argued firstly that the public policy maxim of ex turpi causa non oritur actio, which means that “no court will lend its aid to a man who founds his cause of action on an immoral or an illegal act”, could not prevent the Company from suing the Auditors for losses caused by Mr. Stojevic because the Company had no knowledge of the frauds and was ultimately a “victim” as it was sued successfully by one of the defrauded banks. 

Secondly the liquidator argued that as the detection of dishonesty in the operation of the Company's affairs was the “very thing” the Auditors were retained to do, the Auditors should not be allowed to rely on the ex turpi causa maxim as a defence. 

The Court of Appeal were unmoved by these arguments and made it clear that the ex turpi causa principle is applicable indiscriminately and is not subject to the court's discretion.  The claim was unquestionably linked with the fraud perpetrated on the banks and the Company's liquidator could not bring the claim without relying on illegality.  The ex turpi causa principle therefore applied and the claim was automatically barred, irrespective of whether or not the Auditors were in fact negligent. 

The courts also made it clear that the rule set out in the case of Re Hampshire Land Co [1896] 2 Ch 743 did not apply here.  In Re Hampshire Land it was established that where fraudulent acts are perpetuated against a company by its directors or agents, those acts will not be attributed to the company.  The Court of Appeal in Moore Stephens ruled that the Company was not the target or the victim of Mr. Stojevic's fraud but was itself the fraudster (through its agent Mr. Stojevic), even though the fraud ultimately caused harm to the Company. 

Finally, the Court of Appeal dismissed the liquidator's argument that the Auditors should not have the benefit of the ex turpi causa principle because the “very thing” they were retained to do was to prevent the fraud as there was no authority to support it. 

Another recent Court of Appeal decision (Gray v Thames Trains Limited [2008] EWCA Civ 713) has suggested that such a narrow application of the principle of ex turpi causa is not always appropriate.  In that case, a victim of the Ladbroke Grove rail crash who developed post-traumatic stress disorder and significant personality change, stabbed a stranger to death and was convicted of manslaughter.  He later brought a claim for negligence against those responsible for the rail crash for loss of earnings resulting from his post-traumatic stress disorder.  The Court of Appeal disagreed with the High Court decision that the principle of ex turpi causa prevented him from claiming loss of earnings after the date of the manslaughter.  The court took a broader approach saying that the test was whether the relevant loss was inextricably linked to the claimant's illegal act, which in their opinion it was not.  The facts of this case differ from those of Moore Stephens because the Company in Moore Stephens had to rely on its own illegal act to bring the claim whereas in Gray the claim was not based on the manslaughter committed by the claimant.

These two Court of Appeal decisions do however indicate that there is still an element of confusion as to when to apply the principle of ex turpi causa.  A House of Lords decision would help to confirm the position. 

Finally, it is of interest to note that the claim in Moore Stephens was for in excess of £90 million and was funded by IM Litigation Funding, which raised money from hedge funds and other investors. 

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Procedural update Autumn 2008

Undertakings to the court - A cautionary note

The recent decision in Zipher v Markem [2008] EWHC 1379 (Pat) emphasises the importance of thinking carefully before indicating to the court a willingness to provide an undertaking and about the terms on which such an undertaking is given. Where an unconditional undertaking is provided (as opposed to one which is conditional upon a certain order being made) it will be binding, even if it is not recorded in an order of the court, unless it is discharged.  The record in the transcript will suffice as evidence of the undertaking. In Zipher the parties had previously been engaged in litigation to determine entitlement to inventions disclosed in patents and a number of patent applications concerned with tape drivers for use in printers, tape recorders and similar equipment.  Having secured its ownership of the inventions, Zipher issued infringement proceedings against the defendants and sought to amend one of the patents.  One of the issues to be determined was whether Zipher had given an undertaking in earlier proceedings which prevented it from making the proposed amendments to the patent in question.

The court found that the Zipher's proposed amendments to the patent were precluded as a result of an unconditional undertaking given to the first instance court in the earlier proceedings, which in this case also meant that the application for infringement of that patent failed.  It made no difference that the defendant had not accepted the undertaking in compromise of its claim or that at a subsequent hearing the whole foundation for the undertaking fell away, as the undertaking was not conditional upon these factors.

New rules on service

New rules on service of documents in court proceedings come into force on 1 October.  The aim of the changes is to make the rules on service clearer, particularly in relation to provisions where the development of case law, or the rules themselves, meant that there could be insufficient certainty for claimants as to whether their claim had been validly served.  This is an area that can lead to problems, for example, where: the limitation period is due to expire, it transpires that the claim form has not been validly served within the time limit for doing so after issue and expiry of the limitation period means that it is not possible to file a new claim.

The main changes to note are:

• there will be a clear distinction between the rules governing service of the claim form and service of other documents in the proceedings;
  
  
• the method of calculating the deemed date of service has been simplified:
  
  
• claim forms will be deemed served on the second business day after dispatch (before 12 midnight), by whatever means;
  
  
• other documents will be deemed served either: two days after dispatch by post or DX; or the same day if served before 4.30pm (extended from current time of 4pm) by hand, personal service, fax or e-mail, provided that day is a business day (if it is not, the deemed date of service will be the next business day after that day);
  
  
• service by post will be permissible by any “next day” postal service provider (i.e. not limited to the Royal Mail);
  
  
• the deemed date of service can not be a Saturday, Sunday or bank holiday;
  
  
• under the new rules parties are explicitly required to carry out reasonable enquiries and consider alternative methods before serving on an address known to be out of date.  Under the current CPR rules there is a lack of certainty as to what steps a claimant should take in the event that it is not clear whether a defendant is still residing or carrying on business at his last known address.  The new rules should provide more certainty;
  
  
• the time limit for serving the claim form on parties will be by reference to the time of dispatch (rather than deemed service).  The despatch must be completed before midnight on the calendar day four months after the issue of the claim form;
  
  
• the deadline for filing the certificate of service in relation to the claim form is now within 21 days of service of particulars of claim (current rules require service within seven days of service of claim form).

Note that the changes primarily concern service of documents within the jurisdiction; rules in relation to service of documents outside the UK are still under review and may change further in the future.

Determining the applicable law in relation to contract and tort: Rome I and Rome II

When analysing any potential claim, as well as considering which jurisdiction the claim should properly be brought in, it is important to consider what governing/substantive law will apply to the dispute, as clearly this will affect your ability to bring or defend claims in relation to specific issues.  The Rome I and Rome II Regulations will harmonise the approach to determining applicable law and should mean greater predictability and certainty in this area.

The Rome I Regulation will apply to contractual disputes.  It will apply in all EU member states (except Denmark) from 17 December 2009, to all contracts concluded after that date. As matters currently stand it will not apply to the UK but it is expected that it will do so as the UK is seeking permission for the Regulation to apply here.

The Rome II Regulation will apply to non-contractual matters, such as tort.  It will apply in all EU member states (except Denmark) from 11 January 2009.

We will provide a further update on the implications of this as the implementation date approaches.

Disclosure of insurance details 

The decision last year in Harcourt v Griffin [2007] EWHC 1500 (QB) and others led to concerns by some (and hopes by others) that defendants might be required to give disclosure of insurance documents in litigation pursuant to requests for further information under CPR 18.  In Harcourt the Judge found that where there is a real basis for determining whether further litigation is useful or simply a waste of time and money, a defendant should disclose the extent of its insurance. 

The recent decision in West London Pipeline v Total [2008] EWHC 1296 (Comm) makes it less likely that such orders will be made in practice.  In this case the judge considered that the court did not have jurisdiction to make an order for disclosure as CPR 18 could not be construed, in the more liberal manner it had been in Harcourt, to cover requests for details of a defendant's insurance.  The insurance position did not impact on the ability of the claimant to prepare its case or to understand any potential defence.

However note that, as both West London and Harcourt are first instance decisions there is still scope for argument on this point.

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Bribery and corruption investigations by Segun Osuntokun and Aaron Stephens 

International business dealings continue to be under unprecedented scrutiny as a result of governmental efforts to enforce anti-bribery legislation.  Relevant US and UK enforcement bodies (e.g. the SEC, Department of Justice (the “DOJ”)and Serious Fraud Office (the “SFO”)) are committing significant resources to this area and a substantial number of companies are currently under investigation.

Companies that use foreign agents, advisers or consultants (whether individuals or entities) when conducting international business are particularly vulnerable to allegations of corruption.  This is because such individuals and entities are often used as “middlemen” by companies seeking to engage in corrupt activities.

Moreover, even where a company has no obvious corrupt intent, it may still risk liability by engaging the services of agents, advisers or consultants, especially in jurisdictions where corruption is commonplace.  Third party arrangements must be approached with caution - a company without a compliance programme may incur monetary and criminal sanctions, both against the company itself and/or relevant individuals.

The bottom line:

• Laws now in force across the OECD countries are being used to prosecute acts of corruption across the globe;
  
  
• Under the Anti-Terrorism, Crime and Security Act 2001, bribery is a criminal offence if done by a UK company or national anywhere in the world - moreover, there is a joint SFO/City of London Police effort to investigate and punish corrupt activities linked to the City; and
  
  
• Investigations by US authorities under the Foreign Corrupt Practices Act (the “FCPA”) are particularly frequent and aggressive and there is an emphasis on pursuing non-US companies - European companies listed on US exchanges, doing business in the US or with US parent companies are all caught by the FCPA.

In order to manage their exposure, companies may need to:

• Conduct a risk assessment to review and upgrade internal procedures and controls, including anti-money laundering systems;
  
  
• Establish a compliance and training programme;
  
  
• Ensure sufficient transactional due diligence; and/or
  
  
• If appropriate, voluntarily disclose problem engagements and/or consult with the DOJ, SFO, etc. in order to pre-empt enforcement activity.

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Contacts:

Oliver Glynn-Jones
+44 (0)20 7760 4340
oliver.glynn-jones@blplaw.com