Daughter cut out of will loses to animal Charities

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Supreme Court landmark decision:

The long awaited judgment in the saga of Ilott v Mitson & Ors[i] is a landmark decision by the Supreme Court. The result overturns the previous Court of Appeal judgment, which itself had caused shockwaves. It appeared to give almost no weight to the clearly expressed views of the late Mrs Jackson who did not want her only child, Mrs Illott to benefit from her £500,000 estate. Instead, she left everything to the animal charities. In a decision that will attract considerable attention, the Supreme Court has largely upheld the wishes of Mrs Jackson, and made serious criticisms as to the confused state of the present law, which led to such prolonged proceedings.

Background

In 2004, Mrs Melita Jackson died leaving a Will giving most of her £500,000 estate to Animal Charities. She had one daughter, Heather Illott. They had been estranged for 26 years. Heather had left home aged 17 to live with her boyfriend. Mrs Jackson disapproved. Mrs Jackson had left a detailed letter for her executors, explaining her decision to exclude Heather from her Will and that she had made it clear to Heather that she would receive anything under the will.

By the time of the latest hearing, Heather was in her 50’s and her husband had been made redundant. They were in receipt of benefits of around £13,000 a year, and their annual income totalled £4,665. The Court of Appeal said Mrs Jackson had been “…unreasonable, capricious and harsh.”

The Court of Appeal Decision

Mrs Illott was awarded £143,000 to buy the rented home she lived in. A further £20,000 was granted as ‘additional income’. This was a substantial increase beyond the £50,000 granted on an earlier hearing by a District Judge. She succeeded on her application for an award for maintenance under the Inheritance (Provision for Family and Dependants) Act 1975 (“IPFD”). The Court of Appeal stated that it was applying the law as set out in the statute, including considering all relevant factors under s.3, such as:

  • Financial resources and needs of claimant;
  • Financial resources and needs of any other claimant;
  • Financial resources and needs of beneficiaries;
  • Obligations and responsibilities of deceased towards claimants and beneficiaries;
  • Size and nature of estate;
  • Disabilities of claimants and beneficiaries;
  • Any other matter

Supreme Court Judgment

The Supreme Court highlighted errors in the approach by the Court of Appeal. Their order was set aside and the District Judge’s order restored.

Lady Hale in her judgment reviews the history of the Act and preceding legislation. She comments on the unsatisfactory state of the law, giving as it does no guidance as to the weight of the factors to be taken into account in deciding whether an adult child is deserving or undeserving of reasonable maintenance. The approach under the Act invariably involves a value judgment, which may be problematic as there is a wide range of opinion among the public and the judiciary about the circumstances in which adult descendants ought or ought not to be able to make a claim on an estate which would otherwise go elsewhere.

For an applicant other than a spouse or partner, reasonable financial provision is limited to what it would be reasonable for her to receive for maintenance only. This is an objective standard, to be determined by the court. The limitation to maintenance provision represents a deliberate legislative choice and demonstrates the significance attached by English law to testamentary freedom. Maintenance cannot extend to any or everything which it would be desirable for the claimant to have, but is not limited to subsistence level. The level at which maintenance may be provided is clearly flexible and falls to be assessed on the facts of each case, as at the date of hearing.

Although maintenance is by definition the provision of income rather than capital, it may be provided by way of a lump sum. As to the first suggested error, the process suggested by the Court of Appeal is not warranted by the Act. The Act does not require the judge to fix some hypothetical standard of reasonable provision and then increase or discount it with reference to variable factors. All of the s.3 factors, so far as they are relevant, must be considered, and in light of them a single assessment of reasonable financial provision should be made.

The District Judge worked through each of the s.3 factors, and was entitled to take into account the nature of the relationship between Mrs Jackson and Mrs Ilott in reaching his conclusion. As to the second suggested error, the District Judge specifically addressed the impact on benefits twice. The Court of Appeal’s criticism that his award was of little or no value to Mrs Ilott was unjustified.

Reasonable financial provision can in principle include the provision of housing, but ordinarily by creating a life interest rather than a capital and inheritable sum, which possibility appeared not to have been considered by the Court of Appeal.

To the extent that the benefits means test was relevant, it was likely to apply also to the additional sum of £20,000 apparently awarded with a view to avoiding that test. The statement in the Court of Appeal that a claimant in receipt of benefits should be treated in the same way as a disabled claimant was problematic; what must have been meant was that receipt of means tested benefits is likely to be a relevant indication of a claimant’s financial position. Finally, the Court of Appeal’s order gave little weight to Mrs Jackson’s very clear wishes and the long period of estrangement. The Court of Appeal’s justification for this approach was that the charities had little expectation of benefit either.

Lady Hale said this approach should be treated with caution, given the importance of testamentary bequests for charities, and because the testator’s chosen beneficiaries, whether relatives, charities or otherwise, do not need to justify their claim either by need or by expectation.

COMMENT

Media comment had seized on the Court of Appeal decision, fearing that people’s wishes in their Will are not being followed. The Supreme Court judgment should now reassure those concerned that the courts were unduly interfering in the wishes of testators about who should inherit. The judgment provides more clarity for those involved who may object to a decision made by a relative to exclude them from the Will and also for those, executors and beneficiaries alike, involved in issues concerning “reasonable financial provision” when a challenge to a Will is being considered.

The Court has to decide whether the Will makes

“reasonable financial provision”

according to IPFD, for the adult child of the deceased. The trial judge is not exercising a discretion in reaching a decision, but making a value judgment based on an assessment of the statutory provisions which have to be taken in to account. It is solely the Act which sets out the factors for the exercise of the court’s decision.

  • Based on this judgment, people are still entitled to cut their children out of their Will if they wish. However, there will have to be good reason shown. How and why they are making other provision needs to be explained, and what their connection is to any particular charity to which they wish to leave their estate.

In view of the Supreme Court’s guidance on IPFD:

  • The upshot is likely to be that adult children who have been excluded may now be less encouraged than suggested by the Court of Appeal decision to dispute a Will by arguing that they have not been left reasonable financial provision.
  • The Court will still take in to account any accompanying letter of wishes. If anything, these may now be more important than before, and this case can be seen in the context of its own particular and quite unusual circumstances.

 


[i] https://www.supremecourt.uk/cases/docs/uksc-2015-0203-judgment.pdf

This piece has previously appeared at http://social.luptonfawcett.com/blog/daughter-cut-out-will-loses-animal-charities

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Supreme Court: Malicious Claims Actionable – What do you think?

Does this Landmark Decision “open the floodgates” to claims from aggrieved parties?

5:4 Decision – What would you decide? (Vote at the end)

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A 9 Member panel of the Supreme Court decided 5:4 that the tort of malicious prosecution extends to civil proceedings. The Supreme Court usually sits with a panel of 5, and more rarely, 7.  The “Brexit” decision of 24 January 2017 involving a full 11 member panel is thought to have been unique. That 9 members heard this case demonstrates its high importance.

It is also an extreme illustration of assets and liabilities, specifically legal proceedings, surviving the death of a principal party.

Willers v Joyce and another (in substitution for and in their capacity as executors of Albert Gubay (deceased)) [2016] UKSC 43 and [2016] UKSC 44.

Background

Mr Willers and Mr Gubay were business associates for over 20 years. Mr Willers was a director of Langstone Leisure Ltd, a company controlled by Mr Gubay. They fell out in 2009.

Mr Willers was sued by Langstone Leisure Ltd for alleged breaches of contractual and fiduciary duties when he was a director of the company. He defended the action and issued a third-party claim for an indemnity from Mr Gubay, on the basis that he had acted under Mr Gubay’s direction. Langstone discontinued its claim against Mr Willers shortly before trial.

Mr Willers brought proceedings against Mr Gubay for the malicious prosecution of the Langstone claim against him, contending that it had been part of a campaign to damage to his reputation, health and earnings. Mr Gubay’s defence was that there was no cause of action recognised in England &Wales for malicious prosecution of a civil suit (in contrast to criminal proceedings, where it is well established).

Precedent

Mr Willers’ claim was struck out. The Judge held that she was bound by the doctrine of precedent to follow a decision of the House of Lords in Gregory v Portsmouth City Council [2000] which reiterated that the tort of malicious prosecution did not extend to civil proceedings.

However, due to a recent conflicting decision of the justices sitting in their different capacity as members of the Judicial Committee of the Privy Council (JCPC) in an appeal from the Cayman Islands (Crawford Adjusters (Cayman) Ltd v Sagicor General Insurance (Cayman) Ltd [2014]), Mr Willers was granted leave to appeal to the Supreme Court.

The High Court granted a leapfrog certificate so the scope of the tort of malicious prosecution could be resolved definitively, bypassing the Court of Appeal. As well as dealing with that issue, the court also addressed the status of Privy Council decisions in the doctrine of precedent.

The Supreme Court decision

The Supreme Court allowed Mr Willers’ appeal which can now go to trial, and held that the tort does apply to civil proceedings.

The dissenting minority of justices did not find sufficient support in historical case law, arguing that recognising the tort would be inconsistent with longstanding rules of law, and expressing concerns that the decision could spawn undesirable satellite litigation.

However, the majority held that it seemed instinctively unjust for a person who has suffered injury as a result of the malicious prosecution of civil proceedings against him to be left with no redress. Addressing the concerns about ‘satellite litigation’, the majority emphasised that to establish a claim for malicious prosecution of civil proceedings it must be proved that the original proceedings were not a bona fide use of the court’s process, e.g. where proceedings were wholly without foundation or where the party sought some extraneous benefit to which he had no right. This means that the claimant has a heavy burden to discharge, and as such successful claims are likely to be rare.

“Simple justice” dictated that Mr W’s claim for malicious prosecution should be sustainable in English law.

Lord Toulson gave the lead judgment, Lady Hale, Lord Kerr and Lord Wilson agreed. Lord Clarke delivered a concurring judgment. Lords Neuberger, Mance, Sumption and Reed dissented.

Broadly, the court approached the appeal by looking both at whether the historic cases supported the existence of a general tort of malicious prosecution and also at the policy considerations for and against permitting claims of this type. The majority recognized that the authorities stretching back to the 17th century were not conclusive, but they did show that the courts were willing to develop the tort to achieve justice in situations where a person has suffered injury as a result of the malicious use of legal process without any reasonable basis.

The minority’s conclusion however was that the tort had never applied in civil proceedings as such and the House of Lords had taken a firm stand against an extension to civil proceedings in Gregory. They were also unpersuaded that there was any general need to extend the tort as it would, in their view, create uncertainty, further anomalies and the potential undesirable practical consequences.

The policy arguments

  • Lord Toulson found the statement in Savile v Roberts (1698 12 Mod Rep 208) that

…if this injury be occasioned by a malicious prosecution, it is reason and justice that he should have an action to repair him the injury…”

to be obvious and compelling. He found that it would be instinctively unjust for there to be no recourse for a person who suffers injury as a result of malicious prosecution of civil proceedings.

  • The tort would not discourage those with valid claims
  • There is no evidence that the existing risk of indemnity costs faced by claimants pursuing improper claims has deterred the pursuit of legitimate claims
  • There is a public interest in avoiding unnecessary satellite litigation, but malicious prosecution isn’t a collateral attack on the outcome of the first proceedings
  • There might be an attack where, for example, the judge in the original proceedings refused to award indemnity costs, the malicious prosecution claim being an indirect means of challenging the judge’s refusal to penalise the claimant’s conduct
  • There is no duty of care between litigants, but a liability for maliciously instituting proceedings without reasonable or probable cause is “simple justice”
  • Anyone seeking to establish such a claim would have a heavy burden to discharge

The test to be applied

The court held that, to establish a claim for malicious prosecution, the claimant would have to prove: Proceedings had been brought against it without reasonable and probable cause. The party that brought those proceedings did so maliciously.

Guidance.

The first limb will be satisfied where the claimant does not have a proper case to put before the court; if the claimant did not believe its claim would succeed. On the second limb, a claim will be malicious if the claimant had deliberately misused the process of the court. This includes cases where it can be shown that the underlying claim was brought in the knowledge that it had no foundation: the proceedings were not a bona fide use of the court’s process.

Privy Council

The case is also of constitutional importance in deciding the extent to which Privy Council decisions made by a board formed solely of serving Supreme Court Justices and based on English law interpretation was legal precedence in England and Wales.

It was confirmed unanimously that a court should not normally follow a decision of the Privy Council if it is inconsistent with the decision of another court which would otherwise be binding on it. However, this should be subject to an exception. In an appeal to the Privy Council involving an issue of English law on which a previous decision of the House of Lords, Supreme Court or Court of Appeal is challenged, the members of the Privy Council can, if they think it appropriate, not only decide that the previous decision is wrong, but can also expressly direct that domestic courts should treat their decision as representing the law of England and Wales. This was considered expedient bearing in mind that the Privy Council panel normally consists of the same judges as the Supreme Court. This should increase the value of Privy Council judgments on English law.

Landmark Decision

The decision means that any claimant bringing unfounded proceedings for malicious reasons now faces additional potential sanctions (being sued for damages for Malicious Prosecution) on top of the usual costs and other risks. While this is a landmark decision, the issue before the court was whether this type of claim was sustainable in principle, do there has been no specific award as yet.

  • It is suggested that the decision is an overdue recognition that where there is a wrong, as a matter of principle and policy, it would be unjust to leave the claimant without a remedy for the damage caused.
  • An anomalous contradiction between civil and criminal and law has been resolved and a gap in the law filled.
  • The specifics of Malicious Prosecution, its precise boundaries, causation and the types of loss that can be recovered will be the subject of developing case law.
  • It remains to be seen how far the tort will evolve, although it is likely that successful claims will be rare, and there will be no “opening of the floodgates”.
  • There is already a tort of “abuse of process” (the abuse of civil proceedings for a predominant purpose other than that for which they were designed). The tort is rarely invoked.
  • Distinct from the tort, “abuse of process” is also a ground for striking out a claim under CPR 3.4(2)(b).
  • There already exist related torts offering protection from malicious prosecution, including defamation, malicious falsehood, conspiracy and misfeasance in public office.
  • Reflecting Lord Neuberger’s concern that it could have a chilling effect on the bringing, prosecuting or defending of civil proceedings, judges will take in to account the risk of defendants threatening malicious prosecution claims in order to deter genuine claimants.
  • The heavy burden of satisfying the test to establish a successful claim is referred to above, and emphasized in the judgment.

link to the judgment: http://bit.ly/2eFrgAl

A version of this piece was previously published September 2016 http://social.luptonfawcett.com/blog/supreme-court-malicious-claims-actionable

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BREXIT “To Do” List: Contracts & Disputes

Contract and Commercial Litigation Priorities

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Following the UK Supreme Court’s historic 8:3 ruling on 24 January  that an Act of Parliament is needed before Article 50 can be triggered –  what due diligence and risk analysis should businesses be undertaking now?


Practical steps to consider

1. Introduction

Triggering Article 50 needs Parliamentary approval rules the Supreme Court, but what does Brexit mean for you and your business?

How will your contracts and their enforceability be affected here and abroad?

The Supreme Court has upheld the High Court’s  decision that Parliamentary Sovereignty trumps the Government’s reliance on the Royal Prerogative, and Parliament should debate and decide before Article 50 is triggered. The Government says this won’t delay its timetable of serving the Article 50 notice under the Lisbon Treaty by March 2017.

Whatever the precise timetable, the withdrawal of the UK from the EU is likely to take some years, but businesses need to be fine tuning their plans now. Until the shape of a post-Brexit agreement is fixed, the precise legal implications are yet to crystallize. But, the UK’s departure will impact on fundamentals for your business like contracts, terms & conditions and potential disputes. Areas to explore from a dispute management perspective include

  • Corporate and commercial contracts
  • Competition law
  • Governing law and jurisdiction
  • Issue and service of English proceedings in the EU
  • Enforcement of English and EU judgments

2. Risk Analysis

How can you ensure your business stays ahead? Whilst some detailed plans can be left until there is greater certainty about post Brexit arrangements, considering the legal implications should be at the forefront of your strategy. A risk analysis should be implemented to ensure businesses get their ducks in a row and identify the effect Brexit will have on their rights and obligations under existing and proposed new contracts and regarding potential litigation.

As each business is different, the process should be targeted to your needs.

Below we highlight typical practical points which businesses should be addressing now, especially if you trade in the EU or have foreign customers, interests or suppliers.

3. Corporate and Commercial Contracts

Businesses should already be reviewing their existing contracts, particularly those likely to be in force at the point of Brexit. Where necessary, contractual terms and conditions intended for use from now on should be amended for when the UK ceases to be a EU Member State.

Many existing contracts and trading arrangements will be affected, referring to a range of EU laws, regulators and territories. A due diligence exercise should be carried out to identify the key contracts and consider their terms. The need for possible amendments and contingent steps should be considered.

  • Can the contract be varied to mitigate the impact of Brexit?
  • Where the contract price or payments under a contract are made or received in Sterling, Euros, Dollars or fixed to a particular exchange rate, consideration should be given as to whether the currency used is amended to reflect the recent drop in Sterling.
  • Does the governing law clause need amending?
  • Will Brexit result in a breach of contract?
  • Whilst unlikely, can force majeure or material adverse effect clauses be relied upon?
  • How can the contract be future-proofed?

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4. Existing Contracts

The impact of the UK leaving the EU may affect the operation of existing contracts, potentially beyond how the parties might expect. It is unlikely that they will have foreseen or planned for the implications when entering in to the contract.

Territorial scope. Does the contract include the EU as its territorial scope? On leaving the EU, the UK won’t be covered by that territorial description. Should the contract be amended, or can the contract be terminated by any party invoking a force majeure or material adverse change clause?

Reference to EU legislation. Analyze clauses referring to EU legislation, compliance and any changes. Contracts that refer to EU legislation may need to be amended to deal with the different circumstance.

Force majeure provisions. A force majeure clause may be drafted wide enough for a contract to be terminated. For example, if the contract depended on certain EU legislation (e.g. “passporting” under EU financial services legislation), the contract may be frustrated or force majeure might be triggered by Brexit.

Material adverse change provisions. Similarly, if a contract includes a “material adverse change” provision (MAC), this may permit termination of the contract, although this will depend on a number of factors.

These issues may well result in a dispute, and businesses should consider their existing agreements as to how they maybe impacted.

Shorter term contracts. These are less likely to be affected by the UK leaving the EU, due to the two-year negotiating window after Article 50 is triggered. This should give parties some time to consider how the terms of Brexit might affect their longer term contractual arrangements and to renegotiate where necessary.

5. New Contracts

Notwithstanding “Brexit means Brexit”, new contracts should address the impact of the UK’s departure from the EU, and provide accordingly in the contract so far as possible:

  • Do your contracts contain provisions which assume that the UK is an EU Member State? This may include references to the EU that are formulated on the assumption that this includes UK, or may be less obvious – e.g. references to rights or obligations arising from specific EU laws which currently apply to the UK.
  • Do your contracts rely on or assume the availability of free movement within the EU, or of any EU level consolidation (such as engaging an EU wide regulatory body)?
    • Prolonged Negotiations. Specific provisions could be considered on prolonged negotiations to implement the exit or the impact of new trade agreements once negotiated.
    • Termination rights. Consider whether to include termination rights in case the new trade agreements will result in an increased burden or negative effects on the intended business transaction.

Force majeure provisions

  • Expressly include or exclude the UK leaving the EU in or from any force majeure provision;
  • Consider termination rights when the UK leaves the EU (depending potentially on the terms Brexit ultimately takes); and/or
  • An alternative mechanism once the UK leaves the EU
  • Include notice terms and detailed explanation of the consequences of the right to terminate, and include justifiable Brexit definition and when it can be triggered.

Material adverse change provisions

Similarly to force majeure provisions, consider whether to include or exclude Brexit from the MAC definition. This depends on the outcome sought. Similar considerations will need to be given to how the Brexit definition is drafted and when it can be triggered. A business may wish to consider the inclusion of its own MAC clause, or even a bespoke Brexit clause. This could provide businesses with flexibility to respond to altered circumstances rather than being tied to expensive or inflexible terms. This would require heightened awareness on the part of businesses to work out the ramifications of such clauses, and to be prepared for counterparties seeking to include them also.

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6. Competition/Antitrust

  • EU law continues to apply in the UK. Substantive UK competition law mirrors EU competition law. As such, competition law continues to apply in the UK as it did before the referendum.
  • EU and UK antitrust/competition law has a significant impact on contracts and trading arrangements. Competition law compliance continues to be of prime importance. This will still apply post Brexit, but there will be changes.
  • Transitional provisions are likely for Brexit and the UK’s new trading arrangements with the EU. Businesses should be taking steps now to evaluate the impact of Brexit on competition law as it relates to them.
  • Private competition law litigation (including claims for injunctions and damages) has been increasing in the UK and Europe. It now represents a significant commercial weapon for businesses of whatever size.
  • Brexit raises significant commercial, legal and other issues for businesses. Whilst there may be understandable motives for wanting to discuss this with competitors in various forums, informally or formally, extreme caution should be employed. Confidential commercial information must remain confidential and businesses must avoid offending against anti competition laws. Discussions with competitors should be avoided until advice on competition law is first obtained.
  • As with other types of litigation, the impact of Brexit on competition litigation should be considered when planning strategy.

7. Litigation

Brexit may impact on litigation affecting your business, including current or prospective cases, such as where jurisdictional issues arise, or when it comes to enforcing a judgment post Brexit.

EU legislation governs parties’ choice of which EU member state’s courts has jurisdiction over disputes between them, and the cross-border recognition of judgments of EU member states’ courts.

The Court of Justice of the European Union (CJEU) is responsible for the rule of law within the EU. The UK’s right to appear in all cases and to appoint judges to the CJEU will no longer exist when Brexit is implemented. This should not be confused with the European Convention on Human Rights, its council and its court (the ECtHR), which are not affected by Brexit. The European Convention on Human Rights has been incorporated into UK law through the Human Rights Act, and the referendum of 23 June did not involve the UK leaving the Council of Europe either.

From the date Brexit takes effect, litigants will no longer be able to appeal cases to the CJEU and UK judges will no longer be required to follow CJEU decisions (although they may decide to do so), but they will continue to follow ECtHR decisions. Litigants are likely no longer to be able to challenge UK legislation on the basis of incompatibility with EU law alone. They would however retain the ability to mount such challenges to the ECtHR based on human rights issues.

In other respects, the court system in the UK is likely to remain unchanged, with the UK Supreme Court (formerly the House of Lords) as the final Court of Appeal.

Brexit is unlikely to affect the recognition and enforcement of judgments between the UK and EU member states, as the relevant countries are signatories to the Lugano and Brussels Conventions. However, these conventions are more limited than the Brussels Regulation, which currently governs jurisdictional issues between courts of EU member states.

Brexit may mean that the UK falls outside the scope of the Brussels Regulation which created a requirement of “judicial comity”. This means that courts relinquish cases if they are already being heard in another EU member state. Without this restriction, the English courts would be able to accept jurisdiction over more cases and, in appropriate cases, could provide anti-suit relief to restrain parties from pursuing proceedings in the courts of other EU member states. The reverse may unfortunately be propounded by the courts of different EU member states depending on how they view jurisdiction clauses. This would potentially result in considerable uncertainty.

8. Choice of Court

It is fundamental for businesses to be able to agree between themselves where and how any disputes between them should be resolved. This general freedom is subject to some obvious exceptions. The Recast Brussels Regulation sets out which courts of EU member states should have jurisdiction in disputes in civil and commercial matters, and provides for the mutual recognition and enforcement of civil and commercial judgments within the EU. The general rule is that the courts where the defendant is domiciled have jurisdiction. This is subject to a number of exceptions, including:

  • Where the parties have agreed that the courts of another member state should have jurisdiction
  • Agreements regarding the sale of land in a particular country where the domestic courts of a member state have exclusive jurisdiction
  • Contract protection for public policy reasons protecting “weaker” parties
  • Cases involving employment, consumer or insurance contracts

It is anticipated that whether the “Norwegian Model” or the World Trade Organization “WTO Model” is adopted, courts of EU member states will generally be obliged to recognise a choice of jurisdiction in favour of the English courts. However this remains uncertain.

In the absence of any international agreement with the EU, the English courts are still likely to respect provisions in contracts which confer jurisdiction by agreement on the English courts. How such clauses will be treated by EU member states will be a matter for the laws of those member states.

That would result in considerable uncertainty, depending on how jurisdiction clauses are viewed by the courts of different EU member states.

In some cases, the courts of a counterparty domiciled in another EU member state may be reluctant to cede jurisdiction to the English courts, even if that is what the parties agreed.

9. Parallel Proceedings

Parallel proceedings (i.e. where proceedings concerning the same subject matter are commenced in more than one country’s courts) are a risk in commercial disputes, particularly where the parties to a contract are based in different countries. Having to defend a dispute on multiple fronts can be time-consuming and costly.

Under current arrangements, if parallel proceedings are brought in the courts of more than one EU member state involving the same or related issues, in general, the courts of the member state first seized of the dispute decide the question of jurisdiction. One exception is that the courts of a member state that have jurisdiction under the terms of an exclusive jurisdiction clause can proceed to determine the question of their jurisdiction over the dispute in question, even if parallel proceedings are already under way in the courts of another EU member state. This greatly reduces the risk of parallel proceedings within the EU.

If the UK accedes to the 2007 Lugano Convention, this prohibition will remain, but the precedence given to the courts of the country that the parties have agreed should have jurisdiction will not apply.

That rule was introduced to the Brussels Regulation from the beginning of 2015 to resolve the so-called “Italian torpedo” problem.

This is whereby a party first issues proceedings in a country where the judicial process is relatively slow and complicated so as to delay proceedings, and tie disputes up in jurisdictional battles for years.

If the UK does not accede to the 2007 Lugano Convention, there will be no bar on parallel proceedings, provided that the courts in the countries in question are prepared to take jurisdiction over the dispute under their own rules of private international law. For example, at common law, the English courts can take jurisdiction over a dispute where the parties have agreed that the English courts should have non-exclusive jurisdiction and proceedings are pending in a different jurisdiction, on the basis that the parties must have contemplated the possibility of parallel proceedings by agreeing to a non-exclusive jurisdiction clause in the first place.

The English courts would also once again be able to issue anti-suit injunctions to prevent proceedings from being brought in other EU member states, something that they are not able to do at the moment because of the effect of the Recast Brussels Regulation (and its predecessors).

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10. Service

If the counterparty to a contract is in the jurisdiction (or has appointed an agent for service of process in the jurisdiction), it is quite straightforward to serve English court proceedings on them where a dispute arises. The position is more complex, time-consuming and expensive if proceedings have to be served abroad.

Normally under English law, the claimant commencing proceedings must apply to the court for “permission” to serve out of the jurisdiction. The claimant must persuade the English court at the start that it has jurisdiction over the matter. However, there is currently no need to apply for permission to serve out of the jurisdiction if service is to be effected in the EU, and the English courts have jurisdiction under the Recast Brussels Regulation. This provides a clear and relatively predictable basis on which proceedings can be served in the EU without permission. Similarly, EU Service Regulations also set out the procedure and mechanics of effecting service within the EU.

A similar exemption for the need to obtain permission to effect service also applies to service within the countries that are party to the 2007 Lugano Convention. However, if the UK were not to accede to the 2007 Lugano Convention when it leaves the EU, it is likely that it would become necessary again to apply for permission to serve English court proceedings within the EU. This would increase the importance in any contract of having an EU based counterparty expressly appoint an agent for service of process in England if the parties have agreed to submit to the jurisdiction of the English courts.

If parties have chosen the English courts to hear their disputes and one or more of the parties is based abroad, it is always worthwhile including an agent for service clause in a contract.

11. Recognition and Enforcement of Judgments

The Brussels Regulation provides for a streamlined method of recognising and enforcing judgments in civil and commercial matters within the EU, and the 2007 Lugano Convention contains a similar regime for the states included. The bar for refusal of recognition is very high: including judgments contrary to public policy and judgments given in default in certain circumstances. As such, a business contracting with another party elsewhere in the EU can be reasonably confident of being able to

  • issue proceedings
  • serve the proceedings
  • enforce a judgment of the English courts against the counterparty in its home member state

In the absence of any international agreement on jurisdiction and enforcement, the enforceability of judgments of the English courts within the EU would depend on the laws of each member state. This would result in uncertainty. For example, an English company dealing with a French company would need to take French law advice as to the enforceability of English court judgments in France. Potential enforcement issues may hinder jurisdiction being conferred on the English courts by agreement. There is further uncertainty on judgments of English courts being recognised by courts of member states. Money judgments may be straightforward, but the same may not apply to claims for declarations, accounts and inquiries, specific performance, injunctions and interim relief.

The corollary is that the English courts would also no longer automatically recognise and enforce the judgments of the courts of EU member states.

This would be a concern for EU based businesses dealing with counterparties based in the UK. Potential difficulties with recognition and enforcement of judgments could affect decisions by businesses as to which courts they elect to have jurisdiction over their disputes. It could also influence how parties decide to pursue dispute resolution, whether via the courts or arbitration, considering the enforcement mechanisms for arbitral awards.

12. Planning Ahead

Whilst parties negotiating contracts now can plan ahead for in case a dispute arises (e..g. by appointing an agent for service of process, and thinking carefully about potential enforcement issues), the position is different for litigation that is currently either imminent or under way. It is difficult to see how possible changes to the rules on jurisdiction would affect proceedings being issued today, because such proceedings will need to be issued in accordance with the rules currently in place.

As explained above, developments during the negotiation period under the Article 50 process may have an impact on decisions on disputes that arise during the process, for example there may be a particular date by which it will be advantageous to commence proceedings. Alternatively it may become clear e.g. that the UK will accede to the 2007 Lugano Convention.

Regarding existing litigation, depending on the circumstances, the fact that the UK will be leaving the EU may buttress reasons to seek judgment as soon as possible, taking advantage of the present recognition and enforcement mechanism in the Recast Brussels Regulation.

The impact of Brexit may also be felt indirectly in future, such as on funding for current civil litigation projects in the UK. Funding for the proposed online court may be at risk, depending on economic factors.

13. Summary

As an EU member state, the UK is a party to a framework of EU legislation which sets out the rules that courts in EU member states will apply to decide the governing law of a contract and of tort (civil wrong) claims and their jurisdiction over disputes. This framework also provides the procedure for serving legal proceedings as between member states and the mechanism for enforcing a judgment from a court in one member state in other member states. This area is therefore likely to be directly affected by Brexit, although it remains to be seen to what extent. In the meantime,

businesses should strategically review their contracts and Terms and Conditions to see how and to what extent they can be Brexit proofed, and to analyse the threats and opportunities that arise.

Issues such as Intellectual Property, Employment Law and Data Protection are amongst further areas for consideration, outside the scope of this piece.

Updated from a previously published version 4. 11.16 http://bit.ly/2fpcBcb

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Civil Courts Structure Review: Final Report

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My critique of Lord Justice Briggs  long-awaited 299 page final report http://bit.ly/2ayk0qL. on the Civil Courts Structure Review:

The final report follows an extensive series of meetings with judges, practitioners, stakeholders and users of the civil courts, and a series of detailed written and oral submissions after the publication of the review’s interim report in January 2016. The review makes a series of recommendations intended to inform the current programme of wider court modernisation being undertaken by HM Courts and Tribunals Service.

It also makes a number of recommendations on different aspects of the civil justice system, such as enforcement of court rulings, the structure of the courts and deployment of judges. A summary of the main point follows.

Briggs LJ identified five main weaknesses of the civil courts structure:

Weaknesses

a. Lack of adequate access to justice due to excessive costs expenditure / risk and the “lawyerish culture and procedure of the civil courts”

b. Inefficiencies from the “continuing tyranny of paper” and inadequate IT facilities

c. Court of Appeal delays

d. Under investment in civil justice in the regions

e. Weaknesses in the processes of enforcement

Final Recommendations

1. The “Online Solutions Court”

To resolve a perceived access to justice defecit, Briggs LJ recommends introducing an Online Court and the extension of fixed costs. The new court is to have its own set of “user-friendly rules” created by a new cross-jurisdictional rules committee in place of the current Civil Procedure Rules, which will still apply to other cases.

Briggs LJ also sets out the appropriate appeals procedure, where permission would apply. Stage 3, the final adjudication, will be made by judges on paper, via a video/telephone hearing or by way of a traditional trial.

When implemented it should be dealing with “straightforward” money claims valued at up to £25,000. Despite this initial ceiling of £25,000, he suggests it may “pave the way” for change over “much wider ground” and will eventually become compulsory. It is not envisaged that the Online Court will apply to fast and multi-track personal injury cases, but, as Briggs LJ has previously indicated, it may apply to small claims track cases.

Recommendations are made on helping people who need assistance with online systems. Complex and important cases are to be transferred upwards to higher courts. Open justice and transparency issues are to be addressed.

Legal advice and expertise would be by way of unbundled solicitors’ services and direct access to barristers.

A target date of 2020 has been suggested.

2. Digitisation

The Online Court proposed is to be accessible via smart phones and tablets.To avoid duplication and “a parallel paper path”, Briggs LJ has endorsed the development of Assisted Digital resources and proposes the “digitisation of all the processes” of the civil courts, which will eventually be paperless.

Reforms have already been implemented to overcome the chronic workload and backlog of the Court of Appeal.

3. Case Officers

A senior body of court lawyers and other officials who can assist with certain functions currently carried out by judges, such as paperwork and uncontentious matters. To be trained and supervised by judges, and decisions subject to reconsideration by judges on request by a party. To operate independently of government when exercising their functions, transferring some of judges’ more routine and non-contentious work to case officers, under judicial training and supervision.

4. Increase in High Court threshold

A substantial increase in the minimum claim value threshold for commencing claims in the High Court – initially to £250,000 and subsequently to £500,000.

5. Enforcement of Judgments and Orders

There should be a single court as the default court for the enforcement of the judgments and orders of all the civil courts (including the new Online Court). This should be the County Court, but there would need to be a “permeable membrane” allowing appropriate enforcement issues to be transferred to the High Court, and special provision for the enforcement of arbitration awards, in accordance with current practice and procedure. All enforcement procedures to be digitised, centralised and rationalised.

6. Mediation/ADR

Re-establish a court-based out of hours private mediation service in County Court hearing centres prepared to participate, along the lines of the service which existed prior to the establishment and then termination of the National Mediation Helpline.

7. Deployment of Judges

The principle should be that no case is too big to be resolved in the regions. The current acute shortage of Circuit judges specialising in civil work in the County Court needs an urgent remedy.

8. Number of Courts and Future of the Divisions

There should be no general unification of the civil courts (ie combining the High Court and County Court). The time has come for a decision about the future of the High Court’s Divisions, but that is beyond the scope of the current review.

9. District Registries and Regional High Court Trial Centres

The concept of the District Registry as a place for the issue of High Court proceedings will eventually be replaced by a single Portal for the issue of all civil proceedings, and should then be abolished.

10. Routes of Appeal

There should in due course be a review of the question whether the recent reforms to the procedure of the Court of Appeal should be extended to cover appeals to the High Court and to Circuit Judges in the County Court, based upon better time and motion evidence than is currently available, and in the light of experience of the reforms in the Court of Appeal.

11. Boundaries between jurisdictions – the Family Court should be given a shared jurisdiction (with the Chancery Division and the County Court) for dealing with Inheritance Act and disputes about co-ownership of homes. There continues to be a case for convergence between the Employment Tribunal (and Employment Appeal Tribunal) and the civil courts, but the detail is a matter beyond the scope of this review.

Lord Justice Briggs said:

“It is for others to decide which of the above recommendations should be implemented, and by what means. In my view, if they are all substantially implemented, then the essentially high quality of the civil justice service provided by the courts of England and Wales will be greatly extended to a silent community to whom it is currently largely inaccessible, and both restored and protected against the weaknesses and threats which currently affect it.”

Comment

The stated aim of the reforms is laudable; to ensure our civil justice system is fit for purpose and open to all. However, this needs to be viewed in the context of enormous court fee increases e.g. last year’s issue fee increases of up to 600% in some cases, and last month’s application fee increases as follows:

  • contested applications made on notice — £255 (from £155)
  • applications without notice or by consent — £100 (from £50)

In Briggs LJ’s view, the new court, if successful, “may pave the way for fundamental changes in the conduct of civil litigation over much wider ground than is currently contemplated by its first stage ambition”.

The proposed timing for the launch of the system is April 2020, although Briggs LJ acknowledges that this will represent “a real challenge”.

The civil courts have come under increasing strain due to budget cuts and the phenomena of a large rise of litigants in person, the latter unpredicted and itself due to previous reforms and cost cutting exercises. This, combined with the lack of any significant positive track record in computerisation of government services represent significant further challenges, as do the requirement for such changes to be adequately funded and given sufficient Parliamentary and Ministry of Justice attention.

The ongoing hikes in court fees and previous termination of funding for Mediation initiatives contrast with the aspiration of increased access to justice and suggested allocation of funds from the Treasury for such a wide-ranging programme of reform.The challenge now lies in effective implementation of Lord Justice Briggs’ recommendations, and avoiding further reductions in access to justice.

First Published: 5.8.16 http://social.luptonfawcett.com/blog/civil-courts-structure-review-final-report

 

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Negligent Financial Advice Claim: “Bolam Test” Abandoned

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Professional Negligence

In O’Hare and another v Coutts & Co [2016] EWHC 2224 (QB) (9 September 2016) the High Court held that the defendant bank had not breached its duty (in contract and in tort) to exercise reasonable skill and care when advising the claimants on making certain investments. Kerr J dismissed the claim in its entirety, although not without considerable sympathy for the claimants, considering that he preferred their evidence where it conflicted with Coutts’.

The judge decided that Coutts had not breached its duty (in contract and in tort) to ascertain the claimants’ requirements and objectives and to advise, explain and inform the claimants about investments that were suitable.

The decision is of particular interest regarding the judge’s approach to

  • Professional negligence / breach of duty
  • Damages in contract and tort
  • Evidence of the professionals involved – including attendance notes

Duty of Care

The judge held that the Bolam test did not apply to the issue of whether the defendant had breached its duty of care when advising the claimants about the investments. Instead, he preferred the approach of the Supreme Court in the Scottish medical negligence case of Montgomery v Lanarkshire Health Board [2015] UKSC 11. The judge focused on what the claimant, as an informed investor would expect to be told.

The judge did not adopt the common Bolam Test (see below) i.e. whether the defendant had advised in accordance with a practice accepted as proper by a responsible body of persons skilled in the giving of financial advice. The judge was influenced in his decision by the fact that the expert evidence indicated that there was little consensus in the industry about how to manage the risk appetite of clients. The decision suggests that the giving of investment advice is not simply an exercise of professional skill; an informed investor, like a medical patient, is entitled to decide the risks that he is willing to take and has to take responsibility for his own mistakes.

The Bolam test

The Bolam test derives from the decision in Bolam v Friern Hospital Management Committee [1957] 2 All ER 118 ( www.practicallaw.com/D-016-0979) . In that case it was held that a doctor was not necessarily negligent if he conformed to a practice accepted as proper by some responsible members of his profession, even if other members would have taken a different view. Evidence of an accepted practice must be responsible and reasonable. In other words, provided the doctor explained the risks of a given treatment, to the extent that it accorded with a responsible body of medical opinion, liability would not attach. The Bolam test applies to all professional liability cases.

The Bolam test was approved by the House of Lords in Sidaway v Board of Governors of the Bethlem Royal Hospital and the Maudsley Hospital [1985] AC 871.

The Montgomery Test

In Montogmery v Lanarkshire Health Board [2015] UKSC 11, the Supreme Court held that Sidaway (and, therefore, the Bolam test) did not reflect the reality and complexity of the way in which healthcare services were provided. It held that an adult person of sound mind was entitled to decide which, if any, of the available forms of treatment to undergo, and her consent had to be obtained before treatment interfering with her bodily integrity was undertaken. Doctors were under a duty to take reasonable care to ensure that patients were aware of any material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments. The court defined materiality as:

“…whether, in the circumstances of the particular case, a reasonable person in the patient’s position would be likely to attach significance to the risk, or the doctor is or should be aware that the particular patient would be likely to attach significance to it…”

This is only when the medical professional has taken reasonable care to ensure that the patient was aware of the material risks involved in any recommended treatment, and of any reasonable alternative or variant treatments.

Decision in O’Hare

In the O’Hare’s negligent financial advice claim against Coutts, Kerr J preferred and applied the approach taken in the case of Montgomery, namely the onus is on the patient or client, as an adult with sound mind, to make their own decision about the risks involved. The O’Hares, as informed investors, were entitled to decide the risks that they were prepared to take and accept responsibility if those risks did not pay off. This standard is now likely apply more generally in financial advice claims.

The judge referred to the FCA’s Conduct of Business Sourcebook (COBS rules) which do not rule out the use of persuasion. The need for full information to be given is emphasised, and conflicts of interest to be properly managed:

“…As I read the authorities and the COBS regulatory scheme, there is nothing intrinsically wrong with a private banker using persuasive techniques to induce a client to take risks the client would not take but for the banker’s powers of persuasion, provided the client can afford to take the risks and shows himself willing to take them, and provided the risks are not – avoiding the temptation to use hindsight – so high as to be foolhardy. The authorities include mention of the adviser sometimes having to save the client from himself, but also of the principle that investors take responsibility for their investment decisions including mistaken ones. The duty of care must reflect a balance between those two propositions, which pull in opposite directions…”

Damages in contract and tort

A duty can be owed both in contract and in tort and concurrent duties of care are routinely owed by professionals (Henderson v Merrett Syndicates Ltd [1994] UKHL 5 ( www.practicallaw.com/D-000-1263) ). Accordingly, a financial advisor, who fails to exercise reasonable care in providing services to the client who retains him, can render himself liable in contract and in tort, unless tort liability is specifically excluded.

The general aim of an award of damages in tort is to put the injured party in the same position as he would have been in if the tort had not occurred. Damages in tort aim to restore the claimant to his pre-incident position. Generally, the purpose of an award of damages for breach of contract is to compensate the injured party. The general rule is that damages are meant to place the claimant in the same position as if the contract had been performed. Damages are usually awarded for expectation loss (loss of a bargain) or reliance loss (wasted expenditure).

Not all losses caused (in the factual/ “but for” sense) by a breach of contract or breach of duty are recoverable by the innocent party from the party in breach. Remoteness of damage refers to the principle by which the law determines which consequences caused by the defendant’s breach are within the scope of the defendant’s responsibility and should be brought into account.

There is a difference between the principle of remoteness in contract and in tort. In contract, generally, all foreseeable but not unlikely losses are recoverable. In tort, all losses that are reasonably foreseeable as liable to happen, even in the most unusual case, are recoverable. In Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146 ( www.practicallaw.com/D-035-2377) , the Court of Appeal held that in cases of concurrent liability in contract and in tort, the narrower principle of remoteness of damage in contract applies.

Witness evidence

The Civil Evidence Act 1995 (CEA 1995) effectively abolished the rule against hearsay evidence in civil proceedings. In assessing the weight to be given to any hearsay evidence, the court is to have regard to any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence. The general rule is that any fact which needs to be proved by the evidence of a witness is proved by either:

  1. Written evidence at an interim application.
  2. Oral evidence at trial.

In Gestmin SGPS SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm), Leggatt J analysed the approach that a judge should take when faced with evidential discrepancies between recent and sworn witness statements prepared with the help of lawyers and evidence in the form of contemporaneous electronic stored information. After emphasising the unreliability of human memory, he said that the best approach for a judge to adopt was:

“…to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events…”

Absence of key defence witness

Mr Shone, the O’Hares’ main contact and relationship manager did not provide evidence in court. Instead, Coutts relied upon the contemporaneous (attendance) notes written by Mr Shone. Given that Mr Shone was alleged to have persuaded the O’Hares to take a higher risk than they would otherwise have done, the judge had expected to hear direct evidence from the advisor.

Although Coutts provided hearsay evidence from other witnesses, which was accepted, the judge concluded that Mr Shone’s testimony was necessary for Coutts to prove its defence. Coutts explained that the reason for Mr Shone’s absence was that he was no longer employed by them and had told the defendant that he was too preoccupied with other business responsibilities to devote time to the current proceedings. Why the witness summons procedure to secure his attendance at trial was not adopted is not examined.

The judge devoted a significant part of his judgment to address the difference between the parties about whether the claimants had been led and persuaded by Mr Shone to take a higher risk than they would otherwise have done. It was significant that Coutts did not adduce any direct evidence from Shone. If he was not called at trial, “…he would plainly be the Banquo’s ghost at the feast…”

Mr Shone’s hearsay evidence was derived from his contemporary notes of various meetings and conversations with the claimants. This evidence was recited in the statements of witnesses called to give oral testimony at trial. The judge held that the hearsay evidence was admissible and that by setting it out in the statements of its witnesses, the defendant had complied with the requirement in CPR 33.2, that hearsay evidence is to be served in a written statement. It was for the claimants to apply under CPR 33.4 to call Mr Shone for the purpose of cross-examining him on his notes of the various meetings and telephone calls, but they did not do so. Instead, the claimants relied on the fact that Mr O’Hare gave oral evidence at trial and his evidence was in many cases uncontradicted by any other witness at trial.

The judge assessed the weight to be given to the evidence by reference to the factors in section 4(1) of the CEA 1995. He concluded that the defendant needed Mr Shone’s testimony to assist its defence and without him, significant parts of the claimants’ account remained uncontradicted, except by notes that were disputed and not defended by their maker. In the circumstances, the judge was not prepared to accept that the notes were to be preferred, or that Mr O’Hare’s evidence contradicting them was to be rejected.

In this case Mr O’Hare’s oral evidence at trial, that Mr Shone had used persuasion on the claimants to induce them to take higher risks /that than they otherwise would have done, was accepted by the judge over and above the documentary evidence. He asserted that the judge in Gestmin had not suggested that oral testimony served no purpose. He remained of the view that the general rule (that any fact which needs to be proved by the evidence of witnesses is to be proved at trial, by their oral evidence) still applies.

Comment

  • The decision emphasises that undocumented witness evidence can be important. The reliability of contemporaneous documents is generally preferred to uncorroborated recollections, but there are occasions where oral testimony is required to support such documents.
  • The decision is of particular interest because of the approach of the judge to breach of duty. He held that the Bolam test did not apply to the issue of whether the defendant had breached its duty of care when advising the claimants about the investments. Instead, the judge preferred the approach of the Supreme Court in the Scottish medical negligence case of Montgomery v Lanarkshire Health Board [2015] UKSC 11. The judge focused on what the claimant, as an “informed investor”, would expect to be told and not on whether the defendant had advised in accordance with a practice accepted as proper by a responsible body of persons skilled in the giving of financial advice.
  • The judge was clearly influenced in his decision by the fact that the expert evidence in the case indicated that there was little consensus in the industry about how to manage the risk appetite of clients.
  • The decision suggests that the giving of investment advice is not simply an exercise of professional skill; an informed investor, like a medical patient, is entitled to decide the risks that he is willing to take and has to take responsibility for his own mistakes.
  • Finally, the judge’s obiter (non binding) comments are also of interest: that, if the negligence claim had succeeded, he would not have allowed the claimants to benefit from the more generous measure of damages in tort, in circumstances where their concurrent claim in contract was statute-barred.

First Published 20 September 2016 – http://social.luptonfawcett.com/blog/negligent-financial-advice-claim-bolam-test-abandoned

 

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Conflict of Interest: Accountants Penalised for Breach

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Professional Services Sector  – Lessons from critical High Court ruling:

Read my featured article highlighting the latest case law regarding Accountants’ duties,  client confidentiality & conflicts of interest, of wider interest to Professional Service Firms:

This was a salutary and expensive lesson (US$11.6M) on when instructions should be declined or consent sought from clients where conflicts of interest might arise.   The piece summarises the key issues for accountants’ firms from December 2016’s 987 paragraph High Court judgement, where the court was highly critical of failures by the Defendant top tier accountant firm in relation to client confidentiality.

Case:

Harlequin Property (SVG) Ltd and another v Wilkins Kennedy (a firm) [2016] 3188 EWHC (TCC)

Link to judgement: http://www.bailii.org/ew/cases/EWHC/TCC/2016/3188.html

The article covers:

  • What is acceptable practice
  • The Defendant firm’s practical failings
  • What constitutes an adequate information barrier
  • Recommendations

 

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Directors & Shareholder Claims: 3

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Understanding the options – 5 tips

As discussed in previous posts, Boardroom and shareholder disputes arise for many reasons. When they do, it is important to understand the legal rights of all parties and the options available. The consequences of allowing things to drift and potentially get worse shouldn’t be ignored. There are options which help make life easier.

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the third of this series, here are five important tips:

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1] Shareholder Agreements

The House of Lords in Russell v Northern Bank Developments Corp Ltd[i] emphasised the practical utility of Shareholder Agreements. These are used for a wide variety of purposes, adding significantly to the company’s constitutional regime of Memorandum and Articles. This includes providing personal rights to minority shareholders who otherwise have no control over fundamental points.  The minority shareholder’s concerns would be more difficult to deal with unless specifically covered as an enforceable private contract between members.

These should be provided in the Shareholder Agreement, covering similar areas to partnership agreements.

The benefits include avoiding future misunderstandings and practical difficulties in running the business.

A Shareholder Agreement typically deals with issues such as:

  • restrictions on transferability of shares
  • lack of a market for sale of shares
  • establishing a purchaser
  • formulas for valuation and funding
  • pre-emption rights
  • compulsory transfer or option arrangements
  • protection of minority members by permitting a veto
  • preserving confidentiality
  • efficient transfer on death, disability, retirement
  • estate planning
  • regulating management and involvement of investors
  • mechanisms for dealing with stalemate.

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2] “Unfair Prejudice” Petition
Section 994 of the Companies Act 2006 permits a shareholder to petition the court on the basis that the shareholder’s interests have been unfairly prejudiced in the conduct of the Company’s affairs due to e.g. breach of:

  • the Articles of Association
  • the Shareholder Agreement
  • fiduciary duties by directors
  • exclusion of a minority from the running of the company in small “quasi-partnership” companies.

The Court has wide discretion to grant the relief it decides is appropriate. This is often an order that the aggrieved minority shareholder’s shares are purchased for ‘fair value’. This may include a premium on the actual value of the shares as recompense to the petitioner for any wrongdoing by the majority.

3] What is a ‘derivative claim’ – S.260 of the Companies Act 2006?

In certain circumstances a shareholder can ask the court to prevent action being taken by the Directors which is harmful to the company, or make a claim against the Directors for any loss suffered by the company as a result of their action.  The claim must be made by the shareholder on behalf of the company. The shareholder’s right to bring a claim “derives from” the company. This is a claim made in a “representative capacity” by the individual shareholder, not on the shareholder’s own behalf. It is the company which is suffering the harm.  The damage to the company may also harm the shareholder indirectly, e.g. if there is a reduction in profits or other damage suffered.

Derivative claims are relatively unusual because although it is the member who issues the court proceedings as claimant to launch the action, the court must give permission for the claim to continue to trial.  A number of tests have to be satisfied before the court will give permission.

The shareholder runs a risk on costs and at least initially has to fund the claim themselves. It is possible to obtain an order that the company indemnify the member, although they may obtain no immediate benefit themselves by launching the court case. However, if the claim succeeds, the company will have been protected. Ultimately, that should benefit the shareholder because it protects their investment in the company.

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4] What is a claim under S.122(g)  of the Insolvency Act 1996?

Any shareholder may apply to have a company wound up on “just and equitable grounds” including in quasi-partnerships, involving the shareholder’s right to manage the company – Ebrahimi  v Westbourne Galleries Ltd[ii]. The sole remedy here of winding up is draconian, available only in specific circumstances. This is the “nuclear option” in shareholder disputes – the aggrieved shareholder petitions the court for a winding up order to terminate the company.

Usually the shareholders’ differences have become irreconcilable and a ‘commercial divorce’ is the only way to move forward. When a company is wound up, if there is anything left after paying the creditors and the liquidator the proceeds are divided amongst the shareholders.

Not every aggrieved shareholder will be able to justify a winding up petition to the court. There must be compelling reasons showing that the company can no longer continue.  The aggrieved shareholder has to prove there will be a concrete benefit in making a winding up order.  If there is some alternative remedy, which would allow the company to continue, the court may refuse to make the order.

A typical scenario where a winding up may be justified is where there is deadlock or stalemate between two or more shareholders in a quasi-partnership company which can’t be resolved. Where there is an aggrieved minority shareholder, experience shows that the majority shareholder will seek to dispute:

  • the complaints by the minority that there was any “quasi-partnership” in the first place
  • the circumstances of any alleged unfairly prejudicial conduct
  • the alleged value of the business
  • the aggrieved minority shareholder’s share

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5] Finally

The sooner informed negotiations start, the more likely it is that a private business will survive a shareholder dispute. A comprehensive Shareholder Agreement can help to preserve operations and resolve matters quickly.

Expert legal advice early on could keep the process out of prolonged, expensive and destructive litigation. This is by providing the facts, insight and information to allow all parties to make informed decisions quickly. This would ultimately be to the benefit of the company as a whole and the shareholders individually.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

[i] [1992] 1 WLR 588

[ii] [1972] 2 All ER 492

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

Service of a Claim Form on a Director

WHEN DIRECTORS FALL OUT

Disclaimer

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