rosenblatt view

Brexit and the British Legal Sector: Uncertainties, Solutions and Jewels in Crowns

12/06/2017 | Tom Spiller
The use of the legal sector by domestic and international parties is a huge contributor to the British economy in terms of: Jobs - with over 300,000 people directly employed; GDP - generating

The use of the legal sector by domestic and international parties is a huge contributor to the British economy in terms of:

  • Jobs – with over 300,000 people directly employed;
  • GDP – generating roughly 1.6% at around £30.6 billion per year; and
  • International trade – with an annual surplus of approximately £3 billion.

(more…)

Can’t pay or won’t pay – Court confirms insolvency proceedings are not appropriate for enforcing debts due under construction contracts

05/06/2017 | Elizabeth Weeks & Joshua Heavyside
Parties should settle construction disputes through adjudication or Court proceedings, according to High Court Judge Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, has prov

Parties should settle construction disputes through adjudication or Court proceedings, according to High Court Judge

Daniel Alexander QC, sitting as a Deputy Judge of the Chancery Division, has provided further clarification on the appropriate avenue for parties to contest debts arising from construction contracts. In his Judgment in the recent decision, Breyer Group plc v RBK Engineering Ltd [2017] EWHC 1206 (Ch) (19 May 2017), Alexander QC stated that it would constitute “an abuse of process” for a party to pursue a winding up petition against a debtor in circumstances where it is “not a case of can’t pay, but won’t pay.” The proper place to settle such a dispute is either through adjudication or Court proceedings.

Origins of the dispute

Breyer Group plc (“Breyer”) was a contractor on a building project and had appointed RBK Engineering Ltd (“RBK”) in May 2015 as a sub-contractor to carry out certain refurbishment and electrical works. The appointment was formalised at the time by a contract between the parties containing standard terms and conditions, including terms relating to payment (including interim payment) and an express dispute resolution clause.

The work performed by RBK continued beyond the term of the contract, late into 2016. However, although a subsequent draft contract was never signed by either Breyer or RBK, it was clear both parties considered the relationship to be governed by the terms of the original contract.

By the end of 2016, a dispute had arisen between the parties with Breyer contesting the contents of RBK’s payment applications and alleging that RBK had carried out defective works, which Breyer would have to remedy at its own cost. In December 2016 the parties entered into a settlement agreement, which included provisions setting out a number of payments to be made by Breyer to RBK. Ultimately however, on 1 March 2017, when the final payment was due, Breyer served a Pay Less Notice on RBK, which in fact required RBK to settle a small balance to Breyer arising from the defects which had been disputed between the parties.

The winding up petition

The parties failed to reach agreement and on 22 March 2017 RBK filed a winding up petition against Breyer, claiming the contractor was indebted to it in the sum of £258,729.16. However, following the application of Breyer and an assessment of its finances, the Deputy Judge elected to strike out the winding up petition.

Alexander QC’s Judgment

In his Judgment, Alexander QC concluded that Breyer was “plainly not insolvent in the sense of being unable to pay the alleged debt.” Rather, a “genuine dispute” had arisen between the parties, to which Beyer had arguable defences and substantial cross-claims of its own.  Breyer’s position was predicated on its concerns regarding the quality of RBK’s electrical works, together with a dispute about which contract terms were operative. To therefore continue insolvency proceedings in such circumstances would be “oppressive” and an inappropriate forum for settling the dispute. Instead, Alexander QC held, the dispute could be readily resolved either through adjudication or Court proceedings.

In conclusion, where a dispute is purely about money and late payment, issuing a statutory demand for payment can be a cost effective and straightforward way to seek to extract timely settlement. However, should a dispute resulting in unpaid monies actually concern “won’t pay” issues, as was the case in Breyer, then the Court has made clear that the proper forum to seek resolution is adjudication or litigation. It appears as though the Court has one eye on seeking to dissuade parties from using the commercial threat of a winding up petition in circumstances where there are more substantive issues to be ventilated.

Adjudication

Adjudication is a prescribed “fast track” procedure designed to settle disputes arising from a construction contract. Adjudication is available to all parties to a construction contract, unless one of the contracting parties is a residential occupier or another exclusion is applicable. Statutory adjudication was introduced by the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”), with the Scheme for Construction Contracts Regulations 1998 (the “Scheme”) providing the procedural fall back in the event that the construction contract in question does not contain all of the adjudication provisions of the Construction Act.

Pursuant to the Construction Act, any party to a construction contract has the right to refer a dispute to adjudication. Typically, adjudication will last only 28 days, although it is possible for the parties to extend this period by agreement.

Under the Scheme, the parties appoint an adjudicator to consider the issues in dispute, with the decision treated as interim-binding (unless the construction contract provides otherwise), meaning an adjudication decision is binding until finally determined by legal proceedings, arbitration or agreement. A successful party will most commonly seek to enforce an adjudicator’s decision in the Technology and Construction Court.

Rosenblatt offers expertise on all forms of construction disputes, including adjudication and arbitration, as well as court proceedings in complex and multijurisdictional litigation, supported by its Dispute Resolution team. The firm has extensive experience in the Technology and Construction Court. Rosenblatt’s Construction and Projects team also provides expert advice on non-contentious construction matters, working closely with its Real Estate department. For more information, please contact Rosenblatt’s Construction and Projects team.

The content of this bulletin should not be construed as legal advice. If you do require legal advice, please contact a solicitor at Rosenblatt.

Liquidated damages: how much is too much?

30/05/2017 | Matthew Littlestone
When two parties enter into a commercial contract, they do so with the best intentions.  After all, neither party wants to spend time, energy and money involved in a dispute over the performance of

When two parties enter into a commercial contract, they do so with the best intentions.  After all, neither party wants to spend time, energy and money involved in a dispute over the performance of the contract.

However, back in the real world, parties will continue to enter into agreements and subsequently fail to comply with their contractual obligations.  In most cases, a breach of the contract will require the offending party to pay the innocent party damages for such breach.  But how much will the innocent party be entitled to in damages?

Generally speaking, the guilty party will pay damages as required under common law.  However, in order to avoid the difficulties that can arise in calculating how much this will be, and to provide a level of certainty, parties will often make provision in the contract for the level of damages to be awarded to the innocent party by including a liquidated damages clause.  A liquidated damages clause also has the advantage, for the guilty party, of limiting its liability where the stipulated sum is less than the actual loss.

So if a contract includes a liquidated damages clause, that is the end of the problem right? Well, not quite.

One of the defences to a claim for liquidated damages is that the clause is unenforceable on the basis that it is a penalty.  If a clause is considered by the Court to be a penalty, then it will not be enforced beyond the actual loss incurred by the innocent party.  But under what circumstances is a liquidated damages clause deemed a penalty?

For over a century, the leading case on this particular question was Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 in which a liquidated damages clause was deemed to be a penalty if it is extravagant or unconscionable, with the predominant aim of deterring a party from breaching the contract, instead of compensating the innocent party by way of a genuine pre-estimate of loss.  In Dunlop, Lord Dunedin referred to the following four tests to help determine whether a clause is extravagant or unconscionable:

  • A clause may be penal if it is extravagant by comparison to the maximum possible loss arising from the breach.
  • A clause may be penal if the breach of contractconsists only of not paying a sum of money, and the amount stipulated as damages is greater than the sum that ought to have been paid (if assessed at common law).
  • A clause may be penal when a single lump sum is made payable by way of compensation, on the occurrence of one or more events, some of which may cause serious and others “trifling” damage.
  • A clause is not a penalty merely because a precise pre-estimation of loss is impossible.

It remains the case that determining whether a liquidated damages clause is a penalty or not will depend on many factors, including the wording of the clause itself and the circumstances at the time of making the contract (rather than the time of the breach).  The tests set out in Dunlop also remain relevant when considering straightforward liquidated damages clauses.

However, the Supreme Court, in Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 67 stated that the real question is whether the clause is penal and not whether it is a genuine pre-estimate of loss.  It held that in considering whether a provision in a contract is a penalty:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.  The innocent party can have no proper interest in simply punishing the defaulter.  His interest is in performance or some appropriate alternative to performance.”

As such, while the fact that the clause is not a genuine pre-estimate of loss may be relevant, it is necessary to consider other factors such as whether the innocent party has a commercial interest in the performance by the other party of its obligations under the contract.  Similarly, even if the clause seeks to protect a legitimate interest of the innocent party, it may still be a penalty if it is extravagant or unconscionable.

So what can be deemed to be a legitimate interest of a party?

At its simplest, it may be the case that a party’s legitimate interest is to receive compensation for breach of a contract.  However, there are more complex scenarios where compensation may not be the only legitimate interest.  Whether a clause is justified will depend upon the facts of the case.

For instance, in Cavendish, the relevant clause in question was in a share purchase agreement which provided that, if the sellers carried out certain activities which competed with the interests of the relevant company, the buyers could withhold any outstanding deferred consideration payments and exercise a call option over the sellers’ remaining shares.  The Supreme Court held that the buyers had a legitimate interest in the observance of the covenants which aimed to protect the goodwill of the business and the loyalty of the sellers was essential to preserve that goodwill.

In ParkingEye, the relevant clause imposed a charge for overstaying the free period of parking in a car park.  The Supreme Court held that although the claimant had not suffered any direct financial loss from the defendant overstaying the period of free parking, it had a commercial interest in the observance of the terms of its contract with the defendant which extended beyond the recovery of any loss (i.e. the management of the efficient use of parking space and the generation of income to run the scheme).

In light of these cases, when drafting a liquidated damages clause, it is worth bearing in mind that not only should you ensure that the figure in the clause can be justified as a genuine pre-estimate of loss but also that it is commercially justified.

This article should not be taken as definitive legal advice on any of the subjects covered. If you do require legal advice, please contact Rosenblatt as above.

Search Orders: Nugee goes Nuclear

04/05/2017 | Tom Spiller
On 3 February 2017, Mr Justice Nugee dismissed an application to set aside a search order that had been granted against non-parties in legal proceedings - the first time this has happened. The searc

On 3 February 2017, Mr Justice Nugee dismissed an application to set aside a search order that had been granted against non-parties in legal proceedings – the first time this has happened.

The search order has been described as one of the Court’s two “nuclear weapons” as its consequences are considered to be draconian and oppressive. (The other atomic device is the freezing order, which restricts a Respondent’s rights to deal with his or her own property.) Once granted, a search order required a Respondent to allow an Applicant’s solicitors to enter his or her premises or home to search for, copy and remove specified documents and information.

That this order has been made against a party who is not a defendant to a claim in the English courts makes this decision somewhat remarkable. It is also notable from the perspective of successful claimants hoping to obtain satisfaction from underhanded opponents.

Procedural and Factural Background

The underlying claim was brought by (1) Mr Albert John Martin Abela [“Mr Abela“], (2) Albert JM Abela SRL and (3) Albert JM Abela Catering and Interactive Services Limited [together, the “Claimants“]. Mr Abela was heir to a substantial catering business operating internationally.

In 2002, the Claimants purchased 40% of the shares of an Italian company, Gama Spa [“Gama“], for $14m. Two percent of Gama was owned by the defendant, Mr Ahmad Baadarani, a Lebanese businessman. At the time of the purchase, the Abela group owned the remaining 52% of the balance of Gama shares, while Mr Abela was Gama’s Chairman. The purchase agreement was governed by English law, with disputes arising from it subject to the non-exclusive jurisdiction of the Courts of England and Wales.

The Claimants alleged they were induced to purchase an interest in Gama as a result of fraud by Mr Baadarani and others, who concealed Gama’s true financial position from them.

Mr Abela alleged that, following his father’s death in 1998, he lapsed into depression and that, whilst depressed, and unknown to him, Mr Baadarani conducted the business of Gama so that its assets were substantially diminished. Mr Baadarani had significant interests of his own in Kazakhstan, and used a Kazakh subsidiary to divert Gama’s funds for his own benefit.

In 2009, the Claimants issued what became proceedings in the English courts. Initially, Mr Baadarani defended the claim and disagreed that the English courts had jurisdiction. This question reached the Supreme Court in December 2013. Mr Baadarani lost and was ordered to pay the Claimant’s costs of the appeal, which were substantial.

Mr Baadarani was similarly unsuccessful in defending the underlying claim. On 3 June 2015, after failing to comply with various orders made against him, Chief Master Marsh entered judgement in default against him, for a sum of just over $20m.

Having obtained judgement against Mr Baadarani, the Claimants sought to enforce it. This process proved to be lengthy, not helped by Mr Baadarani’s lack of co-operation and efforts to avoid his liabilities. On 19 June 2014, he was required to attend Court to provide information about his means to aid the enforcement process. During his cross-examination, it became clear that Mr Baadarani had failed to disclose numerous documents. This discovery began a long process of unsuccessful attempts to obtain full disclosure from him.

Eventually, the Claimants obtained a world-wide freezing order against Mr Baadarani and third party disclosure orders against an individual and company that had had dealings with him, being Mr Fakih and Leesdel Limited.

One of the documents disclosed by one of Mr Fakih and Leesdel Limited relating to Mr Baadarani’s possessions included a statement of assets, dated 17 April 2013, which Mr Baadarani had signed. The Claimants understood this had been provided to the National Bank of Kuwait in connection with the re-mortgage of a leasehold property in Hanover Gate Mansions, London.

This document proved to be forged: it has been created in 2015 but was back-dated to 2013, a discovery was made as a result of a separate third party disclosure order the Claimants had obtained from the National Bank of Kuwait.

Following this discovery, the Claimants applied for a search order against both Mr Fakhi and Leesdel Limited. The order was granted. Mr Fakih and Leedsel Limited applied to have it set aside. It was this application that gave rise to the decision of Mr Justice Nugee.

The “Nuclear” Decision

As stated above, search orders are considered to be a remedy of “nuclear” impact. In making such an order against a non-party to proceedings, the Judge was sending a clear signal as to how and when such an order could be used. The importance of the decision is underscored by the fact that this is the first Court decision in this area in at least twenty years.

Mr Fakih and Leesdel Limited’s lawyers argued that the wording of the Civil Procedure Act 1997 (the statute that gives the Court the power to grant search orders) made clear that this power could only be exercised in ongoing “proceedings”. They submitted that, as judgement had been given and the parties were now dealing with enforcement, it was too late to make a search order.

Mr Justice Nugee rejected this argument, and concluded that there was no need for such restrictive interpretation, nor did the authorities (some of which pre-dated the Civil Procedure Act) support that view. The word “proceedings” could include steps taken to enforce a judgement. He found there was no doubt that the Claimants were actively pursuing Mr Baadarani under the judgement, and hoped to obtain information via the search order to identify assets against which to execute that judgement.

In rejecting the application to set aside the search order, Mr Justice Nugee made it clear that he was taking a pragmatic approach.

He also rejected the proposition that a search order could not be granted against a person against whom the Applicant has no cause of action. All that was necessary was for the Respondent to have the relevant evidence in their possession and that there be good reason to grant an order so as to preserve that evidence.

Practical Lessons

In claims involving fraud, a dishonest opponent is often willing to use all manner of underhanded tactics at the pre-action stage, throughout proceedings, and during trial, even to the extent of lying under oath. Such behaviour is unlikely to end at the point at which a judgement is given.

Mr Justice Nugee’s decision strengthens the hand of successful claimants who are still grappling with an opponent after judgement, and shows that the Court will be willing to act in a pragmatic fashion against potential conspirators attempting to help a judgement debtor shield his assets from enforcement. Making search orders against non-parties may be a “nuclear” option, but that does not mean the Court is not willing to use it, if it is persuaded that it is just and fair to do so.

Settlement Agreements: Be careful what you draft for

08/02/2017 | Tom Spiller
For those engaged in High Court litigation, an acceptable offer of settlement is often a great relief which promises to lift the burden of stress and work the process causes. However, the end of the

For those engaged in High Court litigation, an acceptable offer of settlement is often a great relief which promises to lift the burden of stress and work the process causes. However, the end of the recent proceedings brought by Vincent Tchenguiz against the liquidators of Kaupthing Bank, Grant Thornton UK (“GT“), provides a salutary lesson. When considering the terms of which a dispute should be settled, a careful and clear approach should be taken, especially if future, related litigation is contemplated.

Background

The Tchenguiz brothers are globally wealthy British businessmen who began their careers in the Middle East, specifically Iraq and Iran. At various times, their business empire has included the Odeon chain of cinemas, the pub chain Mitchells and Butlers plc, real estate assets and substantial shareholdings in Sainsbury’s, Somerfield and Kaupthing Bank. After that bank’s spectacular implosion at the height of the global financial crisis in 2008 (it was at the time Iceland’s largest bank), a body known as the Resolution Committee appointed GT to recover funds for Kaupthing’s creditors. Following investigations of Kaupthing’s affairs, and a referral of several loans made to companies owned by the Tchenguiz brothers to the Serious Fraud Office (the “SFO“), warrants for the arrest of the Tchenguiz brothers and the search of their Mayfair offices were issued. The collapse of the subsequent police case against the brothers, at the end of which no charges were made, was perhaps as dramatic as the collapse of Kaupthing Bank that gave rise to the SFO investigation, and led to Judicial Review proceedings in the Administrative Court in which the arrest and search warrants were quashed.

The Tchenguiz brothers ultimately reached a negotiated settlement of the proceedings with the SFO. The terms agreed provided that the parties waive any claim or cause of action arising out of or in relation to the dispute between them, whether known or unknown. It also created a group of identified people who were specifically protected from any future law suit and created a category of specific claims that were explicitly released. Additionally, the settlement agreement made clear that it did not relate to future claims between the parties that arose after the date of that agreement.

However, not content with victory against the SFO and his entitlements under the settlement agreement, Vincent Tchenguiz and several trust companies controlled by him (together, the “Claimants“), took further legal proceedings, against Mr Johannes Johannsson of the Resolution Committee and the Committee’s advisors, GT, (together, the “Defendants“). The Claimants alleged malicious conspiracy, stating that the Defendants instigated and then directed the SFO investigation by making false allegations against Mr Tchenguiz. The Claimants said the aim of the alleged conspiracy was to obtain documents and information that would allow the liquidators of Kaupthing to enforce security over assets owned by the brothers’ companies.

Court decisions

Both Mr Johannsson and GT applied for summary judgement in the proceedings and won. Both applications were made on the basis that the terms of the settlement agreement prohibited Vincent Tchenguiz and his companies from making claims against Mr Johannsson and GT. The applications were opposed on slightly different grounds. However, the Judge who heard both applications applied the same reasoning in deciding them.

Mr Johannsson’s application came before the Court first and was opposed on the grounds that (i) the claim against him related to matters arising after the date of the settlement agreement; (ii) the settlement agreement was only signed because of “sharp practice” by which Mr Johannsson had concealed a good claim against him (being the alleged conspiracy to obtain documents and information) in order to benefit from the protection of the settlement agreement; (iii) the doctrine of illegality (i.e. the Court will not allow a person to found a claim or a defence on an illegal act) prevented Mr Johannsson from relying on the settlement agreement because the agreement was the result of a conspiracy between Mr Johannsson and GT; and (iv) there had been a breach of fiduciary duty. This article concerns itself with only issues arising from points (ii) and (iii).

In dismissing the arguments made in relation to “sharp practice”, the Judge referred to the legal principle (as stated in the House of Lords case of BCCI v Ali & others [2001] IKHL 8) that where one party to a settlement does not disclose the existence of a claim against them about which the other was not aware before an agreement is entered into containing a general release (i.e of all claims whether known or unknown), this would be considered unacceptable – the law would then provide a remedy to the wronged party. The Judge concluded that this principle did not apply to the settlement agreement in this case. It was drafted in a sufficiently detailed way. Crucially, it included specific releases of claims in relation to investigations and actions by the authorities and provision of documents and information to authorities, which covered Mr Johannsson.

In respect of illegality, the Judge held that it could not be argued that Mr Johannsson relied on this as the settlement agreement was not an illegal document, as was not the purpose of the agreement (i.e. the end of the dispute) nor the carrying out of the agreement’s obligations. The Judge therefore found that Mr Johannsson was acting legally when relying on the settlement agreement which settled claims alleging illegal conduct.

After losing the summary judgment application made by Mr Johannsson, the Claimants altered their position when opposing GT’s application. This time, “illegality” was the main ground on which the application was opposed (although there were others). The issue of “sharp practice” was presented and decided in the same way. In deciding this issue, the Judge repeated his previous reasoning but added further points:

  • The Claimant’s remedy for suffering loss from a legal contract made by illegal means or a legal contract used for illegal means was damages, as a result of a successful claim for conspiracy – they could not rely on illegality alone to set the settlement agreement aside;
  • It was crucial the Claimants argued that the Court should rule that GT could not enforce the settlement agreement whilst maintaining they themselves could enjoy its benefits – they were seeking partially to set aside the obligations the settlement agreement placed only on them; and
  • If the Courts treated a legal contract as illegal because it was achieved by illegal means on the part of one contracting party, the innocent party to the contract would suffer by not being able to enforce the contract once they learned of the illegal means. However, if the agreement was recognised as legal (even if achieved by illegal means) then the innocent party has the choice of electing to enforce or set the agreement aside. There is no place in the law of England & Wales for an innocent party to a contract to be entitled to call for the provisions of a legal contract that are in his favour to be enforced while the others that are not innocent to be refused enforcement of the contract.

 

Following the successful applications, the proceedings were brought to a close. However, Vincent Tchenguiz and the other Claimant companies have vowed to appeal the Judge’s decisions.

Practical Lessons

As in any dispute involving personal issues (such as reputation) or substantial amounts of money, it is clear that the perceived harm he suffered as a result of the SFO investigation and insolvency of Kaupthing Bank made this a bitter clash for Vincent Tchenguiz.

In such circumstances, it may be tempting for a party to attempt to leave the door open for continued litigation against individuals they hold responsible for wronging them, either as a deliberate, aggressive strategy or as a cautionary approach to a scenario of incomplete information. The above decisions show that anyone wishing to settle against some but not all protagonists in a dispute will need to pay close attention to the wording of any settlement agreement. Any such agreement would need clearly and frankly to set out future potential claims that are to be preserved, or limit the settlement to disputes that the parties are aware of at a certain time.

Similarly, those settling claims made against them who are holding information up their sleeve that could give rise to future claims against them should either make a clean breast of matters during settlement negotiations or include categories of disputes that are explicitly settled. Failure to do so risks future action in respect of their “sharp practice”.

If the promised appeals of the Judge’s decisions are unsuccessful, this will restrict the abilities of a party to a settlement to rely solely on the doctrine of illegality to overturn an agreement, even if there was a conspiracy to force them to settle. The remedy for any such situation will lie in a separate claim in respect of that conspiracy. Given his apparent appetite for litigation, it may be that Mr Tchenguiz follows this course of action. We shall soon find out.

This article should not be taken as definitive legal advice on any of the subjects covered.  If you do require legal advice in relation to any of the above, please contact Tom Spiller on 020 7955 1444 or any member of the Rosenblatt Dispute Resolution Department.

  • contact

Latest news