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Top finance litigation and contractual developments in 2018

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30 January 2019

This is a round-up of the most interesting finance litigation and contractual developments in 2018. The selection is necessarily subjective and draws from a wide range of cases and developments that are of direct relevance to finance parties. Full coverage can be found in our monthly Litigation and Dispute Resolution Review.

Contract – good faith, implied representations, no variation clauses

Following the decision in Marks & Spencer v BNP Paribas [2015] UKSC 72, it is generally challenging to imply terms into contracts, especially agreements between sophisticated parties.  However one development running counter to this trend in recent years has been the implication of a duty of good faith into certain types of so called “relational” contracts (see for instance Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB)).

In Nehayan v Kent [2018] EWHC 333 (Comm) the court, in implying a duty of good faith into an oral joint venture contract, considered what factors might constitute a relational contract. The overarching framework was one where a contract might demand “a high degree of communication, cooperation and predictable performance based on mutual trust and confidence”. The court found that in the context of the oral joint venture agreement between the parties, a duty of good faith was fundamental to ensure that the parties’ reasonable expectations were met.

This was an unusual case where a significant business joint venture was agreed via an oral agreement, and clearly that had an influence on the court’s decision. Nevertheless, joint venture agreements are likely to be the sorts of long term relational contracts into which the courts may be persuaded to imply a duty of good faith.  It may be difficult to avoid entirely the risk that a counter party may later seek to argue later that a duty of good faith should be implied into a long term supply agreement or joint venture – for instance who is going to agree to a right to act in bad faith?  Therefore, parties would be well advised to set out their respective rights and obligations clearly, not least because the implication of terms (including of good faith) is much more difficult in the case of a carefully drafted written agreement between two well advised commercial parties.

Another development which runs counter to contractual certainty came in PAG v RBS [2018] EWHC 3137 (Ch). There, PAG threw the proverbial kitchen sink at RBS to try to avoid its obligations under an interest rate swap, including arguments that RBS had made implied fraudulent misrepresentations in respect of the LIBOR benchmark. Although at first instance this argument was rejected, the Court of Appeal agreed with PAG that RBS had in fact impliedly represented at the time of agreeing the swaps that it was not seeking to manipulate LIBOR and had no intention of doing so in the future.  While on the facts here, the implied representation had not in fact been false (and as such the court found in favour of RBS), this finding is potentially very concerning for those parties involved in setting benchmarks who would have been hoping that this case would have drawn a line under these sorts of claims.

More reassuring was the decision in Rock Advertising v MWB Business Exchange Centres [2018] UKSC 24, 16 May 2018.  There, MWB was able to rely on a “no oral variation” clause to defeat an argument by Rock that a lower rent had been agreed orally. Unfortunately (for contract lawyers at least), the Supreme Court’s decision on the “no oral variation” clause meant that it opted not to engage with the more interesting argument raised by MWB: that Rock was not entitled to rely on the oral variation because it had not given any additional consideration for that promise. The decision means that parties will find it difficult to rely on informal changes to contracts where there is a "no oral variation" provision in place.

Data Protection – vicarious liability, right to be forgotten

With GDPR in force since May 2018, firms now face the possibility of a fine totalling the greater of EUR20 million or 4% of annual global turnover for breaches of the regulation.  Firms therefore need to be ever more careful as to how they hold and use personal data (which has a very broad definition under the regulation) and vigilant as to how they protect the data that they hold from, for instance, misuse and/or cyber attacks.

In WM Morrison Supermarkets PLC v Various Claimants [2018] EWCA Civ 2339, Morrisons lost their appeal against a finding of vicarious liability after the actions of a vindictive employee, Mr Skelton, caused the sensitive personal data of approximately 100,000 employees to be posted online. At first instance it was held that Morrisons had no primary liability, which was not contested on appeal. Rather, Morrisons challenged the finding of vicarious liability. The Court of Appeal held that Mr Skelton’s actions were within the course of his employment owing to the fact that his job required him to disclose the relevant data to third parties – albeit prescribed third parties as opposed to the internet at large. Further, Morrison’s attempt to contest that Mr Skelton had to be “on the job” for his actions to constitute behaviour during the course of employment was rejected. The success of the group litigation against Morrisons is likely to embolden class actions in respect of future data breaches (although it is worth noting that the case was decided under the Data Protection Act 1998 rather than GDPR). 

In NT1 and NT2 v Google LLC [2018] EWHC 799 (QB), the English courts heard follow-on actions (one successful, the other unsuccessful) from the 2014 European Court of Justice ruling that there is a so-called “right to be forgotten”. This case underscores the renewed importance of the rights of so-called data subjects.  Data privacy is entering a new era and firms need to be mindful of the new topography to avoid pitfalls. 

Privilege - good and bad news on litigation privilege

The twin decisions in recent years of (i) RBS Rights Issue Litigation [2016] EWHC 3161 (Ch), which followed Three Rivers No 5 [2003] EWCA Civ 474, that legal advice privilege could not be obtained of a solicitor’s notes of an interview with his client’s employees, and (i) SFO v ENRC [2017] EWHC 1017 (QB), which significantly limited the availability of litigation privilege in the context of corporate criminal investigations, have given rise to considerable concern. Just as corporate civil and criminal liability expanded, the scope for parties claiming privilege in investigations seemed to be getting ever narrower. 

In ENRC v SFO [2018] EWCA Civ 2006 the Court of Appeal overturned the second of these decisions, finding that lawyers’ notes of employee interviews, generated in the context of an internal investigation, attracted litigation privilege. The Court of Appeal held that a criminal prosecution was reasonably in contemplation by ENRC at the point that it launched its internal investigation (even though this preceded the commencement of the SFO investigation). Furthermore, the interview notes were created for the purpose of resisting or avoiding proceedings. They were therefore covered by litigation privilege. 

The Court of Appeal, however, did not rule on the question as to whether the notes were covered by legal advice privilege. While the Court of Appeal did offer non-binding comment, such that it would have departed from Three Rivers No 5 if it could have done, it noted that such a decision ought to be made by the Supreme Court. We understand that the SFO has decided not to appeal this decision, so the current uncertainty in relation to legal advice privilege remains.

In a contrasting development, a different composition of the Court of Appeal refused to extend the scope of litigation privilege in WH Holding Ltd v E20 Stadium LLP [2018] EWCA Civ 2652. In that case, in the context of a dispute over the number of seats in the London Olympic Stadium, the Landlord (E20) asserted privilege over emails between the E20 Board Members and its stakeholders. The Court of Appeal found that such documents, while created in the context of litigation, nevertheless did not themselves involve the seeking of advice or evidence for the purpose of the litigation and therefore did not attract litigation privilege. This decision, which seems to have been driven by a resistance on the part of the court to granting parties blanket privilege over documents created in the context of litigation, is likely to create uncertainty about what is covered by litigation privilege. The court appeared to accept that this ruling might lead to some difficult privilege calls, indicating that other material might also attract litigation privilege where it was mixed in with advice or information that did attract litigation privilege, and could not be disentangled, or where that other material might reveal the privileged information or advice. 

Insolvency – controversial CVAs and some speedy action by the English courts 

The insolvency space was increasingly active in 2018, and this trend looks set to continue particularly if Brexit hits the economy as hard as some are predicting. Headlines were captured in particular by controversial CVAs of heavily indebted retailers, such as Mothercare, Homebase and House of Fraser. These involved the landlords of these retailers having their property rights compromised through the votes of other creditors who were not being required to take a similar devaluation in their claims. We still await a challenge to one of these CVAs to come to fruition (although we understand that a challenge to the House of Fraser CVA was settled out of court). 

One example of an insolvency dispute which did come to court in very short order was Citibank v Oceanwood Opportunities [2018] EWHC 448 (Ch). The matter concerned a Norske Skog, a Norwegian paper company in severe financial difficulties, whose restructuring risked being scuppered by a technical argument on the wording of a New York indenture, which would have meant that the majority noteholders could never in practice give instructions to the agent (Citibank) to effect the sale required for the restructuring. The court not only was prepared to accept jurisdiction (having heard evidence that the Norske Skog would have been hopelessly insolvent by the time the New York courts heard the issue), but also was able to resolve the matter on the basis of expert evidence on New York law, within just nine weeks of proceedings being issued. The result was that the restructuring completed and significant value was recovered for creditors.

A similarly expedited matter was Heis & ors v Financial Services Compensation Scheme Ltd & anr [2018] EWCA Civ 1327. In that case the question was whether the MF Global CVA, under which a small group of “Participating Creditors” had agreed in effect to buy out 3000 “Exiting Creditors”, should be implemented following the emergence of a new claim which had the potential to wipe out the participating creditors’ investment entirely. This case turned on the construction of a condition precedent which stated that if there was a Disputed Claim, the CVA would not come into effect unless the Administrators confirmed that it should not preclude the CVA from becoming effective. The Participating Creditors argued that the clause required the Administrators to perform a cross check against the Disputed Claims identified in the CVA, and to decide whether any increase was so great that it would be unfair to proceed with the CVA. The Exiting Creditors by contrast viewed this as a far more limited technical clause to do with late challenges to the CVA. Although the High Court favoured the narrow construction of the Exiting Creditors, the Court of Appeal ultimately decided the matter in favour of the Participating Creditors. 

This case was notable not only for speed of justice - a drop dead date in the CVA meant that High Court and Court of Appeal proceedings had to be squeezed into 11 weeks from the Administrators first issuing an application for directions; but also for the difficulty of predicting how the courts will interpret contractual provisions. Indeed, the Court of Appeal thought the High Court’s preferred reading of the relevant condition precedent was “absurd”, while the reading rejected by the High Court was in fact “obvious”. 

Developments on Jurisdiction

2018 saw a variety of jurisdictional disputes litigated in the courts of England and Wales. Judgments have provided welcome clarity in respect of jurisdiction clauses in market-standard documentation and in relation to the limits of non-exclusive jurisdiction. Various disputes have involved the application of the Brussels Recast to contractual exclusive jurisdiction clauses. Although these decisions may soon prove obsolete in light of the UK’s decision to leave the EU, conversely, they also provide insight as to how EU courts could apply the same provisions to the UK if, as anticipated, the UK ceases to be an EU Member State. 

In Angola v Perfectbit [2018] EWHC 965 (Comm), one of the co-defendants was unable to obtain a stay of the proceedings even though he had the benefit of an exclusive jurisdiction clause in favour of the Angolan courts. This was because, under the Brussels Recast, the fact that one or more of the other defendants were domiciled in the UK (i.e. in a Member State) meant that the English courts did not have the discretion to stay the proceedings. 

Similarly, in UPC plc v Nectrus Ltd [2018] EWHC 380 (Comm), the fact that there was a non-exclusive jurisdiction clause in favour of the English courts, meant that the English courts had no discretion to stay the proceedings commenced before them, even though there were prior filed proceedings on foot in the Isle of Man. 

These cases are good examples of how exclusive and non-exclusive English jurisdiction clauses may not be infallible, once the UK becomes a third country post Brexit. As things stand, while Britain is a member of the EU, under the Brussels Recast the courts of EU Member States have to stay their proceedings if faced with an exclusive jurisdiction clause in favour of the English courts or if the jurisdiction clause is non-exclusive and there are prior filed proceedings on foot in England. This is due to end on Brexit day, so unless (a) the Hague Convention on Choice of Court Agreements applies, (b) national law in the relevant EU Member State applies and would allow the relevant court to respect the clause, or (c) the UK signs up to the Lugano Convention, there will be an increased risk of parallel proceedings. The flip side is that, post Brexit, the UK courts should regain their powers to make anti-suit orders against parties that commence proceedings in Member States courts in breach of exclusive English jurisdiction clauses.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards,