International Law Firm with Global Reach - Allen & Overy ......international arbitration awards outweighs the public policy of refusing to enforce penalty clauses. The judge summed

www.allenovery.com 1

April 2016

Litigation and Dispute

Resolution

Review

EDITORIAL

In this edition we include three articles focusing on different aspects of financial crime.

We cover the first successful prosecution of a company for a failure to prevent bribery

under the UK Bribery Act 2010. We also report on the UK’s first deferred prosecution

agreement (relating to the same offence), made between the SFO and a financial

institution. Both articles consider the lessons we can learn from the first rulings in this

area, particularly about the meaning and effect of “cooperation” during an investigation.

We also cover a challenge to the SFO’s use of its “seize and sift” powers to process

privileged documents (see Financial Crime and Privilege).

For those involved in derivatives litigation, we cover the Court of Appeal’s decision

in Videocon Global Ltd and Videocon Industries Ltd v Goldman Sachs International

concerning the construction of Section 6(d) of the 1992 ISDA Master Agreement and

close-out mechanics. Allen & Overy acted for the successful respondent.

We also cover Teare J’s decision in Gold Reserve Inc v Bolivarian Republic of

Venezuela in which the court analyses what constitutes an “investor” under a bilateral

investment treaty. Teare J’s judgment also provides an interesting consideration of

certain immunity issues.

Finally, we have produced 15 specialist papers looking at the legal consequences

of Brexit on different areas. These specialist papers can be accessed via our website1.

Alternatively please contact us if you would like us to send you soft copies of

these publications.

Sarah Garvey Counsel

Litigation – London

Contact Tel +44 20 3088 3710

[email protected]

Contributing Editor:

Amy Edwards

Senior Professional Support Lawyer


Contact

[email protected]

1 www.allenovery.com/news/en-gb/articles/Pages/Brexit.aspx


Contents

Arbitration 3

Penalty decider: High Court allows enforcement of

arbitration award which includes a contractual

penalty: Pencil Hill Ltd v US Città Di Palermo S.p.A

Arbitrator bias: financial dependence and

inappropriate conduct: Cofely Ltd v Anthony

Bingham & Knowles Ltd

“Weaknesses” in the IBA guidelines on conflicts of

interest: W Ltd v M Sdn Bhd

Contract 10

The construction of Section 6(d) of the 1992 ISDA

Master Agreement and close-out mechanics:

Videocon Global Ltd & Videocon Industries Ltd v

Goldman Sachs International

Costs 13

Court cannot divide an offer to settle: Sugar Hut

Group Ltd & ors v A J Insurance Service

Damages 16

Contractual or tortious damages: what is the

difference (and when does it matter)?: Wemyss

v Karim

Disclosure 18

Court approves use of predictive coding in large

disclosure exercise: Pyrrho Investments Ltd & ors v

MWB Property Ltd & ors

Financial Crime 20

First UK deferred prosecution agreement between

the SFO and a bank

Lessons from the first Section 7 UK Bribery Act

case: R v Sweett Group plc

Immunity 25

Structuring foreign investments: who qualifies as an

“investor” under a bilateral investment treaty?: Gold

Reserve Inc v Bolivarian Republic of Venezuela

Privilege 27

Investigating the investigators – what happens to

your seized privileged documents? McKenzie, R (On

the Application Of) v Director of the Serious Fraud

Office

Regulatory 29

Shareholder not able to claim for mis-selling to

company: Sivagnanam v Barclays Bank plc

Forthcoming client seminars 32

Litigation Review consolidated

index 2016 32

Litigation and Dispute Resolution – April 2016


Arbitration

PENALTY DECIDER: HIGH COURT ALLOWS ENFORCEMENT OF ARBITRATION AWARD

WHICH INCLUDES A CONTRACTUAL PENALTY

Pencil Hill Ltd v US Città Di Palermo S.p.A (Unreported) QBD (Merc) (Manchester),

19 January 2016

The High Court rejected an application to block enforcement of a Swiss arbitration award, part of

which comprised a penalty. The court held that the public policy in enforcing foreign arbitral awards

under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New

York Convention) far outweighs that in refusing to enforce penalty clauses. Relevant to the decision

was the Swiss law requirement to reduce excessive penalties. The Tribunal in this case had already

reduced an award which it considered “disproportionate and unfair”. The decision is a further

reminder of the very limited circumstances in which the English courts will refuse to enforce an

arbitral award under the New York Convention on public policy grounds.

Pencil Hill Ltd (Pencil Hill) sold the financial rights in

footballer Paulo Dybala to US Città Di Palermo S.p.A

(Palermo) for EUR 10 million. Under an agreement

dated 27 April 2012 (the April Agreement), Palermo

agreed to pay Pencil Hill EUR 6.72 million in two

instalments of EUR 3.36 million. A further EUR 1

million was due under an agreement made in August

2012 (the August Agreement).

If Palermo failed to pay any of the instalments, all

remaining amounts would become due together with

a penalty equal to double the sum outstanding. Palermo

failed to pay the sum of EUR 6.72 million. Disputes

were referred to a three-member Tribunal of the Court

of Arbitration for Sport (the CAS) for resolution

“according to Swiss Private law”.

The Swiss award

The CAS made an award in favour of Pencil Hill and

directed Palermo to pay EUR 9.4 million plus interest,

comprising: (i) the EUR 1 million due under the August

Agreement; (ii) the EUR 6.72 million due under the

April Agreement; and (iii) a reduced additional sum of

EUR 1.68 million in place of the penalty (the Award).

The reduced additional sum represented 25% of the

penalty claimed.

The Tribunal applied Article 163.3 of the Swiss Code

of Obligations and held that the original penalty of

EUR 6.72 million was disproportionate and unfair.

The reduced penalty was upheld on appeal by the

Swiss supervising court.

Would the English court enforce the penalty?

Pencil Hill sought to enforce the Award against

Palermo in the English courts. Palermo argued that the

penalty clause in the April Agreement was “sufficiently

injurious” to justify the court’s refusal to enforce the

penalty element of the Award as contrary to public

policy under s103(3) of the Arbitration Act 1996

(the Act). Palermo cited the recent decision of the

Supreme Court in Makdessi1 in support of its argument

that the rule against penalties is a matter of public

policy. Even after the reduction of the amount of the

penalty, there remained a penalty which the English

court should not enforce.

A balancing act – New York Convention versus

public policy

His Honour Judge Bird acknowledged that the English

courts have a general duty to enforce a New York

Convention award, subject only to certain limited

exceptions, including public policy (s103(3) of the Act).


Counsel for Pencil Hill argued that the court was

required to find a balance between, on the one

hand, the desirability of finality in international

arbitration, and, on the other, public policy

considerations concerning penalties. In the hierarchy

of these public policy considerations, the public policy

imperative to refuse to enforce penalty provisions was

not sufficient to tip the balance against enforcement.

Central to this argument was the decision of the Swiss

supervisory court to uphold the adjustment of the

penalty, thus confirming that the “penalty” was no

longer “excessive”.

English court enforces award – governing law

a vital factor

HHJ Bird held that the Award should be enforced

in its entirety, since the public policy of upholding

international arbitration awards outweighs the public

policy of refusing to enforce penalty clauses. The judge

summed up the challenge of raising a public policy

exception with reference to the authorities,

acknowledging that:

− “considerations of public policy can never be

exhaustively defined, but they should be

approached with extreme caution”;2 and

− in order to exercise the public policy exception,

the award in question must “fundamentally offend

the most basic and explicit principles of justice and

fairness” (per Professor Merkin).

The judge found the authorities to be clear on the limits

of raising public policy arguments to block enforcement.

While the rule against penalties does represent an

important public policy, the judge was not persuaded

that it protects “a universal principle of morality”

(Westacre Investments Inc v Jugoimport-SPDR Holding

Co Ltd3 applied) or that the rule is so “injurious to

the public good” that enforcement should, without more,

be refused.

Of key importance to HHJ Bird’s decision was the

position under the governing law as applied by the Swiss

supervisory court. Although Swiss law, as applied by the

CAS, classified the clause as a penalty, the effect of the

reduction of the payment obligation was that it was no

longer regarded by the governing law as objectionable.

The judge held that the role of the English court was not

to adjudicate upon the underlying contract. Accordingly,

the decision of the supervisory Swiss court, being “the

court chosen by the parties applying the law chosen by

the parties”, should be respected.

COMMENT

The decision is a useful reminder of the difficulties

involved in raising public policy exceptions to the

enforcement of arbitral awards.

Despite the acknowledgment of the Supreme Court in

Makdessi that the rule against penalty clauses is a matter

of public policy, Palermo were unable to demonstrate

that it outweighed the broader public policy

consideration in favour of the enforcement of foreign

arbitral awards.

A further tension revealed in HHJ Bird’s judgment is

between domestic public policy considerations and the

freedom of the parties to resolve their disputes according

to their chosen governing law. In this case, the Swiss

governing law chosen by the parties provided the means

of transforming a penalty clause into a non-objectionable

clause as a matter of Swiss law. For HHJ Bird, the

application of domestic public policy exceptions in this

case would have infringed the parties’ choice.

This decision is a not a green light to the enforcement

of awards containing penalty clauses in the English

courts. Central to the judge’s reasoning was the fact that

Swiss law required a penalty clause to be reduced and

that the supervisory Swiss court had confirmed that the

clause was no longer objectionable as a matter of Swiss

law. English law does not allow the courts to intervene

to reduce the effect of a penalty clause so as to make it

enforceable. It is unclear how this might tip the balance

between competing public policy considerations in other

enforcement scenarios, so parties should continue to

exercise caution when drafting clauses which may be

construed as penalties as a matter of English law.



Sophie Nettleton

Associate

Litigation – Corporate – Dubai

Contact

Tel +971 8971 7174

[email protected]

1 www.allenovery.com/publications/en-gb/Pages/New-penalty-

test.aspx. 2 Deutsche Schachlbau und Tiefbohrgeselischaft mbH v Ras al-

Khaimah National Oil Co [1987] 2 Lloyds Rep 246, per Sir John

Donaldson MR. 3 [2000] QB 288.

ARBITRATOR BIAS: FINANCIAL DEPENDENCE AND INAPPROPRIATE CONDUCT

Cofely Ltd v Anthony Bingham & Knowles Ltd [2016] EWHC 240 (Comm), 17 February 2016

A real possibility of bias on the part of an arbitrator was found to exist in circumstances where

(1) 18% of the arbitrator’s appointments and 25% of his income as arbitrator/adjudicator over the

past three years derived from cases involving the second defendant, and (2) the arbitrator’s conduct

in response to the claimant’s request for information about the relationship gave rise to concerns.

The High Court was not persuaded that it mattered that the appointments were made by an appointing

body rather than the second defendant directly, particularly because the second defendant was able to

and did influence the appointment process. The court held that the arbitrator had “descend[ed] into

the arena” in an inappropriate manner and there were therefore grounds for his removal.

The second defendant (Knowles) was appointed by

the claimant (Cofely) to advise upon and progress

a claim arising out of a concession agreement.

Following settlement of that claim, Knowles

commenced arbitration against Cofely for breach

of contract. Knowles sought the appointment by

the Chartered Institute of Arbitrators (CIArb) of

Anthony Bingham, an experienced arbitrator/adjudicator

in construction disputes, as sole arbitrator. CIArb

confirmed Mr Bingham as arbitrator in February 2013,

despite Cofely’s objections and its request for an

alternative appointee. APartial Award in favour of

Knowles followed in August 2013. After various periods

of subsequent inactivity, Cofely made an application for

further Partial Awards.

In February 2015, a judgment was issued in Eurocom

Ltd v Siemens plc [2014] EWCH 3710 (TCC). This case

highlighted a practice by Knowles of pre-emptively

raising false conflicts of interest in order to exclude

potential adjudicators when applying for adjudicator

appointments. This, together with Mr Bingham’s

conduct in the arbitration, prompted Cofely to seek

information from Knowles about the nature and extent

of the professional relationship between Knowles

and Mr Bingham.

In the correspondence that followed, initially between

Cofely’s lawyers and Knowles, and then also with

Mr Bingham, Knowles provided some of the requested

information, but Mr Bingham repeatedly challenged the

relevance of Cofely’s requests. At a hearing on the issue

in April 2015, Mr Bingham was dismissive of Cofely’s

requests. After the hearing, Knowles provided Cofely

with further information and Mr Bingham issued a

ruling, finding that the tribunal was properly constituted

and that there was no conflict of interest.

Application to remove arbitrator

Cofely applied to remove Mr Bingham under s24(1)(a)

of the Arbitration Act 1996 (the Act) on the grounds that

“circumstances exist that give rise to justifiable doubts

as to his impartiality”. Cofely alleged apparent bias, not

actual bias, arising out of Mr Bingham’s repeated

appointments by Knowles.

The court noted that the regularity of appointments

by the same party/counsel may be relevant to the issue

of apparent bias, particularly if it raises questions


of “material financial dependence”. The arbitrator’s

explanation of his knowledge of the relevant

circumstances was also said to be relevant. Apparent

bias will exist where a fair-minded and informed

observer finds a “real possibility” that the arbitrator

is biased.

Cofely relied on Rule 3 of the CIArb Code of

Professional and Ethical Conduct for Members (2000),

which requires the on going disclosure of matters that

are likely to affect the member’s independence/

impartiality or which might reasonably be perceived

as likely to do so. Mr Bingham had signed a form

committing to on going disclosure and left blank

a question regarding his involvement with either party.

Cofely also relied on the IBA Guidelines on Conflicts

of Interest in International Arbitration (the IBA

Guidelines), which require the disclosure of repeat

appointments in certain situations.

Factors relevant to the finding of apparent bias

Over the past three years, 18% of Mr Bingham’s

appointments and 25% of his income as

arbitrator/adjudicator derived from cases involving

Knowles. The fact that all of these appointments were

made by an appointing body did not weaken Cofely’s

argument, particularly because Knowles was able to and

did influence appointments (for example, by putting

forward appointees, issuing an appointment “blacklist”

and identifying required characteristics of appointees).

These practices would have been known to Mr Bingham

and their significance was highlighted by the Eurocom

case, which contained a striking example of Knowles

steering the appointment process.

Other factors were relevant to the relationship issue:

− While Cofely’s requests for information had been

reasonable, Mr Bingham acted inappropriately by

trying to foreclose further inquiry and doing so in

an aggressive manner, including by issuing an

inappropriate ruling.

− Mr Bingham had taken an aggressive and hostile

approach towards Cofely’s counsel during the April

hearing, which demonstrated that he had descended

“into the arena” in an inappropriate manner.

− The witness statement submitted to the court by

Mr Bingham at the application to the High Court to

remove him demonstrated a lack of objectivity

and an increased risk of unconscious bias.

The court held that the grounds for the removal of

Mr Bingham under s24(1)(a) of the Act had been

satisfied. The court noted, however, that there

was nothing untoward with the Partial Award or

the conduct of the arbitration prior to March 2015.

Two other factors – Mr Bingham’s unilateral

communications with Knowles and his earlier conduct

in the arbitration – did not indicate apparent bias.

COMMENT

The Orange List in the IBA Guidelines requires

disclosure where an arbitrator has, within the past three

years, amongst other things: (i) been appointed as an

arbitrator on two or more occasions by a party or

affiliate (3.1.3); (ii) served, or currently serves, as

arbitrator in another arbitration involving a party or

affiliate (3.1.5); or (iii) been appointed as an arbitrator

on more than three occasions by a legal representative

(3.3.8). This sets a low threshold that is open to criticism

for being based on a numerical, rather than a substantive,

assessment. The IBA Guidelines do note, however, that

repeat appointments extending beyond the three-year

period may also need to be disclosed. Arbitral

institutions, arbitral tribunals and national courts have

taken a case-by-case approach to determining whether

multiple appointments demonstrate apparent bias.

Three important points arise from this decision:

What is financial dependence?

Repeat appointments by a party or their lawyers can

signify the experience and qualities of an arbitrator.

However, as this case shows, arbitrators/parties/counsel

should avoid circumstances where an objective observer

might view the relationship as becoming one of a

significant financial dependence. The key factor in the

court’s finding of apparent bias in this case was that 18%

of Mr Bingham’s appointments and 25% of his total

income as arbitrator/adjudicator over three years derived

from cases involving Knowles. The threshold for



establishing a relationship of financial dependence is

fact-specific and has been considered in other cases:

– A v B [2011] 2 Lloyds Rep. 591: a real

possibility of apparent bias was said to exist

where a barrister arbitrator receives a very

substantial proportion of his instructions as

counsel (“say 60%”) from one of the firms

acting in the arbitration.

– Fileturn Ltd v Royal Garden Hotel Ltd [2010]

EWHC 1736 (TCC): dependence was said not

to exist where 90-95% of the adjudicator’s

annual adjudications did not involve the

claims consultant representing the claimant.

– Tidewater Inc. & ors v Bolivarian Republic of

Venezuela (ICSID Case No. ARB/10/5,

Decision on Claimant’s Proposal to

Disqualify Professor Brigitte Stern,

Arbitrator, 23 December 2010): the

arbitrator’s four appointments by Venezuela

did not indicate a relationship of dependence,

particularly given her extensive practice as an

arbitrator in investment cases.

Appointing body not a defence against bias

The courts will not be reassured by the fact that an

appointment has been made by an appointing body

rather than by the party directly, particularly where the

party/counsel has influenced the appointment process.

In this case, of the 25 cases involving Knowles in which

Mr Bingham acted as arbitrator/adjudicator, 19 involved

appointments by a nominating body in circumstances

where Knowles had not indicated a choice or choices

for the appointment. The court was nevertheless

persuaded that Knowles was able to and did influence

the process.

Arbitrator’s disclosure

Arbitrators should take an expansive approach to their

duty of initial and continuing disclosure where

circumstances exist that may give rise to actual or

apparent bias. Arbitrators and parties should act

appropriately and transparently when making statements

regarding disclosure. Where an arbitrator is confronted

by questions about his/her relationship with a party

(as here), it is essential that a neutral and responsive tone

is adopted. The behaviour of an arbitrator may heighten

concerns over existing questions over his/her

relationship with a party.

As an aside, it should be noted that this case would have

played out differently under the new CIArb Arbitration

Rules 2015, which widen the functions of CIArb beyond

those contained in the 2000 Rules. There is now a

mechanism for CIArb to decide challenges to arbitrators

by issuing an unreasoned decision (Articles 12 and 13);

this process must be pursued before an application can

be made to the English courts (s24(2) of the Act).

Rick Gal Associate

Litigation – Arbitration – London

Contact Tel +44 20 3088 3345

[email protected]


“WEAKNESSES” IN THE IBA GUIDELINES ON CONFLICTS OF INTEREST

W Ltd v M Sdn Bhd [2016] EWHC 422 (Comm), 2 March 2016

There has recently been a push among some members of the international arbitration community to

make the application of so-called “soft law”, such as the IBA Guidelines on Conflicts of Interest in

International Arbitration (the IBA Guidelines), standard practice in international arbitration.1 In this

context, W Ltd v M Sdn Bhd is important. First, it confirms the position of the English courts towards

the IBA Guidelines (ie that they are not legally binding) and, secondly, it highlights certain

“weaknesses” of the IBA Guidelines.

The IBA Guidelines

The IBA Guidelines contain general standards designed

to ensure the impartiality and independence of

arbitrators in international arbitration. These include the

requirement to disclose certain circumstances upon

appointment (or as soon as possible thereafter) if they

exist.2 A list of circumstances is included in the

Guidelines and coded by colour (red, orange and green).

This case concerned the non-disclosure of a

circumstance listed on the Red List. The Red List

consists of: (i) “a Non-Waivable Red List” and (ii)

“a Waivable Red List”. The IBA Guidelines explain that

“[t]hese lists are non-exhaustive and detail specific

situations that, depending on the facts of a given case,

give rise to justifiable doubts as to the arbitrator’s

impartiality and independence.”3 That is “in the

circumstances, an objective conflict of interest exists

from the point of view of a reasonable third person

having knowledge of the relevant facts of the case.”4

If any Non-Waivable Red List conditions exist, an

arbitrator should not accept an appointment.5 Waivable

Red List conditions are also serious, but not as severe,

and can be waived by the parties (albeit only expressly).

Facts – arbitrator’s firm advising affiliate

of defendant

W Ltd v M Sdn Bhd concerned the application by the

claimant, W Ltd, to challenge two arbitral awards before

the English courts under s68 of the Arbitration Act 1996

(the Act). W Ltd argued that there had been “serious

irregularity affecting the tribunal” because the sole

arbitrator responsible for the awards had failed to

disclose circumstances that fell within the Non-Waivable

Red List of the IBA Guidelines, rendering him

apparently partial .

The sole arbitrator was Mr Haigh QC, a Canadian

lawyer. There was no suggestion of actual bias on

his behalf, or of actual absence of impartiality or

independence. The challenge was based on apparent bias

from an alleged conflict of interest. Specifically, it was

established that the law firm of which Mr Haigh QC was

a partner regularly advised an affiliate of the defendant

(the Company), and had earned significant

remuneration for that work.

Mr Haigh QC himself had never done any work for the

Company. He operated effectively as a sole practitioner,

only using his firm for the secretarial and administrative

assistance of his work as an arbitrator. Nevertheless,

under the IBA Guidelines, his firm’s work for the

Company was something he should have disclosed.

Paragraph 1.4 of the Non-Waivable Red List of the IBA

Guidelines includes as a condition to be disclosed

circumstances in which “[t]he arbitrator or his or her

firm regularly advises the party, or an affiliate of the

party, and the arbitrator or his or her firm derives

significant income therefrom.”

The conflict checks carried out by Mr Haigh QC had

not picked up the relationship between the Company

and the defendant.

Judge rejects bias arguments

Knowles J unhesitatingly rejected the

claimant’s application.

While he noted that the IBA Guidelines could be,

and had been, of assistance in assessing challenges



under s68 (the Act), that was the extent of their value.6

He confirmed that the IBA Guidelines are not binding

on the English courts. The relevant test for apparent

bias under English law is whether “a fair minded and

informed observer, having considered the facts, would

conclude that there was a real possibility that the tribunal

was biased”.7 In Yiacoub v The Queen [2014] UKPC 22,

“bias” was further explained to “mean an absence of

demonstrated independence or impartiality.”8

Knowles J concluded that a fair minded and informed

observer would not conclude that there was a real

possibility that the arbitrator was biased, or lacked

independence or impartiality.9

“Weaknesses” in IBA Guidelines

As noted above, Knowles J also referred to certain

“weaknesses” in the IBA Guidelines.10

Specifically,

Knowles J suggested that it was problematic to treat

“compendiously (a) the arbitrator and his or her firm

and (b) a party and any affiliate of the party, in the

context of the provision of regular advice from which

significant financial income is derived.”11

Linked to this,

he questioned “this treatment occurring without

reference to the question whether the particular facts

could realistically have any effect on impartiality or

independence (including where the facts were not

known to the arbitrator).”12

Knowles J noted that the Red List conditions are stated

to give rise to doubts about impartiality depending on

the “facts of a given case.”13

That did not, however,

overcome the difficulty. That was because “Paragraph 1

of Part II of the IBA Guidelines states that, ‘[i]n all

cases’, it is the General Standards ‘that should control

the outcome’.”14

And “General Standard 2(d) states,

without qualification, that justifiable doubts ‘necessarily

exist’ as to the arbitrator’s impartiality or independence,

‘in any of the situations described in the Non-Waivable

Red List.’”15

COMMENT

The scope of paragraph 1.4 of the Non-Waivable Red

List was expanded in the 2014 version of the IBA

Guidelines. Under the previous (2004) version, only

regular advice given to the affiliate of a party directly

by the arbitrator needed to be disclosed, as opposed

to such advice given by the arbitrator’s law firm. Also

under the 2004 version, justifiable doubts as to the

arbitrator’s impartiality and independence were held

to exist in a much more limited set of circumstances

(as opposed to in every situation described in the

Non-Waivable Red List).

The IBA Guidelines make an important contribution

to international arbitration. However, if they purport

to exclude competent, qualified and impartial arbitrators,

query whether, in their current form, they extend too

far in their application. In W Ltd v M Sdn Bhd, Mr Haigh

QC indicated that, had he been aware of his firm’s

relationship with the Company, he would have disclosed

that fact.16

Applying the IBA Guidelines, he would have

been required to recuse himself.

Naomi Briercliffe

Associate


Contact

Tel +44 20 3088 4575

[email protected]

1 For example, at the International Bar Association International

Arbitration Day on 4 March 2016, the President of the International Chamber of Commerce International Court of Arbitration officially

called upon all international arbitral institutions to endorse the

Guidelines. See Global Arbitration Review, Mourre takes hard line on soft law, 7 March 2016.

2 IBA Guidelines, General Standard 3. 3 Ibid., Part II, para. 2. 4 Ibid. 5 Ibid. 6 Ibid., para. 26. 7 That test was set out by Lord Hope in Porter v Magill [2002] AC

357 at 103. 8 Per Lord Hughes, at para. 12. 9 W Ltd v M Sdn Bhd [2016] EWHC 422 (Comm), para. 22. 10 Ibid., para. 34. 11 Ibid. 12 Ibid. 13 Ibid., para. 38. 14 Ibid. 15 Ibid. 16 Ibid., 24.


Contract

THE CONSTRUCTION OF SECTION 6(D) OF THE 1992 ISDA MASTER AGREEMENT AND

CLOSE-OUT MECHANICS

Videocon Global Ltd & Videocon Industries Ltd v Goldman Sachs International [2016] EWCA Civ

130, 15 March 2016

The English Court of Appeal has decided that the requirement to serve a statement of calculation

“on or as soon as reasonably practicable” under Section 6(d)(i) of the 1992 ISDA Master Agreement

is not a condition precedent to the obligation to pay the debt that arises under Section 6 (ie the Early

Termination Amount). It also decided that the Early Termination Amount accrues due on, or as at,

the Early Termination Date, and that the amount due in respect of an Early Termination Date is

payable when notice of the amount payable is “effective” under Section 6(d)(ii) – a delivery of

a statement under Section 6(d)(i) is not required.

Background

The appeal turned on a point of construction of

Section 6(d) of the 1992 (Multicurrency – Cross Border)

ISDA Master Agreement relating to the payment of

amounts following the close-out of transactions under

the ISDA Master Agreement. Section 6(d) reads:

“(d) Calculations.

(i) Statement. On or as soon as reasonably

practicable following the occurrence of an Early

Termination Date, each party will make the

calculations on its part, if any, contemplated by

Section 6(e) and will provide to the other party

a statement (1) showing, in reasonable detail, such

calculations (including all relevant quotations and

specifying any amount payable under Section 6(e))

and (2) giving details of the relevant account to

which any amount payable to it is to be paid. In the

absence of written confirmation from the source of

a quotation obtained in determining a Market

Quotation, the records of the party obtaining such

quotation will be conclusive evidence of the

existence and accuracy of such quotation.

(ii) Payment Date. An amount calculated as being

due in respect of any Early Termination Date under

Section 6(e) will be payable on the day that notice

of the amount payable is effective (in the case of

an Early Termination Date which is designated or

occurs as a result of an Event of Default) and on the

day which is two Local Business Days after the day

on which notice of the amount payable is effective

(in the case of an Early Termination Date which

is designated as a result of a Termination Event).

Such amount will be paid together with (to the

extent permitted under applicable law) interest

thereon (before as well as after judgment) in the

Termination Currency, from (and including) the

relevant Early Termination Date to (but excluding)

the date such amount is paid, at the Applicable

Rate. Such interest will be calculated on the basis

of daily compounding and the actual number of

days elapsed.”

The first appellant (Videocon Global Limited or

Videocon) entered into a 1992 (Multicurrency – Cross

Border) ISDA Master Agreement together with a

Schedule and a Credit Support Annex (the Master

Agreement) with Goldman Sachs International (the

Respondent) on 26 October 2010. The obligations of

Videocon under the Master Agreement were guaranteed

by its parent, Videocon Industries Limited (together with

Videocon, the Appellants). Two currency swap

transactions (each a Transaction) were entered into

under the Master Agreement.



As a result of Videocon failing to pay a margin call

made by the Respondent under the Transactions,

the Respondent served notice on 2 December 2011

(designating 2 December 2011 as the Early Termination

Date) to early terminate the Transactions under the

Master Agreement. For the purposes of the Master

Agreement, “Loss” and “Second Method” were elected

as the payment measure and payment method

respectively. By a letter dated 14 December 2011,

the Respondent served a statement pursuant to Section

6(d) of the Master Agreement, in which it stated the

amount payable under Section 6(e) (together with

interest and costs) (the Early Termination Amount),

set out certain details of its calculations and gave details

of the account to which the amount payable was to be

paid (the Original Section 6(d) Statement). The

Respondent stated in the Original Section 6(d) Statement

that such Early Termination Amount was due “on the

date of this letter (or, if later, the date on which this

letter is effective)”.

The Respondent issued proceedings in the Commercial

Court on 6 August 2012 following the Appellants’

failure to pay the Early Termination Amount and

proceeded to seek summary judgment. One of the issues

raised by the Appellants in defending the application

(although not pleaded) was that the Original Section

6(d) Statement lacked certain details required under

Section 6(d)(i). The judge hearing the summary

judgment application (Mr Robin Knowles QC)

concurred, noting that, in his view, it did not show,

among other things, reasonable details of the

calculations the Respondent had made or details of the

quotations used in determining Loss. The Judge held that

the purpose of the requirements as to the content of

a statement under Section 6(d)(i) was to provide to the

party receiving a statement the information required to

enable a reasonable understanding of how the figures

stated were arrived at, and to form a view as to whether

the determination of Loss satisfied the contractual

requirements of reasonableness and of good faith.

The Judge therefore granted summary judgment to the

Respondent in respect of issues of liability but did not

grant summary judgment in respect of the quantum

of the sum claimed.

Rather than pursuing its originally pleaded claim

to a trial on quantum, the Respondent delivered to

Videocon a second notice under Section 6(d)(i) of the

Master Agreement in March 2014 (the Second Section

6(d) Statement). The Second Section 6(d) Statement

was expressly stated to supersede the Original Section

6(d) Statement. It provided further details of matters

required under Section 6(d)(i) but claimed the same

sum as that set out in the Original Section 6(d) Statement

served in December 2011. The Respondent then sought

summary judgment on the issue of quantum. In their

defence, the Appellants contended that the Second

Section 6(d) Statement had not been provided “on or

as soon as reasonably practicable” following the Early

Termination Date as required under section 6(d)(i) and,

as a result, the Respondent could not claim the Early

Termination Amount.

Teare J gave judgment in favour of the Respondent.

He ruled that even if the Second section 6(d) Statement

had not been served “on or as soon as reasonably

practicable” following the Early Termination Date,

the Early Termination Amount was payable. In coming

to this conclusion, Teare J considered that it would make

no commercial sense to conclude that following a failure

to serve the notice “on or as soon as reasonably

practicable” following the Early Termination Date, any

later notice will inevitably be ineffective with the result

that the sum claimed will never be payable. The

Appellants appealed the judgment.

The appeal

In a unanimous judgment, the Court of Appeal dismissed

the Appellants’ appeal without hearing submissions from

the Respondent.

When is the debt obligation in respect of the Early

Termination Amount due?

The court referred to the decision of the Court of Appeal

in Lomas v JFB Firth Rixson Inc [2012] 1 CLC 713

(CA), in which the Court of Appeal had to decide on the

proper construction of Section 2(a)(iii) of the Master

Agreement. In Lomas v Firth Rixson, the Court of

Appeal distinguished between the underlying

indebtedness obligation and the payment obligation, and

the different dates on which those obligations can arise.


Gloster LJ in the present appeal adopted the same

approach and ruled that a similar distinction may be

found in Section 6 in respect of the amount which

becomes due in respect of an Early Termination Date

and subsequently payable. In particular, the court

decided that the debt obligation in respect of an Early

Termination Date (ie the Early Termination Amount)

arises, or accrues due on, or as at, the Early Termination

Date for the following reasons:

− by the operation of Section 6(c)(ii), the Early

Termination Date is the date on which the numerous

obligations under the terminated Transactions are

replaced by the single obligation to pay the Early

Termination Amount;

− under the definition of “Loss”, Loss is determined

as of the relevant Early Termination Date or, if that

is not reasonably practicable, as at the earliest date

thereafter as is reasonably practicable; and

− pursuant to Section 6(d)(ii), interest is payable on

the amount due in respect of an Early Termination

Date from (and including) the relevant Early

Termination Date to (but excluding) the date of

payment. Accordingly, the debt obligation

necessarily arises prior to the service of the

statement referred to in Section 6(d) and the debt

obligation cannot be discharged by reason of a

failure to serve a statement that is compliant with

the requirements of Section 6(d) or failure to serve

“as soon as reasonably practicable”.

When is the Early Termination Amount payable?

Gloster LJ then proceeded to consider when the Early

Termination Amount is payable under Section 6(d).

Gloster LJ referred to Section 6(d)(ii) which provides

that the amount calculated as being due in respect of

any Early Termination Date under Section 6(e) will be

payable (in the case of an Early Termination Date which

is designated or occurs as a result of an Event of

Default) on the day that “notice of the amount payable

is effective”. Gloster LJ concluded that the words

“notice of the amount payable” do not refer to the

detailed statement of the relevant calculations and

quotations as contemplated by the Section 6(d)(i)

statement. There is no reference in Section 6(d)(ii) that

stipulates that only when a statement compliant with

Section 6(d)(i) has been served will the payment

obligation be triggered. The reference to “effective”

in Section 6(d)(ii) is a reference to the language of

Section 12, and the effectiveness of the notice does not

depend on “sufficient details” of both the calculation of

the sum claimed and of the bank account into which the

sum is to be paid having been set out.

Is the payment obligation subject to a condition

precedent that the statement required under

Section 6(d)(i) has been served “as soon as

reasonably practicable”?

Gloster LJ firmly dismissed this submission by the

Appellants, holding that there was no basis whatsoever

for construing the requirement to serve a statement under

Section 6(d)(i) “on or as soon as reasonably practicable

following the occurrence of an Early Termination Date”

as imposing a condition precedent that time is of the

essence, so that in the absence of timely compliance by

the Non-defaulting Party, no payment obligation is ever

triggered and the Non-defaulting Party is left to pursue

its remedy at common law to establish its loss.

This construction did not mean that the obligation to

serve “on or as soon as reasonably practicable following

the occurrence of an Early Termination Date” had no

legal consequence. It is certainly possible to conceive of

circumstances in which, by reason of changes in market

or financial conditions, such as interest or other rates,

or lending criteria, a Defaulting Party might well have

suffered loss as a result of delay in the provision of

a Section 6(d)(i) compliant notice, which would enable

it to bring an action for damages.

COMMENT

The decision by the Court of Appeal is interesting in

a number of respects.

First, this is the first decision of the English courts which

has considered when a debt due under Section 6(e) of the

ISDA Master Agreement is payable. Market practice has

typically proceeded on the basis that the debt is payable

following service of a statement under Section 6(d)(i).

The Court of Appeal’s decision accepts the possibility

that two separate notices in the close-out process will



be delivered. We expect, however, that counterparties

in the derivatives market will continue to deliver just

one Section 6(d)(i) statement containing both payment

amount and calculation methodology. From a timing

perspective, there would not normally be a large gap in

time between the dates when the two could be delivered

since it will be necessary to undertake the calculation

(reasonable details of which are required to be given

under Section 6(d)(i)) before one could deliver a notice

under Section 6(d)(ii). More importantly, if a claim

is commenced on the back of a Section 6(d)(ii) payment

notice where no detailed Section 6(d)(i) statement has

been delivered, we would expect quantum to be

challenged, leading to disclosure of the details that

would have been delivered under Section 6(d)(i)

in any event. Delivering a Section 6(d)(i) statement is

the means by which a counterparty can seek to control

the delivery of the details of the calculation to reduce

the scope for challenge.

Second, Gloster LJ envisages that, in a case where

a Section 6(d)(i) statement is not served “on or as soon

as reasonably practicable”, a damages claim may be

found for breach of Section 6(d)(i). However, if a

Section 6(d)(ii) payment notice is delivered and an Early

Termination Amount is claimed in such notice which

the court ultimately upholds as being a valid

determination and calculation of the debt claimed, then

it is not clear in practice what loss would arise if a

Section 6(d)(i) statement is not delivered as the amounts

payable and time for payment would remain the same,

although ultimately this would be a question of fact to

be determined by the court.

Allen & Overy acted for the Respondent in

these proceedings.

Matt Bower

Partner

Litigation – Arbitration – Hong Kong

Contact

Tel +852 2974 7131

[email protected]

Victoria Williams

Associate Litigation – Banking, Finance &

Regulatory – London

Contact

Tel +44 20 3088 3411

[email protected]

Costs

COURT CANNOT DIVIDE AN OFFER TO SETTLE

Sugar Hut Group Ltd & ors v A J Insurance Service [2016] EWCA Civ 46, 3 February 2016

The Court of Appeal has over-ruled the High Court’s judgment about how costs should be awarded

where a claimant succeeds on only part of its case. There was no facility for dividing a defendant’s

Part 36 offer (eg in which separate amounts had been offered for different aspects of a claim) and

penalising the claimant in costs for rejecting “parts” of it. The ruling also covers what constitutes

unreasonableness in pursuing a claim.

Normally in litigation, the loser pays the winner’s costs.

These are awarded on the “standard basis”, such that the

party claiming them must show that they were

reasonably incurred. However, this can change if

a claimant succeeds only in part, or has behaved

unreasonably. Part 36 of the Civil Procedure Rules

(CPR) also contains a special regime for awarding costs

which is intended to encourage settlement.


If a claimant makes a Part 36 offer which is rejected,

and then recovers more at trial than it had offered to

accept in settlement, the loser must pay the claimant’s

costs on an indemnity basis from 21 days after the offer

was made. If a defendant makes a Part 36 offer, and

succeeds at trial, or is ordered to pay less than it had

offered in settlement, the claimant must pay the

defendant’s costs on an indemnity basis. The “indemnity

basis” assumes that the costs were reasonable,

(and therefore allowable) unless proved otherwise.

The Court of Appeal held that Eder J had applied Part 36

incorrectly and had wrongly treated the claimants’

refusal to accept an offer as unreasonable.

Background

Sugar Hut owned a nightclub which was seriously

damaged by fire. Sugar Hut claimed against its insurers

for losses caused by the fire, but its claim failed. It then

sued its brokers, A J Insurance Service, for negligence

in placing the policy. Parts of the claim were settled, and

A J Insurance paid GBP 813,000 on account before trial.

However, it disagreed about some of Sugar Hut’s claim,

especially for “Business Interruption”. At trial, Eder J

held that “the overall gross level of recovery” should be

GBP 1,676,955.30, of which 65% was allowable. Given

the interim amount already paid, this left GBP 277,021

payable by A J Insurance.

Before trial, both sides made Part 36 offers but “none

had been “effective” in that each of the claimants’ offers

had been for sums higher than in the event recovered,

and each of the defendant’s offers had been for sums

lower than in the event allowed.” A J Insurance made

its last Part 36 offer on 23 May 2014. It offered to settle

the claim for a further GBP 250,000 in addition to the

payments made on account. The letter explained that

the basis for the calculation of the defendant’s offer was

a figure of GBP 600,000 for Business Interruption

losses. It also explained that interest was calculated

at 2.5% over shorter periods than those claimed by

Sugar Hut. The offer was rejected.

Eder J ordered that Sugar Hut should recover its costs

up to 13 June 2014 (ie 21 days after A J Insurance’s last

Part 36 offer), subject to a 30% reduction reflecting

issues on which it had failed at trial. For the period

thereafter, it was to pay A J Insurance’s costs, save for

costs relating to a claim for interest. This was because

Sugar Hut had acted unreasonably in rejecting A J

Insurance’s final Part 36 offer, in particular, as regards

the Business Interruption claim.

Eder J found that “The present case is… a paradigm

example of one where the overall claim and certain

individual components were indeed very much

exaggerated.” He also found that Sugar Hut’s

compliance with its disclosure obligations had been

“piecemeal”, slow and patchy.

Court of Appeal’s ruling

Sugar Hut appealed saying that the judge had treated

A J Insurance’s Part 36 offer as if it had been effective.

It also said that it had suffered a double penalty. First,

its recoverable costs up to 13 June 2014 had been

reduced to reflect points on which it had failed at trial,

and second, it had been ordered to pay A J Insurance’s

costs thereafter until trial.

In his judgment, Lord Justice Tomlinson highlighted key

elements of the costs regime. In particular, the court

must give “real weight” to the overall success of the

winning party, bearing in mind that “It is a fortunate

litigant who wins on every point” (per Christopher

Clarke J in Travellers’ Casualty v Sun Life [2006]

EWHC 2886 (Comm)). Sugar Hut had failed to recover

anything for three elements of its claim, prompting Eder

J’s disallowance of 30% of its claim for costs.

When awarding costs, the CPR require the courts to

consider “the conduct of all the parties” and “whether

a claimant who has succeeded in the claim, in whole

or in part, exaggerated its claim”.

Tomlinson LJ found that:

− Eder J had treated Sugar Hut’s pursuit of its

Business Interruption claim as unreasonable from

the point at which it had rejected A J Insurance’s

last Part 36 offer. This converted “what was not an

offer to compromise the claim… at GBP 600,000

into just such an offer”.

− Eder J had treated the letter of 23 May as containing

distinct offers in relation to (i) Business Interruption

losses and (ii) interest, and treated Sugar Hut on the



footing that they could and should have accepted

the first, notwithstanding his acknowledgement that

the first could not in fact be accepted without also

accepting the second.

− A J Insurance had made no offer to that effect

capable of acceptance by the Sugar Hut.

− There was no facility for dividing Part 36 offers

and applying the cost consequences of rejecting

parts of it.

− He also held that “it cannot be misconduct… simply

to pursue a claim in an amount greater than that

at which it is valued by the opponent party.

Something more is required to render pursuit of

the claim unreasonable.” If Sugar Hut’s behaviour

could be criticised, this had been reflected in

the disallowance of 30% of its costs before

13 June 2014.

The Court of Appeal amended Eder J’s order to award

Sugar Hut 70% of its costs, on the standard basis.

COMMENT

While this case turns on its own facts, it does highlight

the importance of considering costs, and costs awards,

throughout preparation for and during the conduct of

cases which are likely to end up in a hearing. In this

case, a relatively small claim had led to a three-day

hearing about costs in the High Court, followed by

an appeal to the Court of Appeal.

There are a number of points which parties should bear

in mind. The most obvious is the “loser pays” principle.

The costs of bringing a bad claim, or defending a strong

one can, therefore, include not just any award of

damages, but also a considerable bill for the loser’s

own legal costs, and its opponent’s.

The next is that even a clear winner is likely to end up

having to bear perhaps 30-35% of its own legal costs

itself, since the courts rarely award costs in full against

a losing party. Given that few complex claims succeed

in their entirety, this proportion may rise if a claimant

is only partly successful, though, as the Court of Appeal

noted, a claimant who is generally successful can expect

a fairly liberal approach in its costs award.

A further point is the importance of the Part 36 regime.

This provides a powerful tactical weapon. If an offer is

made, the other party faces the choice of accepting it,

or of running the risk that it will have costs awarded

against it on the indemnity basis. An offer which is made

at an early stage in the proceedings, when considerable

costs have yet to be incurred, can be a real incentive to

settle and, if a party has a weak case, rejecting an offer

can be disastrous. At the same time, the courts expect

Part 36 offers to comply strictly with the rules governing

their form and content. A Part 36 offer which is not

capable of immediate acceptance in full is not good

enough, nor is an offer which comes close to, but just

short of, the amount awarded at trial.

Finally, the case highlights the fact that a claimant is

allowed to take a generous view of the value of its claim.

In terms of misconduct or unreasonable behaviour “the

question is whether the claim exceeded the bounds of

permissible optimism”. Provided a claimant stays on the

right side of this boundary, it will not be penalised in any

costs award.

Rainer Evers

Senior Associate

Litigation – Corporate – London

Contact Tel +44 20 3088 3849

[email protected]


Damages

CONTRACTUAL OR TORTIOUS DAMAGES: WHAT IS THE DIFFERENCE (AND WHEN

DOES IT MATTER)?

Wemyss v Karim [2016] EWCA Civ 27, 28 January 2016

There are different measures for calculating damages depending on whether the claim is for a

contractual or a tortious cause of action. Where both claims are available, a party is free to choose

whichever measure produces the more beneficial result. The measures can produce significant

differences in the amount of damages which the injured party stands to recover. In this business sale

dispute the Court of Appeal has set out clear guidance regarding the differences between the

contractual and tortious measures of damages and how correctly to apply each measure.

Mr Karim purchased a solicitor’s practice from

Mr Wemyss in March 2008. In pre-contractual

negotiations in December 2007, Mr Wemyss told

Mr Karim in an email that the practice’s turnover and

net income were “on course” for GBP 640,000 and

GBP 120,000 respectively. The Sale and Purchase

Agreement (SPA) contained a warranty: “… all other

information relating to the Business given by … the

Seller to the Buyer … are true accurate and complete

in every respect and are not misleading”.

After the purchase, it became apparent to Mr Karim that

the practice would not hit the turnover or net income

figures for 2008 that Mr Wemyss had indicated.

Forecast figures were not true, and seller did not

believe them to be true

The court found that, in December 2007 when

Mr Wemyss made the statements regarding turnover

and profit, they were not true and he did not believe

them to be true. When the parties entered the SPA

a few months later in March 2008, the statements were

still not true and Mr Wemyss “must have known the

true position if he had looked at it”. The court also found

that the information was not only not true at the date

of the contract, it was also incomplete and misleading.

Accordingly, Mr Wemyss was liable to Mr Karim on

tortious grounds for misrepresentation and for breach

of contract.

Tortious and contractual claims – how to choose

The Court of Appeal provides helpful guidance in

this area.

Entitlement to choose measure of damages

Where a party is entitled to damages on both the

tortious and the contractual measure, as in this case,

the party is free to select whichever measure produces

the better outcome.

Contractual versus tortious measure of damages

The manner in which tortious and contractual damages

are calculated is different and, although in some cases

the same outcome will result, in others the difference

can be significant.

The measure of contractual damages is the difference

between “the true value of the asset and its value with

the quality as warranted”, whereas the measure of

tortious damages is the difference between “the true

value of the asset and the price paid”.

Lord Justice Lewison demonstrated the consequence of

the difference: A buys a painting from B for GBP 8,000

because B told A that it was painted by a famous artist.

This was not true and the painting was therefore only

worth GBP 100; if it had been true, however, it would

have been worth GBP 10,000.



If B’s claim constituted a contractual warranty, A

could recover the difference between what the painting

would have been worth if the quality was as warranted

(GBP 10,000) and its true value (GBP 100), so

GBP 9,900. However, if B’s statement only constitutes

an actionable misrepresentation, then A would be

entitled to the difference between the price paid

(GBP 8,000) and the true value (GBP 100), so

GBP 7,900.

When damages are difficult to calculate

As Mr Wemyss was liable on both a contractual and

tortious basis, Mr Karim could choose between:

− the difference between the price he paid and the true

value of the business (ie the tortious measure); and

− the difference between the value of the business if

the information regarding turnover and net income

had complied with the warranty and the business’s

true value (ie the contractual measure).

However, the parties had not provided the court with

a valuation of either the business’s true value at the

contract date or what its value would have been if

the warranted information had been true, complete

and not misleading.

Absence of expert evidence does not preclude

assessment of damages

The court quoted from a number of judgments in support

of the principle that the fact that it may be difficult to

calculate damages does not disentitle the injured party

from receiving compensation for its loss. In such

circumstances, the court must assess damages as best it

can, even if this involves a degree of speculation. In this

instance, the profit earning capacity of the business,

which had been warranted to be GBP 120,000, was in

fact only GBP 92,000. The usual way in which a

business’s profit-earning capacity is reflected in the sale

price of the business is through goodwill. The value of

goodwill is ordinarily calculated by the application of

an agreed multiplier to the value of the business’s annual

profit. The court observed that this was a point on which

it would have benefited from expert evidence regarding

what that multiplier would have generally been agreed

to be between sellers and buyers in the market.

In the absence of expert evidence, the court calculated

the multiplier itself. It concluded that damages of GBP

15,000 were owed as reflecting the difference in the

value of the price that Mr Karim paid for goodwill for

the profit earning capacity as warranted and the price it

could be assumed that he would have paid for goodwill

for the actual profit earning capacity of the business

(ie the difference between the value as warranted and

the actual value).

COMMENT

If a party is able to claim on both a contractual and a

tortious basis, how should it go about choosing which

will produce the better outcome? One approach is to

look whether the claimant made a good bargain in the

first place, compared to what the value of the asset had

been warranted to be.

− If the claimant’s bargain would have been a bad

one, even on the assumption that the representation

was true, the tortious measure is best.

− If, on the assumption that the representation was

true, the claimant’s bargain would have been a good

one, the contractual measure (under which he may

recover something even if the actual value of what

he has recovered is greater than the price) is best.1

The reason why the tortious measure will be better in the

case of a bad bargain is because the purpose of damages

under this measure is to put the party, so far as is

possible, in the position it would have been in had it not

been induced by the representation to enter the contract,

which means the party may be able to rescind the

contract and recover its money. Contractual damages

will only operate to put the party in the position it would

have been in if the representation had been true. If it is

the case that, had the representation been true, the party

would have made a good bargain, then the contractual

measure will effectively give the party the benefit it

would have received if that representation had been true.

It is important to remember that the loss for which

Mr Karim was claiming damages arose as the result of

Mr Wemyss’s misrepresentation and breach of warranty

as to the business’s profit earning capacity. Accordingly,

it was not a case in which questions of remoteness arose.


Equally, as the court stated, it was not a case in which

damages were to be calculated on the “no transaction”

basis. If a party finds itself in either of those scenarios

it should have regard to the specific rules which come

into play in those instances in order to determine which

measure will produce the better outcome.

Michaela Widdowson-Kidd

Associate

Litigation – Banking, Finance & Regulation – London

Contact

Tel +44 20 3088 4989 [email protected]

1 See also Prof Treitel in “Damages for Deceit” (1969) 32 MLR 556,

558-559, which the court cited with approval (and which had previously been approved by Lord Steyn in Smith New Court Ltd v

Citibank NA [1997] AC 254, 282).

Disclosure

COURT APPROVES USE OF PREDICTIVE CODING IN LARGE DISCLOSURE EXERCISE

Pyrrho Investments Ltd & ors v MWB Property Ltd & ors [2016] EWHC 256 (Ch), 16 February 2016

A Chancery Master has approved the use of “predictive coding” in a large disclosure process

involving millions of electronically stored documents. Although not completely replacing manual

review (for example, to train the software and check relevance or privilege) the use of such

technology can vastly cut down the cost of (and time taken for) large disclosure exercises. This article

discusses the meaning and effect of “Predictive coding” and the factors that were taken into account in

this case for approving its use.

What is predictive coding?

Predictive coding is a process whereby software is

trained to assess the likely relevance of large quantities

of electronically stored information (ESI). The parties

agree a predictive coding protocol, including definition

of the data set, sample size, batches, control set,

reviewers, confidence level and margin of error. Criteria

will include who held the documents (custodians) and

the date range, but perhaps also whether the documents

contained any of the keywords chosen. Certain types of

documents, not having any or any sufficient text, will

be excluded (they will have to be considered manually).

The resulting documents are “cleaned up”, by removing

repeated content (eg email headers or disclaimers) and

words that will not be indexed (eg because they are not

useful in assessing relevance).

A representative sample (eg of up to 4,000) of the

“included” documents is then used to “train” the

software. A person who would otherwise be making

the decisions as to relevance for the whole document

set (ie a lawyer involved in the litigation) considers

and makes a decision for each of the documents in

the sample, and each such document is categorised

accordingly. It is essential that the criteria for relevance

are consistently applied at this stage. The best practice

would be for a single, senior lawyer who has mastered

the issues in the case to consider the whole sample.

Where documents would, for some reason, not be good

examples, they should be deselected so that the software

does not use them to learn from. The software analyses

all of the documents for common concepts and language

used. Based on the training that the software has

received, it then applies a likely relevance score to each

individual document in the whole document set.

The results of this categorisation exercise are then

validated through a number of quality control exercises.

These are based on statistical sampling. The samples are

randomly (and blindly) selected and then reviewed by



a human for relevance. The software creates a report of

software decisions overturned by humans. The overturns

are themselves reviewed by a senior reviewer. Where

the human decision is adjudged correct by the senior

reviewer, it is fed back into the system for further

learning. It analyses the correctly overturned documents

just as the originals were analysed. Where not correct,

the document is removed from the overturns. Where

the relevance of the original document was incorrectly

assessed at the first stage, that is changed and all the

documents depending on it will have to be re-assessed.

Although the number of documents that have to be

manually reviewed in the predictive coding process may

be high in absolute numbers, it is only a small proportion

of the total number Thus – whatever the cost per

document of manual review – provided that the exercise

is large enough to absorb the up-front costs of engaging

a suitable technology partner, the costs overall of a

predictive coding review should be considerably lower.

Large disclosure exercise – over 17.6 million

documents

To give an idea of the scale of the disclosure exercise

in the MWB case, the total number of electronic files

restored from the back-up tapes of the second

claimant was originally more than 17.6 million. After

de-duplication, 3.1 million documents remained.

The bulk of the relevant documents were controlled

by the second claimant, which held back-up tapes

storing email accounts used by the second to fifth

defendants (who were directors of the second claimant).

Why did the court agree to predictive coding?

The Master commended the parties on their attempts to

agree an approach to disclosure, including the proposal

to use predictive coding. He considered that use of

predictive coding would further the overriding objective

in CPR Part 1. The Master observed that experience

in other jurisdictions is that predictive coding can be

useful, and there is no evidence to show that predictive

coding is less accurate than human review alone or

keyword searches and manual review combined. Greater

consistency can be achieved using the computer to apply

the approach of a senior lawyer towards an initial sample

of documents than using several lower-grade fee earners

and nothing in the CPR or Practice Directions prohibits

the use of such software.

The Master noted that over three million documents had

to be considered for relevance and possible disclosure

and the cost of a manual search would be several million

pounds and, therefore, unreasonable, at least in

circumstances where a suitable automated alternative

exists at lower cost. The cost of using predictive coding

would depend on various factors, but would be between

GBP 181,988 and GBP 469,049 (plus monthly hosting

fees between GBP 15,717 and GBP 20,820) – far less

expensive than the full manual alternative (although

some degree of manual review might also be necessary

after the software has been applied). The value of the

claims is in the tens of millions of pounds and use of

the software is therefore proportionate.

The trial is not scheduled until June 2017, leaving plenty

of time to consider other disclosure methods if predictive

coding should prove unsatisfactory. Finally, he noted

that the parties had agreed on use of the software and

how to use it.

Master Matthews acknowledged that the suitability

of predictive coding would have to be assessed on a

case- by-case basis.

COMMENT

An English judgment supporting the use of technology

in the disclosure process (as envisaged by Practice

Direction 31B) is welcome.

Although this may be the first published judgment on the

subject, it is not the first time that the court has approved

its use. In 2009, when acting for a major financial

institution, Allen & Overy used predictive technology

successfully (with the blessing of the court and the

opposing party) in a Commercial Court case. It is likely

that it has also been used in other cases that have not

resulted in formal public judgments.

Master Matthews is correct to acknowledge that

predictive coding is not suitable for every case – for

example, in cases where there are vast amounts of

manuscript documents (perhaps lab notebooks in some

IP cases), or where there are large quantities of

spreadsheets (it is not very good with strings of


numerical characters), or where the documents have very

short strings of words (perhaps instant messaging and

chat data). It is, however, very effective with emails.

Using predictive coding is, in many ways, a leap of faith

for lawyers and their clients. However, it need not be

seen as just determining which documents fall to be

disclosed. It could also be a very useful tool to assist

with prioritisation of review sets; to get the documents

most likely to be relevant in front of the senior team as

early as possible; or to quality control the results of a

human review. Having applied the software, documents

are not just sent over to the opposition as they will need

to be considered, eg for privilege. There is still a useful

role for the so-called “lower-grade fee-earners”. Their

reviews and sampling will be smarter if predictive

coding technology is applied to the data-set and used

to prioritise it ahead of review.

Allen & Overy’s document management and

review system, Ringtail Caseroom, already provides

a predictive coding facility, in addition to powerful

concept analysis and clustering tools. Allen & Overy

also uses predictive coding technology via e-disclosure

service providers if appropriate.

Vince Neicho Litigation Support Senior Manager


Contact Tel +44 20 3088 3725

[email protected]

Financial Crime

FIRST UK DEFERRED PROSECUTION AGREEMENT BETWEEN THE SFO AND A BANK

The Serious Fraud Office’s recent deferred prosecution agreement with Standard Bank, the first in the

UK, provides a useful walk through the new legislation, but a more complex case is needed to shine

some light on the tougher questions inherent in the process. The agreement was signed amid growing

concern from leading anti-corruption organisations that settlements (which account for the majority

of bribery investigations internationally) are reducing the deterrent effect of anti-corruption laws.

On 30 November 2015, Lord Justice Leveson (sitting

as a judge of the Crown Court) approved the UK’s first

deferred prosecution agreement (DPA) between the

Serious Fraud Office (SFO) and Standard Bank relating

to a charge under s7 of the Bribery Act 2010

(the Bribery Act).

Standard Bank (a UK-regulated bank) and its Tanzanian

sister company, Stanbic Bank Tanzania, pitched for

a joint mandate from the Government of Tanzania to

act as lead managers for a sovereign note issuance.

The proposed fee for the mandate was 2.4% of the

proceeds raised, although two of Stanbic’s senior

officers had arranged (initially unbeknown to Standard

Bank) that 1% of this fee would be paid to a local

Tanzanian partner company called EGMA, whose

Chairman and substantial shareholder was the

Commissioner of the Tanzania Revenue Authority,

and therefore a member of the Tanzanian government.

EGMA did not subsequently provide any services in

relation to the deal, leading to the inescapable inference

that the Stanbic officers intended that the 1% fee would

induce EGMA’s Chairman (and perhaps others in the

government) to show favour to Stanbic and Standard

Bank’s proposal.

Standard Bank relied on Stanbic to conduct KYC

checks on EGMA and the individuals involved with it.

The checks undertaken by Stanbic were at a standard

well below that which Standard Bank would have



required, particularly given the obvious involvement

of politically-exposed persons. Certain “high risk” flags

were raised within Stanbic but not followed up.

Standard Bank and Stanbic were subsequently mandated

by the Tanzanian government and the financing was

completed, raising USD 600 million. Stanbic

consequently paid USD 6 million (1%) into EGMA’s

newly opened accounts with Stanbic, the vast majority

of which was quickly withdrawn in cash by EGMA’s

Managing Director, the ex-head of the Tanzanian Capital

Markers and Securities Authority. Following this,

concerns were quickly raised and escalated within the

Standard Bank group, leading to Standard Bank

promptly self-reporting in the UK to the Serious

Organised Crime Agency (SOCA) and to the SFO.

Standard Bank went on to conduct an internal

investigation authorised by the SFO.

The result of the investigation was sufficient admissible

evidence to enable the SFO to conclude that there was

a reasonable suspicion that Standard Bank had failed to

prevent bribery by Stanbic, one of its associated persons,

and that continued investigation would likely uncover

further admissible evidence leading to a realistic

prospect of a conviction under s7 of the Bribery Act.

Content that the public interest would be satisfied by

a DPA in this instance, the SFO proceeded to reach

an agreement with Standard Bank to defer prosecution

in return for Standard Bank compensating the Tanzanian

government to the tune of USD 6 million (being the 1%

fee paid to EGMA), disgorging the USD 8.4 million

profits in respect of the transaction (being the remaining

1.4% fee) and paying a USD 16.8 million fine, as well

as submitting to a review of its anti-bribery policies

and paying the SFO’s costs.

COMMENT

This was a pre-packed, model case for both the SFO

and the court to demonstrate the effectiveness not only

of the recently introduced DPA legislation,1 but also of

s7 of the Bribery Act itself. As reflected in the two

very comprehensive but unremarkable judgments from

Leveson LJ, the requirements of the legislation, the

DPA Code of Practice and the applicable Sentencing

Guidelines, were followed to the letter, thereby

providing a useful step-by-step guide through the

process. But in the absence of any particularly thorny

issues, what can usefully be drawn from this case?

We pick out two points.

When will prosecutors offer a DPA: the public

interest test and cooperation?

The DPA Code of Practice makes clear that “[t]he more

serious the offence, the more likely it is that prosecution

will be required in the public interest”, and that “[a]

prosecution will usually take place unless there are

public interest factors against prosecution which clearly

outweigh those tending in favour of prosecution.” So

why did the SFO elect to offer Standard Bank a DPA

rather than prosecute? It came down to two factors:

the nature of the alleged offence and Standard Bank’s

cooperative approach upon discovering the misconduct.

First, as the judge made clear, the offence that Standard

Bank faced was failing to prevent bribery by an

associated person arising from the inadequacy of

Standard Bank’s own compliance procedures. There

was insufficient evidence to suggest that any of Standard

Bank’s employees had committed a substantive bribery

offence (ie under s1 or s6 of the Bribery Act), so that

was not the conduct against which Standard Bank itself

had to be judged. It would be going too far, however, to

suggest that there is now a rebuttable presumption that

a DPA should be offered in every s7 case.

Secondly, Standard Bank self-reported immediately

and adopted a genuinely proactive approach to dealing

with the issue, cooperating with the SFO at every stage.

This high degree of cooperation was clearly a very

weighty factor, evidently impressing both the SFO and,

ultimately, the court. One question that arises, however,

is whether the Standard Bank example sets the minimum

bar for the “full cooperation” needed to be offered

a DPA. Comments from the SFO suggest that it does.

However, in a less clear cut case, where the nature and

scope of the misconduct is not so apparent at the outset,

it will be asking a lot for a company to self-report and

fully open up so quickly. Also, a 55-page statement of

facts, in which key individuals were named, is perhaps

longer than many were expecting.


Avoiding double jeopardy: authorities in

other jurisdictions

One concern for a company considering entering

into a DPA is the prospect of agreeing to stringent

compensation payments and financial penalties in the

UK, but remaining open to fines being levied in other

jurisdictions by prosecutors and agencies then-armed

with the DPA statement of facts. This lack of certainty

about treatment elsewhere is a significant disincentive

to any company considering signing up to a DPA.

In the Standard Bank case, it is clear that significant

steps were taken to try to remove this uncertainty.

The U.S. Department of Justice (DoJ) was consulted

both on the size of the fine being imposed under the

DPA and to obtain an indication that it would drop its

own investigation should the matter be dealt with by

a concluded DPA in the UK. The U.S. Securities and

Exchange Commission (SEC) was also informed of

the proposed DPA, in particular the disgorgement of

profit, and announced its agreed civil penalty effectively

simultaneously. Further, the appropriate Tanzanian

anti-corruption authority was, apparently, consulted

and confirmed that it did not object to the DPA.

This proactive approach is commendable. However,

in the absence of any formal agreements or treaties,

it remains open to question whether authorities in other

jurisdictions will always be willing to yield so readily,

particularly in the context of higher stakes, or in a more

politically charged case.

Opposition to settlements

A letter from four prominent anti-corruption

organisations to the OECD ahead of its Anti-Bribery

Ministerial meeting on 16 March questioned whether

the increasing prevalence of settlements is reducing the

deterrent effect of anti-bribery laws (about 69% of cases

between 2009 and 2014 were settled, according to

OECD figures). New legislation allowing settlements

is in progress in France, Ireland and Canada and more

jurisdictions are likely to follow. There is a call for a set

of international OECD principles about the appropriate

use of settlements in bribery cases.

Edward Clough

Associate Litigation – Corporate – London

Contact


1 Schedule 17 of the Crime and Courts Act 2013.

LESSONS FROM THE FIRST SECTION 7 UK BRIBERY ACT CASE

R v Sweett Group plc (unreported), 19 February 2016

Sweett Group plc has been ordered to pay GBP 2.25 million in penalties after pleading guilty to

a failure to prevent bribery. From a hotel in the United Arab Emirates to Southwark Crown Court,

the reach of the “toughest anti-bribery legislation in the world” has been further illustrated. The first

successful conviction under s7 of the Bribery Act 2010 contains useful guidance on interpretation,

fining and is (at points) a case study on how not to deal with the Serious Fraud Office (SFO).

The offence: failing to prevent bribery

In 2012, Sweett’s Cypriot subsidiary secured a contract

with the Al Ain Ahlia Insurance Company (AAIC) to

manage the construction of a hotel in the United Arab

Emirates (UAE). Separately, Sweett entered into

a second contract with North Property Management

(NPM) for associated “hospitality services”. One of

AAIC’s officers, Mr Al Badie, was the beneficial owner

of NPM. While payments were made to NPM under this

second contract, there was no record of Sweett receiving

any services from NPM. The contract was summarised



by the sentencing judge (HHJ Beddoe) as a vehicle

to provide a “bung”.

On 18 December 2015, Sweett admitted a failure to

prevent bribery. Under s7(1) of the Bribery Act 2010

(the Bribery Act), a company is guilty of an offence

if a person associated with it bribes another person to

obtain business. While under s7(2) there is a statutory

defence if a company can show it had in place adequate

procedures designed to prevent the bribery occurring,

Sweett admitted that it had not.

Extra-territorial effect

The actions of a foreign subsidiary, carried on outside

the UK, in relation to a UAE contract were caught by

the Bribery Act. While Sweett’s Cypriot subsidiary may

(as the defence suggested) have been a “gangrenous

limb” within the organisation, the systemic failures of

Sweett, as the parent company, properly to supervise its

subsidiary made Sweett liable.

What can we learn?

Sweett is arguably an extreme case. From what has

been stated publicly about Sweett’s dealings with the

SFO, the relationship between the two was difficult.

The nadir appears to have been reached when the SFO

reportedly told Sweett to stop trampling on the evidence.

Nonetheless, there are a number of lessons to be drawn.

The importance of prompt self-reporting

A Wall Street Journal article dated 21 June 2013 linked

Sweett to Middle Eastern bribery (albeit involving a

hospital in Casablanca, rather than the aforementioned

hotel), but Sweett only reported the payments to the SFO

a week before the article was published. A year later,

the SFO formally began its investigation into Sweett.

However, it was only in December 2014 that Sweett

self-reported certain other connected payments as being

potentially suspicious, and it appears that the SFO took

a dim view of this late self-reporting.

The dangers of hedging your bets

In March 2015, Sweett sought a letter from

AAIC suggesting some of the payments under

investigation by the SFO were made under a finder’s

fee arrangement – in effect, trying to find a defence for

the bribery. Further, for a significant period of the SFO’s

investigation, these payments continued to be made.

Rather than repudiate the contract under which these

payments were being made, Sweett considered placing

monies owed in escrow until the SFO investigation had

been concluded. At sentencing, HHJ Beddoe referred to

this as a cynical attempt by Sweett to hedge its bets.

The SFO’s Joint Head of Bribery and Corruption, Ben

Morgan, exhorted those reporting misconduct to “pick

your horse and ride it” in a speech late last year. It can

be safely assumed that this case influenced those

remarks and demonstrates the importance of ensuring

that potential misconduct that is the subject of an SFO

investigation is not continuing.

Cooperation means full cooperation

Sweett appears to have frustrated the SFO by refusing to

hand over its accounts of witness interviews. The issue

culminated in November 2014, when Sweett (a company

listed on AIM) made an announcement to the market

stating that it was cooperating fully with the SFO

investigation. The SFO disagreed. Sweett was forced

to retract the announcement and issue a public

statement that it was “doing all that it reasonably could

to cooperate with the SFO while at the same time

exercising its fundamental right to legal professional

privilege in fulfilling its corporate and

regulatory requirements”.

The fact that the SFO is taking a very strict view

on cooperation (and is willing to make its views on

the topic publicly known) means that firms need to take

particular care in wording any public statements issued,

even more so in the case of listed firms, for whom

disclosure of SFO investigations frequently cause

significant share price movements.

It was suggested at sentencing that the relationship

between Sweett’s legal advisers and the SFO had

become particularly antagonistic. Sweett had replaced

this law firm with its original advisers, but this act and

the full cooperation from mid-2015 onwards was

evidently not enough for Sweett to obtain a deferred

prosecution agreement (DPA) given all that had gone

before. HHJ Beddoe also warned that while a company

might blame a lack of cooperation on poor legal advice,


ultimately the company was responsible for such

decisions – not its legal advisers.

Conviction or DPA: a distinction with

little difference?

Sweett was not offered a DPA, probably because of its

self-reporting and cooperation shortcomings. However,

it is interesting to compare the penalty given to Sweett

and that agreed between the SFO and Standard Bank

in its DPA of 30 November 2015. Sweett was ordered

to pay a penalty of GBP 2.25 million, consisting of a

GBP 1.4 million fine and GBP 850,000 in confiscation

(calculated based on the gross profit from the contract

with AAIC).

The fine component of both Sweett’s and Standard

Bank’s financial penalties was calculated based on the

benefit gained from the bribery. This was multiplied by

a percentage to reflect culpability in accordance with

Sentencing Guidelines. For Standard Bank, this

percentage was assessed at 300%, while for Sweett,

it was only 250%.

It can be argued that such a difference in the assessed

level of culpability is explained by the fact that

Standard Bank had previously received an FCA fine for

failings in its money laundering systems and controls.

However, Sweett had wilfully ignored multiple auditors’

warnings regarding its subsidiary, permitted bribery

payments for 18 months and, as evidenced by the fact

that it did not receive a DPA, been at points less

cooperative with the SFO. While Sweett serves to

illustrate the discretion that judges will have in enforcing

the Bribery Act 2010, it is notable that the first corporate

criminal conviction for bribery incurred a lower

financial penalty (in both absolute and relative terms)

than the first deferred prosecution.

COMMENT

Following the Standard Bank DPA last November and

the Brand-Rex Scottish civil settlement last September,

it appears that the Bribery Act is finally coming of age.

The risks of half-hearted cooperation with the SFO have

been brought into sharp relief. Taken together, the

Standard Bank DPA and the Sweett case provide some

guidance as to the extent of cooperation needed to have

a chance of securing a DPA. Moreover, if the indications

from the SFO are anything to go by, there may well

be several more Bribery Act cases to guide us by the

end of the year.

Just as the s7 of the Bribery Act offence finally makes

its presence felt, it seems set to be joined by another

form of corporate criminal liability. A new offence of

failure to prevent the facilitation of tax evasion has been

proposed, whereby a corporate body commits an offence

if a person associated with it (and acting in that capacity)

facilitates tax evasion. As with s7 of the Bribery Act,

upon which this new offence appears to be modelled,

it is a defence for the body to show that it had in place

procedures designed to prevent persons associated with

it from committing tax evasion facilitation offences,

and its procedures were reasonable given all the

circumstances. If you would like to discuss this new

proposed offence in more detail please contact us.

Calum Macdonald Associate

Litigation – Banking, Finance &

Regulation – London

Contact

Tel +44 20 3088 3458

[email protected]



Immunity

STRUCTURING FOREIGN INVESTMENTS: WHO QUALIFIES AS AN “INVESTOR” UNDER

A BILATERAL INVESTMENT TREATY?

Gold Reserve Inc v Bolivarian Republic of Venezuela [2016] EWHC 153 (Comm), 2 February 2016

The decision interprets the public international law concept of “investor” and is particularly relevant

to those seeking to structure foreign investments in a manner that affords maximum protection under

investment-protection treaties. While the initial indirect, passive acquisition of mining concessions

did not make the claimant an “investor”, the subsequent expenditure on developing the project did.

As the claimant qualified as an “investor” under the Canada/Venezuela Bilateral Investment Treaty,

Venezuela had thereby waived its state immunity by entering into an arbitration agreement (by virtue

of the dispute resolution provisions in the BIT). The English court refused to set aside the ex parte

enforcement order against Venezuela for amounts due under an ICSID arbitration award.

Mining concessions – that came to nothing

The underlying dispute involved two mining concessions

that had been granted to Brisas Company, a Venezuelan

entity, in 1988 (Brisas) and 1998 (Unicornio). The

concessions related to the same geographical area, with

the first granting rights to extract near-surface resources

and the second to mine from the underlying hard rock.

GRI became an indirect shareholder of the Brisas

Company through a corporate restructuring in 1999, and

accordingly had an indirect interest in the concessions.

In 2007, following a long period of exploration, GRI

obtained an initial construction permit for the project.

However, the Bolivarian Republic of Venezuela

(Venezuela) refused to issue the further authorisations

necessary to commence construction and, in 2008,

revoked the initial permit to commence construction

of the mine. In October 2009, Venezuela seized GRI’s

assets and occupied the site of the project. By that time,

Venezuela had already terminated the Brisas concession

and in June 2010 it also terminated the Unicornio

concession. During the period when the Company had

indirect rights under the concessions, GRI spent almost

USD 300 million on exploration and exploitation

activities to develop the project.

In October 2009, GRI commenced an ICSID arbitration

against Venezuela under the 1998 bilateral investment

treaty between Canada and Venezuela (the BIT). The

tribunal found that Venezuela’s actions had breached

the BIT and ordered it to pay USD 713 million plus

costs and interest in compensation to GRI, who then

sought to enforce the award. GRI brought proceedings

in the United Kingdom, France, Luxembourg and the

U.S. and before the English courts. GRI made a without

notice application seeking to enforce the award as if it

were a judgment. The order was granted, without notice,

and without a hearing, in May 2015. Venezuela applied

to have it set aside.

Who is an “investor”?

It was common ground between the parties that

Venezuela would be entitled to state immunity under s1

of the State Immunity Act 1978 (SIA) unless it had

agreed in writing to submit a dispute to arbitration, in

which case it would be deprived of immunity under s9

SIA. This turned on whether GRI satisfied the definition

of “investor” under the BIT: “an enterprise [which]

makes the investment in the territory of Venezuela”

(Article 1(g)). Venezuela submitted that a passive

acquisition of an asset (such as when GRI became the

indirect owner of Bridas and Unicornio via a corporate

restructuring) does not amount to “making” that

investment as required by the treaty. GRI argued that


the ordinary meaning of making an investment must

necessarily entail an acquisition, including a passive one.

Teare J analysed the ordinary meaning of the language

used in the BIT and found that, in the treaty’s context

and in light of its object and purpose: “a person can

only be one who “makes the investment” if there is

some action on his part. Passive holding of an asset

by itself would not amount to making the investment”.

In his analysis, the judge emphasised that according

to the evidence before him, the only consideration

for the restructuring transaction came from GRI’s

shareholders (in the form of a share swap), and not from

GRI itself. The judgment suggests that had GRI paid

for the transaction, the conclusion on whether the

acquisition was “passive” or “active” might well

have been different.

In any event, while the initial indirect acquisition of

the concessions did not make GRI an “investor”, the

subsequent expenditure on developing the project did

satisfy the definition. The judge explained that as long

as an asset falls within the broad definition of

“investment” in the BIT, and even if that asset is not

protected by the BIT due to a lack of an “active”

acquisition (as was the case here), the act of making

expenditure to develop or improve that asset will be

an “investment” in its own right. Thus, on the facts

of the case, s9 SIA was engaged and Venezuela was

not entitled to invoke state immunity.

Failure to give full and frank disclosure on state

immunity issues

A party making an application without notice owes

a duty to make full and frank disclosure to the court of

all relevant matters. Venezuela argued that GRI failed

to disclose that the BIT arbitration agreement was still

being disputed by Venezuela in proceedings in Paris and

Luxembourg. Teare J agreed and stressed that because

the court is required by s1(2) SIA to give effect to state

immunity even if the state does not appear, it is crucial

for an applicant to draw the court’s attention to those

matters which would suggest that the state was likely

to claim state immunity. Had GRI made the disclosures,

the enforcement application would have been dealt with

at an inter partes hearing. The failure also prevented the

court from protecting Venezuela’s position against

involuntarily submitting to the jurisdiction (eg by

contesting the order on grounds other than state

immunity). The judge described the failings as serious

and giving rise to a “powerful case for setting aside

the order”. However, because state immunity was not

available to Venezuela, the only consequence of setting

the order aside would be additional expense and further

delay. In these “rare” circumstances, it was appropriate

for the enforcement order to stand but GRI was directed

to pay Venezuela’s costs (on an indemnity basis) on the

issue of full and frank disclosure.

COMMENT

This case serves as a powerful illustration of the issues

that an investor ought to consider when planning or

restructuring an investment with a view to taking

advantage of the protections afforded by investor-state

treaties. Whether an investment can be made passively,

and the degree of control that the investor must exercise

over the assets, are issues on which views are divided

among the practitioners of investor-state arbitration.

While the language of the treaty ultimately determines

the answer to those questions, various judicial and

arbitral fora have interpreted similar language in

different ways. Indeed, in this case Teare J’s conclusion

on the definition of “investor” differed from that reached

by the tribunal. The latter was satisfied that a passive

acquisition by way of a corporate restructuring satisfied

the definition. In light of these differing views, it is

prudent to consider very carefully how internal

reorganisations are structured, including in particular the

nature of any consideration, and how that consideration

is to be paid and accounted for.

The case is also a stark reminder of the very

considerable weight that the English courts attach to

matters of state immunity at the enforcement stage,

particularly as regards disclosure obligations. Any

immunities available to the counterparty should ideally

be considered at the contracting stage or before

commencing legal proceedings. What will be of

importance are the types of immunity available under the

law of the forum, but also in any jurisdictions where

enforcement would be likely. Contractual arrangements

can, of course, have a significant impact on questions of



state immunity and must also be taken into account,

as well as any circumstances that might amount to

a waiver. The practical impact of determining the

question of state immunity is illustrated by the fact

that in the aftermath of Teare J’s decision, GRI and

Venezuela negotiated a comprehensive settlement

of their differences.

Tomasz Hara

Associate


Contact

Tel +44 20 3088 4469

[email protected]

Privilege

INVESTIGATING THE INVESTIGATORS – WHAT HAPPENS TO YOUR SEIZED

PRIVILEGED DOCUMENTS?

McKenzie, R (On the Application Of) v Director of the Serious Fraud Office [2016] EWHC 102

(Admin), 27 January 2016

A challenge to the SFO’s use of its seize and sift powers to process privileged documents has failed.

The High Court permitted the SFO to use its own technical staff to process privileged documents.

There was no need for the SFO to show that there was no real risk of disclosure to the investigating

team. However, the decision highlights positive obligations for all investigating authorities handling

privileged documents, including what to do when privileged documents are inadvertently disclosed

to the investigating team.

Privileged material can be seized – but who

looks at it?

While generally items that are subject to legal

professional privilege (LPP) cannot be seized by the

investigating authority, s50 and s51 of the Criminal

Justice and Police Act 2001 authorise the seizure of

devices suspected to contain LPP material where it is

not reasonably practicable to separate the LPP from

the non-LPP material contained on the device.

Following such a seizure, the Serious Fraud Office

(SFO) will handle the material in accordance with its

Operational Handbook. For electronic material, it will:

− process and load the material onto its Digital

Review System (at which point it is not yet

available to the investigating team);

− apply search terms provided by the owner of the

data (or his/her legal representative) to isolate

the privileged material;

− confine the results of the search terms to a separate

folder for review by an independent, non-SFO

lawyer; and

− upon conclusion of the review, return privileged

documents to the target, and release non-privileged

materials to the investigation team.

These steps (with the exception of the ultimate privilege

review) are all undertaken by the SFO’s in-house

technical staff. These individuals are independent of

the case team, but are still employed by the SFO.


Why the dispute?

The applicant was arrested on suspicion of conspiracy to

commit an offence contrary to the Bribery Act 2010. His

electronic devices (such as phones, USB stick and

computer) were lawfully seized by the SFO. The SFO

told the claimant’s solicitors that one of the seized

devices might contain LPP material (as he had not

alerted them to this fact). It sought a list of search terms

to isolate the LPP material for independent review, and

the claimant refused.

Instead, in his application for judicial review, the

claimant argued that the SFO’s use of in-house IT staff

to isolate the potentially privileged material was

unlawful, mainly because it gave rise to a real risk that

the SFO’s investigative team would gain access to LPP

material. On his case, the initial exercise of searching

and isolating the data should be contracted out by the

SFO to independent third-party IT specialists.

Did the SFO need to use external technical staff to

process the data?

The claimant contended that the onus was on the seizing

authority to satisfy the court that there was no real risk

that LPP material would be disclosed to an investigator,

by analogy with the duty imposed by the court on a

solicitor who later acted against the interests of a

former client.

The court definitively rejected the argument. The SFO,

as an investigating body, was “exercising statutory

powers for the public good in the investigation of

suspected crime”. Given the different context, there

was no justification for imposing such a heavy duty

on the SFO, and it was therefore not required by law

to outsource the preliminary sifting process.

Setting the standards for investigating agencies

Notwithstanding its rejection of the immediate case,

the court recognised that it remains important for public

investigating authorities which are sifting potentially

privileged material to have procedures in place to

prevent investigators from accessing LPP material.

It imposed a positive duty on seizing authorities to

“devise and operate a system to isolate potential LPP

material from bulk material lawfully in its possession”,

such that the system could “reasonably be expected to

ensure that such material will not be read by members

of the investigative team before it has been reviewed

by an independent lawyer to establish whether

privilege exists”.

In addition, a seizing authority should have clear

guidance in place such that, if a member of an

investigating team did read material subject to LPP, that

fact is recorded, the potential conflict recognised, and

steps taken to prevent privileged information from being

deployed in the investigation – including, in some cases

the removal of the relevant investigator from the case.

What does it mean for investigation targets?

From a practice perspective, the decision provides an

insight into the SFO’s handling of privileged material.

In circumstances where privileged, or potentially

privileged, material is seized, it will be important

to ensure that the SFO is proactively put on notice of

the existence of that potential material, and diligently

to develop comprehensive search terms in order to

isolate that privileged material.

Separately, it is helpful to have an authority setting out

the positive duty on the part of investigating authorities

(not just the SFO) in sifting potentially privileged

materials. In the event that privileged material is perused

by the authorities, or the standards set by other seizing

authorities are not as high as the SFO’s, it may give

the target of the investigation the ability to take action,

including potentially seeking the removal of the

compromised investigator, or restricting the use of

matters covered within the privileged material in

the investigation.

Stacey McEvoy Associate

Litigation – Banking, Finance &

Regulatory – London

Contact

Tel +44 20 3088 3009

[email protected]



Regulatory

SHAREHOLDER NOT ABLE TO CLAIM FOR MIS-SELLING TO COMPANY

Sivagnanam v Barclays Bank plc [2015] EWHC 3985 (Comm), 4 December 2015

Barclays Bank plc (the Bank) has been awarded summary judgment in a s138D of the Financial

Service and Markets Act 2000 (FSMA) claim. The claim had been brought by a sole

director/shareholder for his loss, as a “private person”, from the alleged mis-selling of certain interest

rate hedging products (IRHP) to his company (who had entered into the IRHP). The court held that

the shareholder did not fall within the category of persons the legislation was intended to protect as

a matter of interpretation. Therefore even as a “private person”, he did not meet the fundamental

threshold which was a precursor to enabling him to bring an action for breach of statutory duty.

Additionally, given that the company had been able to take action for the loss it suffered from the

alleged mis-selling, and had obtained substantial compensation, his loss as a shareholder was

irrecoverable due to the rule against reflective loss.

Mr Sivagnanam (the claimant) was the sole shareholder

and director of WHL (the Company). The Company had

entered into three IRHP with the Bank between 2006

and 2008.

In July 2010, the Company and the Bank entered into

a written compromise agreement. Five years later, in

April 2015, the Company accepted approximately

GBP 2.4 million from the Bank through the voluntary

redress scheme implemented at the instigation of the

Financial Services Authority (FSA) (as it then was).

That sum was paid “in full and final settlement” by the

Company of all complaints, claims and causes of action,

including for costs, expenses or damages that might be

alleged to arise from or be in any way connected to the

sale of the IRHP, however such claims could arise.

The claimant then sought to bring a claim in his

individual capacity against the Bank pursuant to s138D

of FSMA, on the basis that he suffered loss due to the

Bank’s contraventions of the FSA’s rules, specifically

its Conduct of Business (COB) rules or rules in the

Conduct of Business Sourcebook (COBS) (as in force

at the time of the transactions).

Actions for damages

Section 138D establishes a right for persons who suffer

loss as a result of the breach of FCA or PRA rules to

bring an action for damages. More specifically,

s138D(2) provides that:

“The contravention by an authorised person of

a rule made by the FCA is actionable at the suit of

a private person who suffers loss as a result of the

contravention, subject to the defences and other

incidents applying to actions for breach of

statutory duty.”

A “private person” is relevantly defined in the Financial

Services and Markets Act Rights of Action Regulations

2001/2256, paragraph 3, to include:

(a) any individual, unless he suffers the loss in

question in the course of carrying on (i) any

regulated activity or (ii) any activity which

would be a regulated activity apart from any

exclusion made by Article 72 or 72(a) of the

Regulated Activities Order;

(b) any person who is not an individual unless he

suffers the loss in question in the course of

carrying on business of any kind….


It was agreed that the claimant was a “private person”

who was not carrying on a business.

The claimant was not a person whom the legislation

was designed to protect

Cooke J focussed on the condition within s138D(2),

emphasising that the availability of an action was subject

to the court having regard to “the defences and other

incidents” applicable generally to actions for breach

of statutory duty.

One such fundamental principle in actions for breach of

statutory duty is that the person bringing the claim must

fall within a category of persons intended by Parliament,

as a matter of interpretation, to be protected by the

relevant legislation.

On the facts, each alleged breach of the COB/COBS

rules was pleaded by the claimant with reference to the

position of the Company only: there had been no claim

for breach of a duty owed to him personally in relation

to the sale of the IRHP. The only pleading as to his

personal position was that the Bank had required him

to inject further personal money into the Company, and

to provide security in the form of personal guarantees

and charges over his personal property. That pleading

was not sufficient to amount to a plea of any breach of

duty by the Bank towards the claimant as an individual

under FSMA or COB/COBS.

Cooke J held that, on those facts, the claimant did not

fall within the category of person intended to be

protected by FSMA or the relevant COB rules or COBS

rules, and therefore no action under s138D(2) was open

to him. In his view, it was “clear beyond argument” that

the relevant FSA rules were designed to protect the

customers who constituted private persons within the

meaning of s138D. The right to bring an action under

s138D did not apply to a “different” group of persons

outside that category (such as the claimant), to whom no

duty was owed under FSMA or the relevant FSA rules.

Reflective loss on the part of the shareholder

was irrecoverable

The second ground on which Cooke J rejected the claim

was that it contravened the principle of reflective loss

established in Johnson v Gore Wood & Co [2000]

UKHL 65: a shareholder of a company cannot sue

to recover damages for loss which is merely reflective

of loss suffered by the company, where the company

can itself put forward a claim for that loss.

The loss a shareholder is unable to recover on the

basis of this principle extends to the shareholder’s

potential loss of dividends, the diminished value of

their shareholding, and “all other payments” that the

shareholder might have obtained from the company had

it been in funds. Following Gardner v Parker [2004]

EWCA Civ 781, it is “irrelevant” that the duties that

the defendant wrongdoer owed to the company and the

shareholder might differ, provided that the loss sought

to be claimed was merely reflective.

On the facts of this case, the claimant’s claim fell foul

of the rule against reflective loss: he had simply pleaded

that the Company itself had suffered a loss due to its

need to pay the IRHP payments and breakage charges.

This led the Company to be unable to repay its loans

to him, and reduced the value of his shareholding.

Cooke J recognised these as, properly speaking,

losses of the Company.

Having found the claimant’s loss to be merely reflective,

the court was then called upon to consider whether the

Company could itself have put forward a claim for its

loss (in order to consider whether the Bank could rely on

the principle to bar the claimant’s recovery for that loss).

Cooke J recognised that the settlement payment to the

Company had not been made on the basis of any specific

claim at common law or under FSMA, but nevertheless

held that, in practice, it was “perfectly clear” that the

Company and the Bank had proceeded on the basis that

compensation was paid in respect of any advice that the

Company might have had in relation to the sale of the

IRHP. In those circumstances, “it cannot lie in the mouth

of WHL, nor its sole shareholder and director, the

claimant, to say that there was no realistic prospect

of success on a claim by WHL against the Bank”.

Finally, if additional recovery on the part of the

claimant was allowed, there would be an element of

double recovery (in breach of the principle of reflective

loss) given the GBP 2.4 million already received by

the Company.



COMMENT

The judgment is short and, being delivered ex tempore,

certain aspects of the argument and reasoning are not

fully developed in the available written judgment.

Most important is the clear finding that an individual

shareholder of a corporate entity transacting with an

authorised person will not generally have a right to

a personal action under s138D if it is unable to show

a duty owed to them personally under FSMA or the

FCA rules. This is on the basis that, absent such a duty,

they will not fall within the category of persons that

the statute or the FCA rules are intended to protect as

a matter of interpretation. Therefore, despite technically

being “private persons”, any s138D claims will be

barred at a more preliminary hurdle by failing the more

fundamental test in actions for breach of statutory duty.

In short, it is necessary, but not sufficient, to be such

a “private person” to bring an action.

The claimant evidently strongly resisted such a finding,

but without success. In particular, Cooke J rejected

the argument that s138D should not be limited in scope

to any particular class or category of private person

(such as a “customer”), beyond the exemptions set out

in the statute itself (for private individuals carrying on

a business, and so forth). Rather, once an individual fell

outside the scope of the persons intended to be protected

by the legislation, Cooke J found it did not matter that

he might otherwise be a “private person” within the

terms of the statute. Additionally, although not entirely

clear from the text of the judgment, the claimant appears

to have argued that he may have had a common law

claim against the Bank, or that (having regard to the

findings on reflective loss) the Company may not have

had a claim against the Bank, thereby potentially making

his claim proper. Cooke J found that it was “irrelevant”

whether either the Company had a claim under FSMA,

or whether the claimant had any common law rights

against the Bank.

The principle that actions for breach of statutory

duty should be limited to the category of person

the legislation is designed to protect has been well

considered in the context of other statutes. This is

a renewed application in the context of financial

regulatory law and brings welcome clarification,

limiting the ambit of s138D to those “private persons”

owed duties under the relevant legislation and rules.

Equally interesting is the application of the principle

of reflective loss in an action for damages under FSMA.

Cooke J was understandably in favour of reliance on

the principle to bar the claimant’s recovery in this

particular case, given the GPB 2.4 million already paid

to the Company. However, the onus is on the defendant

firm to establish the applicability of the principle in the

circumstances of each case, including that the relevant

company was able to pursue a claim for its loss against

the firm, and was not prevented from doing so by

reason of the wrong done to it. As such, in order to

benefit from the defence, firms may find it useful

to include an express acknowledgement to that effect

in settlement agreements.

A version of this article was first published on

www.practicallaw.com.

Stacey McEvoy

Associate

Litigation – Banking, Finance & Regulatory – London

Contact



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We also offer a full range of bespoke seminars in our

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specialists at a client’s premises. If you are a client

and have a query in relation to this, please contact

Sarah Garvey on +44 20 3088 3710 or

[email protected].

Litigation Review consolidated

index 2016

Arbitration

Penalty decider: High Court allows enforcement of

arbitration award which includes a contractual penalty:

Pencil Hill Ltd v US Città Di Palermo S.p.A (April)

Arbitrator bias: financial dependence and inappropriate

conduct: Cofely Ltd v Anthony Bingham & Knowles

Ltd (April)

“Weaknesses” in the IBA guidelines on conflicts of

interest: W Ltd v M Sdn Bhd (April)

“May” or “Shall”: what should be used in an

arbitration clause?: Anzen Ltd & ors v Hermes One

Ltd (BVI) (Mar)

Arbitral award enforced despite bona fide challenge

at the seat: IPCO (Nigeria) Ltd v Nigerian National

Petroleum Corp (No 3) (Jan/Feb)

Bribery

Historic bribery of agents of foreign principals will

not go unpunished: R v Ail, GH & RH (Mar)

Conflicts of law

“There can sometimes be good forum shopping”: Re

Codere Finance (UK) Ltd (Mar)

When in Rome (and you don’t want to be): escaping the

default rules on governing law: Molton Street Capital

LLP v Shooters Hill Capital Partners LLP & Odeon

Capital Group LLC (Mar)

Enforcement of EU member state judgment: Dr Richard

Barry Smith v Xavier Huertas

Contribution claims: uncertain jurisdictional basis:

Iveco SpA & Iveco Ltd v Magna Electronics Srl &

XL Insurance Co SE v AXA Corporate Solutions

Assurance (Jan/Feb)

Contract

The construction of section 6(d) of the 1992 ISDA

Master Agreement and close-out mechanics: Videocon

Global Ltd & Videocon Industries Ltd v Goldman Sachs

International (April)



Indemnity in share purchase agreement only covered

half the loss: Capita (Banstead 2011) v RFIB Group

Ltd (Mar)

When mitigation leads to a profit, who should benefit?:

Fulton Shipping Inc of Panama v Globalia Business

Travel S.A.U. (formerly Travelplan S.A.U.) of Spain

(“The New Flamenco”) (Mar)

“Many thanks Myles, much appreciated” – lessons in

audit rights, repudiatory breach and informal variation:

C&S Associates UK Ltd v Enterprise Insurance Co

plc (Mar)

Costs

Court cannot divide an offer to settle: Sugar Hut Group

Ltd & ors v A J Insurance Service (April)

Damages

Contractual or tortious damages: what is the difference

(and when does it matter)?: Wemyss v Karim (April)

Disclosure

Court approves use of predictive coding in large

disclosure exercise: Pyrrho Investments Ltd & ors v

MWB Property Ltd & ors (April)

Alleged swaps misselling: specific disclosure of similar

complaints refused: Claverton Holdings Ltd v Barclays

Bank plc (Jan/Feb)

Enforcement

Enforcement of mortgage charge: valid defence was

too late: Dickinson & anr v UK Acorn Finance Ltd

(Jan/Feb 16)

Financial Crime

First UK deferred prosecution agreement between the

SFO and a bank (April)

Lessons from the first s7 UK Bribery Act case: R v

Sweett Group plc (April)

Immunity

Structuring foreign investments: who qualifies as an

“investor” under a bilateral investment treaty?: Gold

Reserve Inc v Bolivarian Republic of Venezuela (April)

Kurdistan Regional Government’s sovereign immunity

plea fails in English court: Pearl Petroleum Co Ltd &

ors v Kurdish Regional Government of Iraq (Jan/Feb)

Insolvency

Client money and poor records: guidance for

administrators: Allanfield Property Insurance Services

Ltd & ors v Aviva Insurance Ltd & anr (Jan/Feb)

Insurance/limitation

Fraud claims not covered by standstill agreement:

Hyundai Marine & Fire Insurance & anr v Houlder

Insurance Services & anr (Jan/Feb)

Privilege

Investigating the investigators – what happens to

your seized privileged documents? McKenzie, R (On

the Application Of) v Director of the Serious Fraud

Office (April)

Regulatory

Shareholder not able to claim for mis-selling to

company: Sivagnanam v Barclays Bank plc (April)

Was an individual “identified” in a decision notice?:

Christian Bittar v The Financial Conduct

Authority (Mar)

Tort

“A case based on hindsight” – misselling claim rejected:

Thornbridge Ltd v Barclays Bank plc (Jan/Feb)

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